16.9 CESSATION OF BUSINESS

Cessation of business in foreign companies refers to the process of terminating or winding down operations of a company incorporated and operating outside a specific country. When a foreign company decides to cease its business activities, there are several key considerations and steps to be followed:

1. Compliance with local laws: The foreign company must comply with the laws and regulations of the country where it operates regarding the cessation of business. This may involve filing necessary notifications, permits, or documents with the local authorities and ensuring the fulfillment of any statutory requirements. 
   

   RCM BOOKS

   CS INTERMEDIATE LEVEL  COMPANY LAW

   Dr. Joshua Aura

    

    

   First edition 2020

   ISBN

   All our rights reserved.

   No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of RCM Publishers.

    

   We are grateful to the Kenya Accountants and Secretaries Examination Board for permission to quote from the past examination questions. The suggested solutions in this Revision Kit have been prepared by RCM publishers in conjunction with Regional Centre of Management Studies.

    

    

    

    

    

    

    

    

    

    

    

    

   Published by;

   RCM Publishers,

   Nairobi-Kenya.

   Tel; 0719 525 000

   Mail; [email protected]

    

    

    

   Table of Contents

   ACKNOWLEDGEMENTS. vii

   The completion of this undertaking would not have been possible without the participation and assistance of so many people whose names may not be enumerated. Their contributions are sincerely appreciated and gratefully acknowledged. However, the author would like to express his deepest appreciation and indebtness. vii

   Above all to the great Almighty God, the author of knowledge and wisdom for his sufficient Grace  vii

   CHAPTER 1. 1

   NATURE AND CLASSIFICATION OF COMPANIES. 1

   1.1 NATURE AND CHARACTERISTICS OF A COMPANY. 1

   1.2 TYPES OF COMPANIES. 1

   1.3 PRINCIPLE OF LEGAL PERSONALITY AND VEIL OF INCORPORATION.. 2

   1.4 DISTINCTION BETWEEN COMPANIES AND OTHER FORMS OF BUSINESS ASSOCIATIONS SOLE PROPRIETORSHIPS, PARTNERSHIPS AND COOPERATIVE SOCIETIES. 3

   CHAPTER 2. 4

   FORMATION OF COMPANIES. 4

   2.1 PROMOTERS AND PRE-INCORPORATION CONTRACTS AND DEEDS. 4

   2.2 PROCESS AND DRAFTING DOCUMENTS REQUIRED TO FORM A COMPANY. 5

   2.3 RULES RELATING TO COMPANY NAMES. 6

   2.4 MEMORANDUM AND ARTICLES OF ASSOCIATION.. 6

   2.5 CERTIFICATE OF INCORPORATION.. 7

   2.6 EFFECTS OF INCORPORATION.. 7

   2.7 EXECUTION OF A COMPANY’S DOCUMENTS. 7

   2.8 ALTERATION OF STATUS OF COMPANIES. 8

   CHAPTER 3. 9

   MEMBERSHIP OF A COMPANY. 9

   3.1 ACQUISITION OF MEMBERSHIP. 9

   3.2 REGISTER OF MEMBERS. 9

   3.3 RIGHTS AND LIABILITIES OF MEMBERS. 10

   3.4 CESSATION OF MEMBERSHIP. 11

   3.5 REGISTER OF A COMPANY’S BENEFICIAL OWNERS. 11

   3.6 DERIVATIVE ACTIONS. 12

   CHAPTER 4. 14

   SHARES. 14

   4.1 CLASSES OF SHARES. 14

   4.2 VARIATION OF CLASS RIGHTS. 15

   4.3 SHARE CERTIFICATES. 16

   4.4 ISSUE AND ALLOTMENT. 17

   4.5 TRANSFER AND TRANSMISSION.. 18

   4.6 TRANSFER OF SHARES UNDER CENTRAL DEPOSITORY SYSTEM.. 19

   4.7 MORTGAGING AND CHARGING OF SHARES. 19

   CHAPTER 5. 21

   SHARE CAPITAL. 21

   5.1 MEANING AND TYPES OF SHARE CAPITAL. 21

   5.2 RAISING OF SHARE CAPITAL. 21

   5.3 PROSPECTUS/INFORMATION MEMORANDUM… 22

   5.4 MAINTENANCE OF CAPITAL. 22

   5.5 ALTERATION AND CONSOLIDATION OF SHARE CAPITAL. 23

   5.6 DIVIDENDS. 23

   CHAPTER 6. 24

   DEBT CAPITAL. 24

   6.1 BORROWING POWERS OF A COMPANY. 24

   6.2 COMPANY ASSETS THAT CAN SECURE A COMPANY’S BORROWINGS. 24

   6.3 COMPANY DEBENTURES. 25

   6.4 COMPANY CHARGES. 25

   6.5 MEETINGS AND RESOLUTIONS IN RESPECT OF DEBT CAPITAL. 25

   6.6 REGISTRATION OF CHARGES. 26

   6.7 REMEDIES FOR DEBENTURE HOLDERS. 26

   CHAPTER 7. 28

   COMPANY MEETINGS. 28

   7.1 NATURE AND CLASSIFICATION OF COMPANY MEETINGS. 28

   7.2 TYPES OF COMPANY MEETINGS HELD TO EXECUTE VARIOUS FUNCTIONS OF COMPANY MEETINGS. 29

   7.3 METHODS OF HOLDING COMPANY MEETINGS. 30

   7.4 ESSENTIALS OF A VALID PHYSICAL, VIRTUAL AND HYBRID MEETING VOTING.. 30

   7.5 RESOLUTIONS. 31

   7.6 DRAFTING RESOLUTIONS. 31

   7.7 PROTECTION OF MINORITY SHAREHOLDERS. 32

   CHAPTER 8. 33

   COMPANY DIRECTORS. 33

   8.1 QUALIFICATIONS, APPOINTMENT AND DISQUALIFICATION.. 33

   8.2 POWERS AND DUTIES OF DIRECTORS. 34

   8.3 REMOVAL AND VACATION OF OFFICE. 34

   8.4 REGISTER OF DIRECTORS. 34

   8.5 REMUNERATION OF DIRECTORS. 35

   8.6 LOANS TO DIRECTORS. 35

   8.7 COMPENSATION FOR LOSS OF OFFICE. 36

   8.8 DISCLOSURE OF DIRECTOR’S INTEREST IN CONTRACTS. 36

   8.9 THE RULE IN TURQUAND’S CASE/INDOOR MANAGEMENT RULE. 36

   8.10 INSIDER DEALING.. 37

   CHAPTER 9. 38

   THE COMPANY SECRETARY. 38

   9.1 QUALIFICATION, APPOINTMENT AND REMOVAL. 38

   9.2 POWERS AND DUTIES OF THE COMPANY SECRETARY. 38

   9.3 LIABILITY OF THE COMPANY SECRETARY. 39

   9.4 REGISTER OF SECRETARIES. 39

   CHAPTER 10. 41

   AUDITORS. 41

   10.1 QUALIFICATION, APPOINTMENT AND REMOVAL. 41

   10.2 REMUNERATION OF AUDITORS. 41

   10.3 POWERS AND DUTIES. 42

   10.4 RIGHTS AND LIABILITIES. 42

   CHAPTER 11. 43

   COMPANY ACCOUNTS. 43

   11.1 BOOKS OF ACCOUNTS. 43

   11.2 FORM AND CONTENT OF ACCOUNTS. 43

   11.3 GROUP ACCOUNTS. 44

   11.4 DIRECTOR’S REPORT. 44

   CHAPTER 12. 45

   AUDIT OF COMPANY ACCOUNTS. 45

   12.1 AUDITOR’S REPORT. 45

   12.2 ANNUAL RETURNS. 45

   CHAPTER 13. 47

   COMPANY INVESTIGATION.. 47

   13.1 INVESTIGATION OF COMPANY AFFAIRS. 47

   13.2 APPOINTMENT AND POWERS OF INSPECTORS. 47

   13.3 INSPECTOR’S REPORT. 48

   CHAPTER 14. 49

   CORPORATE RESTRUCTURING.. 49

   14.1 NEED FOR RESTRUCTURING.. 49

   14.2 MERGERS. 49

   14.3 POST – MERGER REORGANISATION OF A COMPANY’S SHARE CAPITAL. 49

   14.4 TAKEOVERS AND ACQUISITIONS. 50

   14.5 MERGERS AND DIVISIONS OF PUBLIC COMPANIES. 51

   14.6 COMPROMISES, ARRANGEMENTS, RECONSTRUCTIONS AND AMALGAMATIONS. 51

   CHAPTER 15. 53

   RECEIVERSHIP, ADMINISTRATION, LIQUIDATION AND DISSOLUTION OF COMPANIES. 53

   15.1 MEANING OF RECEIVERSHIP, ADMINISTRATION AND DISSOLUTION.. 53

   15.2 APPOINTMENT AND VACATION OF OFFICE BY THE OFFICIAL RECEIVER. 53

   15.3 POWERS AND DUTIES OF A RECEIVER. 54

   15.4 TERMINATION OF RECEIVERSHIP. 55

   15.5 APPOINTMENT OF AN ADMINISTRATOR. 55

   15.6 FUNCTIONS AND POWERS OF AN ADMINISTRATOR. 56

   15.7 PROCESS OF ADMINISTRATION.. 56

   15.8 TERMINATION OF APPOINTMENT AND REPLACEMENT OF ADMINISTRATORS. 57

   15.9 COMPANY VOLUNTARY ARRANGEMENTS. 58

   15.10 MEANING OF LIQUIDATION.. 58

   15.11 TYPES OF LIQUIDATION.. 58

   15.12 APPOINTMENT, POWERS AND DUTIES OF LIQUIDATORS. 59

   15.13 DISCHARGE OF LIQUIDATORS. 59

   15.14 DISTRIBUTION OF ASSETS AND DISSOLUTION OF COMPANIES. 60

   CHAPTER 16. 61

   FOREIGN COMPANIES. 61

   16.1 PROCESS OF REGISTERING A COMPANY. 61

   16.2 CERTIFICATE OF REGISTRATION.. 62

   16.3 POWER TO HOLD LAND.. 62

   16.4 REGISTRATION OF CHARGES. 63

   16.5 ACCOUNTS OF FOREIGN COMPANIES. 63

   16.6 SERVICE OF PROCESS AND NOTICES ON FOREIGN COMPANIES. 64

   16.7 RETURNS. 64

   16.8 PENALTIES. 65

   16.9 CESSATION OF BUSINESS. 65

    

    

    

    

   ACKNOWLEDGEMENTS

   The completion of this undertaking would not have been possible without the participation and assistance of so many people whose names may not be enumerated. Their contributions are sincerely appreciated and gratefully acknowledged. However, the author would like to express his deepest appreciation and indebtness.

    

   Above all to the great Almighty God, the author of knowledge and wisdom for his sufficient Grace

    

   Unit description

   This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to apply and comply with the provisions of Company Law in relevant circumstances and environments and further to demonstrate knowledge of the law and regulations governing corporate entities and ensure compliance in practice.

    

   Learning outcomes

   A candidate who passes this paper should be able to:

   • Apply legal principles relating to formation of companies
   • Evaluate the rights and obligations of members and shareholders
   • Comply with the legal principles governing liquidation of corporates
   • Comply with the legal principles governing restructuring of companies
   • Comply with the legal principles relating to companies incorporated outside the country
   • Comply with the legal requirements relating to the financing of companies.

    

   Content

   1. Nature and classification of companies

   1.1 Nature and characteristics of a company

   1.2 Types of companies

   1.3 Principle of legal personality and veil of incorporation

   1.4 Distinction between companies and other forms of business associations sole proprietorships, partnerships and cooperative societies.

    

   2. Formation of companies

   2.1 Promoters and pre-incorporation contracts and deeds.

   2.2 Process and drafting documents required to form a company.

   2.3 Rules relating to company names

   2.4 Memorandum and articles of association

   2.5 Certificate of incorporation

   2.6 Effects of incorporation

   2.7 Execution of a company’s documents

   2.8 Alteration of status of companies

    

   3. Membership of a company

   3.1 Acquisition of membership

   3.2 Register of members

   3.3 Rights and liabilities of members

   3.4 Cessation of membership

   3.5 Register of a company’s beneficial owners

   3.6 Derivative actions.

    

   4. 4. Shares

   4.1 Classes of shares

   4.2 Variation of class rights

   4.3 Share certificates

   4.4 Issue and allotment

   4.5 Transfer and transmission

   4.6 Transfer of shares under central depository system

   4.7 Mortgaging and charging of shares

    

   5. Share capital

   5.1 Meaning and types of share capital

   5.2 Raising of share capital

   5.3 Prospectus/information memorandum

   5.4 Maintenance of capital

   5.5 Alteration and Consolidation of share capital

   5.6 Dividends

    

   6. Debt capital

   6.1 Borrowing powers of a company

   6.2 Company assets that can secure a company’s borrowings

   6.3 Company debentures

   6.4 Company charges

   6.5 Meetings and resolutions in respect of debt capital

   6.6 Registration of charges

   6.7 Remedies for debenture holders

    

   7. Company meetings

   7.1 Nature and classification of company meetings

   7.2 Types of company meetings held to execute various functions of company meetings

   7.3 Methods of holding company meetings

   7.4 Essentials of a valid physical, virtual and hybrid meeting Voting

   7.5 Resolutions

   7.6 Drafting resolutions

   7.7 Protection of minority shareholders

    

   8. Company Directors

   8.1 Qualifications, appointment and disqualification

   8.2 Powers and duties of directors

   8.3 Removal and vacation of office

   8.4 Register of directors

   8.5 Remuneration of directors

   8.6 Loans to directors

   8.7 Compensation for loss of office

   8.8 Disclosure of director’s interest in contracts

   8.9 The rule in Turquand’s case/Indoor Management rule

   8.10 Insider dealing

    

   9. The Company Secretary

   9.1 Qualification, appointment and removal

   9.2 Powers and duties of the Company Secretary

   9.3 Liability of the Company Secretary

   9.4 Register of Secretaries

    

   10. Auditors

   10.1 Qualification, appointment and removal

   10.2 Remuneration of auditors

   10.3 Powers and duties

   10.4 Rights and liabilities

    

   11. Company accounts

   11.1 Books of accounts

   11.2 Form and content of accounts

   11.3 Group accounts

   11.4 Director’s report

    

   12. Audit of Company Accounts

   12.1 Auditor’s report

   12.2 Annual returns

    

   13. Company Investigation

   13.1 Investigation of company affairs

   13.2 Appointment and powers of inspectors

   13.3 Inspector’s report

    

   14. Corporate restructuring

   14.1 Need for restructuring

   14.2 Mergers

   14.3 Post – merger reorganisation of a company’s share capital

   14.4 Takeovers and acquisitions

   14.5 Mergers and divisions of public companies

   14.6 Compromises, arrangements, reconstructions and amalgamations

    

   15. Receivership, Administration, Liquidation and Dissolution of companies

   15.1 Meaning of receivership, administration and dissolution

   15.2 Appointment and vacation of office by the Official Receiver

   15.3 Powers and duties of a receiver

   15.4 Termination of receivership

   15.5 Appointment of an administrator

   15.6 Functions and powers of an administrator

   15.7 Process of administration

   15.8 Termination of appointment and replacement of administrators

   15.9 Company voluntary arrangements

   15.10 Meaning of liquidation

   15.11 Types of liquidation

   15.12 Appointment, powers and duties of liquidators

   15.13 Discharge of liquidators

   15.14 Distribution of assets and dissolution of companies

    

   16. Foreign Companies

   16.1 Process of registering a company

   16.2 Certificate of registration

   16.3 Power to hold land

   16.4 Registration of charges

   16.5 Accounts of foreign companies

   16.6 Service of process and notices on foreign companies

   16.7 Returns

   16.8 Penalties

   16.9 Cessation of business

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

   CHAPTER 1

   NATURE AND CLASSIFICATION OF COMPANIES

   Learning outcomes

   On completion of this topic, you should be able to; 1. Nature and characteristics of a company 2. Types of companies 3. Principle of legal personality and veil of incorporation 4. Distinction between companies and other forms of business associations sole proprietorships, partnerships and cooperative societies.

    

    

   1.1 NATURE AND CHARACTERISTICS OF A COMPANY

   A company is a legal entity that is formed to conduct business activities and generate profits. It is an organization that brings together individuals, resources, and capital to achieve specific objectives.

   Nature and characteristics of a company:

   1. Legal entity: A company is a distinct legal entity separate from its owners, known as shareholders or members.
   2. Limited liability: Shareholders or members are typically only liable for the debts and obligations of the company up to the extent of their investment.
   3. Ownership and shareholders: A company is owned by its shareholders or members. Shareholders invest capital into the company by purchasing shares, which represents their ownership interest.
   4. Separate management: The management and control of a company are entrusted to the board of directors, who are elected by the shareholders. The board appoints executives and managers who are responsible for day-to-day operations.
   5. Perpetual succession: The Company continues to exist even if its shareholders change or new shareholders join. The death, retirement, or transfer of shares by a shareholder does not affect the company’s existence.
   6. Transferability of shares: Shares of a company are generally freely transferable, allowing shareholders to buy or sell their ownership interest without affecting the company’s operations.
   7. Profit distribution: Companies aim to generate profits through their business activities.
   8. Regulatory compliance: Companies are subject to various legal and regulatory requirements.

    

   1.2 TYPES OF COMPANIES

   1. Sole proprietorship; It is the simplest form of business entity, owned and operated by a single individual. The owner has complete control over the business.
   2. Partnership: It is a business owned by two or more individuals who agree to share profits and losses.
   3. Limited Liability Company (LLC): It is a flexible business structure that provides limited liability protection to its owners, known as members. It combines features of a corporation and a partnership.
   4. Corporation: It is a separate legal entity from its owners (shareholders). It has the most complex structure and is subject to more regulations and formalities.
   5. Public corporation: A public corporation is owned by shareholders and its shares are traded on a public stock exchange. It is subject to strict regulations, including financial reporting requirements and disclosure obligations.
   6. Private corporation: A private corporation is owned by a limited number of shareholders and its shares are not publicly traded. It often has fewer regulatory requirements compared to public corporations.

    

   4. Nonprofit Organization: Nonprofit organizations are formed for purposes other than generating profits for the owners. They may be organized as corporations or other legal entities, depending on the jurisdiction.

    

   1.3 PRINCIPLE OF LEGAL PERSONALITY AND VEIL OF INCORPORATION

   Separate legal personality

   The principle of legal personality refers to the recognition of a company as a separate legal entity distinct from its owners or shareholders. When a company is incorporated, it is granted legal personality or legal existence.

   Consequences:

   (a) Company is liable for its own debts

   The shareholders are not liable for the debts and liabilities of the company and cannot be sued by the company’s creditors. A shareholder can be a debtor or creditor of the company and can sue or be sued by the company. (Salomon v A Salomon & Co Ltd)

   Salomon had a business in boot manufacture. He formed a company called Salomon & Co. (with himself, his, wife daughter and 4 sons as shareholders) and transferred to it his business. As consideration for the transfer he received the major portion of the shares of the company and debentures for £ 10,000.  Later on, the company went into liquidation. Salomon, as a debenture holder, claimed to be a secured creditor and demanded priority in the payment of £ 10,000, out of the assets of the company. The unsecured creditors of the company objected on the ground that the business really belonged to Salomon and he should not be allowed to claim as a secured creditor. It was held that Solomon as an individual, was quite distinct from Salomon & Co. and he could therefore be a secured creditor of the company, even though he happened to hold the majority of the shares.

   (b) Limited Liability

   The fact that the company is a separate person from its shareholders makes limited liability possible.

   (c) Company can own Property

   A company owns its own property – the shareholders have no direct right to this or any share of it.

   In Macaura v Northern Assurance Co case, Mr. Macaura owned the Killymoon estate in County Tyrone, Northern Ireland. He sold the timber there to Irish Canadian Sawmills Ltd for 42,000 fully paid up £1 shares, making him the whole owner (with nominees). Mr Macaura was also an unsecured creditor for Kshs.19, 000. He got insurance policies – but in his own name, not the company’s – with Northern Assurance covering for fire. Two weeks later, there was a fire. Northern Assurance refused to pay up because the timber was owned by the company, and that because the company was a separate legal entity, it did not need to pay Mr Macaura any money.

   The House of Lords held insurers were not liable on the contract, since the timber that perished in the fire did not belong to Mr. Macaura, who held the insurance policy.

   (d) Contractual Capacity

   A company has full contractual capacity – and only the company can enforce its contracts

   (e) A company has perpetual succession

   Separate personality means that the existence of a company does not depend on the existence of its members.

    

   Veil of incorporation

   The veil of incorporation is a legal concept that recognizes the separation between a company and its shareholders. It refers to the notion that the corporate entity and its shareholders are distinct from each other, and there is a metaphorical “veil” separating their legal identities. The veil serves to protect shareholders from personal liability for the company’s actions.

    

   In Salomon V Salomon and company limited it was established that a registered company is legal entity separate from its members. Thus once a company is incorporated a veil is drawn between the company and its members. This is called veil of incorporation.

    

   1.4 DISTINCTION BETWEEN COMPANIES AND OTHER FORMS OF BUSINESS ASSOCIATIONS SOLE PROPRIETORSHIPS, PARTNERSHIPS AND COOPERATIVE SOCIETIES.

   1. Companies:
   2. Legal status: Companies are separate legal entities from their owners or shareholders.
   3. Limited liability: Shareholders of companies generally have limited liability.
   4. Ownership: Companies are owned by shareholders who hold shares representing their ownership interest.
   5. Management: Companies have a board of directors that oversees the company’s operations and major decisions.
   6. Perpetual succession: meaning they continue to exist even if shareholders change or new shareholders join.

    

   2. Sole Proprietorships
   3. Legal status: The business and the owner are considered the same legal entity.
   4. Unlimited liability: The owner of a sole proprietorship has unlimited liability. They are personally responsible for all the debts and obligations of the business.
   5. Ownership: The business is owned and operated by a single individual.
   6. Management: The owner has complete control and management of the business.

    

   3. Partnerships
   4. Legal status: Partnerships are generally not separate legal entities, except for limited liability partnerships (LLPs) in some jurisdictions.
   5. Shared liability: Partners in a partnership have unlimited liability, meaning they are personally responsible for the partnership’s debts and obligations.
   6. Ownership: Partnerships are owned by two or more individuals who agree to share profits and losses.
   7. Management: Partners typically participate in the management and decision-making of the business.

    

   4. Cooperative societies
   5. Legal status: Cooperative societies are separate legal entities formed by a group of individuals with a common goal or interest.
   6. Cooperative principles: Cooperative societies operate based on principles of democratic control, voluntary membership, and equitable distribution of benefits among members.
   7. Ownership and control: Members of the cooperative society have equal ownership and control, with each member having one vote regardless of their level of investment or shareholding.
   8. Profit sharing: Profits are distributed among members based on their participation or patronage of the cooperative.

   
    

   CHAPTER 2

   FORMATION OF COMPANIES

   Learning outcomes

   On completion of this topic, you should be able to; 1. Promoters and pre-incorporation contracts and deeds. 2. Process and drafting documents required to form a company. 3. Rules relating to company names 4. Memorandum and articles of association 5. Certificate of incorporation 6. Effects of incorporation 7. Execution of a company’s documents 8. Alteration of status of companies

    

   2.1 PROMOTERS AND PRE-INCORPORATION CONTRACTS AND DEEDS.

   Promoters

   Promoters are individuals or entities who take the initiative to conceive and set up a company. They play a vital role in the formation and organization of the company before it is officially incorporated. Promoters identify the business opportunity, arrange for initial financing, undertake necessary groundwork, and take steps to bring the company into existence.

    

   The role of promoters typically involves activities such as:

   1. Identifying a viable business idea or opportunity.
   2. Conducting feasibility studies and market research.
   3. Raising initial capital.
   4. Securing necessary permits and licenses.
   5. Assembling a team of professionals.
   6. Negotiating contracts and agreements.

   Promoters have a fiduciary duty to act in the best interests of the company and its prospective shareholders. They must disclose all relevant information and avoid conflicts of interest while performing their duties. Promoters are personally liable for any pre-incorporation actions and contracts they enter into on behalf of the company.

    

   In Gluckstein Vs. Barnes.

   The promoters bought a property at Ksh. 140,000 from a company in financial difficulties. They had made profit of Ksh. 40,000 on the purchase price. They then sold it to the company at an additional profit of Ksh. 20,000. They disclosed their profit of Ksh. 40,000 but not the Ksh. 20,000. When company went into liquidation a few years later, the court held that the promoters were liable to hand over Ksh. 20,000 being secret profit.

    

   Pre-incorporation contracts

   Pre-incorporation contracts are agreements entered into by promoters on behalf of a company that is yet to be incorporated. These contracts are made during the period when the company is in the process of being formed, but before it has obtained legal recognition as a separate legal entity.

   Pre-incorporation contracts can include various types of agreements, such as:

   1. Lease or purchase of property or assets.
   2. Employment contracts or service agreements.
   3. Supplier agreements.
   4. Contracts with customers or clients.
   5. Loan agreements or financing arrangements.

   It’s important to note that since the company does not yet legally exist, pre-incorporation contracts are typically made in the name of the future company, with the intention that they will be ratified or adopted by the company once it is incorporated. Promoters are personally liable for these contracts until the company is incorporated and assumes the contractual obligations.

    

   Deeds of ratification

   Deeds of ratification are legal documents executed by a company after its incorporation to validate or adopt pre-incorporation contracts or actions made by the promoters on its behalf. These deeds serve to confirm that the company, upon its formation, intends to assume and be bound by the terms of the pre-incorporation contracts.

   By executing a deed of ratification, the company effectively adopts the pre-incorporation contracts, making them binding on the company. Once ratified, the company becomes directly liable for the obligations and responsibilities under those contracts. The deed of ratification essentially cures any lack of legal capacity the company had at the time the pre-incorporation contracts were made.

    

   2.2 PROCESS AND DRAFTING DOCUMENTS REQUIRED TO FORM A COMPANY.

   General overview of the process and the documents typically involved:

   1. Choose the type and name of the company:

   – Decide on the type of company you want to form, such as a corporation or limited liability company (LLC).

   – Choose a unique and available name for your company, ensuring it complies with any naming conventions or restrictions set by the relevant authorities.

   – Prepare the Company’s Constitution or Articles of Incorporation:

   – Draft the company’s constitution or articles of incorporation. This document sets out the company’s name, purpose, share structure, registered office address, rules for governance, and other key provisions.

   – Include any additional provisions or clauses required by the jurisdiction or desired by the founders.

    

   2. Prepare other statutory documents:

   – Depending on the jurisdiction, you may need to prepare additional statutory documents, such as a memorandum of association, statement of compliance, or statement of capital.

   – These documents provide specific information about the company, its structure, and its compliance with legal requirements.

    

   3. Obtain consent and signatures:

   – Obtain the consent and signatures of the initial shareholders or members who will be part of the company.

   – Ensure that all required parties sign the necessary documents, such as the constitution or articles of incorporation, memorandum of association, and other relevant forms.

    

   4. Register with the relevant authorities:

   – Submit the required documents to the appropriate government authority or registrar of companies.

   – Pay the applicable registration fees.

   – Provide any additional information or documentation as required by the registration authority.

    

   5. Obtain certificates and registrations:

   – Once the company is successfully registered, you may receive various certificates or registrations, such as a certificate of incorporation or certificate of formation, tax identification number, or business license.

    

   6. Comply with ongoing requirements:

   – After the company is formed, there are ongoing compliance requirements, such as filing annual reports, maintaining proper corporate records, holding annual general meetings, and complying with tax and regulatory obligations.

    

   2.3 RULES RELATING TO COMPANY NAMES

   1. Unique and distinguishable:

   The company name should be unique and distinguishable from existing registered companies or trademarks within the jurisdiction.

   It should not be identical or too similar to an existing company name to avoid confusion among customers and stakeholders.

   2. Legal restrictions and prohibited terms:

   Names that are offensive, misleading, deceptive, or violate public order or morality are generally prohibited.

   3. Descriptive and not generic:

   The name should describe the nature of the business or be associated with the company’s activities.

   4. Restricted words or phrases:

   Some jurisdictions have specific regulations on the use of certain words or phrases in company names, such as “national,” “international,” “group,” or “holding.”

   5. Sensitive words or expressions:

   Certain sensitive words or expressions may require additional approval or documentation, such as “royal,” “charity,” “foundation,” or “government.”

   6. Company type indicators:

   Some jurisdictions require specific indicators to be included in the company name to indicate the type of legal entity, such as “Limited,” “Ltd,” “Incorporated,” “Inc,”

   7. Trademark considerations:

   It is important to conduct a thorough trademark search to ensure that the desired company name does not infringe on existing trademarks.

    

   2.4 MEMORANDUM AND ARTICLES OF ASSOCIATION

   Memorandum of association

   It is a foundational document that sets out the company’s constitution and defines its relationship with the outside world. It contains fundamental information about the company, including:

   1. Company name and registered office: The official name and address of the company.
   2. Object clause: The primary objective or purpose for which the company is formed.
   3. Liability clause: The type of liability that the members or shareholders have, such as limited liability in the case of a company limited by shares.
   4. Capital clause: The authorized share capital of the company, i.e., the maximum value of shares that can be issued.
   5. Association clause: The agreement of the initial shareholders or members to form the company and become its members.

    

   Articles of association

   The Articles of Association are the internal regulations that govern the internal management and operations of the company. They define the rights, duties, and powers of the company, its shareholders, and its officers. The Articles typically cover the following areas:

   1. Shareholders’ rights and dividends: The rights attached to different classes of shares, dividend distribution, and procedures for issuing or transferring shares.
   2. Directors’ powers and duties: The appointment, powers, and responsibilities of directors, including their meetings, decision-making process, and potential conflicts of interest.
   3. General meetings: The rules and procedures for conducting general meetings of shareholders, including the annual general meeting (AGM) and extraordinary general meetings (EGMs).
   4. Voting and resolutions: The rules for voting on company matters and passing resolutions, including the majority required for various types of decisions.
   5. Borrowing powers: The authority of the company to borrow money, issue debentures, or create charges on company assets.
   6. Winding up: The procedures and conditions for winding up or dissolution of the company.

    

   2.5 CERTIFICATE OF INCORPORATION

   A Certificate of incorporation is an official document issued by the government or company registrar when a company is successfully incorporated or registered. It serves as legal proof that the company has been formed and recognized as a separate legal entity.

   Key information about the certificate of Incorporation:

   1. Issuance and contents

   The Certificate of Incorporation is typically issued by the government authority or registrar responsible for overseeing company registrations..

   2. Legal recognition

   The Certificate of Incorporation is a significant document as it confers legal recognition on the company as a separate legal entity distinct from its owners or shareholders.

   3. Public document

   The Certificate of Incorporation is a public document that is accessible for inspection by anyone who wishes to verify the existence and details of the company.

   Importance for legal and business transactions

   It is often required during various legal and business transactions, such as opening a bank account, entering into contracts, obtaining licenses or permits, or participating in government tenders or bids.

    

   2.6 EFFECTS OF INCORPORATION

   1. Separate legal entity

   Upon incorporation, the company becomes a separate legal entity distinct from its shareholders or owners.

   2. Limited liability

   Shareholders or owners of the company are typically not personally liable for the company’s debts or obligations beyond their investment in the company.

   3. Perpetual existence

   Incorporation grants the company perpetual existence, meaning it can continue to exist even if the original shareholders or owners change or pass away.

   4. Transferability of Shares

   Incorporation allows for the transferability of shares, providing flexibility in the ownership structure of the company.

   5. Capital generation

   It allows for the issuance and sale of shares, enabling the company to raise funds from investors and shareholders..

   6. Taxation and financial advantages

   Incorporation may provide certain tax advantages and financial benefits, depending on the jurisdiction and specific regulations. Companies may be subject to different tax rates, deductions, or incentives compared to other business forms.

    

   2.7 EXECUTION OF A COMPANY’S DOCUMENTS

   The execution of a company’s documents refers to the process of signing and formalizing the company’s legal agreements and contracts. Here are some key considerations for executing a company’s documents:

   1. Authority to execute

   Before signing any documents on behalf of the company, it is essential to ensure that the person executing the document has the proper authority to do so.

   2. Proper Identification

   The person executing the document should clearly state their name, title, and position within the company to indicate their authority to act on behalf of the company.

   3. Signature

   The person executing the document should sign their name in a legible manner.

   4. Witnessing

   Depending on the jurisdiction and the nature of the document, witnesses may be required to attest to

   5. Company seal:

   In some jurisdictions or for certain types of documents, the company seal may be required for execution.

   6. Document retention:

   Executed documents should be properly retained and stored as part of the company’s records.

   7. Legal advice:

   It is advisable to seek legal advice or consult with professionals familiar with the specific laws and regulations governing document execution in the relevant jurisdiction.

    

   2.8 ALTERATION OF STATUS OF COMPANIES

   The alteration of the status of a company refers to making changes to its legal structure, rights, powers, or any other aspect that affects its operations and governance.

   Types of alterations that can be made to a company’s status:

   1. Change of company type
   2. Change of ownership structure
   3. Change of registered office
   4. Change of directors or officers
   5. Alteration of memorandum and articles of association

    

    

    

   
    

   CHAPTER 3

   MEMBERSHIP OF A COMPANY

   Learning outcomes

   On completion of this topic, you should be able to; 1. Acquisition of membership 2. Register of members 3. Rights and liabilities of members 4. Cessation of membership 5. Register of a company’s beneficial owners 6. Derivative actions.

    

   3.1 ACQUISITION OF MEMBERSHIP

   The membership of a company refers to the individuals or entities who hold shares or membership interests in the company.

   Ways in which membership in a company can be acquired:

   1. Initial subscription
   2. Share purchase
   3. Share allotment
   4. Transfer by operation of law
   5. Conversion or merger
   6. Share split or bonus issue:

    

   3.2 REGISTER OF MEMBERS

   A register of members, also known as a shareholder register or membership register, is a record that a company maintains to track information about its shareholders or members.

   Key points to understand about the register of members

   1. Purpose and importance

   – The register of members is a legal requirement in many jurisdictions and is considered a fundamental record for a company.

   – It provides an accurate and up-to-date record of the company’s shareholders or members, their ownership interests, and relevant contact information.

   – The register of members helps establish the ownership structure of the company and facilitates communication and engagement with shareholders or members.

    

   2. Information recorded

   The register of members typically includes the following information for each shareholder or member:

   1. Full name and any other identifying information, such as identification numbers or passport details.
   2. Address for communication.
   3. Number and class of shares or membership interests held.
   4. Date of acquisition of shares or membership interests.
   5. Details of any transfers, transmissions, or other changes in ownership.
   6. Any restrictions on the transferability of shares or membership interests.

    

   3. Maintenance and accessibility

   – The company is responsible for maintaining the register of members and ensuring it is accurate and -up to date.

   – The register should be kept at the company’s registered office or at another designated location as required by law.

   – Certain jurisdictions may also require companies to notify the relevant company registrar of the location where the register is kept.

   – Shareholders or members have the right to inspect the register of members and obtain copies of its contents, subject to any legal requirements or restrictions.

    

   4. Updates and changes

   – The register of members should be regularly updated to reflect any changes in shareholdings or membership interests.

   – Updates may include recording new share issuances, transfers, transmissions, or changes resulting from corporate actions such as share buybacks or mergers.

   – Companies are typically required to file any significant changes or updates to the register with the relevant company registrar within specified timeframes.

    

   5. Confidentiality and data protection

   – The information contained in the register of members is generally considered confidential and should be protected in accordance with applicable data protection laws and regulations.

   – Companies should implement appropriate measures to safeguard the personal information of shareholders or members and ensure compliance with privacy requirements.

    

   6. Use in corporate actions

   – The register of members is used in various corporate actions, such as voting, issuing dividends, conducting shareholder meetings, or communicating with shareholders or members.

   – It is important for companies to rely on the register to confirm the eligibility of shareholders or members for participating in these actions.

    

   3.3 RIGHTS AND LIABILITIES OF MEMBERS

   Rights of members

   1. Voting rights: Members typically have the right to vote on significant matters that affect the company, such as the appointment of directors, changes to the company’s constitution etc.
   2. Dividend rights: Members may be entitled to receive dividends, which are a portion of the company’s profits distributed to shareholders.
   3. Right to information: Members have the right to access certain information about the company, such as financial statements, annual reports, and minutes of shareholder meetings.
   4. Pre-emption rights: Members may have pre-emption rights, also known as rights of first refusal, which allow them to purchase new shares or shares being transferred by existing shareholders before they are offered to external parties.
   5. Right to attend shareholder meetings: Members have the right to attend and participate in general meetings of the company.
   6. Right to share in distributions upon liquidation: In the event of the company’s liquidation or winding up, members have the right to share in the company’s assets after the payment of debts and other liabilities. The distribution of assets is typically based on the proportion of shares held by each member.

    

   Liabilities of members

   1. Liability for shares: Members are generally liable to pay the nominal value or the subscription price of the shares they hold.
   2. Liability to third parties: Members are generally not personally liable for the company’s debts and obligations. The concept of limited liability protects members from being held individually responsible for the company’s liabilities.
   3. Compliance with company’s constitution: Members have a responsibility to comply with the provisions outlined in the company’s constitution, including any restrictions on share transfers, voting procedures, or other obligations imposed on members.

    

   4. Fiduciary duties: In some jurisdictions, members who are also directors have fiduciary duties to act in the best interests of the company and its shareholders.

    

   3.4 CESSATION OF MEMBERSHIP

   1. Transfer of shares

   The transfer may be voluntary, such as selling the shares to a third party, or involuntary, such as transferring shares through inheritance or court order.

   2. Share buyback

   Companies may have the authority to buy back shares from their members.

   3. Redemption of shares

   In certain cases, a company may have the power to redeem shares, meaning the company repurchases the shares from the member at a predetermined price or according to specific conditions.

   4. Share forfeiture

   If a member fails to comply with certain obligations or breaches the company’s rules, the company may have the right to forfeit their shares.

   5. Resignation

   Members can voluntarily resign from their membership in a company by submitting a resignation letter or notice to the company.

   6. Death or bankruptcy

   The death or bankruptcy of a member usually results in the cessation of their membership.

   7. Termination or dissolution

   If a company is terminated or dissolved, the membership of all its members ceases automatically.

    

   3.5 REGISTER OF A COMPANY’S BENEFICIAL OWNERS

   A register of a company’s beneficial owners, also known as a beneficial ownership register, is a record that contains information about the individuals or entities that ultimately own or control the company.

   Key points to understand about the register of a company’s beneficial owners:

   1. Definition of beneficial owner

   A beneficial owner refers to an individual or entity that ultimately owns or controls a company or has the ability to exercise significant influence or control over its operations.

    

   2. Information recorded

   The register of beneficial owners typically includes the following information for each beneficial owner:

   1. Full name, date of birth, nationality, and residential address.
   2. Nature and extent of the beneficial interest or control held by the individual.
   3. Details of any changes in beneficial ownership or control.
   4. In some cases, supporting documentation such as identification documents or proof of ownership or control may be required.

    

   3. Maintenance and accessibility

   – The company is responsible for establishing and maintaining the register of beneficial owners.

   – The register should be kept at the company’s registered office or at another designated location as required by law.

   – Certain jurisdictions may also require companies to notify the relevant authorities or maintain the register in a central registry or database.

   – The register may be accessible to government authorities, regulatory bodies, and other entities as permitted by law, to facilitate investigations, compliance checks, or due diligence processes.

    

   4. Reporting and compliance

   – Companies may be required to regularly update the register of beneficial owners to reflect any changes or new information.

   – The specific reporting requirements and timelines for updating the register may vary depending on the jurisdiction and the applicable laws or regulations.

   – Companies may also be obligated to undertake due diligence measures to identify their beneficial owners and verify the accuracy of the information provided.

    

   5. Confidentiality and data protection:

   – The information contained in the register of beneficial owners is generally considered sensitive and confidential.

   – Companies should implement appropriate measures to protect the personal information of beneficial owners and ensure compliance with data protection and privacy laws.

   – The disclosure of beneficial ownership information to third parties is typically restricted to authorized entities and subject to legal requirements.

    

   6. Penalties for non-compliance:

   – Failure to establish and maintain an accurate register of beneficial owners or to comply with reporting requirements can result in penalties and sanctions.

   – Penalties may include fines, restrictions on company activities, or potential criminal liability for the company and its officers.

    

   3.6 DERIVATIVE ACTIONS

   A derivative action, also known as a shareholder derivative suit, is a legal mechanism that allows shareholders to bring a lawsuit on behalf of a company against a third party, typically directors, officers, or other insiders of the company.

   Key points to understand about derivative actions:

   Purpose

   – Derivative actions are brought when a shareholder believes that the company has suffered harm due to the wrongdoing of its directors, officers, or other insiders.

   – The purpose of a derivative action is to allow shareholders to seek redress for the harm caused to the company and recover damages on behalf of the company.

   – The ultimate objective is to hold accountable those responsible for the harm and protect the interests of the company and its shareholders.

    

   Standing to bring a derivative action

   – Shareholders who have continuous ownership of shares during the relevant period, and who meet other eligibility requirements specified by law, typically have standing to bring a derivative action.

   – The shareholder must demonstrate that they are suing on behalf of the company and not in their personal capacity.

   – In some jurisdictions, the shareholder may need to make a demand on the company’s board of directors before filing a derivative action, giving the board an opportunity to address the alleged wrongdoing.

    

   Requirements for filing a derivative action

   – To file a derivative action, the shareholder must typically allege and provide evidence of specific facts supporting the claim of wrongdoing by the directors, officers, or insiders.

   – The shareholder must show that they have made a good faith effort to exhaust internal remedies, such as making a demand on the board or showing that such demand would be futile.

   – The shareholder must comply with procedural requirements, such as notifying the company and obtaining court approval to proceed with the derivative action.

    

   Conducting a derivative action

   – Once a derivative action is initiated, the court will evaluate the merits of the claim and determine whether the action can proceed.

   – If the court allows the action to proceed, the shareholder acts as the plaintiff on behalf of the company.

   – The company becomes the nominal defendant, and the named defendants are the alleged wrongdoers.

   – The shareholder’s recovery, if successful, typically goes to the company, rather than the shareholder personally.

    

   Role of the company

   – The company’s board of directors and management have the opportunity to defend against the derivative action and protect the company’s interests.

   – In some cases, the company may choose to initiate an internal investigation or take corrective actions to address the alleged wrongdoing before or during the derivative action.

    

   Legal remedies and outcomes

   – If successful, the court may order remedies such as damages, restitution, injunctive relief, or changes in corporate governance.

   – The court may also award attorneys’ fees and costs to the prevailing party.

   – However, it’s important to note that the outcome of a derivative action can vary depending on the specific circumstances, applicable laws, and the court’s evaluation of the evidence and arguments presented.

   
    

   CHAPTER 4

   SHARES

   Learning outcomes

   On completion of this topic, you should be able to; 1. Classes of shares 2. Variation of class rights 3. Share certificates 4. Issue and allotment 5. Transfer and transmission 6. Transfer of shares under central depository system 7. Mortgaging and charging of shares

    

   4.1 CLASSES OF SHARES

   Shares are units of ownership in a company that represent a shareholder’s proportionate interest in the company’s capital, assets, profits, and voting rights. Companies issue shares to raise capital and attract investors.

   1. Ordinary shares

   They are also referred to as equity capital. The holders of ordinary shares usually carry the main risk of business as they invest their money without assurance that they will be paid interest on their investment. Holders receive dividends out of profit as determined by directors and declared by members in the Annual General Meeting.

   Ordinary shareholders are entitled to the following rights which are not available in respect of other shares:

   (i)After providing for any other dividend, which is payable on preference shares, the whole of the remaining profits can be available to them by way of dividend if they so wish.

   (ii)They are entitled to control the company by use of voting rights at the Annual General Meeting.

   (iii)During winding up ordinary shareholders are entitled to the entire residue after payment of the company’s liability.

   (iv)They receive dividend at variable rates based on the discretion of directors and availability of profits.

    

   2. Preferred Shares

   They carry preferential rights in relation to other classes of shares. The rights relate to dividend and right to receive proportionate parts of capital during winding up. The rights on preference shares may be stated in the Articles of association. As regards their priority entitlement, the following features must be observed:

   (i) The right to receive a dividend at a specified rate usually fixed by the terms of issue or the Articles.

   (ii) The right to receive dividends before any other class but not a right to compel the company to pay dividends if it fails to do so.

   (iii)The right to receive dividends is assumed to be cumulative unless otherwise stated.

   (iv) If a Company which has arrears of unpaid dividends goes into liquidation, a preference shareholder ceases to be entitled to the arrears of the dividends unless the dividend had been declared and not paid or the articles provide for payment for such arrears.

   (v)Holders of preference shares are not entitled to participate in any surplus dividend over and above the specified rates.

    

   Preference shares have various sub-types; they are as follows:

   1. Cumulative preference shares
   2. Non-cumulative preference shares
   3. Participating preference shares
   4. Non-participating preference shares
   5. Convertible preference shares
   6. Non-convertible preference shares
   7. Redeemable preference shares
   8. Irredeemable preference shares

    

   3. Non-voting shares

   Non-voting shares are a class of shares that do not carry voting rights or have limited voting rights.

   Non-voting shareholders participate in the company’s financial benefits, such as dividends and capital appreciation, but do not have a say in the company’s decision-making process.

   Non-voting shares are often issued to investors or employees as a way to provide economic ownership without granting voting power.

    

   4. Redeemable shares

   Section 520 provides that a company may issue preference shares which are liable to be redeemed. This is only possible under the following conditions:

   (i)The company must have shares which are not redeemable e.g. Ordinary shares

   (ii)Issue of redeemable preference shares must be authorized by the articles

   (iii)The shares must be fully paid at the time of redemption.

   (iv)Money required for redemption must be from either the proceeds from a fresh issue of shares made for the purpose or out of accumulated profit.

   (v)Any premium on redemption must be provide out of profits available for distribution or out of the share premium account.

   (vi)Redemption of preference shares should not be taken as a reduction of the Company’s authorized share capital.

   (vii)Within one month of redemption notice of the number of shares redeemed must be given to the register.

    

   5. Founder’s shares

   Founder’s shares are a class of shares issued to the founders or early-stage investors of a company.

   These shares often carry special rights, such as enhanced voting rights or preferential treatment in the event of a sale or liquidation of the company.

   Founder’s shares are typically issued to align the interests of the company’s founders with the long-term success and control of the company.

    

   6. Class-specific shares

   Some companies may create specific classes of shares to cater to particular groups of investors or to meet specific needs.

   Class-specific shares may have unique rights, preferences, or restrictions not found in other classes of shares.

   For example, a company may issue class-specific shares with special dividend rights, conversion rights, or restrictions on transferability.

    

   4.2 VARIATION OF CLASS RIGHTS

   Variation of class rights refers to the process by which a company makes changes to the rights and privileges attached to a particular class of shares. It allows the company to modify the rights of one class of shares without affecting the rights of other classes of shares.

   Key points to understand about the variation of class rights

   Purpose:

   – Companies may seek to vary class rights for various reasons, such as to restructure the company, raise capital, accommodate the changing needs of shareholders, or address specific business requirements.

   – Variation of class rights allows the company to adapt to evolving circumstances while preserving the rights and interests of different classes of shareholders.

    

   Legal framework

   – The ability to vary class rights is typically governed by the company’s constitution, articles of association, shareholder agreements, and applicable laws or regulations.

   – Companies must comply with the legal requirements and procedures specified in these documents and the relevant corporate laws before varying class rights.

    

   Shareholder approval

   – Varying class rights generally requires the approval of the affected class of shareholders.

   – The specific approval threshold may be outlined in the company’s constitution or articles of association. It can vary depending on the jurisdiction and the terms set out in the governing documents.

   – The company typically holds a general meeting of the affected class of shareholders to seek their approval for the proposed variation. The meeting must comply with the legal requirements for notice, quorum, and voting procedures.

    

   Disclosure and communication

   Companies are usually required to provide full and accurate information about the proposed variation to the affected shareholders.

   The company must communicate the details of the variation, its implications, and the rationale behind it to enable shareholders to make an informed decision.

   Shareholders may also have the right to ask questions, seek clarifications, and express their views on the proposed variation.

    

   Court approval

   In some cases, court approval may be necessary to vary class rights, particularly if there are dissenting shareholders or if the variation affects the rights of minority shareholders.

   The court will review the proposed variation, consider the interests of all affected parties, and determine whether the variation is fair and equitable.

   The court’s approval provides an added layer of protection for shareholders and ensures that their rights are not unfairly prejudiced.

    

   Documentation and record-keeping

   Once the variation of class rights is approved, the company must document the changes and update its records accordingly.

   The amended rights and privileges of the affected class of shares should be clearly reflected in the company’s constitutional documents, shareholder registers, and any relevant agreements.

    

   4.3 SHARE CERTIFICATES

   Share certificates are physical or electronic documents issued by a company to its shareholders to evidence their ownership of shares in the company.

    

   Purpose

   – Share certificates serve as proof of ownership and provide shareholders with tangible evidence of their investment in the company.

   – They represent a legal title to the shares and can be used to establish ownership and transferability of shares.

    

   Contents of share certificates

   – Share certificates typically include essential information such as the name of the company, the class and type of shares held, the shareholder’s name, the number or quantity of shares, the unique share certificate number, and the date of issuance.

   – The certificates may also include details about any restrictions or special rights attached to the shares, such as voting rights or dividend preferences.

    

   Physical share certificates

   – Traditionally, share certificates were physical documents printed on paper and issued to shareholders.

   – Physical certificates often include security features like watermarks, holograms, or unique designs to prevent counterfeiting.

   – Shareholders were required to keep their share certificates in a safe place as they were required for share transfers or exercising shareholder rights.

    

   Electronic share certificates

   – Electronic shareholding systems eliminate the need for physical share certificates. Instead, shares are held and recorded electronically in a central depository or registry.

   – Shareholders receive statements or electronic records confirming their share ownership instead of physical certificates.

    

   Transfer and transmission of share certificates

   – Share certificates are transferable documents that allow shareholders to sell, gift, or transfer their shares to other individuals or entities.

   – To transfer shares, the shareholder typically endorses or signs the back of the share certificate and delivers it to the buyer or the company’s registrar.

   – In the case of transmission, where shares are transferred due to the death or bankruptcy of a shareholder, the appropriate legal procedures must be followed, and the share certificate may need to be accompanied by relevant documentation, such as a probate order or court order.

    

   Replacement and cancellation

   – If a physical share certificate is lost, stolen, or damaged, the shareholder should inform the company and follow the required procedures to obtain a replacement certificate.

   – In the case of electronic shareholding, the shareholder may need to contact the relevant depository or registrar to request a replacement or updated statement of their shareholding.

   – When shares are transferred or canceled, the share certificates are usually returned to the company for cancellation or marked as “canceled” to prevent misuse.

    

   4.4 ISSUE AND ALLOTMENT

   Issue of shares

   The issue of shares refers to the creation and availability of new shares by a company for subscription or purchase. Companies may issue new shares to raise capital, fund expansion, acquire assets, or for other business purposes.

   The issue of shares may require shareholder approval, particularly if it involves a significant increase in the company’s authorized share capital or if it involves the issuance of shares with special rights or preferences.

    

   Allotment of shares:

   Allotment is the process of allocating or assigning the newly issued shares to specific individuals or entities who have applied for or agreed to purchase the shares.

   Allotment is usually conducted by the company’s board of directors or by a designated committee with the authority to make allotments.

   The allotment process involves reviewing applications or purchase agreements, verifying compliance with applicable laws and regulations, and determining the allocation of shares based on the terms and conditions of the share issuance.

   The allotment decision is typically communicated to the applicants, and the allotted shares are reserved for the successful applicants.

    

   NOTE;

   1. Share issuance and allotment must comply with the legal requirements and regulations of the jurisdiction in which the company operates.
   2. The process may involve obtaining necessary approvals from regulatory authorities, such as securities commissions or stock exchanges, depending on the nature and size of the share issuance.
   3. Companies may choose to issue shares publicly through an initial public offering (IPO) or privately through a private placement or rights offering.
   4. The terms of the share issuance, including the price per share, the number of shares being issued, any special rights or preferences attached to the shares, and the timeline for payment and share delivery, are typically set out in the offer documents or subscription agreements.
   5. After the allotment of shares, the company usually prepares share certificates or electronic statements to evidence the ownership of the allotted shares by the shareholders.
   6. Shareholders who have been allotted shares may be required to make the necessary payment for the shares within a specified timeframe as per the terms of the share issuance.

    

   4.5 TRANSFER AND TRANSMISSION

   Transfer of shares

   1. Transfer of shares refers to the process of transferring ownership of shares from one shareholder to another.
   2. Shareholders may choose to transfer their shares for various reasons, such as selling them to another investor, gifting them, or transferring them as part of a business transaction.
   3. The transfer of shares involves a change in legal ownership, but the shares remain with the same class and rights as originally issued.
   4. The transfer process is typically initiated by the transferor (seller) and requires the transferor to execute a share transfer form or instrument, which is then delivered to the company or its registrar.
   5. The company or its registrar updates the register of members to reflect the transfer and issues a new share certificate or updates the electronic shareholding record for the transferee (buyer).

    

   Transmission of shares:

   1. Transmission of shares refers to the transfer of shares due to the death, bankruptcy, or insolvency of a shareholder.
   2. In the case of transmission, the shares pass to the legal representative or successor of the deceased or bankrupt shareholder.
   3. The transmission process is governed by the relevant laws and regulations, as well as the company’s articles of association or constitution.
   4. The legal representative or successor is required to provide the necessary legal documentation, such as a death certificate, probate order, or court order, to establish their entitlement to the shares.
   5. The company or its registrar updates the register of members to reflect the transmission and issues a new share certificate or updates the electronic shareholding record for the new shareholder.

    

   Note:

    

   • Both transfer and transmission of shares require compliance with the company’s constitutional documents, applicable laws, and regulations.
   • The transfer or transmission process may involve notifying the company or its registrar, completing the necessary forms or instruments, and providing supporting documentation.
   • Companies may have specific procedures and requirements for share transfers or transmissions, including any restrictions on transferability outlined in the articles of association or shareholders’ agreements.
   • It is common for companies to charge a fee for processing share transfers or transmissions to cover administrative costs.
   • Shareholders should ensure that they follow the prescribed procedures and seek legal advice if necessary to ensure a smooth and legally valid transfer or transmission of shares.

    

   4.6 TRANSFER OF SHARES UNDER CENTRAL DEPOSITORY SYSTEM

   Transfer of shares under a Central Depository System (CDS) refers to the process of electronically transferring ownership of shares between buyers and sellers through a centralized depository. The CDS is a system that facilitates the electronic holding, transfer, and settlement of securities, including shares.

   How the transfer of shares works under a CDS:

   1. Opening a CDS account:

   To participate in share transfers through the CDS, investors need to open a CDS account with a registered depository participant (DP).

   The DP is an intermediary authorized to provide CDS services and maintain investor accounts.

   2. Initiation of transfer:

   The transfer of shares is initiated by the seller (transferor) who instructs their DP to transfer the shares to the buyer (transferee).

   The transfer instruction includes details such as the buyer’s CDS account number, the number of shares being transferred, and any relevant transaction information.

   3. Verification and settlement:

   The transfer instruction is verified by the transferor’s DP to ensure that it complies with the rules and regulations of the CDS.

   4. Updating share ownership:

   After the transfer is settled, the CDS updates its records to reflect the change in ownership.

   5. Reporting and Confirmation:

   The CDS provides confirmation of the share transfer to both the transferor and transferee, typically in the form of electronic statements or transaction reports.

   The confirmation includes details such as the transferred share quantity, transaction date, and the respective CDS account numbers.

    

   4.7 MORTGAGING AND CHARGING OF SHARES

   Mortgaging of shares

   – Mortgaging of shares refers to the process of creating a mortgage over shares to secure a loan or debt.

   – The shareholder who owns the shares pledges them as collateral to a lender or creditor.

   By creating a mortgage, the shareholder grants the lender a security interest in the shares, and in the event of default, the lender may have the right to sell the shares to recover the outstanding debt.

   – The terms and conditions of the mortgage, including the repayment terms, interest rates, and events of default, are usually outlined in a mortgage agreement or deed.

    

   Charging of shares

   – Charging of shares is a similar concept to mortgaging and involves using shares as security for a debt or obligation.

   – When shares are charged, the shareholder grants a charge or lien over the shares to the creditor.

   The charge gives the creditor the right to sell the shares or enforce the security interest if the debtor fails to fulfill their obligations.

   – The terms and conditions of the charge, such as the amount secured, repayment terms, and enforcement procedures, are typically set out in a charge agreement or deed.

   
    

   CHAPTER 5

   SHARE CAPITAL

   Learning outcomes

   On completion of this topic, you should be able to; 1. Meaning and types of share capital 2. Raising of share capital 3. Prospectus/information memorandum 4. Maintenance of capital 5. Alteration and Consolidation of share capital 6. Dividends

    

   5.1 MEANING AND TYPES OF SHARE CAPITAL

   Share capital refers to the total value of the shares issued by a company, representing the ownership interest of its shareholders. It is the capital raised by the company through the issuance of shares.

   Types of share capital

   1. Authorized share capital:

   Authorized share capital, also known as authorized capital or nominal capital, represents the maximum value of shares that a company is authorized to issue as per its constitutional documents (e.g., memorandum of association). It sets the limit on the amount of capital that the company can raise from the issuance of shares.

   2. Issued share capital:

   Issued share capital refers to the portion of authorized share capital that has been issued by the company and allocated to shareholders. It represents the actual shares held by shareholders.

   3. Subscribed share capital:

   Subscribed share capital refers to the portion of the issued share capital that has been subscribed to or agreed to be taken up by shareholders. It represents the shares for which shareholders have made a commitment to purchase but may not have fully paid for yet.

   4. Paid-up share capital:

   Paid-up share capital refers to the portion of the subscribed share capital that shareholders have actually paid for. It represents the amount of money that shareholders have contributed to the company in exchange for their shares.

    

   5.2 RAISING OF SHARE CAPITAL

   Raising share capital refers to the process of increasing the funds available to a company by issuing new shares to investors. It is a common method used by companies to raise funds for various purposes, such as expansion, acquisitions, debt repayment, or working capital.

   Ways in which companies can raise share capital:

   1. Public Issue/Initial Public Offering (IPO):

   A company can raise share capital by making an initial public offering (IPO) and listing its shares on

   2. Rights Issue:

   A rights issue allows existing shareholders of a company to purchase additional shares in proportion to their existing shareholdings.

   3. Private Placement:

   A private placement involves offering shares to a select group of institutional or accredited investors, rather than to the general public.

   4. Venture Capital and Private Equity:

   Companies in their early stages or high-growth phases may raise share capital through venture capital (VC) or private equity (PE) investments.

   5. Crowdfunding:

   Crowdfunding platforms allow companies to raise share capital by soliciting investments from a large number of individuals, often through online platforms.

   6. Convertible Debt:

   Companies may raise share capital by issuing convertible debt instruments, such as convertible bonds or convertible notes.

    

   5.3 PROSPECTUS/INFORMATION MEMORANDUM

   A prospectus (also known as an information memorandum or offering memorandum) is a legal document prepared by a company seeking to raise funds from the public through an initial public offering (IPO) or a public issue of securities. It provides potential investors with detailed information about the company, its business operations, financials, risks, and terms of the offering.

    

   Purpose:

   – The primary purpose of a prospectus is to provide potential investors with all relevant information necessary for making an informed investment decision.

   – It aims to ensure transparency and disclosure of material facts about the company, its operations, and the securities being offered.

    

   Contents:

   – It contains information about the company’s history, business model, products or services, management team, financial performance, risk factors, and future prospects.

   – It includes details about the securities being offered, such as the number of shares, their price, and any rights or restrictions associated with them.

   – It may also include information about the offering process, underwriters, legal and financial advisors, and the intended use of the proceeds.

    

   5.4 MAINTENANCE OF CAPITAL

   Maintenance of capital refers to the legal principle that governs the protection of a company’s share capital and restricts certain actions that could result in the reduction or depletion of that capital. The aim of this principle is to safeguard the interests of the company’s creditors and shareholders.

    

   Capital preservation

   The principle of capital preservation requires a company to safeguard its share capital and prevent it from being distributed or diminished in a way that could prejudice the interests of creditors.

    

   Prohibited reduction of capital

   Companies are generally prohibited from reducing their share capital unless certain legal procedures and requirements are followed. Reduction of capital may involve canceling shares, reducing their nominal value, or returning capital to shareholders.

    

   Distribution restrictions

   Companies must comply with restrictions on the distribution of capital to shareholders, including dividends and other forms of distributions. Dividends or distributions can only be made out of profits or distributable reserves, ensuring that the company remains financially sound and able to meet its obligations.

    

   Solvency and financial tests:

   Some jurisdictions require companies to meet solvency or financial tests before making distributions or reducing capital. Solvency tests typically assess the company’s ability to pay its debts as they become due and determine whether the distribution or reduction would negatively impact its financial viability.

    

   Regulatory compliance

    

   Companies are required to comply with relevant laws, regulations, and accounting standards related to the maintenance of capital.

    

   Consequences of non-compliance:

   Failure to comply with capital maintenance requirements can result in legal consequences, including liabilities for directors, challenges to distributions or reductions, and potential invalidation of transactions.

    

   5.5 ALTERATION AND CONSOLIDATION OF SHARE CAPITAL

   Alteration and consolidation of share capital refer to the changes made to a company’s existing share capital structure. These changes may involve increasing or decreasing the nominal value of shares, reorganizing share classes, or consolidating shares.

   Alteration of share capital

   – Alteration of share capital involves making changes to the existing share capital structure of a company.

   – It may include increasing or reducing the nominal value of shares, altering the rights attached to shares, or reclassifying shares into different classes.

   – Alterations are typically made through a special resolution passed by the shareholders and may require regulatory approvals or court sanction, depending on the jurisdiction.

    

   Consolidation of share capital:

   – Consolidation of share capital refers to the process of reducing the number of shares in circulation while increasing their nominal value proportionally.

   – The purpose of consolidation is to improve the marketability and trading of shares by reducing the number of outstanding shares.

   – For example, if a company consolidates its shares in a ratio of 1 new share for every 10 existing shares, it will result in reducing the number of shares by a factor of 10 while increasing their nominal value by a factor of 10.

    

   5.6 DIVIDENDS

   Dividends refer to the portion of a company’s profits that is distributed to its shareholders. They represent a way for the company to share its financial success with its owners.

   Types of dividends

   1. Cash dividends: These are dividends paid in the form of cash to shareholders, usually based on the number of shares they own.
   2. Stock dividends: Sometimes, companies may distribute additional shares to shareholders instead of cash. These are known as stock dividends or bonus shares.
   3. Property dividends: In certain cases, companies may distribute assets or property to shareholders as dividends.
      

   CHAPTER 6

   DEBT CAPITAL

   Learning outcomes

   On completion of this topic, you should be able to; 1. Borrowing powers of a company 2. Company assets that can secure a company’s borrowings 3. Company debentures 4. Company charges 5. Meetings and resolutions in respect of debt capital 6. Registration of charges 7. Remedies for debenture holders

    

   6.1 BORROWING POWERS OF A COMPANY

   The borrowing powers of a company refer to its ability to raise funds through borrowing, either from financial institutions, individuals, or other entities. These powers are typically outlined in the company’s constitution, specifically in its memorandum and articles of association.

   If a loan (or any portion of a loan) is ultra vires the company, it is void, even if it is ratified by the members in general meeting. However, in such circumstances, the lender may have the following remedies.

   • If the money has not been spent, he can obtain an injunction restraining the company from parting with it and he can recover it.
   • He can bring an action against the directors for breach of warranty of authority.
   • If money has been used to pay creditors, the lender may stand in the place of such creditors (this is known as subrogation), but he/she will not get any priority which may have attached to such creditors’ interest.

   Ultra vires

   Where a company has no borrowing powers or where the Memorandum or Articles fix a limit to the borrowing powers of the company, any borrowing in the one case, and any borrowing in excess of such limit in the other case, is ultra vires. If a company borrows money beyond its powers, the borrowing is ultra vires the company and is void.

    

   6.2 COMPANY ASSETS THAT CAN SECURE A COMPANY’S BORROWINGS

   When a company borrows funds, it may be required to provide security or collateral to the lender to secure the borrowing. This collateral serves as a guarantee for the lender that, in the event of default by the company, they have a claim on specific assets to recover their loan.

   The types of assets that can secure a company’s borrowings can vary, but here are some common examples:

   1. Real estate: The lender may require a mortgage or charge on the property, giving them the right to sell the property to recover their loan if the company defaults.
   2. Equipment and machinery: Companies that own valuable equipment, machinery, or other assets necessary for their operations may use these assets as security for borrowing.
   3. Inventory; Companies with substantial inventory levels may pledge their inventory as collateral for borrowing.
   4. Accounts receivable: Companies with outstanding invoices or accounts receivable can sometimes use these future cash flows as security for borrowing.
   5. Intellectual property: Companies that own valuable intellectual property, such as patents, trademarks, or copyrights, can use these assets as collateral for borrowing.

    

   6.3 COMPANY DEBENTURES

   Debentures are debt instruments issued by a company to raise funds from investors.

   They are usually issued for a fixed term and carry a specified interest rate, known as the coupon rate, which is paid to debenture holders periodically.

   Debentures are typically unsecured, meaning they are not backed by specific assets of the company. However, some debentures may have security or collateral attached to them, known as secured debentures.

   Types of debentures

   1. Secured debentures: These debentures are backed by specific assets of the company.
   2. Unsecured debentures: They are not secured by any specific assets. In case of default, the debenture holders have a claim on the general assets of the company.
   3. Convertible debentures: These debentures can be converted into equity shares of the company at a predetermined conversion ratio and within a specified time period.
   4. Non-convertible debentures: These debentures cannot be converted into equity shares and remain as fixed-income instruments until maturity.

    

   6.4 COMPANY CHARGES

   Company charges refer to a form of security interest or lien created by a company over its assets to secure the repayment of a debt or obligation. These charges provide a measure of protection for lenders and creditors by granting them a claim on specific assets of the company in case of default.

   Types of charges

   1. Fixed charges: They are created over specific assets of the company that are identified and defined in the charge document.
   2. Floating charges: They are created over a class of assets that may change in nature and value over time.

   Crystallization of floating charges

   A floating charge “crystallizes” upon the occurrence of specific events defined in the charge document, such as default on the loan, insolvency of the company, or other trigger events.

    

   6.5 MEETINGS AND RESOLUTIONS IN RESPECT OF DEBT CAPITAL

   When it comes to debt capital, companies may need to convene meetings and pass resolutions to address matters related to borrowing, repayment, and other debt-related issues.

   Key points regarding meetings and resolutions in respect of debt capital:

   1. General meetings:

   Companies may convene general meetings, such as annual general meetings (AGMs) or extraordinary general meetings (EGMs), to discuss and approve matters related to debt capital.

   2. Debt issuance resolutions:

   Before a company can issue debt securities, such as debentures or bonds, it typically needs to pass a resolution at a general meeting to authorize the issuance.

   The resolution may include details such as the maximum amount of debt to be issued, the terms and conditions of the securities, and any security or collateral provided.

   3. Approval of loan agreements:

   In certain cases, depending on the company’s constitution or relevant laws, shareholders’ approval may be required for significant loan agreements.

   4. Amendments to debt agreements:

   If the terms of existing debt agreements need to be modified, such as changes to interest rates, repayment terms, or covenants, the company may need to convene a meeting and pass a resolution to approve the amendments.

   5. Debt repayment resolutions:

   When it is time for the company to repay the debt, a resolution may be required to authorize the repayment and to approve the necessary funds for repayment.

   6. Board resolutions:

   Apart from general meetings, the board of directors may pass resolutions related to debt capital without requiring shareholder approval.

   7. Notice and quorum:

   Adequate notice must be given to shareholders or debenture holders regarding meetings where debt capital-related matters will be discussed. The meetings must have the necessary quorum, as defined in the company’s constitution or applicable laws, for the resolutions to be valid.

    

   6.6 REGISTRATION OF CHARGES

   Registration of charges refers to the process of registering security interests or liens created by a company over its assets with the appropriate government authority. The purpose of registration is to provide public notice of the charges and establish their priority in case of the company’s insolvency or liquidation.

    

   Timeframe for registration

   The timeframe for registration often ranges from 21 to 30 days from the creation of the charge, although it can vary depending on the jurisdiction.

    

   Charge documents

   – To register a charge, the company must submit the relevant charge documents to the registration authority.

   – The charge documents typically include the charge instrument, such as a debenture or a charge deed, which outlines the terms and conditions of the charge and identifies the assets or property subject to the charge.

   – Additional supporting documents, such as board resolutions, copies of the charge instrument, and other relevant agreements, may also be required for registration.

    

   Amendments and discharge of charges:

   – If there are amendments or changes to the charge, such as alterations to the charged assets or modifications to the terms, the company may need to register these amendments with the registration authority.

   – Similarly, when a charge is fully discharged or satisfied, the company should file the necessary documents with the registration authority to update the public register and remove the charge from the records.

    

   6.7 REMEDIES FOR DEBENTURE HOLDERS

   Debenture holders are individuals or entities that hold debentures, which are debt instruments issued by a company. If a company fails to fulfill its obligations towards debenture holders, there are several remedies available to protect the rights and interests of the debenture holders.

   Remedies for debenture holders:

   1. Legal action

   Debenture holders have the right to take legal action against the company to enforce their rights and seek remedies for any breach of the debenture agreement. This may involve filing a lawsuit in court to recover the outstanding principal amount, interest, or any other payments due under the debenture.

   2. Appointment of receiver

   In cases where the debenture is secured by specific assets of the company, debenture holders may have the right to appoint a receiver. A receiver is a professional appointed by the debenture holders to take control of the secured assets and manage them on their behalf. The receiver’s role is to protect the interests of the debenture holders and realize the value of the assets to recover the outstanding debt.

   3. Foreclosure or sale of security:

   If the debenture is secured by specific assets, such as property or equipment, debenture holders may have the right to foreclose on the security or force a sale of the assets to recover their debt.

   The foreclosure process involves taking legal action to seize and transfer ownership of the secured assets to satisfy the outstanding debt.

   4. Enforcement of Guarantees:

   If the debenture is guaranteed by a third party, such as a parent company or a personal guarantor, debenture holders can seek to enforce the guarantee.

   This involves taking legal action against the guarantor to recover the outstanding debt in case the company fails to fulfill its obligations.

   5. Insolvency Proceedings:

   If the company becomes insolvent or goes into liquidation, debenture holders may participate in the insolvency proceedings to recover their debt.

   Depending on the jurisdiction and the type of debenture held, debenture holders may have a preferential claim over other unsecured creditors, providing them with a higher priority for repayment.

   6. Negotiation and Restructuring:

   In some cases, debenture holders may choose to negotiate with the company to restructure the debt or modify the terms of the debenture.

    

    

   
    

   CHAPTER 7

   COMPANY MEETINGS

   Learning outcomes

   On completion of this topic, you should be able to; 1. Nature and classification of company meetings 2. Types of company meetings held to execute various functions of company meetings 3. Methods of holding company meetings 4. Essentials of a valid physical, virtual and hybrid meeting Voting 5. Resolutions 6. Drafting resolutions 7. Protection of minority shareholders

    

   7.1 NATURE AND CLASSIFICATION OF COMPANY MEETINGS

   Company meetings are gatherings of shareholders, directors, or other stakeholders of a company to discuss and make decisions on various matters related to the company’s affairs. Meetings play a crucial role in corporate governance and provide a platform for communication, decision-making, and accountability.

    

   Nature of company meetings

   – Company meetings are formal gatherings held according to legal requirements, the company’s constitution, and relevant regulations.

   – They provide a forum for shareholders and other stakeholders to exercise their rights, express their opinions, and participate in decision-making processes.

   – Meetings serve as a means of ensuring transparency, accountability, and proper governance within the company.

    

   Classification of Company Meetings:

   1. Shareholders’ Meetings:
   2. General Meetings: These include the Annual General Meeting (AGM) and Extraordinary General Meeting (EGM).
   3. AGM: It is held annually and provides an opportunity for shareholders to receive company reports, approve financial statements, elect directors, and address other matters required by law or the company’s constitution.
   4. EGM: It is called for specific purposes outside the regular AGM, such as approving special resolutions, making significant changes to the company’s constitution, or considering urgent matters.
   5. Class meetings: These are specific meetings held for shareholders of a particular class of shares, allowing them to discuss and vote on matters affecting their class rights, such as changes to dividend preferences or other class-specific issues.

    

   1. Board Meetings:

   Directors’ Meetings: These are meetings of the board of directors, where they discuss and make decisions on company matters.

   Board Committees: Committees formed by the board, such as audit committees or remuneration committees, may hold separate meetings to address specific areas of responsibility assigned to them.

   1. Creditors’ Meetings:

   Creditors’ meetings may be held in specific situations, such as during a company’s insolvency or restructuring process, where creditors come together to discuss and vote on matters affecting their interests.

   1. Other Meetings:

    

   Meetings may also be held with other stakeholders, such as employees, suppliers, or customers, to address specific issues or gather input on relevant matters.

    

   7.2 TYPES OF COMPANY MEETINGS HELD TO EXECUTE VARIOUS FUNCTIONS OF COMPANY MEETINGS

   Annual General Meeting (AGM)

   The AGM is a mandatory meeting held by public and private companies once a year.

   Functions:

   1. Presentation and approval of annual financial statements and reports.
   2. Election or reappointment of directors.
   3. Appointment of auditors.
   4. Declaration of dividends.
   5. Discussion of company performance and future plans.
   6. Shareholders’ question and answer session.

    

   2. Extraordinary General Meeting (EGM)

   The EGM is held outside the regular AGM to discuss and decide on specific matters that require immediate attention.

   Functions:

   1. Approving special resolutions for significant changes to the company’s constitution.
   2. Approving major corporate actions like mergers, acquisitions, or disposals.
   3. Issuing new shares or altering share capital structure.
   4. Authorizing the company to borrow or provide guarantees.
   5. Resolving disputes or making decisions on critical matters.

    

   3. Class meetings

   Class meetings are held for specific classes of shareholders, particularly when their rights or interests are affected.

   Functions:

   1. Voting on matters that specifically impact a particular class of shares.
   2. Discussing and deciding on changes to class rights or preferences.
   3. Approving resolutions related to class-specific issues like dividend preferences or liquidation preferences.

    

   4. Board meetings

   Board meetings are held by the company’s board of directors.

   Functions:

   1. Strategic decision-making and policy formulation.
   2. Reviewing financial performance, budgets, and management reports.
   3. Approving major transactions and contracts.
   4. Discussing and resolving operational issues.
   5. Monitoring compliance with legal and regulatory requirements.
   6. Evaluating and approving business plans and strategies.

    

   5. Committee meetings

   Committee meetings are held by specific committees formed by the board, such as audit committees, remuneration committees, or nomination committees.

   Functions:

   1. Conducting detailed reviews and assessments in specific areas of responsibility.
   2. Making recommendations and providing guidance to the board.
   3. Monitoring compliance and governance in their respective domains.
   4. Undertaking specialized tasks assigned by the board.

    

   Creditors’ meetings

   Creditors’ meetings are held in specific circumstances, typically during insolvency or restructuring processes.

   Functions:

   1. Discussing and voting on matters related to the company’s financial restructuring or insolvency proceedings.
   2. Reviewing proposals for debt repayment or debt restructuring.
   3. Appointing or approving the appointment of administrators or liquidators.
   4. Addressing the interests and concerns of creditors in the insolvency process.

    

   7.3 METHODS OF HOLDING COMPANY MEETINGS

   1. Physical meetings

   Traditional physical meetings involve participants gathering at a specific physical location.

   Participants attend in person and engage in face-to-face discussions and voting.

   This method allows for direct interaction and immediate feedback among participants.

   2. Virtual meetings

   Virtual meetings are conducted online using video conferencing or web conferencing tools.

   Participants join the meeting remotely from different locations using their computers or mobile devices.

   3. Hybrid meetings

   Hybrid meetings combine elements of both physical and virtual meetings.

   Some participants attend the meeting in person at a physical location, while others join remotely through video conferencing.

   4. Postal or written resolutions:

   In certain cases, instead of holding a meeting, decisions can be made through written resolutions.

    

   7.4 ESSENTIALS OF A VALID PHYSICAL, VIRTUAL AND HYBRID MEETING VOTING

   Physical meeting voting

   1. Quorum: The meeting must have the minimum number of participants required by the company’s constitution or applicable laws to form a valid quorum.
   2. Notice: Adequate notice must be provided to the participants, informing them of the meeting date, time, location, and agenda.
   3. Conduct: The meeting should be conducted according to the rules outlined in the company’s constitution and applicable laws. The chairperson should ensure fairness, transparency, and adherence to proper meeting procedures.
   4. Voting Process: Voting can take place through show of hands or by poll. The method of voting and the majority required for a resolution to pass should be specified in the company’s constitution or applicable laws.
   5. Minutes: Detailed minutes of the meeting should be recorded, documenting the voting results, resolutions passed, and any discussions or decisions made during the meeting.

    

   Virtual meeting voting

   1. Technology and platform: The virtual meeting should be conducted using a reliable and secure video conferencing or web conferencing platform. Participants should have access to the necessary technology and ensure a stable internet connection.
   2. Verification of participants: The participants’ identities should be verified before allowing them to vote. This can be done through attendance registration, login credentials, or other methods of participant verification.
   3. Notice: Similar to physical meetings, participants must receive proper notice, specifying the meeting details, agenda, and instructions for accessing the virtual meeting.
   4. Voting process: The chairperson should explain the voting procedure to the participants, including how to cast their votes electronically or by other means. The voting process should be clear, transparent, and allow for participation and counting of votes.
   5. Recording: The virtual meeting should be recorded to maintain an accurate record of the proceedings, including the voting process and results.
   6. Minutes: Detailed minutes should be prepared, summarizing the discussions, resolutions passed, and the outcome of the voting.

    

   Hybrid meeting voting

   1. Hybrid meetings involve both physical and virtual participants. The essentials for voting would generally depend on the specific format and arrangements made for the hybrid meeting.
   2. Notice: Participants must receive proper notice, indicating whether they will attend physically or virtually, and providing instructions for both types of participants.
   3. Voting process: The voting process should accommodate both physical and virtual participants, ensuring that all participants have an equal opportunity to cast their votes.
   4. Technology and platform: For virtual participants, a reliable and secure video conferencing or web conferencing platform should be used to facilitate their remote participation and voting.
   5. Recording and minutes: Similar to virtual meetings, the hybrid meeting should be recorded, and detailed minutes should be prepared, capturing the discussions, resolutions, and the voting results.

    

   7.5 RESOLUTIONS

   Resolutions are formal decisions made by a company’s shareholders or board of directors. Resolutions are an important part of the decision-making process in corporate governance.

   Ordinary resolutions

   Ordinary resolutions are passed by a simple majority of votes cast by the shareholders or directors.

   They are used for routine matters and general business decisions that do not require a higher level of approval.

    

   Special resolutions

   Special resolutions require a higher majority of votes to be passed, typically at least two-thirds or a specified majority of votes cast.

   Special resolutions are used for significant decisions that have a more substantial impact on the company’s operations or structure.

   Examples of matters typically decided by special resolutions include amending the company’s constitution, changing the company’s name, approving share buybacks, or authorizing a reduction of share capital.

    

   Written resolutions

   In addition to resolutions passed during meetings, companies may also use written resolutions.

   Written resolutions are resolutions that are circulated among the shareholders or directors, who then sign and return the document indicating their approval or disapproval.

    

   Notice and documentation

   Resolutions, whether ordinary or special, are usually proposed and discussed during company meetings.

   Proper notice of the meeting and the resolution to be voted upon must be provided to the participants.

    

   7.6 DRAFTING RESOLUTIONS

   Drafting resolutions involves preparing the text and content of the resolution document in a clear and concise manner.

   Steps to consider when drafting resolutions

   1. Title and introduction

   Start with a clear and descriptive title for the resolution, indicating the purpose or subject matter.

   Include an introductory paragraph that sets the context and provides a brief background or explanation of the resolution.

   2. Resolving clause

    

   The resolving clause is the core part of the resolution where the decision or action to be taken is stated. Use clear and unambiguous language to express the intended decision.

   3. Statement of reasons or purpose

   Depending on the nature of the resolution, it may be helpful to include a statement of reasons or purpose. This section explains the rationale or justification for the proposed decision.

   4. Detailed provisions

   If the resolution involves specific actions, amendments, or provisions, provide a detailed description of what is being proposed.

   Be specific, clear, and precise in outlining the details and scope of the proposed actions or changes.

   Include any relevant conditions, timelines, or restrictions associated with the resolution.

   5. Voting requirements

   Clearly state the voting requirements for the resolution to be passed.

   Specify the majority or percentage of votes needed for approval (e.g., simple majority, two-thirds majority, etc.).

   Ensure the voting requirements comply with the company’s constitution and applicable laws.

   6. Effective date and implementation

   Indicate the effective date of the resolution, especially if it differs from the date of the meeting or signing.

   If the resolution requires further implementation steps, outline the necessary actions or processes to be undertaken.

    

   7.7 PROTECTION OF MINORITY SHAREHOLDERS

   Protection of minority shareholders refers to the safeguards and measures put in place to ensure that minority shareholders’ rights and interests are respected and protected within a company. Minority shareholders are those who hold a minority stake in a company and do not have controlling or majority voting power.

   Aspects of protecting minority shareholders

   1. Statutory protections

   Many jurisdictions have laws and regulations specifically designed to protect minority shareholders. These laws may include provisions related to the rights of minority shareholders, disclosure requirements, and restrictions on abusive practices by majority shareholders.

   2. Shareholder agreements

   Minority shareholders can protect their rights through shareholder agreements. These agreements can be negotiated and drafted to address specific concerns and protect the interests of minority shareholders.

   3. Independent directors

   Appointing independent directors to the board can help ensure that the interests of minority shareholders are taken into account.

   5. Proxy voting

   Proxy voting allows minority shareholders to appoint someone to represent and vote on their behalf at company meetings.

   This mechanism enables minority shareholders to have a say in decision-making, even if they are unable to attend the meeting in person.

   6. Shareholder activism and engagement

   Minority shareholders can engage in shareholder activism to raise concerns and advocate for their rights and interests.

   7. Legal remedies

   Minority shareholders have the right to seek legal remedies if they believe their rights have been violated or they have been unfairly treated.

   Legal options may include filing a lawsuit for breach of fiduciary duty, oppression, or other forms of shareholder misconduct.
   

   CHAPTER 8

   COMPANY DIRECTORS

   Learning outcomes

   On completion of this topic, you should be able to; 1. Qualifications, appointment and disqualification 2. Powers and duties of directors 3. Removal and vacation of office 4. Register of directors 5. Remuneration of directors 6. Loans to directors 7. Compensation for loss of office 8. Disclosure of director’s interest in contracts 9. The rule in Turquand’s case/Indoor Management rule 10. Insider dealing

    

   8.1 QUALIFICATIONS, APPOINTMENT AND DISQUALIFICATION

   Company directors are individuals who are appointed or elected to serve on the board of directors of a company.

    

   Qualifications of directors:

   1. Legal age: Directors must be of legal age, which is typically 18 years or older.
   2. Mental capacity: Directors must have the mental capacity to fulfill their duties and responsibilities.
   3. Consent: Directors must provide their consent to act as a director of the company.
   4. Good standing: Directors should not have a history of disqualification or be subject to any legal restrictions or disqualifications that would prevent them from acting as directors.
   5. Skills and Experience: Depending on the nature and complexity of the company’s business, directors may be expected to possess certain skills, knowledge, or experience relevant to the company’s industry or sector.

    

   Appointment of directors

   1. Shareholder appointment: Directors are usually appointed by the shareholders of the company.
   2. Board appointment: In some cases, directors may be appointed by the existing board of directors, subject to approval by the shareholders.
   3. Election: Directors may also be elected by the shareholders during the company’s annual general meeting or other designated meetings.
   4. Term of office: Directors are typically appointed for a specific term, which may be defined in the company’s constitution or bylaws. At the end of the term, directors may be reappointed or replaced.

    

   Disqualification of Directors

   1. Breach of fiduciary duties: Directors can be disqualified if they breach their fiduciary duties, such as acting in bad faith, engaging in self-dealing, or misusing company assets.
   2. Criminal convictions: Directors may be disqualified if they are convicted of certain criminal offenses, particularly those related to dishonesty or fraud.
   3. Insolvency: Directors who are declared bankrupt or are subject to insolvency proceedings may be disqualified.
   4. Regulatory violations: Directors who violate specific regulatory requirements, such as securities laws or corporate governance regulations, may face disqualification.
   5. Court orders: Directors can be disqualified if a court issues an order disqualifying them from acting as a director due to misconduct or incompetence.

    

   8.2 POWERS AND DUTIES OF DIRECTORS

   Powers of directors

   1. Decision-making: Directors have the power to make decisions on behalf of the company, including approving strategic plans, major investments, acquisitions, and financial transactions.
   2. Appointment and removal: Directors have the power to appoint and remove key executives, such as the CEO or company secretary.
   3. Delegation: Directors can delegate certain responsibilities to committees, executives, or employees of the company while retaining ultimate accountability.
   4. Representation: Directors may represent the company in various capacities, including in legal proceedings, negotiations, and external relations.
   5. Financial Management: Directors have the authority to manage the company’s finances, including approving budgets, financial statements, and dividend distributions.

    

   Duties of directors

   1. Fiduciary duties: Directors owe fiduciary duties to the company, which include the duty of care, duty of loyalty, and duty of good faith.
   2. Compliance: Directors have a duty to ensure the company complies with applicable laws, regulations, and governance standards.
   3. Strategic oversight: Directors are responsible for providing strategic oversight and guidance to the company’s management.
   4. Risk management: Directors should identify and assess the risks faced by the company and implement appropriate risk management strategies and controls.
   5. Accountability and reporting: Directors are accountable to the shareholders and other stakeholders of the company. They have a duty to provide accurate and timely financial and non-financial information to shareholders and regulatory authorities.

    

   8.3 REMOVAL AND VACATION OF OFFICE

   1. Resignation: A director may voluntarily resign from their position by submitting a written resignation to the company.
   2. Expiration of term: If a director’s term of office has a specific duration, their position may automatically come to an end upon the expiration of that term.
   3. Removal by shareholders: Shareholders may have the power to remove a director from office by passing a resolution at a general meeting.
   4. Removal by the board: In some cases, the board of directors may have the power to remove one of its members. This power is typically granted by the company’s governing documents or applicable laws.
   5. Disqualification or bankruptcy: A director may be automatically disqualified or required to vacate their office if they become bankrupt, are convicted of certain offenses, or become subject to legal restrictions or disqualifications.
   6. Court order: In certain circumstances, a court may order the removal or vacation of office of a director. This can occur, for example, if the director has engaged in misconduct, breached fiduciary duties, or is found to be unfit to hold the position.

    

   8.4 REGISTER OF DIRECTORS

   A register of directors is a record maintained by a company that contains important information about its directors.

   1. Director’s name: The full name of each director should be recorded in the register.
   2. Director’s address: The residential address or service address of each director should be recorded.
   3. Director’s nationality: The nationality or citizenship of each director may be recorded in the register.
   4. Director’s date of birth: The date of birth of each director may be included in the register to confirm their age and eligibility for appointment.
   5. Director’s occupation: The occupation or profession of each director may be recorded to provide additional information about their background and expertise.
   6. Date of appointment: The date on which each director was appointed to the position should be recorded in the register.
   7. Date of resignation or removal: If a director has resigned or been removed from office, the date of resignation or removal should be noted in the register.
   8. Details of other directorships: If a director holds directorship positions in other companies, this information may be recorded in the register to provide a comprehensive view of their directorship roles.
   9. Details of shareholding: The register may include information about the shares held by each director in the company, including the number of shares and any changes in shareholdings over time.
   10. Register maintenance: The register should indicate the dates when updates or changes are made, ensuring that the information remains accurate and up to date.

    

   8.5 REMUNERATION OF DIRECTORS

   The remuneration of directors refers to the compensation or payment provided to directors for their services and responsibilities in managing and overseeing the affairs of a company.

   Important factors to consider regarding the remuneration of directors:

   1. Determination: The determination of director remuneration is typically done by the company’s shareholders or a committee authorized by the shareholders. This may be outlined in the company’s articles of association or bylaws.
   2. Remuneration committee: Larger companies often establish a remuneration committee, comprised of non-executive directors, to make recommendations on director remuneration.
   3. Types of remuneration: Director remuneration can be in the form of a salary, fees, bonuses, stock options, pension contributions, or other benefits. The specific structure and components of remuneration may be determined based on the company’s policy, industry practices, and legal requirements.
   4. Disclosure: Companies are usually required to disclose details of director remuneration in their annual financial statements or annual reports. This includes the total remuneration paid to each director and any additional benefits or incentives.
   5. Independent advice: In some jurisdictions, companies may be required to obtain independent advice to ensure that director remuneration is fair and reasonable, especially in cases where there is a potential conflict of interest.
   6. Shareholder approval: In many cases, the remuneration of directors, particularly executive directors, requires approval by shareholders. This is typically done through a resolution at the company’s annual general meeting or a special meeting.

    

   8.6 LOANS TO DIRECTORS

   Loans to directors refer to the provision of financial assistance, such as loans or credit facilities, by a company to its directors.

   Key considerations regarding loans to directors:

   1. Legal and regulatory framework: Companies are typically subject to laws and regulations that govern loans to directors. These rules aim to prevent conflicts of interest, protect shareholders’ interests, and ensure proper corporate governance.
   2. Prohibited or restricted transactions: In many jurisdictions, there are restrictions on loans to directors. For example, certain jurisdictions may prohibit or restrict loans to directors, unless specific conditions or exceptions are met.
   3. Shareholder approval: In cases where loans to directors are permitted, obtaining shareholder approval is often required. Shareholders typically need to be informed about the terms and purpose of the loan and have an opportunity to vote on the transaction.
   4. Arm’s length terms: Loans to directors should generally be provided on arm’s length terms, meaning the terms and conditions should be fair and commercially reasonable.
   5. Disclosure and reporting: Companies are often required to disclose loans to directors in their financial statements or annual reports.
   6. Director’s fiduciary duty: Directors have a fiduciary duty to act in the best interests of the company. When considering loans to directors, directors should carefully assess the impact on the company’s financial health, independence, and reputation.
   7. Non-executive directors: Some jurisdictions may have different rules or exemptions for loans provided to non-executive directors who are not involved in the day-to-day management of the company.

    

   8.7 COMPENSATION FOR LOSS OF OFFICE

   Compensation for loss of office refers to the financial compensation provided to directors or officers of a company when their employment or directorship is terminated.

   1. Contractual obligations: The entitlement to compensation for loss of office is often outlined in the employment contract or service agreement between the director or officer and the company.
   2. Termination without cause: In cases where a director or officer is terminated without cause, they may be entitled to compensation for loss of office.
   3. Change in control: If there is a change in control of the company, such as a merger or acquisition, compensation for loss of office may be triggered for certain directors or officers.
   4. Calculation of compensation: The calculation of compensation for loss of office can include various elements, such as a severance payment, continuation of salary or benefits for a specified period, bonus entitlements, stock options, or pension contributions.
   5. Clawback provisions: In some cases, compensation for loss of office may be subject to clawback provisions.
   6. Shareholder approval: In some jurisdictions, the payment of compensation for loss of office may require shareholder approval, particularly if it exceeds certain thresholds or if it is deemed excessive.
   7. Disclosure and transparency: Companies are generally required to disclose details of compensation for loss of office in their financial statements or annual reports.

    

   8.8 DISCLOSURE OF DIRECTOR’S INTEREST IN CONTRACTS

   The disclosure of a director’s interest in contracts refers to the requirement for directors to disclose any personal or financial interests they may have in a contract or proposed contract entered into by the company.

   Here are some key points to consider regarding the disclosure of director’s interests in contracts:

   1. Legal requirement:
   2. Duty of fidelity and loyalty
   3. Types of interests
   4. Timing of disclosure
   5. Content of disclosure
   6. Board review and decision
   7. Record-keeping
   8. Disclosure in financial statements

    

   8.9 THE RULE IN TURQUAND’S CASE/INDOOR MANAGEMENT RULE

   The rule in Turquand’s Case, also known as the Indoor Management Rule or the Rule of Constructive Notice, is a legal principle that provides protection to third parties who enter into transactions with a company. The rule essentially states that outsiders dealing with a company are entitled to assume that the internal management and decision-making processes of the company have been properly followed, even if there may have been irregularities or breaches of internal procedures.

    

   Rule in Royal British Bank vs. Turquand case

   In this case the Articles empowered the directors to borrow money provided they were authorized by a resolution passed at the general meeting of the Company.

    

   Facts

   Mr Turquand was the official manager (liquidator) of the insolvent Cameron’s Coalbrook Steam, Coal and Swansea and Loughor Railway Company. It was incorporated under the Joint Stock Companies Act 1844. The company had given a bond for £2,000 to the Royal British Bank, which secured the company’s drawings on its current account. The bond was under the company’s seal, signed by two directors and the secretary. When the company was sued, it alleged that under its registered deed of settlement (the Articles of Association), directors only had power to borrow up to an amount authorised by a company resolution. A resolution had been passed but not specifying how much the directors could borrow.

    

   Judgement

   Sir John Jervis CJ, for the Court of Exchequer Chamber ruled that the bond was valid, so the Royal British Bank could enforce the terms. He said the bank was deemed to be aware that the directors could borrow only up to the amount resolutions allowed. Articles of association were registered with Companies House, so there was constructive notice. But the bank could not be deemed to know which ordinary resolutions passed, because these were not registrable. The bond was valid because there was no requirement to look into the company’s internal workings. This is the indoor management rule, that the company’s indoor affairs are the company’s problem.

    

   Exceptions to Rule in Turquands case

   1. Knowledge of the irregularity – a person dealing with Company will not be entitled to protection under this rule if he has noticed that the prescribed procedure as laid down in articles has not been complied with by company.
   2. Forgery – the rule does not protect a person where forgery is involved. Company cannot be held liable for forgeries committed by its officers.

    

   8.10 INSIDER DEALING

   Insider dealing, also known as insider trading, refers to the illegal practice of trading securities (such as stocks, bonds, or derivatives) based on material, non-public information about the company. It involves individuals who have access to confidential information about a company, typically due to their position within the company, using that information to make profits or avoid losses by trading in the company’s securities.

   • Directors of the company
   • Employees of the company
   • Professionals with links to company e.g. auditors, brokers
   • Friends and relatives of directors, employees and professionals.

    

   Insider trading is a criminal offence and persons guilty of the offence shall be liable to a penalty;

   1. In case of individuals, a  fine up to Ksh.2.5m
   2. In case of a body corporate, a fine up to Ksh.5m

   NB: The fines are doubled in case subsequent conviction

   
    

   CHAPTER 9

   THE COMPANY SECRETARY

   Learning outcomes

   On completion of this topic, you should be able to; 1. Qualification, appointment and removal 2. Powers and duties of the Company Secretary 3. Liability of the Company Secretary 4. Register of Secretaries

    

   9.1 QUALIFICATION, APPOINTMENT AND REMOVAL

   A secretary is an officer of the company.

   The company secretary is responsible for the efficient administration of a company, particularly with regard to ensuring compliance with statutory and regulatory requirements and for ensuring that decisions of the board of directors are implemented.

    

   Qualification

   1. Professional Qualifications: In some jurisdictions, there may be specific professional qualifications or certifications for company secretaries. These qualifications may be obtained through professional bodies or institutes that offer specialized courses or examinations.
   2. Knowledge and Experience: A company secretary is typically expected to have a strong understanding of company law, corporate governance principles, and regulatory requirements.

    

   Appointment

   1. Board appointment: The company secretary is usually appointed by the board of directors.
   2. Formal resolution: The appointment of a company secretary is typically formalized through a board resolution. The resolution should clearly state the individual’s name, position, and the effective date of their appointment.
   3. Notification and filing: After the appointment, the company secretary’s details, including their name and position, may need to be filed with the relevant government authorities or regulatory bodies as per the legal requirements of the jurisdiction.

    

   Removal

   1. Board decision: The removal of a company secretary is generally within the discretion of the board of directors.
   2. Notice and termination: The company secretary should be provided with a formal notice of termination or removal, specifying the effective date of the termination.
   3. Legal compliance: When removing a company secretary, the company should ensure compliance with any contractual obligations, statutory requirements, and employment laws governing termination and severance.

    

   9.2 POWERS AND DUTIES OF THE COMPANY SECRETARY

   1. Compliance and corporate governance: The company secretary is responsible for ensuring the company’s compliance with applicable laws, regulations, and corporate governance standards.
   2. Board support: The company secretary provides support to the board of directors in various ways, including:
   3. Preparing and distributing board meeting agendas, board papers, and minutes of meetings.
   4. Facilitating effective communication between the board, management, and shareholders.
   5. Assisting in the organization and administration of board meetings and shareholder meetings.
   6. Advising the board on governance matters, director duties, and board composition.
   7. Shareholder relations: The company secretary manages communications with shareholders, ensuring compliance with legal requirements and facilitating smooth shareholder interactions. Their duties may include:
   8. Issuing notices of meetings, including annual general meetings and extraordinary general meetings.
   9. Managing share transfers and maintaining the register of members.
   10. Responding to shareholder queries and facilitating the exercise of shareholder rights.
   11. Assisting with the preparation and distribution of annual reports and other shareholder communications.
   12. Record-keeping and documentation: The company secretary is responsible for maintaining accurate and up-to-date records and documentation related to the company’s operations. This includes:
   13. Maintaining statutory registers and records required by law.
   14. Ensuring proper record-keeping of board and committee minutes, resolutions, and other important corporate documents.
   15. Coordinating the safekeeping and authentication of important company documents, such as the memorandum and articles of association.
   16. Corporate secretarial functions: The company secretary performs various administrative tasks and corporate secretarial functions, including:
   17. Handling the formation and incorporation of the company and managing any changes to the company’s structure or constitution.
   18. Filing necessary documents and returns with government authorities and regulatory bodies.
   19. Assisting in the preparation and filing of annual financial statements and other statutory reports.
   20. Ensuring compliance with corporate policies and procedures.

    

   6. Advisory role: The company secretary may provide advice and guidance to the board, senior management, and employees on legal, regulatory, and governance matters. They may help interpret laws and regulations, offer insights on best practices, and provide recommendations for improving corporate governance.

    

   9.3 LIABILITY OF THE COMPANY SECRETARY

   The liability of a company secretary can vary depending on the jurisdiction, the specific circumstances, and the legal framework in which the company operates. While I can provide a general overview, it is important to note that the liability of a company secretary may be subject to specific laws and regulations applicable in the relevant jurisdiction.

   1. Legal duties: The company secretary has legal duties and responsibilities to fulfill, which may vary depending on the jurisdiction. Common duties include ensuring compliance with statutory requirements, maintaining accurate records, providing support to the board, and facilitating proper corporate governance.
   2. Statutory compliance: The company secretary is responsible for ensuring compliance with applicable laws, regulations, and corporate governance standards.
   3. Personal liability: In certain situations, a company secretary may be held personally liable for their actions or omissions.
   4. Duty of care and skill: The company secretary is expected to exercise a reasonable standard of care, skill, and diligence in performing their duties. They should possess the necessary qualifications, knowledge, and expertise to carry out their responsibilities effectively.
   5. Indemnification and Insurance: In some cases, the company may provide indemnification to the company secretary to protect them against liabilities incurred in the course of their duties, subject to applicable laws and the company’s articles of association.

    

   9.4 REGISTER OF SECRETARIES

   The Register of Secretaries is a statutory register maintained by a company to record details of its company secretaries.

   The register of secretaries typically includes the following information:

   • Name and any former names of the secretary.
   • Residential address.
   • Nationality.
   • Date of appointment as secretary.
   • Date of cessation (if applicable).
   • Details of any qualifications or professional memberships held by the secretary (if required by law).

   Access and inspection

   Typically, the register can be inspected by company officers, shareholders, and regulatory bodies, as specified by the laws and regulations of the jurisdiction.

   Maintenance and updates

   The company is responsible for keeping the register of secretaries up to date and accurate. Any changes in the details of the company secretary, such as appointments, resignations, or changes in personal information, should be promptly recorded in the register.

   Retention period

   The register should be maintained for a specified period as mandated by the applicable laws or regulations. Companies should comply with the legal requirements regarding the retention and preservation of company records, including the Register of Secretaries.

   
    

   CHAPTER 10

   AUDITORS

   Learning outcomes

   On completion of this topic, you should be able to; 1. Qualification, appointment and removal 2. Remuneration of auditors 3. Powers and duties 4. Rights and liabilities

    

   10.1 QUALIFICATION, APPOINTMENT AND REMOVAL

   Qualification

   1. Professional qualifications
   2. Independence and Ethics

    

   Appointment

   1. Shareholder Approval: The appointment of auditors is generally subject to the approval of the shareholders. The appointment is typically proposed by the board of directors or the audit committee.
   2. Annual General Meeting (AGM): In many jurisdictions, the appointment of auditors is confirmed or reappointed at the AGM of the company, where shareholders have the opportunity to vote on the appointment.
   3. Term of appointment: The appointment of auditors is usually for a specific term, typically one year. However, longer terms may be allowed in some jurisdictions, subject to legal requirements and shareholders’ approval.
   4. Rotation of auditors: Some jurisdictions impose mandatory rotation requirements for auditors to promote independence and fresh perspectives. This means that after a certain period, the company must change its auditors or engage a different audit firm.

    

   Removal

   1. Resignation: Auditors may voluntarily resign from their position by providing a notice to the company.
   2. Removal by shareholders: Shareholders have the authority to remove auditors before the expiration of their term.

   Regulatory intervention: Regulatory bodies overseeing auditing and accounting practices may have the authority to remove auditors if there are serious breaches of professional conduct, non-compliance with regulations, or other misconduct.

    

   10.2 REMUNERATION OF AUDITORS

   Determination of remuneration

   The remuneration of auditors is typically determined by the company’s board of directors or the audit committee. The process of determining the remuneration may involve considering various factors such as the size and complexity of the company, the scope of the audit, the experience and expertise of the auditors, and prevailing market rates.

    

   Shareholder approval

   In many jurisdictions, the remuneration of auditors may require shareholder approval, especially if it is considered significant or if it is proposed to be paid to a related party or affiliated entity.

    

   Basis of remuneration

   The remuneration of auditors can be based on different methods:

    

   1. Fixed fee: The auditors are paid a predetermined fixed fee for their audit services, regardless of the time and effort required.
   2. Hourly rate: The auditors are remunerated based on the number of hours spent on the audit engagement, multiplied by an agreed-upon hourly rate.
   3. Fee scale: Some jurisdictions may have prescribed fee scales or guidelines that provide a framework for determining auditor remuneration based on the size or complexity of the company.
   4. Performance-based: In certain cases, the remuneration may include performance-based components, such as bonuses or incentives linked to the quality of the audit work or achievement of specific objectives.

    

   10.3 POWERS AND DUTIES

   1. Access to information
   2. Examination and verification
   3. Audit procedures
   4. Independence and objectivity
   5. Opinion and audit report
   6. Reporting of irregularities
   7. Communication and recommendations
   8. Compliance with standards

    

   10.4 RIGHTS AND LIABILITIES

   Rights of auditors

   1. Access to information: Auditors have the right to access all books, records, documents, and other relevant information of the company necessary to perform their audit.
   2. Professional judgment: Auditors have the right to exercise professional judgment in conducting the audit and forming their opinion on the financial statements.
   3. Professional confidentiality: Auditors have the right to maintain confidentiality regarding the information they obtain during the audit process.
   4. Fair remuneration: Auditors have the right to receive fair and reasonable remuneration for their services.

    

   Liabilities of Auditors

   1. Professional negligence: Auditors can be held liable for professional negligence if they fail to exercise the level of care, skill, and diligence expected of a reasonably competent auditor.
   2. Breach of duty: Auditors have a duty of care to the company and its shareholders.
   3. Legal and regulatory compliance: Auditors have a responsibility to comply with applicable laws, regulations, and professional standards.
   4. Reliance on misrepresentation: Auditors may be held liable if they rely on false or misleading representations made by management or other individuals within the company that lead to an incorrect audit opinion.
   5. Liability to third parties: Auditors may have potential liability to third parties who rely on their audit reports.

    

   
    

   CHAPTER 11

   COMPANY ACCOUNTS

   Learning outcomes

   On completion of this topic, you should be able to; 1. Books of accounts 2. Form and content of accounts 3. Group accounts 4. Director’s report

    

   11.1 BOOKS OF ACCOUNTS

   Company accounts refer to the financial records and statements that provide information about the financial performance and position of a company.

   Books of accounts are the primary records where companies maintain their financial transactions and other relevant information. These books provide a detailed and organized account of the company’s financial activities and serve as a basis for preparing financial statements.

   Key books of accounts commonly maintained by companies:

   1. General ledger
   2. Cash book
   3. Sales journal
   4. Purchase journal
   5. Accounts receivable ledger
   6. Accounts payable ledger
   7. Inventory records
   8. Fixed assets register

    

   11.2 FORM AND CONTENT OF ACCOUNTS

   The form and content of accounts refer to the structure and information presented in financial statements and other financial reports. The form and content should comply with applicable accounting standards and regulations to ensure the accuracy, transparency, and comparability of financial information.

   Aspects to consider regarding the form and content of accounts:

   1. Financial Statements: Financial statements are the main component of company accounts. They typically consist of the following statements:
   2. Income Statement (or Profit and Loss Statement): It summarizes the company’s revenues, expenses, gains, and losses for a specific period, usually one fiscal year. It shows the company’s net profit or loss by deducting expenses from revenues.
   3. Balance Sheet (or Statement of Financial Position): It provides a snapshot of the company’s financial position as of a specific date, typically the end of the fiscal year. It presents the company’s assets, liabilities, and shareholders’ equity.
   4. Cash Flow Statement: It reports the company’s cash inflows and outflows during a specific period, categorizing them into operating, investing, and financing activities. It provides insights into the company’s liquidity and cash management.
   5. Statement of Changes in Equity (or Statement of Shareholders’ Equity): This statement shows the changes in shareholders’ equity during a specific period, including the impact of net profit or loss, share issuances or repurchases, and other equity-related transactions.

    

   2. Accounting Policies: The financial statements should disclose the accounting policies applied by the company. This includes the methods and principles used to recognize, measure, and present financial transactions, such as revenue recognition, expense allocation, and inventory valuation.
   3. Notes to the Financial Statements: The financial statements are accompanied by detailed explanatory notes that provide additional information about significant accounting policies, assumptions, estimates, and disclosures.
   4. Presentation and Disclosure Requirements: Companies need to comply with presentation and disclosure requirements outlined in relevant accounting standards or regulations.
   5. Consistency and Comparability: To ensure meaningful analysis and interpretation, the form and content of accounts should enable users to compare the financial performance and position of the company over time and with other companies.
   6. Compliance with Regulatory Requirements: Companies need to adhere to specific reporting requirements set by regulatory authorities, such as government agencies or stock exchanges.

    

   11.3 GROUP ACCOUNTS

   Group accounts, also known as consolidated financial statements, refer to the financial statements prepared by a parent company to present the financial performance and position of a group of companies under its control. Group accounts consolidate the financial information of the parent company and its subsidiaries into a single set of financial statements.

    

   Subsidiaries to be included in the group accounts are identified based on the concept of control. Control is generally determined by the parent company’s ownership of more than 50% of the voting rights or through other contractual arrangements that provide control.

    

   Consolidated financial statements

   The consolidated financial statements typically include the following:

   1. Consolidated balance sheet: It presents the group’s assets, liabilities, and equity as of a specific date. It combines the individual balance sheets of the parent company and its subsidiaries.
   2. Consolidated income statement: It shows the group’s revenues, expenses, gains, and losses for a specific period. It combines the individual income statements of the parent company and its subsidiaries.
   3. Consolidated cash flow statement: It presents the group’s cash inflows and outflows from operating, investing, and financing activities. It consolidates the cash flow statements of the parent company and its subsidiaries.
   4. Notes to the consolidated financial statements: These notes provide additional information and disclosures specific to the consolidated financial statements, such as details of subsidiary companies, significant accounting policies, and any non-controlling interests.

    

   11.4 DIRECTOR’S REPORT

   A director’s report is a significant component of a company’s annual report, providing an overview of the company’s operations, performance, and prospects. It is prepared by the directors of the company and is intended to provide shareholders and other stakeholders with key information about the company’s activities during the reporting period.

   The content of a Director’s Report may vary depending on the specific requirements of the jurisdiction and the industry in which the company operates. However, it typically includes the following information:

   1. Business review
   2. Financial performance
   3. Strategic initiatives
   4. Corporate governance
   5. Risk management
   6. Social and environmental responsibility
   7. Outlook and future prospects:

    

   
    

   CHAPTER 12

   AUDIT OF COMPANY ACCOUNTS

   Learning outcomes

   On completion of this topic, you should be able to; 1. Auditor’s report 2. Annual returns

    

   12.1 AUDITOR’S REPORT

   The Auditor’s Report is a document prepared by an independent external auditor upon completion of an audit of a company’s financial statements. The report provides an opinion on the fairness, accuracy, and compliance of the financial statements with relevant accounting standards and regulations.

   Content

   The content of an Auditor’s Report typically includes the following sections:

   1. Title: The report is usually titled “Independent Auditor’s Report” or a similar designation to indicate the independent nature of the auditor’s opinion.
   2. Addressee: The report is addressed to the shareholders, the board of directors, or other relevant parties, depending on the jurisdiction and the company’s governing documents.
   3. Opinion: The opinion section expresses the auditor’s conclusion on the financial statements.
   4. Basis for opinion: This section explains the basis on which the auditor formed their opinion.
   5. Key audit matters: In some jurisdictions, the auditor’s report may include a separate section highlighting the key audit matters that the auditor considered to be of most significance during the audit.
   6. Other reporting responsibilities: The report may include additional reporting responsibilities, such as disclosing any material misstatements identified during the audit, the auditor’s evaluation of the company’s internal controls, or any other required disclosures.
   7. Auditor’s signature and date: The report is typically signed by the external auditor, indicating their responsibility for the audit and the date of the report.

    

   Types of Opinions

   The auditor’s report can express different types of opinions based on the auditor’s findings:

   1. Unqualified opinion: It indicates that the financial statements are free from material misstatements and present a true and fair view.
   2. Qualified opinion: This opinion indicates that the financial statements are materially misstated in specific respects but are otherwise presented fairly.
   3. Adverse opinion: This opinion indicates that the financial statements are materially misstated and do not present a true and fair view.
   4. Disclaimer of opinion: This opinion is issued when the auditor is unable to form an opinion due to limitations or lack of sufficient evidence

    

   12.2 ANNUAL RETURNS

   Annual returns refer to the regular filings that companies are required to submit to the relevant regulatory authorities, typically on an annual basis. These returns provide key information about the company’s activities, structure, and financial position.

   The purpose of filing annual returns is to ensure transparency, accountability, and compliance with legal and regulatory requirements. Annual returns provide a snapshot of the company’s current status, helping regulatory authorities, shareholders, and other stakeholders stay informed about the company’s activities.

    

   Filing requirements

   The specific filing requirements for annual returns vary by jurisdiction, but they typically include information such as:

   1. Basic company information: This includes the company’s name, registered address, company number, and details of its directors and secretary.
   2. Shareholder information: Annual returns may require information about the company’s shareholders, including their names, addresses, and the number and types of shares they hold.
   3. Financial statements: In some jurisdictions, companies are required to include their financial statements as part of their annual returns. These financial statements provide an overview of the company’s financial performance and position.
   4. Changes in company details: Companies must disclose any changes in company details, such as changes in registered address, directors, shareholders, or share capital during the reporting period.

    

    

   
    

   CHAPTER 13

   COMPANY INVESTIGATION

   Learning outcomes

   On completion of this topic, you should be able to; 1. Investigation of company affairs 2. Appointment and powers of inspectors 3. Inspector’s report

    

   13.1 INVESTIGATION OF COMPANY AFFAIRS

   – The investigation of company affairs refers to a formal examination or inquiry conducted into the operations, management, financial position, or any other aspects of a company. The purpose of such investigations is to uncover any irregularities, misconduct, or breaches of laws or regulations within the company.

   – An investigation of company affairs can be initiated by various parties, including regulatory authorities, shareholders, creditors, or the company’s board of directors.

   – The investigators are typically granted powers and authority to carry out their investigation effectively. This may include the power to access company records, interview employees or stakeholders, and request information from relevant parties. In some cases, investigators may be empowered to seize documents or assets if necessary.

   – Once the investigation is completed, a report is prepared detailing the findings and conclusions. The report may identify any misconduct, breaches of laws or regulations, weaknesses in internal controls, or recommendations for improvement.

   – Depending on the findings of the investigation, legal and regulatory consequences may follow.

   – The investigation may lead to recommendations for remedial actions to address the identified issues. These actions may involve changes to internal controls, management practices, or corporate governance processes to prevent future misconduct or irregularities.

    

   13.2 APPOINTMENT AND POWERS OF INSPECTORS

   Appointment of Inspectors

   1. Regulatory authority: inspectors are usually appointed by a regulatory authority, such as government agencies, regulatory bodies, or courts.
   2. Grounds for appointment: Inspectors may be appointed based on various grounds, such as suspected misconduct, breaches of laws or regulations, concerns about the company’s operations, or upon request by stakeholders with a valid interest.
   3. Appointment process: The appointment process varies by jurisdiction, but it typically involves the issuance of an official order or warrant by the relevant authority.
   4. Qualifications and independence: Inspectors are usually professionals with expertise in relevant areas, such as forensic accounting, auditing, or legal matters.

    

   Powers of inspectors

   1. Access to information: Inspectors are granted broad powers to access relevant documents, records, books, and other information necessary for the investigation.
   2. Compulsory attendance and examination: Inspectors have the power to summon individuals and require them to attend the investigation and provide information under oath or affirmation.
   3. Seizing documents and assets: In certain circumstances, inspectors may be empowered to seize documents or assets that are relevant to the investigation.
   4. Examination of persons: Inspectors may conduct interviews and examine individuals who are relevant to the investigation.
   5. Reporting and recommendations: Once the investigation is completed, inspectors prepare a report that outlines their findings, conclusions, and recommendations.
   6. Legal and regulatory consequences: The findings of the inspector’s report may lead to legal and regulatory consequences.

    

   13.3 INSPECTOR’S REPORT

   An inspector’s report is a document prepared by an inspector appointed to investigate the affairs of a company or other corporate entity. The report presents the findings, conclusions, and recommendations based on the inspector’s examination and inquiry.

   Content:

   The content of an Inspector’s Report typically includes the following sections:

   1. Introduction: The report begins with an introduction that outlines the purpose of the investigation, the scope of the inquiry, and the relevant background information.
   2. Investigation process: This section describes the methodology used by the inspector during the investigation. It may include details about the documents reviewed, interviews conducted, site visits, or other methods employed to gather information.
   3. Findings: The findings section presents the key observations and discoveries made during the investigation. It highlights any irregularities, misconduct, breaches of laws or regulations, or other significant matters identified by the inspector.
   4. Analysis and conclusions: The report provides an analysis and evaluation of the findings, drawing conclusions based on the evidence and information gathered. This section may include an assessment of the implications of the findings and the impact on the company or relevant stakeholders.
   5. Recommendations: The report includes recommendations for actions or measures that should be taken based on the inspector’s findings. These recommendations may address specific areas of concern, such as changes in management practices, improvements in internal controls, legal actions, or other remedial measures.
   6. Legal and regulatory compliance: If any breaches of laws or regulations are identified during the investigation, the report may address the legal and regulatory consequences. It may recommend appropriate actions to be taken to ensure compliance and accountability.
   7. Appendices: The report may include appendices that provide supporting documentation, evidence, or detailed data relevant to the investigation. These appendices add transparency and credibility to the report.

    

   
    

   CHAPTER 14

   CORPORATE RESTRUCTURING

   Learning outcomes

   On completion of this topic, you should be able to; 1. Need for restructuring 2. Mergers 3. Post – merger reorganisation of a company’s share capital 4. Takeovers and acquisitions 5. Mergers and divisions of public companies 6. Compromises, arrangements, reconstructions and amalgamations

    

   14.1 NEED FOR RESTRUCTURING

   Corporate restructuring refers to the process of making significant changes to a company’s organizational structure, operations, or financials in order to improve its overall performance, efficiency, and competitiveness. It involves various strategies and actions aimed at adapting to changing market conditions, optimizing resources, and maximizing shareholder value.

   Common reasons why companies may consider restructuring:=

   1. Financial distress
   2. Changes in market conditions
   3. Operational inefficiencies
   4. Organizational alignment
   5. Mergers and acquisitions
   6. Regulatory compliance
   7. Strategic focus

    

    

   14.2 MERGERS

   Mergers refer to the combination of two or more companies into a single entity, often with the goal of achieving synergies, expanding market presence, or enhancing competitiveness.

   Types of mergers

   1. Horizontal merger: In a horizontal merger, companies operating in the same industry and at the same level of the value chain merge to gain market share, eliminate competition, or achieve economies of scale.
   2. Vertical merger: A vertical merger occurs when companies operating at different levels of the value chain, such as suppliers and distributors or manufacturers and retailers, merge to streamline operations, improve efficiency, or control costs.
   3. Conglomerate merger: Conglomerate mergers involve the combination of companies operating in unrelated industries. These mergers are driven by diversification strategies, expanding the product portfolio, or entering new markets.
   4. Reverse merger: A reverse merger is a transaction where a private company merges with an existing public company, enabling the private company to become publicly traded without undergoing an initial public offering (IPO).

    

   14.3 POST – MERGER REORGANISATION OF A COMPANY’S SHARE CAPITAL

   Post-merger reorganization of a company’s share capital refers to the restructuring of the shareholding structure and capitalization of a company following a merger or acquisition. It involves making changes to the company’s shares, share classes, ownership percentages, and other related aspects to align with the new ownership structure and capital requirements of the merged entity.

   Share capital consolidation

   In a post-merger reorganization, the share capital of the merged entity is often consolidated to streamline the ownership structure. This may involve canceling or exchanging existing shares of the merging companies for new shares in the merged entity based on the agreed-upon conversion ratios.

   Conversion or exchange of shares

   Shareholders of the merging companies may be given the option to convert or exchange their shares for shares of the merged entity.

   Share class restructuring

   Following a merger, the merged entity may restructure its share classes to align with the post-merger business objectives and ownership structure. This may involve merging or eliminating certain share classes, creating new share classes, or modifying the rights and privileges associated with existing share classes.

   Adjustments in ownership percentages

   The merger or acquisition may result in changes in the ownership percentages of the pre-merger shareholders. Shareholders of the merging companies may see adjustments in their ownership stakes based on the exchange or conversion ratios agreed upon during the merger.

   Capital Reduction or Increase: Post-merger reorganization may involve a capital reduction or increase to adjust the share capital of the merged entity. This may include reducing the share capital to eliminate any excess or to absorb losses from the merger process. Conversely, the merged entity may increase its share capital to raise additional funds for future growth or capital requirements.

   Regulatory and shareholder approval

   Post-merger reorganization of share capital often requires regulatory approvals and, in some cases, the consent of the shareholders. The company must comply with applicable laws, regulations, and stock exchange requirements to ensure the legality and transparency of the reorganization process.

   Communication and disclosure: The merged entity is responsible for communicating the post-merger share capital reorganization to its shareholders and other stakeholders. This typically involves issuing notices, holding shareholder meetings, and providing relevant disclosure materials that outline the details of the reorganization and its implications.

    

   14.4 TAKEOVERS AND ACQUISITIONS

   Takeovers

   A takeover occurs when one company acquires a controlling interest or ownership stake in another company, often by purchasing a majority of its shares. The acquiring company gains control over the target company’s operations, assets, and management. Takeovers can be friendly (with the consent and cooperation of the target company) or hostile (without the consent or against the wishes of the target company’s management).

    

   Acquisitions

   Acquisitions refer to the broader concept of one company acquiring another company, which includes takeovers as a subset. Acquisitions can be made through various methods, including purchasing shares, assets, or the entire business of the target company. Acquisitions can be friendly or hostile, depending on the nature of the transaction and the consent of the target company.

    

   Motivations for takeovers and acquisitions

   1. Strategic expansion: Companies may pursue takeovers and acquisitions to expand their geographic reach, enter new markets, or diversify their product or service offerings
   2. Synergies: Acquisitions can create synergies by combining resources, capabilities, or market positions of the acquiring and target companies.
   3. Access to resources: Takeovers and acquisitions can provide access to critical resources such as technologies, patents, intellectual property, distribution networks, or skilled workforce.
   4. Financial gain: Companies may pursue acquisitions to enhance financial performance, increase profitability, or generate economies of scale.
   5. Risk diversification: Acquisitions can be a strategy to diversify business risks by entering new industries, product lines, or markets.

   Prior to completing a takeover or acquisition, the acquiring company typically conducts due diligence to assess the financial, legal, operational, and commercial aspects of the target company. This evaluation helps the acquiring company evaluate risks, opportunities, and potential synergies associated with the transaction.

    

   14.5 MERGERS AND DIVISIONS OF PUBLIC COMPANIES

   Merger

   A merger involves the combination of two or more separate companies into a single entity.

   Mergers are typically classified as follows:

   1. Horizontal merger: This type of merger occurs between companies operating in the same industry and at the same stage of the production or distribution chain. Horizontal mergers aim to achieve economies of scale, enhance market power, or eliminate competition.
   2. Vertical merger: Vertical mergers involve companies operating at different stages of the production or distribution process. This type of merger allows for better integration and coordination of operations, reduced costs, and improved efficiency.
   3. Conglomerate merger: Conglomerate mergers involve companies operating in unrelated industries. These mergers aim to diversify business interests, spread risks, or capitalize on new growth opportunities outside the company’s core business.

    

   Divisions

   A division, also known as a spin-off or demerger, involves the separation of a portion or subsidiary of a company into an independent entity. This process allows the parent company to focus on its core operations while providing greater autonomy and growth opportunities for the spun-off entity. Divisions can take different forms:

   1. Partial spin-off: In a partial spin-off, the parent company distributes a portion of its shares in the subsidiary to its existing shareholders, effectively creating a new independent entity.
   2. Total spin-off: A total spin-off involves the complete separation of a subsidiary or business unit from the parent company, resulting in a new independent entity with its own shares and ownership structure.
   3. Carve-out: A carve-out is similar to a partial spin-off, but instead of distributing shares to existing shareholders, the parent company offers shares of the subsidiary to the public through an initial public offering (IPO), creating a separate publicly traded company.

   Both mergers and divisions of public companies require careful planning, due diligence, and compliance with legal and regulatory requirements. Shareholder approval, regulatory clearances, and appropriate communication with stakeholders are important considerations in executing these transactions. Professional advice from legal, financial, and tax experts is often sought to ensure the smooth execution and successful outcomes of mergers and divisions.

    

   14.6 COMPROMISES, ARRANGEMENTS, RECONSTRUCTIONS AND AMALGAMATIONS

   Compromises, arrangements, reconstructions, and amalgamations are legal processes that allow companies to restructure their operations, financials, or ownership structure. These processes are commonly used to address financial difficulties, facilitate business combinations, or achieve operational efficiencies.

   Compromises

   A compromise involves reaching an agreement between a company and its creditors or shareholders to settle outstanding obligations or disputes. It allows the company to negotiate and restructure its debt or financial obligations, often through the rescheduling of payments, debt reduction, or changes in terms and conditions. Compromises require approval from the creditors or shareholders through a formal voting process.

    

   Arrangements

   Arrangements are legal mechanisms that enable companies to propose and implement a plan for reorganizing their affairs, business, or capital structure. They involve obtaining approval from the court or relevant regulatory authorities. Arrangements can be used to restructure debt, alter share capital, consolidate business operations, or facilitate mergers and acquisitions. They require approval from the affected parties, such as creditors or shareholders, and are subject to court scrutiny.

    

   Reconstructions

   Reconstruction refers to the reorganization or restructuring of a company’s operations, assets, or share capital to improve efficiency, profitability, or competitiveness. It may involve changes to the corporate structure, management, business model, or strategic direction of the company. Reconstruction aims to optimize resources, enhance performance, or adapt to changing market conditions.

    

   Amalgamations

   Amalgamations, also known as mergers or consolidations, involve the combination of two or more companies into a single entity. Amalgamations can be horizontal (between companies in the same industry), vertical (between companies at different stages of the production or distribution chain), or conglomerate (between companies in unrelated industries).

   
    

   CHAPTER 15

   RECEIVERSHIP, ADMINISTRATION, LIQUIDATION AND DISSOLUTION OF COMPANIES

   Learning outcomes

   On completion of this topic, you should be able to; 1. Meaning of receivership, administration and dissolution 2. Appointment and vacation of office by the Official Receiver 3. Powers and duties of a receiver 4. Termination of receivership 5. Appointment of an administrator 6. Functions and powers of an administrator 7. Process of administration 8. Termination of appointment and replacement of administrators 9. Company voluntary arrangements 10. Meaning of liquidation 11. Types of liquidation 12. Appointment, powers and duties of liquidators 13. Discharge of liquidators 14. Distribution of assets and dissolution of companies

    

   15.1 MEANING OF RECEIVERSHIP, ADMINISTRATION AND DISSOLUTION

   Receivership

   Receivership is a legal process in which a receiver is appointed by a creditor or a court to take control of a company’s assets, operations, and finances. It typically occurs when a company fails to repay its debts or breaches its financial obligations. The receiver’s role is to protect the interests of the secured creditor and maximize the recovery of funds owed to them.

    

   Administration

   Administration is a formal insolvency procedure that aims to protect a company’s assets and maximize the chances of business survival or achieve a better outcome for creditors. It involves the appointment of an administrator, who takes control of the company’s operations and manages its affairs. The administrator’s primary objective is to rescue the company as a going concern, sell it as a whole, or achieve a better result for creditors than in a liquidation scenario.

    

   Dissolution

   Dissolution refers to the process of legally winding up and terminating the existence of a company. It can occur voluntarily or involuntarily. Voluntary dissolution happens when the shareholders and directors of a solvent company decide to cease its operations and wind up its affairs. Involuntary dissolution can occur when a company fails to comply with legal and regulatory requirements, faces insolvency, or is ordered by a court to be dissolved. During dissolution, the company’s assets are liquidated, debts are paid, and any remaining funds are distributed to shareholders in accordance with legal priorities.

    

   15.2 APPOINTMENT AND VACATION OF OFFICE BY THE OFFICIAL RECEIVER

   Appointment

   1. Automatic appointment: In some jurisdictions, the official receiver is automatically appointed as the receiver or liquidator of a company when it becomes insolvent. This automatic appointment occurs upon the initiation of insolvency proceedings, such as bankruptcy or compulsory liquidation.

    

   2. Court appointment: In other cases, the official receiver may be appointed by a court. This typically happens when a creditor or the company itself applies to the court for the appointment of a receiver or liquidator, and the court decides to appoint the official receiver.
   3. Appointment by relevant authority: The official receiver may also be appointed by a relevant authority responsible for overseeing insolvency proceedings, such as a government department or agency.

    

   Vacation of office

   1. Completion of duties: The official receiver will continue to hold office until their duties are completed. This includes managing the affairs of the insolvent company, investigating its financial affairs, recovering assets, and distributing funds to creditors in accordance with the applicable laws and regulations.
   2. Replacement by an insolvency practitioner: In some cases, the official receiver’s role may be temporary, and they may be replaced by a licensed insolvency practitioner. The insolvency practitioner is typically appointed by creditors or the court and takes over the responsibilities of the Official Receiver to further manage the insolvency proceedings.
   3. Termination or resignation: The official receiver’s office may be terminated or the Official Receiver may resign from their position. This could occur when the insolvency proceedings are completed, or if there are any conflicts of interest, inability to perform duties, or other reasons that warrant the termination or resignation.

    

   15.3 POWERS AND DUTIES OF A RECEIVER

   Powers of a receiver

   1. Taking control of assets: A receiver has the authority to take possession and control of the assets, properties, and business operations that are subject to the receivership. This includes managing, protecting, and preserving the assets to ensure their value is maximized.
   2. Managing and operating the business: In cases where the receiver is appointed to manage a business, they may have the power to make decisions regarding the day-to-day operations of the business. This can include hiring and firing employees, entering into contracts, and making strategic decisions necessary to maintain or improve the business.
   3. Collecting and managing receivables: A receiver can collect outstanding receivables owed to the company and take appropriate action to recover funds or assets from debtors. This may involve pursuing legal action, negotiating settlements, or implementing collection strategies.
   4. Selling assets: A receiver may have the power to sell or dispose of assets to generate funds to repay creditors. This can include selling real estate, inventory, equipment, or other assets in a manner that maximizes their value.
   5. Accessing information and records: Receivers have the authority to access all relevant information, records, and financial data necessary for their duties. They can review books, records, contracts, and other documents to assess the financial position of the company and make informed decisions.

    

   Duties of a receiver

   1. Duty of care: Receivers have a duty to act diligently, honestly, and in good faith while carrying out their responsibilities.
   2. Duty to maximize value: Receivers are obligated to act in the best interests of the creditors. They have a duty to take reasonable steps to maximize the value of the assets, preserve their worth, and minimize losses.
   3. Reporting and communication: Receivers have a duty to provide regular reports to the court, creditors, and other relevant parties.
   4. Compliance with laws and regulations: Receivers must comply with all applicable laws, regulations, and court orders. They should ensure that their actions and decisions align with legal requirements and avoid any conflicts of interest.

    

   15.4 TERMINATION OF RECEIVERSHIP

   The termination of a receivership occurs when the appointed receiver’s duties and responsibilities come to an end. The exact process and requirements for terminating a receivership can vary depending on the jurisdiction and the specific circumstances of the receivership.

   Factors that may lead to the termination of a receivership:

   1. Fulfillment of objectives: A receivership may be terminated when the objectives for which the receiver was appointed have been achieved. This could include satisfying the secured creditor’s debt, selling the assets, or completing the tasks outlined in the appointment order.
   2. Court order: In some cases, the court that appointed the receiver may issue an order for the termination of the receivership. The court will consider factors such as the successful completion of the receiver’s tasks, compliance with legal requirements, and any other circumstances deemed relevant.
   3. Creditor agreement: If the receivership was initiated by a secured creditor, the termination may occur when the creditor and the receiver reach an agreement regarding the repayment of the debt or the settlement of the financial obligations. Once the creditor’s claims are satisfied, they may provide consent for the receivership to be terminated.
   4. Insufficient assets: If there are no remaining assets or insufficient funds to justify the continuation of the receivership, it may be terminated due to a lack of resources to cover the costs of the receivership or to provide meaningful recoveries for the creditors.
   5. Resignation or removal: In certain cases, a receiver may resign from their position voluntarily, or they may be removed by the court or the appointing authority. This could occur due to personal reasons, conflicts of interest, or concerns about the receiver’s performance or conduct.

    

   15.5 APPOINTMENT OF AN ADMINISTRATOR

   The appointment of an administrator refers to the process of appointing an insolvency practitioner to act as an administrator for a company that is facing financial difficulties. The appointment is typically made through a formal legal process and is governed by insolvency laws and regulations.

   Steps involved in the appointment of an administrator:

   1. Decision to appoint: The decision to appoint an administrator can be made by different parties, including the company’s directors, creditors, or the court. The decision is usually based on the company’s financial distress, insolvency, or a belief that administration will be beneficial for the company’s stakeholders.
   2. Notice of intention to appoint: Prior to the formal appointment, the company or its directors may issue a notice of intention to appoint an administrator. This notice provides a legal protection period during which no legal action can be taken by creditors to enforce their claims against the company.
   3. Formal appointment: The administrator is formally appointed through one of the following methods:
   4. Directors’ appointment: The directors of the company can initiate the appointment of an administrator by filing the necessary application and documents with the relevant insolvency authority. The appointment takes effect once the application is accepted.
   5. Creditors’ appointment: Creditors, such as banks or major creditors, can also initiate the appointment of an administrator by holding a meeting and passing a resolution to appoint an administrator. The creditors’ resolution must meet the specified legal requirements, including the required majority vote.
   6. Court appointment: In certain circumstances, such as urgent cases or when there is a dispute between parties, the court may appoint an administrator upon the application of the company, its directors, or its creditors.

    

   4. Administrator’s powers and duties: Once appointed, the administrator takes control of the company’s affairs, assets, and operations. Their primary duty is to act in the best interests of the company’s creditors as a whole. The administrator will assess the company’s financial position, develop a plan of action, and work towards achieving the objectives of administration.
   5. Notification and reports: The administrator is responsible for notifying the relevant parties, including the company’s creditors, shareholders, and employees, about their appointment. They will also prepare and submit reports to the court, creditors, and other interested parties, providing updates on the progress of the administration, financial information, and proposed actions.

    

   15.6 FUNCTIONS AND POWERS OF AN ADMINISTRATOR

   Key functions and powers of an administrator:

   1. Management and operation of the company: The administrator takes over the management and operation of the company during the administration period.
   2. Investigation and assessment: The administrator conducts a thorough investigation into the company’s affairs, financial position, and prospects.
   3. Formulation of proposals and plans: Based on the findings of the investigation, the administrator formulates proposals and plans to achieve the objectives of administration.
   4. Communication and engagement with stakeholders: The administrator is responsible for communicating with the company’s creditors, shareholders, employees, and other stakeholders.
   5. Realization of assets: The administrator has the power to sell or dispose of the company’s assets to generate funds for the benefit of creditors.
   6. Proposal to creditors: The administrator prepares a proposal for a formal arrangement or restructuring plan to be presented to the company’s creditors.
   7. Voting on proposals: The administrator convenes meetings of the company’s creditors to vote on the proposed arrangements or restructuring plan.

    

   15.7 PROCESS OF ADMINISTRATION

   A general outline of the key steps involved:

   1. Appointment of the administrator:
   2. Decision to appoint: The decision to appoint an administrator can be made by the company’s directors, creditors, or the court.
   3. Notice of intention: In some jurisdictions, the company or its directors may issue a Notice of Intention to Appoint an administrator. This notice provides a legal protection period during which no legal action can be taken by creditors to enforce their claims against the company.
   4. Formal appointment: The administrator is formally appointed through the directors’ appointment, creditors’ appointment, or court appointment process, as explained earlier.

    

   2. Investigation and assessment:
   3. Initial assessment: The administrator conducts an initial assessment of the company’s financial position, operations, and prospects.
   4. Investigation: The administrator undertakes a detailed investigation into the company’s affairs, reviewing financial records, contracts, and other relevant documents.
   5. Statement of affairs: The administrator prepares a Statement of Affairs, which provides a comprehensive overview of the company’s assets, liabilities, and creditors.

    

   3. Formulation of proposals:
   4. Development of a plan: Based on the investigation and assessment, the administrator develops proposals and plans to achieve the objectives of administration.
   5. Proposal for creditors: The administrator prepares a formal proposal outlining the proposed treatment of creditors’ claims, the expected financial outcome, and the administrator’s recommendations for achieving the objectives of administration.

    

   4. Communication and meetings:
   5. Communication with stakeholders: The administrator communicates with the company’s creditors, shareholders, employees, and other stakeholders to provide updates on the administration process and seek their input.
   6. Creditors’ meetings: The administrator convenes meetings of the company’s creditors to present the proposals, allow creditors to vote on the proposals, and seek their approval.

    

   5. Implementation:
   6. Execution of the plan: If the proposals are approved by the creditors, the administrator implements the approved plan, which may involve restructuring debt, selling assets, renegotiating contracts, or pursuing other actions to achieve the objectives of administration.
   7. Realization of assets: The administrator sells or disposes of the company’s assets to generate funds for the benefit of creditors. This may involve negotiating sales, conducting auctions, or pursuing legal action to recover assets or funds owed to the company.

    

   6. Reporting and compliance:
   7. Reports to stakeholders: The administrator prepares and submits reports to the court, creditors, and regulatory authorities, providing updates on the progress of the administration, financial information, details of asset realizations, and the distribution of funds to creditors.
   8. Compliance with legal requirements: The administrator ensures compliance with all relevant legal and regulatory requirements, including court orders and insolvency laws applicable in the jurisdiction.

    

   7. Conclusion of administration:
   8. Exit from administration: Once the objectives of administration are achieved, the administrator concludes the administration process.
   9. Handover or winding up: Depending on the circumstances, the administrator may hand back control of the company to the directors, facilitate a transfer of ownership, or commence the process of winding up the company.

    

   15.8 TERMINATION OF APPOINTMENT AND REPLACEMENT OF ADMINISTRATORS

   1. Completion of administration:

   Termination: The administrator’s appointment may be terminated upon the successful completion of the administration objectives. This occurs when the proposed plan is implemented, assets are realized, and creditors’ claims are satisfied to the extent possible.

   Exit strategy: The company may be handed back to the directors, or ownership may be transferred to new owners, depending on the specific circumstances.

    

   2. Court or Creditor Decision:

   Replacement by court order: The court may order the termination of the current administrator’s appointment and the appointment of a new administrator. This could be due to concerns about the performance, conduct, or conflicts of interest of the existing administrator.

   Replacement by creditors: Creditors with sufficient voting power may pass a resolution to replace the existing administrator with a new administrator. This may occur if creditors have lost confidence in the current administrator or if there are disputes or conflicts among stakeholders.

    

   3. Resignation or Removal:

   Resignation: An administrator may choose to resign from their position voluntarily, citing personal reasons or conflicts of interest. Proper notification and compliance with legal procedures may be required for an effective resignation.

   Removal: The court or relevant authorities may remove an administrator if there are concerns about their performance, misconduct, or failure to fulfill their duties. Removal may be initiated by creditors, stakeholders, or regulatory bodies.

    

   4. Company Voluntary Arrangement (CVA):

   Replacement for CVA implementation: In cases where a Company Voluntary Arrangement (CVA) is approved, the administrator’s role may transition to that of a supervisor who oversees the implementation and management of the CVA. This change in role may involve the appointment of a new supervisor.

   5. Death, Illness, or Incapacity:

   Unforeseen circumstances: If an administrator passes away, falls seriously ill, or becomes incapacitated, their appointment may be terminated, and a replacement administrator may be appointed to continue the administration process.

    

   15.9 COMPANY VOLUNTARY ARRANGEMENTS

   A Company Voluntary Arrangement (CVA) is a legally binding agreement between a financially distressed company and its creditors. It allows the company to reach a compromise or arrangement to repay its debts over a specified period of time.

   1, Initiation

   Proposal: The company, its directors, or a licensed insolvency practitioner can propose a CVA to the company’s creditors. The proposal outlines the terms of the arrangement, including how the company will repay its debts.

   Nominee’s report: A licensed insolvency practitioner is appointed as a nominee to review the proposed CVA and prepare a report. The nominee assesses the viability of the arrangement and provides an independent opinion on its likelihood of success.

    

   2. Approval Process:

   Creditors’ meeting: A meeting of the company’s creditors is held to vote on the proposed CVA. The creditors may include secured creditors, unsecured creditors, and shareholders. For the CVA to be approved, it requires a majority vote from the creditors in terms of value.

   Approval threshold: The CVA must be approved by at least 75% in value of the voting creditors present (in person or by proxy) at the meeting.

    

   3. Implementation and supervision:

   Supervisor appointment: If the CVA is approved, a supervisor is appointed to oversee and implement the terms of the arrangement. The supervisor is typically an insolvency practitioner.

   CVA terms: The CVA sets out the agreed-upon terms, which may include reduced debt repayments, extended repayment periods, changes to interest rates, or other modifications to the company’s obligations.

   Repayment plan: The company makes regular payments to the supervisor as per the agreed-upon repayment plan. The supervisor then distributes these payments to the creditors in accordance with the terms of the CVA.

    

   CVA is a complex process that must comply with the relevant laws and regulations of the jurisdiction in which the company is incorporated.

    

   15.10 MEANING OF LIQUIDATION

   Liquidation, also known as winding-up or dissolution, refers to the process of bringing a company’s affairs to an end, realizing its assets, and distributing the proceeds to its creditors and shareholders.

    

   15.11 TYPES OF LIQUIDATION

   1. Voluntary liquidation

   It occurs when a company’s shareholders or directors make a voluntary decision to wind up the company’s affairs. It is typically initiated when the company is insolvent or when the shareholders no longer wish to continue operating the business. There are two main forms of voluntary liquidation:

   1. Members’ Voluntary Liquidation (MVL): This type of liquidation is applicable to solvent companies. It is initiated when the shareholders determine that the company has fulfilled its purpose or is no longer viable.
   2. Creditors’ Voluntary Liquidation (CVL): A CVL is initiated when the company is insolvent and unable to pay its debts as they become due. In this case, the directors or shareholders hold a meeting and pass a resolution to wind up the company. A liquidator is appointed to sell the company’s assets, and the proceeds are distributed to creditors in a prescribed order of priority.

    

   2. Compulsory liquidation:

   It is a type of liquidation that is ordered by a court. It occurs when a creditor, shareholder, or regulatory authority files a petition with the court, stating that the company is unable to pay its debts or has acted in a manner prejudicial to the interests of creditors or the public. The court reviews the petition and, if it is satisfied, makes an order for the company to be liquidated. A liquidator is appointed by the court to oversee the process. The liquidator sells the company’s assets, and the proceeds are distributed to creditors according to the prescribed order of priority.

    

   15.12 APPOINTMENT, POWERS AND DUTIES OF LIQUIDATORS

   Appointment

   1. Members’ Voluntary Liquidation (MVL):

   In an MVL, the shareholders appoint a liquidator through a resolution passed at a general meeting of the company. The liquidator must be a licensed insolvency practitioner.

   2. Creditors’ Voluntary Liquidation (CVL)

   In a CVL, the directors convene a meeting of the shareholders to propose the liquidation, and the shareholders pass a resolution to appoint a liquidator. The liquidator must be a licensed insolvency practitioner.

   3. Compulsory Liquidation

   In compulsory liquidation, the court appoints a liquidator, who is often an official receiver or a licensed insolvency practitioner.

    

   Powers and duties

   1. Investigation and asset realization

   Liquidators have the power to investigate the company’s affairs, examine its books and records, and determine the company’s assets and liabilities.

   2. Collection and distribution of funds:

   Liquidators collect funds from the sale of the company’s assets, outstanding debts, or any legal actions pursued on behalf of the company.

   3. Communication and reporting:

   Liquidators communicate with creditors, shareholders, employees, and other stakeholders regarding the progress of the liquidation.

   4. Legal proceedings:

   Liquidators have the power to initiate or defend legal actions on behalf of the company, if necessary, to recover assets or pursue claims against third parties.

   5. Investigations and reports on directors’ conduct:

   Liquidators may investigate the conduct of the company’s directors, particularly if there is suspicion of wrongful or fraudulent trading.

    

   15.13 DISCHARGE OF LIQUIDATORS

   The discharge of liquidators refers to the process by which a liquidator’s role and responsibilities come to an end. The discharge can occur when the liquidation process is completed and all necessary tasks and duties have been fulfilled.

   1. Completion of liquidation process: The discharge of a liquidator typically occurs when the liquidation process is complete. This involves the realization of the company’s assets, distribution of funds to creditors, settlement of outstanding claims, and resolution of any remaining matters related to the liquidation.
   2. Final accounts and reports: Before the discharge, the liquidator prepares and submits final accounts and reports to the relevant stakeholders, including creditors, shareholders, regulatory authorities, and the court. These documents provide an overview of the liquidation process, details of asset realizations and distributions, and any other relevant information.
   3. Consent of creditors and stakeholders: In some cases, the discharge of a liquidator may require the consent or approval of the company’s creditors and/or shareholders. This is particularly applicable in voluntary liquidations, where the creditors’ or shareholders’ approval may be sought before the liquidator is discharged.
   4. Court approval: In certain jurisdictions or circumstances, the discharge of a liquidator may require court approval. The court may review the liquidator’s final accounts, reports, and any outstanding issues before granting the discharge.
   5. Legal obligations and formalities: The liquidator must ensure that all legal obligations and formalities are fulfilled before seeking discharge. This may include the filing of necessary documents, settling outstanding tax and regulatory obligations, and complying with any reporting requirements.
   6. Finalizing the liquidation: Once the liquidator has completed all necessary tasks, received necessary approvals, and fulfilled all legal obligations, they can seek their discharge. This signifies the end of their role and responsibilities in the liquidation process.

    

   15.14 DISTRIBUTION OF ASSETS AND DISSOLUTION OF COMPANIES

   The distribution of assets and dissolution of a company occur as part of the winding-up process, whether through voluntary liquidation or compulsory liquidation.

   Steps involved in the distribution of assets and dissolution of a company

   1. Asset Realization: The liquidator’s primary responsibility is to identify, value, and sell the company’s assets. This can include physical assets such as property, inventory, equipment, and vehicles, as well as intangible assets like intellectual property or contractual rights.
   2. Payment of Expenses: Before distributing the assets to creditors and shareholders, the liquidator must settle any outstanding expenses related to the winding-up process. These expenses can include the costs of the liquidation process, professional fees, employee wages, taxes, and any other valid claims against the company.
   3. Priority of Payments: The distribution of assets follows a specific order of priority. The order typically involves the following categories:
   4. Secured Creditors: Secured creditors, such as those holding mortgages or liens on specific assets, have priority in the distribution of proceeds from the sale of those assets. They are entitled to recover their debts up to the value of the secured assets.
   5. Preferential Creditors: Certain creditors are given preferential status and are entitled to be paid ahead of unsecured creditors. This can include employees’ unpaid wages, certain tax obligations, and contributions to employee benefit schemes.
   6. Unsecured Creditors: Once secured and preferential creditors have been paid, any remaining assets are distributed among unsecured creditors. Unsecured creditors typically include trade suppliers, service providers, lenders without security, and other creditors who do not have priority status.
   7. Shareholders: After satisfying the claims of all creditors, any remaining assets are distributed among the shareholders according to their rights and shareholding proportions. However, in many cases, shareholders may not receive any distribution if there are insufficient assets remaining after satisfying the claims of creditors.
   8. Dissolution: Once all assets have been realized, and the distribution of funds to creditors and shareholders is completed, the company proceeds to dissolution. Dissolution is the legal process that formally terminates the existence of the company as a legal entity. The liquidator files the necessary documents and notifications with the relevant authorities, and the company is struck off from the register of companies.

   
    

   CHAPTER 16

   FOREIGN COMPANIES

   Learning outcomes

   On completion of this topic, you should be able to; 1. Process of registering a company 2. Certificate of registration 3. Power to hold land 4. Registration of charges 5. Accounts of foreign companies 6. Service of process and notices on foreign companies 7. Returns 8. Penalties 9. Cessation of business

    

   16.1 PROCESS OF REGISTERING A COMPANY

   Foreign companies, also known as overseas companies or non-resident companies, are entities that are incorporated or registered in a jurisdiction outside of the country where they conduct business or have operations.

   A general overview of the process;

   1. Determine the company structure and name

   Decide on the structure of the company, such as a limited liability company (LLC), corporation, partnership, or sole proprietorship. Choose a unique name for the company that complies with the naming regulations of the jurisdiction. Check for availability and ensure it is not infringing on any existing trademarks.

   2. Articles of incorporation/registration:

   Prepare the necessary documents for company registration, such as the Articles of Incorporation or Registration. Include key information about the company, such as its name, registered office address, share capital, details of directors/shareholders, and the company’s purpose or business activities.

   3. Appoint Directors/Officers:

   Identify and appoint directors and officers who will manage the company’s affairs.

   Ensure they meet any legal requirements, such as age restrictions or residency requirements, if applicable in the jurisdiction.

   4. Registered office and registered agent:

   Determine the registered office address of the company, which is the official address for receiving legal and official correspondence. In some jurisdictions, you may need to appoint a registered agent who will act as a representative for the company and receive official documents on its behalf.

   5. Share capital and shareholders:

   Determine the share capital structure of the company, including the number and types of shares to be issued. Identify the initial shareholders of the company and their respective shareholdings.

   6. Filing and documentation:

   Complete the required registration forms and submit them to the appropriate government authority or registrar. Include the necessary supporting documents, such as identification documents for directors and shareholders, consent forms, and any other required information.

   7. Paying fees and taxes:

   Pay the registration fees and any applicable taxes or levies associated with the company registration process. Familiarize yourself with the ongoing compliance requirements and annual fees to maintain the company’s legal status.

   8. Obtain certificates and permits:

   Once the registration documents are reviewed and approved, you will receive a Certificate of Incorporation or Registration, confirming the legal existence of your company. Apply for any additional permits or licenses required to conduct specific business activities, if applicable.

    

   16.2 CERTIFICATE OF REGISTRATION

   A certificate of registration is a legal document issued by the appropriate government authority or registrar upon the successful registration of a company or business entity. It serves as proof that the company has been officially incorporated or registered and is recognized as a legal entity in the jurisdiction where it operates.

   Contents

   1. It typically contains important information about the company, including its registered name, registration number, date of incorporation, registered office address, and details of directors or officers.
   2. It may also include other relevant information depending on the jurisdiction, such as the company’s share capital or any specific conditions or restrictions imposed on the company.

    

   Issuance

   After completing the company registration process and submitting the necessary documentation, the government authority or registrar reviews the application.

   If the application is approved and meets all requirements, a Certificate of Registration is issued to the company.

    

   Duration and renewal

   The certificate of registration is valid for a specific period, usually indicated on the document itself.

   In many jurisdictions, companies are required to renew their registration periodically, either annually or at specified intervals, by filing annual returns or paying renewal fees.

    

   16.3 POWER TO HOLD LAND

   The power to hold land refers to the legal authority of a company to own, possess, and deal with real estate or land. The ability to hold land is an important aspect of a company’s operations, as it allows the company to acquire and utilize properties for its business purposes.

   Legal capacity

   A company’s power to hold land is determined by its constitutional documents, such as the Memorandum and Articles of Association or equivalent documents.

   The constitutional documents specify the company’s objects or purposes, and if the power to hold land is included, the company has the legal capacity to acquire and hold real estate.

    

   Types of land ownership

   A company can hold land through various forms of ownership, including freehold, leasehold, or by entering into agreements, such as licenses or easements.

   Freehold ownership grants the company complete ownership and control over the land indefinitely.

   Leasehold ownership allows the company to hold the land for a specified period under the terms of a lease agreement.

    

   Land acquisition

   Companies can acquire land through purchase, lease, gift, or other legal means, depending on the jurisdiction’s laws and regulations.

   The acquisition process typically involves negotiating the terms and conditions of the transaction, conducting due diligence, and completing the necessary legal documentation.

    

   Legal formalities

   The acquisition and holding of land by a company often require compliance with specific legal formalities, such as registering the company’s interest in the land with the relevant land registry or authority.

   Compliance with local laws and regulations related to land ownership, zoning, planning permissions, and environmental regulations is essential.

   Land transactions and disposal

   Companies with the power to hold land can engage in various land transactions, such as selling, leasing, mortgaging, or otherwise disposing of the land.

   These transactions may require additional legal documentation, approvals, or consents depending on the jurisdiction and nature of the transaction.

    

   Legal restrictions

   Some jurisdictions may impose certain restrictions on companies’ power to hold land, particularly for specific types of land, such as agricultural land, protected areas, or government-owned land.

   Companies may need to comply with land use regulations, obtain permits or licenses, or meet specific eligibility criteria to acquire or hold certain types of land.

    

   16.4 REGISTRATION OF CHARGES

   Registration of charges refers to the process of registering the details of a company’s charges or security interests with the relevant government authority or registrar. This process is typically required to create and establish the priority of charges over the company’s assets.

   Creation of charges

   A charge is a form of security interest granted by a company to a creditor to secure a debt or obligation. It can be in the form of a mortgage, debenture, pledge, or other types of security arrangements.

   Filing timeframe

   Companies are usually required to register charges within a specified timeframe after their creation to ensure their validity and priority.

   Registrar or government authority

   Companies are required to file the necessary documents and information related to the charge with the designated registrar or government authority.

   The registrar maintains a register of charges, which is a public record accessible to interested parties.

   Required documentation

   The company must prepare and submit the appropriate documents for registration, which typically include a charge registration form and supporting documents describing the nature of the charge, details of the parties involved, and the secured obligations.

   Consequences of non-registration

   Failure to register charges within the prescribed timeframe may result in the charge being deemed void or unenforceable against certain parties, such as the company’s liquidator, creditors, or subsequent charge holders.

   Amendment and discharge of charges

   If there are any changes or modifications to the registered charge, such as its terms or the amount secured, the company must file the appropriate amendments or updates with the registrar.

    

   16.5 ACCOUNTS OF FOREIGN COMPANIES

   Accounts of foreign companies refer to the financial records and statements maintained by companies incorporated and operating outside a specific country. These companies conduct business activities in different jurisdictions, and their accounts provide information about their financial performance, position, and cash flows.

   Common elements typically found in these accounts, include;

   1. Balance sheet: The balance sheet presents the financial position of a company at a specific point in time. It includes assets (such as cash, inventory, property, and equipment), liabilities (such as loans, accounts payable, and accrued expenses), and shareholders’ equity (the company’s net worth).
   2. Income statement: The income statement, also known as the profit and loss statement, shows a company’s revenues, expenses, gains, and losses over a specific period. It provides information about the company’s profitability and whether it has generated a net profit or loss.

    

   3. Cash flow statement: The cash flow statement tracks the inflows and outflows of cash and cash equivalents during a particular period. It categorizes cash flows into operating activities, investing activities, and financing activities, providing insights into how a company generates and uses its cash.
   4. Notes to the financial statements: These accompanying notes provide additional details and explanations about specific items in the financial statements. They disclose accounting policies, assumptions, contingent liabilities, and other relevant information necessary for a complete understanding of the company’s financial position and performance.

    

   16.6 SERVICE OF PROCESS AND NOTICES ON FOREIGN COMPANIES

   Service of process and notices on foreign companies refers to the legal procedure of delivering official documents, such as lawsuits, court summons, or other legal notices, to companies that are incorporated and operate outside the jurisdiction where the legal action is taking place. It ensures that foreign companies receive proper notification of legal proceedings and have an opportunity to respond or defend themselves.

    

   The specific rules and procedures for serving process and notices on foreign companies can vary depending on the jurisdiction and the international treaties or agreements in place. However, here are some common methods used:

   1. Hague service convention: Many countries, including the United States and numerous other signatories, are party to the Hague Service Convention. This convention establishes a standardized process for serving judicial and extrajudicial documents internationally. Under the convention, the Central Authority of each member country acts as a channel for the service of process.
   2. Letters rogatory: In jurisdictions that are not party to the Hague Service Convention or in cases where the convention does not apply, letters rogatory may be used. A letter rogatory is a formal request from a court in one country to a court in another country to facilitate the service of process. The court in the receiving country assists in serving the documents on the foreign company according to its own legal procedures.
   3. Direct service: In some cases, service of process on a foreign company may be allowed through direct methods, such as by mail or courier, if permitted by the laws of the jurisdiction where the legal action is taking place. However, direct service can be challenging, as it may require compliance with specific requirements or the use of certified translations.
   4. Service through a registered agent or representative: In certain jurisdictions, foreign companies are required to appoint a registered agent or representative who can accept legal documents on their behalf. Service of process can be made by delivering the documents to the registered agent or representative designated by the company.
   5. Electronic service: With the advancement of technology, some jurisdictions allow for the service of process and notices on foreign companies through electronic means, such as email or fax. However, the permissibility of electronic service depends on the laws and regulations of both the sending and receiving jurisdictions.

    

   16.7 RETURNS

   Returns in foreign companies can refer to the financial gains or profits generated by companies incorporated and operating outside a specific country. These returns can be achieved through various business activities, investments, or operations conducted by the foreign company.

   The calculation and presentation of returns in foreign companies are similar to those in domestic companies. Here are some key aspects to consider:

   1. Financial statements: Foreign companies prepare financial statements, including income statements, balance sheets, and cash flow statements, which provide information about their financial performance. These statements reflect the revenues earned, expenses incurred, and resulting profits or losses.
   2. Currency conversion: Foreign companies often operate in their local currency, which may differ from the reporting currency of the country where the financial statements are presented. In such cases, returns are usually reported in both the local currency and the reporting currency after converting the financial figures using appropriate exchange rates.
   3. Accounting standards: Foreign companies may follow different accounting standards, such as International Financial Reporting Standards (IFRS) or country-specific Generally Accepted Accounting Principles (GAAP). The application of these standards can impact the measurement, recognition, and presentation of returns in the financial statements.
   4. Dividends and distributions: Returns in foreign companies can include dividends or distributions made to shareholders. These represent the portion of profits distributed to owners or investors. The timing and amount of dividends may vary depending on the company’s policies, local regulations, and market conditions.
   5. Tax considerations: Returns in foreign companies should also take into account tax implications. The foreign company may be subject to taxes in its home country and may also have tax obligations in the countries where it operates. Tax laws, rates, and regulations can affect the net returns received by the company and its shareholders.

    

   16.8 PENALTIES

   Penalties refer to the punitive measures or consequences imposed on companies incorporated and operating outside a specific country for non-compliance with the laws, regulations, or contractual obligations of that country. The penalties can vary depending on the jurisdiction in which the violation occurred and the nature of the violation itself.

   Here are some key considerations regarding penalties for foreign companies:

   1. Jurisdiction-specific penalties: Each jurisdiction has its own laws and regulations governing penalties for non-compliance. When foreign companies operate in a particular country, they are subject to the laws and regulations of that country. Penalties may include fines, sanctions, business restrictions, or other punitive measures imposed by the local authorities or regulatory bodies.
   2. Cross-border enforcement: In cases where a foreign company violates laws or regulations in a host country, there may be mechanisms for cross-border enforcement. This can involve cooperation between the authorities of the host country and the home country of the foreign company to enforce penalties or share information relevant to the violation.
   3. International treaties and agreements: Some countries may have entered into international treaties or agreements that facilitate cooperation in enforcing penalties against foreign companies. These agreements may outline specific procedures and mechanisms for penalty enforcement or provide guidelines for resolving cross-border legal issues.
   4. Extraterritorial reach: In certain situations, the laws of a country may have extraterritorial reach, allowing penalties to be imposed on foreign companies even if the violation occurred outside the country’s jurisdiction. This can happen if the violation has a direct impact on the country’s interests, such as cases involving bribery, corruption, or international trade regulations.
   5. Reputation and business consequences: Penalties imposed on foreign companies can have significant reputational and business consequences. Negative publicity, loss of customer trust, and damage to business relationships are some of the potential impacts that can result from non-compliance and penalties. These consequences can extend beyond the specific jurisdiction where the violation occurred and affect the company’s global operations.

    

   16.9 CESSATION OF BUSINESS

   Cessation of business in foreign companies refers to the process of terminating or winding down operations of a company incorporated and operating outside a specific country. When a foreign company decides to cease its business activities, there are several key considerations and steps to be followed:

   1. Compliance with local laws: The foreign company must comply with the laws and regulations of the country where it operates regarding the cessation of business. This may involve filing necessary notifications, permits, or documents with the local authorities and ensuring the fulfillment of any statutory requirements.
   2. Board resolution and shareholder approval: The company’s board of directors typically approves the decision to cease business operations. Shareholder approval may also be required, depending on the jurisdiction and the company’s legal structure.
   3. Settlement of obligations: Before closing down, the foreign company must settle its financial obligations, including payment of outstanding debts, taxes, and employee salaries. It should also ensure that all contractual obligations are fulfilled or properly terminated according to the terms of the agreements.
   4. Employee considerations: If the foreign company has employees, it must comply with labor laws and regulations regarding employee termination or redundancy. This includes providing appropriate notice periods, severance payments, and complying with any legal requirements related to employee benefits or entitlements.
   5. Asset disposition: The company may need to dispose of its assets, such as property, equipment, or inventory, as part of the cessation process. This can involve selling assets, transferring ownership, or liquidating them to satisfy outstanding debts or distribute remaining assets to shareholders.
   6. Tax and legal filings: The foreign company is typically required to file certain tax and legal documents to notify the authorities about the cessation of business. These filings may include tax clearance certificates, deregistration forms, or other relevant documents specified by the local authorities.
   7. Dissolution and deregistration: The final step in ceasing business operations is the formal dissolution and deregistration of the foreign company. This process involves filing the necessary documents with the local regulatory bodies to officially terminate the company’s legal existence.

    

   RCM BOOKS

   CS INTERMEDIATE LEVEL  COMPANY LAW

   Dr. Joshua Aura

    

    

   First edition 2020

   ISBN

   All our rights reserved.

   No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of RCM Publishers.

    

   We are grateful to the Kenya Accountants and Secretaries Examination Board for permission to quote from the past examination questions. The suggested solutions in this Revision Kit have been prepared by RCM publishers in conjunction with Regional Centre of Management Studies.

    

    

    

    

    

    

    

    

    

    

    

    

   Published by;

   RCM Publishers,

   Nairobi-Kenya.

   Tel; 0719 525 000

   Mail; [email protected]

    

    

    

   Table of Contents

   ACKNOWLEDGEMENTS. vii

   The completion of this undertaking would not have been possible without the participation and assistance of so many people whose names may not be enumerated. Their contributions are sincerely appreciated and gratefully acknowledged. However, the author would like to express his deepest appreciation and indebtness. vii

   Above all to the great Almighty God, the author of knowledge and wisdom for his sufficient Grace  vii

   CHAPTER 1. 1

   NATURE AND CLASSIFICATION OF COMPANIES. 1

   1.1 NATURE AND CHARACTERISTICS OF A COMPANY. 1

   1.2 TYPES OF COMPANIES. 1

   1.3 PRINCIPLE OF LEGAL PERSONALITY AND VEIL OF INCORPORATION.. 2

   1.4 DISTINCTION BETWEEN COMPANIES AND OTHER FORMS OF BUSINESS ASSOCIATIONS SOLE PROPRIETORSHIPS, PARTNERSHIPS AND COOPERATIVE SOCIETIES. 3

   CHAPTER 2. 4

   FORMATION OF COMPANIES. 4

   2.1 PROMOTERS AND PRE-INCORPORATION CONTRACTS AND DEEDS. 4

   2.2 PROCESS AND DRAFTING DOCUMENTS REQUIRED TO FORM A COMPANY. 5

   2.3 RULES RELATING TO COMPANY NAMES. 6

   2.4 MEMORANDUM AND ARTICLES OF ASSOCIATION.. 6

   2.5 CERTIFICATE OF INCORPORATION.. 7

   2.6 EFFECTS OF INCORPORATION.. 7

   2.7 EXECUTION OF A COMPANY’S DOCUMENTS. 7

   2.8 ALTERATION OF STATUS OF COMPANIES. 8

   CHAPTER 3. 9

   MEMBERSHIP OF A COMPANY. 9

   3.1 ACQUISITION OF MEMBERSHIP. 9

   3.2 REGISTER OF MEMBERS. 9

   3.3 RIGHTS AND LIABILITIES OF MEMBERS. 10

   3.4 CESSATION OF MEMBERSHIP. 11

   3.5 REGISTER OF A COMPANY’S BENEFICIAL OWNERS. 11

   3.6 DERIVATIVE ACTIONS. 12

   CHAPTER 4. 14

   SHARES. 14

   4.1 CLASSES OF SHARES. 14

   4.2 VARIATION OF CLASS RIGHTS. 15

   4.3 SHARE CERTIFICATES. 16

   4.4 ISSUE AND ALLOTMENT. 17

   4.5 TRANSFER AND TRANSMISSION.. 18

   4.6 TRANSFER OF SHARES UNDER CENTRAL DEPOSITORY SYSTEM.. 19

   4.7 MORTGAGING AND CHARGING OF SHARES. 19

   CHAPTER 5. 21

   SHARE CAPITAL. 21

   5.1 MEANING AND TYPES OF SHARE CAPITAL. 21

   5.2 RAISING OF SHARE CAPITAL. 21

   5.3 PROSPECTUS/INFORMATION MEMORANDUM… 22

   5.4 MAINTENANCE OF CAPITAL. 22

   5.5 ALTERATION AND CONSOLIDATION OF SHARE CAPITAL. 23

   5.6 DIVIDENDS. 23

   CHAPTER 6. 24

   DEBT CAPITAL. 24

   6.1 BORROWING POWERS OF A COMPANY. 24

   6.2 COMPANY ASSETS THAT CAN SECURE A COMPANY’S BORROWINGS. 24

   6.3 COMPANY DEBENTURES. 25

   6.4 COMPANY CHARGES. 25

   6.5 MEETINGS AND RESOLUTIONS IN RESPECT OF DEBT CAPITAL. 25

   6.6 REGISTRATION OF CHARGES. 26

   6.7 REMEDIES FOR DEBENTURE HOLDERS. 26

   CHAPTER 7. 28

   COMPANY MEETINGS. 28

   7.1 NATURE AND CLASSIFICATION OF COMPANY MEETINGS. 28

   7.2 TYPES OF COMPANY MEETINGS HELD TO EXECUTE VARIOUS FUNCTIONS OF COMPANY MEETINGS. 29

   7.3 METHODS OF HOLDING COMPANY MEETINGS. 30

   7.4 ESSENTIALS OF A VALID PHYSICAL, VIRTUAL AND HYBRID MEETING VOTING.. 30

   7.5 RESOLUTIONS. 31

   7.6 DRAFTING RESOLUTIONS. 31

   7.7 PROTECTION OF MINORITY SHAREHOLDERS. 32

   CHAPTER 8. 33

   COMPANY DIRECTORS. 33

   8.1 QUALIFICATIONS, APPOINTMENT AND DISQUALIFICATION.. 33

   8.2 POWERS AND DUTIES OF DIRECTORS. 34

   8.3 REMOVAL AND VACATION OF OFFICE. 34

   8.4 REGISTER OF DIRECTORS. 34

   8.5 REMUNERATION OF DIRECTORS. 35

   8.6 LOANS TO DIRECTORS. 35

   8.7 COMPENSATION FOR LOSS OF OFFICE. 36

   8.8 DISCLOSURE OF DIRECTOR’S INTEREST IN CONTRACTS. 36

   8.9 THE RULE IN TURQUAND’S CASE/INDOOR MANAGEMENT RULE. 36

   8.10 INSIDER DEALING.. 37

   CHAPTER 9. 38

   THE COMPANY SECRETARY. 38

   9.1 QUALIFICATION, APPOINTMENT AND REMOVAL. 38

   9.2 POWERS AND DUTIES OF THE COMPANY SECRETARY. 38

   9.3 LIABILITY OF THE COMPANY SECRETARY. 39

   9.4 REGISTER OF SECRETARIES. 39

   CHAPTER 10. 41

   AUDITORS. 41

   10.1 QUALIFICATION, APPOINTMENT AND REMOVAL. 41

   10.2 REMUNERATION OF AUDITORS. 41

   10.3 POWERS AND DUTIES. 42

   10.4 RIGHTS AND LIABILITIES. 42

   CHAPTER 11. 43

   COMPANY ACCOUNTS. 43

   11.1 BOOKS OF ACCOUNTS. 43

   11.2 FORM AND CONTENT OF ACCOUNTS. 43

   11.3 GROUP ACCOUNTS. 44

   11.4 DIRECTOR’S REPORT. 44

   CHAPTER 12. 45

   AUDIT OF COMPANY ACCOUNTS. 45

   12.1 AUDITOR’S REPORT. 45

   12.2 ANNUAL RETURNS. 45

   CHAPTER 13. 47

   COMPANY INVESTIGATION.. 47

   13.1 INVESTIGATION OF COMPANY AFFAIRS. 47

   13.2 APPOINTMENT AND POWERS OF INSPECTORS. 47

   13.3 INSPECTOR’S REPORT. 48

   CHAPTER 14. 49

   CORPORATE RESTRUCTURING.. 49

   14.1 NEED FOR RESTRUCTURING.. 49

   14.2 MERGERS. 49

   14.3 POST – MERGER REORGANISATION OF A COMPANY’S SHARE CAPITAL. 49

   14.4 TAKEOVERS AND ACQUISITIONS. 50

   14.5 MERGERS AND DIVISIONS OF PUBLIC COMPANIES. 51

   14.6 COMPROMISES, ARRANGEMENTS, RECONSTRUCTIONS AND AMALGAMATIONS. 51

   CHAPTER 15. 53

   RECEIVERSHIP, ADMINISTRATION, LIQUIDATION AND DISSOLUTION OF COMPANIES. 53

   15.1 MEANING OF RECEIVERSHIP, ADMINISTRATION AND DISSOLUTION.. 53

   15.2 APPOINTMENT AND VACATION OF OFFICE BY THE OFFICIAL RECEIVER. 53

   15.3 POWERS AND DUTIES OF A RECEIVER. 54

   15.4 TERMINATION OF RECEIVERSHIP. 55

   15.5 APPOINTMENT OF AN ADMINISTRATOR. 55

   15.6 FUNCTIONS AND POWERS OF AN ADMINISTRATOR. 56

   15.7 PROCESS OF ADMINISTRATION.. 56

   15.8 TERMINATION OF APPOINTMENT AND REPLACEMENT OF ADMINISTRATORS. 57

   15.9 COMPANY VOLUNTARY ARRANGEMENTS. 58

   15.10 MEANING OF LIQUIDATION.. 58

   15.11 TYPES OF LIQUIDATION.. 58

   15.12 APPOINTMENT, POWERS AND DUTIES OF LIQUIDATORS. 59

   15.13 DISCHARGE OF LIQUIDATORS. 59

   15.14 DISTRIBUTION OF ASSETS AND DISSOLUTION OF COMPANIES. 60

   CHAPTER 16. 61

   FOREIGN COMPANIES. 61

   16.1 PROCESS OF REGISTERING A COMPANY. 61

   16.2 CERTIFICATE OF REGISTRATION.. 62

   16.3 POWER TO HOLD LAND.. 62

   16.4 REGISTRATION OF CHARGES. 63

   16.5 ACCOUNTS OF FOREIGN COMPANIES. 63

   16.6 SERVICE OF PROCESS AND NOTICES ON FOREIGN COMPANIES. 64

   16.7 RETURNS. 64

   16.8 PENALTIES. 65

   16.9 CESSATION OF BUSINESS. 65

    

    

    

    

   ACKNOWLEDGEMENTS

   The completion of this undertaking would not have been possible without the participation and assistance of so many people whose names may not be enumerated. Their contributions are sincerely appreciated and gratefully acknowledged. However, the author would like to express his deepest appreciation and indebtness.

    

   Above all to the great Almighty God, the author of knowledge and wisdom for his sufficient Grace

    

   Unit description

   This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to apply and comply with the provisions of Company Law in relevant circumstances and environments and further to demonstrate knowledge of the law and regulations governing corporate entities and ensure compliance in practice.

    

   Learning outcomes

   A candidate who passes this paper should be able to:

   • Apply legal principles relating to formation of companies
   • Evaluate the rights and obligations of members and shareholders
   • Comply with the legal principles governing liquidation of corporates
   • Comply with the legal principles governing restructuring of companies
   • Comply with the legal principles relating to companies incorporated outside the country
   • Comply with the legal requirements relating to the financing of companies.

    

   Content

   1. Nature and classification of companies

   1.1 Nature and characteristics of a company

   1.2 Types of companies

   1.3 Principle of legal personality and veil of incorporation

   1.4 Distinction between companies and other forms of business associations sole proprietorships, partnerships and cooperative societies.

    

   2. Formation of companies

   2.1 Promoters and pre-incorporation contracts and deeds.

   2.2 Process and drafting documents required to form a company.

   2.3 Rules relating to company names

   2.4 Memorandum and articles of association

   2.5 Certificate of incorporation

   2.6 Effects of incorporation

   2.7 Execution of a company’s documents

   2.8 Alteration of status of companies

    

   3. Membership of a company

   3.1 Acquisition of membership

   3.2 Register of members

   3.3 Rights and liabilities of members

   3.4 Cessation of membership

   3.5 Register of a company’s beneficial owners

   3.6 Derivative actions.

    

   4. 4. Shares

   4.1 Classes of shares

   4.2 Variation of class rights

   4.3 Share certificates

   4.4 Issue and allotment

   4.5 Transfer and transmission

   4.6 Transfer of shares under central depository system

   4.7 Mortgaging and charging of shares

    

   5. Share capital

   5.1 Meaning and types of share capital

   5.2 Raising of share capital

   5.3 Prospectus/information memorandum

   5.4 Maintenance of capital

   5.5 Alteration and Consolidation of share capital

   5.6 Dividends

    

   6. Debt capital

   6.1 Borrowing powers of a company

   6.2 Company assets that can secure a company’s borrowings

   6.3 Company debentures

   6.4 Company charges

   6.5 Meetings and resolutions in respect of debt capital

   6.6 Registration of charges

   6.7 Remedies for debenture holders

    

   7. Company meetings

   7.1 Nature and classification of company meetings

   7.2 Types of company meetings held to execute various functions of company meetings

   7.3 Methods of holding company meetings

   7.4 Essentials of a valid physical, virtual and hybrid meeting Voting

   7.5 Resolutions

   7.6 Drafting resolutions

   7.7 Protection of minority shareholders

    

   8. Company Directors

   8.1 Qualifications, appointment and disqualification

   8.2 Powers and duties of directors

   8.3 Removal and vacation of office

   8.4 Register of directors

   8.5 Remuneration of directors

   8.6 Loans to directors

   8.7 Compensation for loss of office

   8.8 Disclosure of director’s interest in contracts

   8.9 The rule in Turquand’s case/Indoor Management rule

   8.10 Insider dealing

    

   9. The Company Secretary

   9.1 Qualification, appointment and removal

   9.2 Powers and duties of the Company Secretary

   9.3 Liability of the Company Secretary

   9.4 Register of Secretaries

    

   10. Auditors

   10.1 Qualification, appointment and removal

   10.2 Remuneration of auditors

   10.3 Powers and duties

   10.4 Rights and liabilities

    

   11. Company accounts

   11.1 Books of accounts

   11.2 Form and content of accounts

   11.3 Group accounts

   11.4 Director’s report

    

   12. Audit of Company Accounts

   12.1 Auditor’s report

   12.2 Annual returns

    

   13. Company Investigation

   13.1 Investigation of company affairs

   13.2 Appointment and powers of inspectors

   13.3 Inspector’s report

    

   14. Corporate restructuring

   14.1 Need for restructuring

   14.2 Mergers

   14.3 Post – merger reorganisation of a company’s share capital

   14.4 Takeovers and acquisitions

   14.5 Mergers and divisions of public companies

   14.6 Compromises, arrangements, reconstructions and amalgamations

    

   15. Receivership, Administration, Liquidation and Dissolution of companies

   15.1 Meaning of receivership, administration and dissolution

   15.2 Appointment and vacation of office by the Official Receiver

   15.3 Powers and duties of a receiver

   15.4 Termination of receivership

   15.5 Appointment of an administrator

   15.6 Functions and powers of an administrator

   15.7 Process of administration

   15.8 Termination of appointment and replacement of administrators

   15.9 Company voluntary arrangements

   15.10 Meaning of liquidation

   15.11 Types of liquidation

   15.12 Appointment, powers and duties of liquidators

   15.13 Discharge of liquidators

   15.14 Distribution of assets and dissolution of companies

    

   16. Foreign Companies

   16.1 Process of registering a company

   16.2 Certificate of registration

   16.3 Power to hold land

   16.4 Registration of charges

   16.5 Accounts of foreign companies

   16.6 Service of process and notices on foreign companies

   16.7 Returns

   16.8 Penalties

   16.9 Cessation of business

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

   CHAPTER 1

   NATURE AND CLASSIFICATION OF COMPANIES

   Learning outcomes

   On completion of this topic, you should be able to; 1. Nature and characteristics of a company 2. Types of companies 3. Principle of legal personality and veil of incorporation 4. Distinction between companies and other forms of business associations sole proprietorships, partnerships and cooperative societies.

    

    

   1.1 NATURE AND CHARACTERISTICS OF A COMPANY

   A company is a legal entity that is formed to conduct business activities and generate profits. It is an organization that brings together individuals, resources, and capital to achieve specific objectives.

   Nature and characteristics of a company:

   1. Legal entity: A company is a distinct legal entity separate from its owners, known as shareholders or members.
   2. Limited liability: Shareholders or members are typically only liable for the debts and obligations of the company up to the extent of their investment.
   3. Ownership and shareholders: A company is owned by its shareholders or members. Shareholders invest capital into the company by purchasing shares, which represents their ownership interest.
   4. Separate management: The management and control of a company are entrusted to the board of directors, who are elected by the shareholders. The board appoints executives and managers who are responsible for day-to-day operations.
   5. Perpetual succession: The Company continues to exist even if its shareholders change or new shareholders join. The death, retirement, or transfer of shares by a shareholder does not affect the company’s existence.
   6. Transferability of shares: Shares of a company are generally freely transferable, allowing shareholders to buy or sell their ownership interest without affecting the company’s operations.
   7. Profit distribution: Companies aim to generate profits through their business activities.
   8. Regulatory compliance: Companies are subject to various legal and regulatory requirements.

    

   1.2 TYPES OF COMPANIES

   1. Sole proprietorship; It is the simplest form of business entity, owned and operated by a single individual. The owner has complete control over the business.
   2. Partnership: It is a business owned by two or more individuals who agree to share profits and losses.
   3. Limited Liability Company (LLC): It is a flexible business structure that provides limited liability protection to its owners, known as members. It combines features of a corporation and a partnership.
   4. Corporation: It is a separate legal entity from its owners (shareholders). It has the most complex structure and is subject to more regulations and formalities.
   5. Public corporation: A public corporation is owned by shareholders and its shares are traded on a public stock exchange. It is subject to strict regulations, including financial reporting requirements and disclosure obligations.
   6. Private corporation: A private corporation is owned by a limited number of shareholders and its shares are not publicly traded. It often has fewer regulatory requirements compared to public corporations.

    

   4. Nonprofit Organization: Nonprofit organizations are formed for purposes other than generating profits for the owners. They may be organized as corporations or other legal entities, depending on the jurisdiction.

    

   1.3 PRINCIPLE OF LEGAL PERSONALITY AND VEIL OF INCORPORATION

   Separate legal personality

   The principle of legal personality refers to the recognition of a company as a separate legal entity distinct from its owners or shareholders. When a company is incorporated, it is granted legal personality or legal existence.

   Consequences:

   (a) Company is liable for its own debts

   The shareholders are not liable for the debts and liabilities of the company and cannot be sued by the company’s creditors. A shareholder can be a debtor or creditor of the company and can sue or be sued by the company. (Salomon v A Salomon & Co Ltd)

   Salomon had a business in boot manufacture. He formed a company called Salomon & Co. (with himself, his, wife daughter and 4 sons as shareholders) and transferred to it his business. As consideration for the transfer he received the major portion of the shares of the company and debentures for £ 10,000.  Later on, the company went into liquidation. Salomon, as a debenture holder, claimed to be a secured creditor and demanded priority in the payment of £ 10,000, out of the assets of the company. The unsecured creditors of the company objected on the ground that the business really belonged to Salomon and he should not be allowed to claim as a secured creditor. It was held that Solomon as an individual, was quite distinct from Salomon & Co. and he could therefore be a secured creditor of the company, even though he happened to hold the majority of the shares.

   (b) Limited Liability

   The fact that the company is a separate person from its shareholders makes limited liability possible.

   (c) Company can own Property

   A company owns its own property – the shareholders have no direct right to this or any share of it.

   In Macaura v Northern Assurance Co case, Mr. Macaura owned the Killymoon estate in County Tyrone, Northern Ireland. He sold the timber there to Irish Canadian Sawmills Ltd for 42,000 fully paid up £1 shares, making him the whole owner (with nominees). Mr Macaura was also an unsecured creditor for Kshs.19, 000. He got insurance policies – but in his own name, not the company’s – with Northern Assurance covering for fire. Two weeks later, there was a fire. Northern Assurance refused to pay up because the timber was owned by the company, and that because the company was a separate legal entity, it did not need to pay Mr Macaura any money.

   The House of Lords held insurers were not liable on the contract, since the timber that perished in the fire did not belong to Mr. Macaura, who held the insurance policy.

   (d) Contractual Capacity

   A company has full contractual capacity – and only the company can enforce its contracts

   (e) A company has perpetual succession

   Separate personality means that the existence of a company does not depend on the existence of its members.

    

   Veil of incorporation

   The veil of incorporation is a legal concept that recognizes the separation between a company and its shareholders. It refers to the notion that the corporate entity and its shareholders are distinct from each other, and there is a metaphorical “veil” separating their legal identities. The veil serves to protect shareholders from personal liability for the company’s actions.

    

   In Salomon V Salomon and company limited it was established that a registered company is legal entity separate from its members. Thus once a company is incorporated a veil is drawn between the company and its members. This is called veil of incorporation.

    

   1.4 DISTINCTION BETWEEN COMPANIES AND OTHER FORMS OF BUSINESS ASSOCIATIONS SOLE PROPRIETORSHIPS, PARTNERSHIPS AND COOPERATIVE SOCIETIES.

   1. Companies:
   2. Legal status: Companies are separate legal entities from their owners or shareholders.
   3. Limited liability: Shareholders of companies generally have limited liability.
   4. Ownership: Companies are owned by shareholders who hold shares representing their ownership interest.
   5. Management: Companies have a board of directors that oversees the company’s operations and major decisions.
   6. Perpetual succession: meaning they continue to exist even if shareholders change or new shareholders join.

    

   2. Sole Proprietorships
   3. Legal status: The business and the owner are considered the same legal entity.
   4. Unlimited liability: The owner of a sole proprietorship has unlimited liability. They are personally responsible for all the debts and obligations of the business.
   5. Ownership: The business is owned and operated by a single individual.
   6. Management: The owner has complete control and management of the business.

    

   3. Partnerships
   4. Legal status: Partnerships are generally not separate legal entities, except for limited liability partnerships (LLPs) in some jurisdictions.
   5. Shared liability: Partners in a partnership have unlimited liability, meaning they are personally responsible for the partnership’s debts and obligations.
   6. Ownership: Partnerships are owned by two or more individuals who agree to share profits and losses.
   7. Management: Partners typically participate in the management and decision-making of the business.

    

   4. Cooperative societies
   5. Legal status: Cooperative societies are separate legal entities formed by a group of individuals with a common goal or interest.
   6. Cooperative principles: Cooperative societies operate based on principles of democratic control, voluntary membership, and equitable distribution of benefits among members.
   7. Ownership and control: Members of the cooperative society have equal ownership and control, with each member having one vote regardless of their level of investment or shareholding.
   8. Profit sharing: Profits are distributed among members based on their participation or patronage of the cooperative.

    

    

   CHAPTER 2

   FORMATION OF COMPANIES

   Learning outcomes

   On completion of this topic, you should be able to; 1. Promoters and pre-incorporation contracts and deeds. 2. Process and drafting documents required to form a company. 3. Rules relating to company names 4. Memorandum and articles of association 5. Certificate of incorporation 6. Effects of incorporation 7. Execution of a company’s documents 8. Alteration of status of companies

    

   2.1 PROMOTERS AND PRE-INCORPORATION CONTRACTS AND DEEDS.

   Promoters

   Promoters are individuals or entities who take the initiative to conceive and set up a company. They play a vital role in the formation and organization of the company before it is officially incorporated. Promoters identify the business opportunity, arrange for initial financing, undertake necessary groundwork, and take steps to bring the company into existence.

    

   The role of promoters typically involves activities such as:

   1. Identifying a viable business idea or opportunity.
   2. Conducting feasibility studies and market research.
   3. Raising initial capital.
   4. Securing necessary permits and licenses.
   5. Assembling a team of professionals.
   6. Negotiating contracts and agreements.

   Promoters have a fiduciary duty to act in the best interests of the company and its prospective shareholders. They must disclose all relevant information and avoid conflicts of interest while performing their duties. Promoters are personally liable for any pre-incorporation actions and contracts they enter into on behalf of the company.

    

   In Gluckstein Vs. Barnes.

   The promoters bought a property at Ksh. 140,000 from a company in financial difficulties. They had made profit of Ksh. 40,000 on the purchase price. They then sold it to the company at an additional profit of Ksh. 20,000. They disclosed their profit of Ksh. 40,000 but not the Ksh. 20,000. When company went into liquidation a few years later, the court held that the promoters were liable to hand over Ksh. 20,000 being secret profit.

    

   Pre-incorporation contracts

   Pre-incorporation contracts are agreements entered into by promoters on behalf of a company that is yet to be incorporated. These contracts are made during the period when the company is in the process of being formed, but before it has obtained legal recognition as a separate legal entity.

   Pre-incorporation contracts can include various types of agreements, such as:

   1. Lease or purchase of property or assets.
   2. Employment contracts or service agreements.
   3. Supplier agreements.
   4. Contracts with customers or clients.
   5. Loan agreements or financing arrangements.

   It’s important to note that since the company does not yet legally exist, pre-incorporation contracts are typically made in the name of the future company, with the intention that they will be ratified or adopted by the company once it is incorporated. Promoters are personally liable for these contracts until the company is incorporated and assumes the contractual obligations.

    

   Deeds of ratification

   Deeds of ratification are legal documents executed by a company after its incorporation to validate or adopt pre-incorporation contracts or actions made by the promoters on its behalf. These deeds serve to confirm that the company, upon its formation, intends to assume and be bound by the terms of the pre-incorporation contracts.

   By executing a deed of ratification, the company effectively adopts the pre-incorporation contracts, making them binding on the company. Once ratified, the company becomes directly liable for the obligations and responsibilities under those contracts. The deed of ratification essentially cures any lack of legal capacity the company had at the time the pre-incorporation contracts were made.

    

   2.2 PROCESS AND DRAFTING DOCUMENTS REQUIRED TO FORM A COMPANY.

   General overview of the process and the documents typically involved:

   1. Choose the type and name of the company:

   – Decide on the type of company you want to form, such as a corporation or limited liability company (LLC).

   – Choose a unique and available name for your company, ensuring it complies with any naming conventions or restrictions set by the relevant authorities.

   – Prepare the Company’s Constitution or Articles of Incorporation:

   – Draft the company’s constitution or articles of incorporation. This document sets out the company’s name, purpose, share structure, registered office address, rules for governance, and other key provisions.

   – Include any additional provisions or clauses required by the jurisdiction or desired by the founders.

    

   2. Prepare other statutory documents:

   – Depending on the jurisdiction, you may need to prepare additional statutory documents, such as a memorandum of association, statement of compliance, or statement of capital.

   – These documents provide specific information about the company, its structure, and its compliance with legal requirements.

    

   3. Obtain consent and signatures:

   – Obtain the consent and signatures of the initial shareholders or members who will be part of the company.

   – Ensure that all required parties sign the necessary documents, such as the constitution or articles of incorporation, memorandum of association, and other relevant forms.

    

   4. Register with the relevant authorities:

   – Submit the required documents to the appropriate government authority or registrar of companies.

   – Pay the applicable registration fees.

   – Provide any additional information or documentation as required by the registration authority.

    

   5. Obtain certificates and registrations:

   – Once the company is successfully registered, you may receive various certificates or registrations, such as a certificate of incorporation or certificate of formation, tax identification number, or business license.

    

   6. Comply with ongoing requirements:

   – After the company is formed, there are ongoing compliance requirements, such as filing annual reports, maintaining proper corporate records, holding annual general meetings, and complying with tax and regulatory obligations.

    

   2.3 RULES RELATING TO COMPANY NAMES

   1. Unique and distinguishable:

   The company name should be unique and distinguishable from existing registered companies or trademarks within the jurisdiction.

   It should not be identical or too similar to an existing company name to avoid confusion among customers and stakeholders.

   2. Legal restrictions and prohibited terms:

   Names that are offensive, misleading, deceptive, or violate public order or morality are generally prohibited.

   3. Descriptive and not generic:

   The name should describe the nature of the business or be associated with the company’s activities.

   4. Restricted words or phrases:

   Some jurisdictions have specific regulations on the use of certain words or phrases in company names, such as “national,” “international,” “group,” or “holding.”

   5. Sensitive words or expressions:

   Certain sensitive words or expressions may require additional approval or documentation, such as “royal,” “charity,” “foundation,” or “government.”

   6. Company type indicators:

   Some jurisdictions require specific indicators to be included in the company name to indicate the type of legal entity, such as “Limited,” “Ltd,” “Incorporated,” “Inc,”

   7. Trademark considerations:

   It is important to conduct a thorough trademark search to ensure that the desired company name does not infringe on existing trademarks.

    

   2.4 MEMORANDUM AND ARTICLES OF ASSOCIATION

   Memorandum of association

   It is a foundational document that sets out the company’s constitution and defines its relationship with the outside world. It contains fundamental information about the company, including:

   1. Company name and registered office: The official name and address of the company.
   2. Object clause: The primary objective or purpose for which the company is formed.
   3. Liability clause: The type of liability that the members or shareholders have, such as limited liability in the case of a company limited by shares.
   4. Capital clause: The authorized share capital of the company, i.e., the maximum value of shares that can be issued.
   5. Association clause: The agreement of the initial shareholders or members to form the company and become its members.

    

   Articles of association

   The Articles of Association are the internal regulations that govern the internal management and operations of the company. They define the rights, duties, and powers of the company, its shareholders, and its officers. The Articles typically cover the following areas:

   1. Shareholders’ rights and dividends: The rights attached to different classes of shares, dividend distribution, and procedures for issuing or transferring shares.
   2. Directors’ powers and duties: The appointment, powers, and responsibilities of directors, including their meetings, decision-making process, and potential conflicts of interest.
   3. General meetings: The rules and procedures for conducting general meetings of shareholders, including the annual general meeting (AGM) and extraordinary general meetings (EGMs).
   4. Voting and resolutions: The rules for voting on company matters and passing resolutions, including the majority required for various types of decisions.
   5. Borrowing powers: The authority of the company to borrow money, issue debentures, or create charges on company assets.
   6. Winding up: The procedures and conditions for winding up or dissolution of the company.

    

   2.5 CERTIFICATE OF INCORPORATION

   A Certificate of incorporation is an official document issued by the government or company registrar when a company is successfully incorporated or registered. It serves as legal proof that the company has been formed and recognized as a separate legal entity.

   Key information about the certificate of Incorporation:

   1. Issuance and contents

   The Certificate of Incorporation is typically issued by the government authority or registrar responsible for overseeing company registrations..

   2. Legal recognition

   The Certificate of Incorporation is a significant document as it confers legal recognition on the company as a separate legal entity distinct from its owners or shareholders.

   3. Public document

   The Certificate of Incorporation is a public document that is accessible for inspection by anyone who wishes to verify the existence and details of the company.

   Importance for legal and business transactions

   It is often required during various legal and business transactions, such as opening a bank account, entering into contracts, obtaining licenses or permits, or participating in government tenders or bids.

    

   2.6 EFFECTS OF INCORPORATION

   1. Separate legal entity

   Upon incorporation, the company becomes a separate legal entity distinct from its shareholders or owners.

   2. Limited liability

   Shareholders or owners of the company are typically not personally liable for the company’s debts or obligations beyond their investment in the company.

   3. Perpetual existence

   Incorporation grants the company perpetual existence, meaning it can continue to exist even if the original shareholders or owners change or pass away.

   4. Transferability of Shares

   Incorporation allows for the transferability of shares, providing flexibility in the ownership structure of the company.

   5. Capital generation

   It allows for the issuance and sale of shares, enabling the company to raise funds from investors and shareholders..

   6. Taxation and financial advantages

   Incorporation may provide certain tax advantages and financial benefits, depending on the jurisdiction and specific regulations. Companies may be subject to different tax rates, deductions, or incentives compared to other business forms.

    

   2.7 EXECUTION OF A COMPANY’S DOCUMENTS

   The execution of a company’s documents refers to the process of signing and formalizing the company’s legal agreements and contracts. Here are some key considerations for executing a company’s documents:

   1. Authority to execute

   Before signing any documents on behalf of the company, it is essential to ensure that the person executing the document has the proper authority to do so.

   2. Proper Identification

   The person executing the document should clearly state their name, title, and position within the company to indicate their authority to act on behalf of the company.

   3. Signature

   The person executing the document should sign their name in a legible manner.

   4. Witnessing

   Depending on the jurisdiction and the nature of the document, witnesses may be required to attest to

   5. Company seal:

   In some jurisdictions or for certain types of documents, the company seal may be required for execution.

   6. Document retention:

   Executed documents should be properly retained and stored as part of the company’s records.

   7. Legal advice:

   It is advisable to seek legal advice or consult with professionals familiar with the specific laws and regulations governing document execution in the relevant jurisdiction.

    

   2.8 ALTERATION OF STATUS OF COMPANIES

   The alteration of the status of a company refers to making changes to its legal structure, rights, powers, or any other aspect that affects its operations and governance.

   Types of alterations that can be made to a company’s status:

   1. Change of company type
   2. Change of ownership structure
   3. Change of registered office
   4. Change of directors or officers
   5. Alteration of memorandum and articles of association

    

    

    

    

    

   CHAPTER 3

   MEMBERSHIP OF A COMPANY

   Learning outcomes

   On completion of this topic, you should be able to; 1. Acquisition of membership 2. Register of members 3. Rights and liabilities of members 4. Cessation of membership 5. Register of a company’s beneficial owners 6. Derivative actions.

    

   3.1 ACQUISITION OF MEMBERSHIP

   The membership of a company refers to the individuals or entities who hold shares or membership interests in the company.

   Ways in which membership in a company can be acquired:

   1. Initial subscription
   2. Share purchase
   3. Share allotment
   4. Transfer by operation of law
   5. Conversion or merger
   6. Share split or bonus issue:

    

   3.2 REGISTER OF MEMBERS

   A register of members, also known as a shareholder register or membership register, is a record that a company maintains to track information about its shareholders or members.

   Key points to understand about the register of members

   1. Purpose and importance

   – The register of members is a legal requirement in many jurisdictions and is considered a fundamental record for a company.

   – It provides an accurate and up-to-date record of the company’s shareholders or members, their ownership interests, and relevant contact information.

   – The register of members helps establish the ownership structure of the company and facilitates communication and engagement with shareholders or members.

    

   2. Information recorded

   The register of members typically includes the following information for each shareholder or member:

   1. Full name and any other identifying information, such as identification numbers or passport details.
   2. Address for communication.
   3. Number and class of shares or membership interests held.
   4. Date of acquisition of shares or membership interests.
   5. Details of any transfers, transmissions, or other changes in ownership.
   6. Any restrictions on the transferability of shares or membership interests.

    

   3. Maintenance and accessibility

   – The company is responsible for maintaining the register of members and ensuring it is accurate and -up to date.

   – The register should be kept at the company’s registered office or at another designated location as required by law.

   – Certain jurisdictions may also require companies to notify the relevant company registrar of the location where the register is kept.

   – Shareholders or members have the right to inspect the register of members and obtain copies of its contents, subject to any legal requirements or restrictions.

    

   4. Updates and changes

   – The register of members should be regularly updated to reflect any changes in shareholdings or membership interests.

   – Updates may include recording new share issuances, transfers, transmissions, or changes resulting from corporate actions such as share buybacks or mergers.

   – Companies are typically required to file any significant changes or updates to the register with the relevant company registrar within specified timeframes.

    

   5. Confidentiality and data protection

   – The information contained in the register of members is generally considered confidential and should be protected in accordance with applicable data protection laws and regulations.

   – Companies should implement appropriate measures to safeguard the personal information of shareholders or members and ensure compliance with privacy requirements.

    

   6. Use in corporate actions

   – The register of members is used in various corporate actions, such as voting, issuing dividends, conducting shareholder meetings, or communicating with shareholders or members.

   – It is important for companies to rely on the register to confirm the eligibility of shareholders or members for participating in these actions.

    

   3.3 RIGHTS AND LIABILITIES OF MEMBERS

   Rights of members

   1. Voting rights: Members typically have the right to vote on significant matters that affect the company, such as the appointment of directors, changes to the company’s constitution etc.
   2. Dividend rights: Members may be entitled to receive dividends, which are a portion of the company’s profits distributed to shareholders.
   3. Right to information: Members have the right to access certain information about the company, such as financial statements, annual reports, and minutes of shareholder meetings.
   4. Pre-emption rights: Members may have pre-emption rights, also known as rights of first refusal, which allow them to purchase new shares or shares being transferred by existing shareholders before they are offered to external parties.
   5. Right to attend shareholder meetings: Members have the right to attend and participate in general meetings of the company.
   6. Right to share in distributions upon liquidation: In the event of the company’s liquidation or winding up, members have the right to share in the company’s assets after the payment of debts and other liabilities. The distribution of assets is typically based on the proportion of shares held by each member.

    

   Liabilities of members

   1. Liability for shares: Members are generally liable to pay the nominal value or the subscription price of the shares they hold.
   2. Liability to third parties: Members are generally not personally liable for the company’s debts and obligations. The concept of limited liability protects members from being held individually responsible for the company’s liabilities.
   3. Compliance with company’s constitution: Members have a responsibility to comply with the provisions outlined in the company’s constitution, including any restrictions on share transfers, voting procedures, or other obligations imposed on members.

    

   4. Fiduciary duties: In some jurisdictions, members who are also directors have fiduciary duties to act in the best interests of the company and its shareholders.

    

   3.4 CESSATION OF MEMBERSHIP

   1. Transfer of shares

   The transfer may be voluntary, such as selling the shares to a third party, or involuntary, such as transferring shares through inheritance or court order.

   2. Share buyback

   Companies may have the authority to buy back shares from their members.

   3. Redemption of shares

   In certain cases, a company may have the power to redeem shares, meaning the company repurchases the shares from the member at a predetermined price or according to specific conditions.

   4. Share forfeiture

   If a member fails to comply with certain obligations or breaches the company’s rules, the company may have the right to forfeit their shares.

   5. Resignation

   Members can voluntarily resign from their membership in a company by submitting a resignation letter or notice to the company.

   6. Death or bankruptcy

   The death or bankruptcy of a member usually results in the cessation of their membership.

   7. Termination or dissolution

   If a company is terminated or dissolved, the membership of all its members ceases automatically.

    

   3.5 REGISTER OF A COMPANY’S BENEFICIAL OWNERS

   A register of a company’s beneficial owners, also known as a beneficial ownership register, is a record that contains information about the individuals or entities that ultimately own or control the company.

   Key points to understand about the register of a company’s beneficial owners:

   1. Definition of beneficial owner

   A beneficial owner refers to an individual or entity that ultimately owns or controls a company or has the ability to exercise significant influence or control over its operations.

    

   2. Information recorded

   The register of beneficial owners typically includes the following information for each beneficial owner:

   1. Full name, date of birth, nationality, and residential address.
   2. Nature and extent of the beneficial interest or control held by the individual.
   3. Details of any changes in beneficial ownership or control.
   4. In some cases, supporting documentation such as identification documents or proof of ownership or control may be required.

    

   3. Maintenance and accessibility

   – The company is responsible for establishing and maintaining the register of beneficial owners.

   – The register should be kept at the company’s registered office or at another designated location as required by law.

   – Certain jurisdictions may also require companies to notify the relevant authorities or maintain the register in a central registry or database.

   – The register may be accessible to government authorities, regulatory bodies, and other entities as permitted by law, to facilitate investigations, compliance checks, or due diligence processes.

    

   4. Reporting and compliance

   – Companies may be required to regularly update the register of beneficial owners to reflect any changes or new information.

   – The specific reporting requirements and timelines for updating the register may vary depending on the jurisdiction and the applicable laws or regulations.

   – Companies may also be obligated to undertake due diligence measures to identify their beneficial owners and verify the accuracy of the information provided.

    

   5. Confidentiality and data protection:

   – The information contained in the register of beneficial owners is generally considered sensitive and confidential.

   – Companies should implement appropriate measures to protect the personal information of beneficial owners and ensure compliance with data protection and privacy laws.

   – The disclosure of beneficial ownership information to third parties is typically restricted to authorized entities and subject to legal requirements.

    

   6. Penalties for non-compliance:

   – Failure to establish and maintain an accurate register of beneficial owners or to comply with reporting requirements can result in penalties and sanctions.

   – Penalties may include fines, restrictions on company activities, or potential criminal liability for the company and its officers.

    

   3.6 DERIVATIVE ACTIONS

   A derivative action, also known as a shareholder derivative suit, is a legal mechanism that allows shareholders to bring a lawsuit on behalf of a company against a third party, typically directors, officers, or other insiders of the company.

   Key points to understand about derivative actions:

   Purpose

   – Derivative actions are brought when a shareholder believes that the company has suffered harm due to the wrongdoing of its directors, officers, or other insiders.

   – The purpose of a derivative action is to allow shareholders to seek redress for the harm caused to the company and recover damages on behalf of the company.

   – The ultimate objective is to hold accountable those responsible for the harm and protect the interests of the company and its shareholders.

    

   Standing to bring a derivative action

   – Shareholders who have continuous ownership of shares during the relevant period, and who meet other eligibility requirements specified by law, typically have standing to bring a derivative action.

   – The shareholder must demonstrate that they are suing on behalf of the company and not in their personal capacity.

   – In some jurisdictions, the shareholder may need to make a demand on the company’s board of directors before filing a derivative action, giving the board an opportunity to address the alleged wrongdoing.

    

   Requirements for filing a derivative action

   – To file a derivative action, the shareholder must typically allege and provide evidence of specific facts supporting the claim of wrongdoing by the directors, officers, or insiders.

   – The shareholder must show that they have made a good faith effort to exhaust internal remedies, such as making a demand on the board or showing that such demand would be futile.

   – The shareholder must comply with procedural requirements, such as notifying the company and obtaining court approval to proceed with the derivative action.

    

   Conducting a derivative action

   – Once a derivative action is initiated, the court will evaluate the merits of the claim and determine whether the action can proceed.

   – If the court allows the action to proceed, the shareholder acts as the plaintiff on behalf of the company.

   – The company becomes the nominal defendant, and the named defendants are the alleged wrongdoers.

   – The shareholder’s recovery, if successful, typically goes to the company, rather than the shareholder personally.

    

   Role of the company

   – The company’s board of directors and management have the opportunity to defend against the derivative action and protect the company’s interests.

   – In some cases, the company may choose to initiate an internal investigation or take corrective actions to address the alleged wrongdoing before or during the derivative action.

    

   Legal remedies and outcomes

   – If successful, the court may order remedies such as damages, restitution, injunctive relief, or changes in corporate governance.

   – The court may also award attorneys’ fees and costs to the prevailing party.

   – However, it’s important to note that the outcome of a derivative action can vary depending on the specific circumstances, applicable laws, and the court’s evaluation of the evidence and arguments presented.

    

    

   CHAPTER 4

   SHARES

   Learning outcomes

   On completion of this topic, you should be able to; 1. Classes of shares 2. Variation of class rights 3. Share certificates 4. Issue and allotment 5. Transfer and transmission 6. Transfer of shares under central depository system 7. Mortgaging and charging of shares

    

   4.1 CLASSES OF SHARES

   Shares are units of ownership in a company that represent a shareholder’s proportionate interest in the company’s capital, assets, profits, and voting rights. Companies issue shares to raise capital and attract investors.

   1. Ordinary shares

   They are also referred to as equity capital. The holders of ordinary shares usually carry the main risk of business as they invest their money without assurance that they will be paid interest on their investment. Holders receive dividends out of profit as determined by directors and declared by members in the Annual General Meeting.

   Ordinary shareholders are entitled to the following rights which are not available in respect of other shares:

   (i)After providing for any other dividend, which is payable on preference shares, the whole of the remaining profits can be available to them by way of dividend if they so wish.

   (ii)They are entitled to control the company by use of voting rights at the Annual General Meeting.

   (iii)During winding up ordinary shareholders are entitled to the entire residue after payment of the company’s liability.

   (iv)They receive dividend at variable rates based on the discretion of directors and availability of profits.

    

   2. Preferred Shares

   They carry preferential rights in relation to other classes of shares. The rights relate to dividend and right to receive proportionate parts of capital during winding up. The rights on preference shares may be stated in the Articles of association. As regards their priority entitlement, the following features must be observed:

   (i) The right to receive a dividend at a specified rate usually fixed by the terms of issue or the Articles.

   (ii) The right to receive dividends before any other class but not a right to compel the company to pay dividends if it fails to do so.

   (iii)The right to receive dividends is assumed to be cumulative unless otherwise stated.

   (iv) If a Company which has arrears of unpaid dividends goes into liquidation, a preference shareholder ceases to be entitled to the arrears of the dividends unless the dividend had been declared and not paid or the articles provide for payment for such arrears.

   (v)Holders of preference shares are not entitled to participate in any surplus dividend over and above the specified rates.

    

   Preference shares have various sub-types; they are as follows:

   1. Cumulative preference shares
   2. Non-cumulative preference shares
   3. Participating preference shares
   4. Non-participating preference shares
   5. Convertible preference shares
   6. Non-convertible preference shares
   7. Redeemable preference shares
   8. Irredeemable preference shares

    

   3. Non-voting shares

   Non-voting shares are a class of shares that do not carry voting rights or have limited voting rights.

   Non-voting shareholders participate in the company’s financial benefits, such as dividends and capital appreciation, but do not have a say in the company’s decision-making process.

   Non-voting shares are often issued to investors or employees as a way to provide economic ownership without granting voting power.

    

   4. Redeemable shares

   Section 520 provides that a company may issue preference shares which are liable to be redeemed. This is only possible under the following conditions:

   (i)The company must have shares which are not redeemable e.g. Ordinary shares

   (ii)Issue of redeemable preference shares must be authorized by the articles

   (iii)The shares must be fully paid at the time of redemption.

   (iv)Money required for redemption must be from either the proceeds from a fresh issue of shares made for the purpose or out of accumulated profit.

   (v)Any premium on redemption must be provide out of profits available for distribution or out of the share premium account.

   (vi)Redemption of preference shares should not be taken as a reduction of the Company’s authorized share capital.

   (vii)Within one month of redemption notice of the number of shares redeemed must be given to the register.

    

   5. Founder’s shares

   Founder’s shares are a class of shares issued to the founders or early-stage investors of a company.

   These shares often carry special rights, such as enhanced voting rights or preferential treatment in the event of a sale or liquidation of the company.

   Founder’s shares are typically issued to align the interests of the company’s founders with the long-term success and control of the company.

    

   6. Class-specific shares

   Some companies may create specific classes of shares to cater to particular groups of investors or to meet specific needs.

   Class-specific shares may have unique rights, preferences, or restrictions not found in other classes of shares.

   For example, a company may issue class-specific shares with special dividend rights, conversion rights, or restrictions on transferability.

    

   4.2 VARIATION OF CLASS RIGHTS

   Variation of class rights refers to the process by which a company makes changes to the rights and privileges attached to a particular class of shares. It allows the company to modify the rights of one class of shares without affecting the rights of other classes of shares.

   Key points to understand about the variation of class rights

   Purpose:

   – Companies may seek to vary class rights for various reasons, such as to restructure the company, raise capital, accommodate the changing needs of shareholders, or address specific business requirements.

   – Variation of class rights allows the company to adapt to evolving circumstances while preserving the rights and interests of different classes of shareholders.

    

   Legal framework

   – The ability to vary class rights is typically governed by the company’s constitution, articles of association, shareholder agreements, and applicable laws or regulations.

   – Companies must comply with the legal requirements and procedures specified in these documents and the relevant corporate laws before varying class rights.

    

   Shareholder approval

   – Varying class rights generally requires the approval of the affected class of shareholders.

   – The specific approval threshold may be outlined in the company’s constitution or articles of association. It can vary depending on the jurisdiction and the terms set out in the governing documents.

   – The company typically holds a general meeting of the affected class of shareholders to seek their approval for the proposed variation. The meeting must comply with the legal requirements for notice, quorum, and voting procedures.

    

   Disclosure and communication

   Companies are usually required to provide full and accurate information about the proposed variation to the affected shareholders.

   The company must communicate the details of the variation, its implications, and the rationale behind it to enable shareholders to make an informed decision.

   Shareholders may also have the right to ask questions, seek clarifications, and express their views on the proposed variation.

    

   Court approval

   In some cases, court approval may be necessary to vary class rights, particularly if there are dissenting shareholders or if the variation affects the rights of minority shareholders.

   The court will review the proposed variation, consider the interests of all affected parties, and determine whether the variation is fair and equitable.

   The court’s approval provides an added layer of protection for shareholders and ensures that their rights are not unfairly prejudiced.

    

   Documentation and record-keeping

   Once the variation of class rights is approved, the company must document the changes and update its records accordingly.

   The amended rights and privileges of the affected class of shares should be clearly reflected in the company’s constitutional documents, shareholder registers, and any relevant agreements.

    

   4.3 SHARE CERTIFICATES

   Share certificates are physical or electronic documents issued by a company to its shareholders to evidence their ownership of shares in the company.

    

   Purpose

   – Share certificates serve as proof of ownership and provide shareholders with tangible evidence of their investment in the company.

   – They represent a legal title to the shares and can be used to establish ownership and transferability of shares.

    

   Contents of share certificates

   – Share certificates typically include essential information such as the name of the company, the class and type of shares held, the shareholder’s name, the number or quantity of shares, the unique share certificate number, and the date of issuance.

   – The certificates may also include details about any restrictions or special rights attached to the shares, such as voting rights or dividend preferences.

    

   Physical share certificates

   – Traditionally, share certificates were physical documents printed on paper and issued to shareholders.

   – Physical certificates often include security features like watermarks, holograms, or unique designs to prevent counterfeiting.

   – Shareholders were required to keep their share certificates in a safe place as they were required for share transfers or exercising shareholder rights.

    

   Electronic share certificates

   – Electronic shareholding systems eliminate the need for physical share certificates. Instead, shares are held and recorded electronically in a central depository or registry.

   – Shareholders receive statements or electronic records confirming their share ownership instead of physical certificates.

    

   Transfer and transmission of share certificates

   – Share certificates are transferable documents that allow shareholders to sell, gift, or transfer their shares to other individuals or entities.

   – To transfer shares, the shareholder typically endorses or signs the back of the share certificate and delivers it to the buyer or the company’s registrar.

   – In the case of transmission, where shares are transferred due to the death or bankruptcy of a shareholder, the appropriate legal procedures must be followed, and the share certificate may need to be accompanied by relevant documentation, such as a probate order or court order.

    

   Replacement and cancellation

   – If a physical share certificate is lost, stolen, or damaged, the shareholder should inform the company and follow the required procedures to obtain a replacement certificate.

   – In the case of electronic shareholding, the shareholder may need to contact the relevant depository or registrar to request a replacement or updated statement of their shareholding.

   – When shares are transferred or canceled, the share certificates are usually returned to the company for cancellation or marked as “canceled” to prevent misuse.

    

   4.4 ISSUE AND ALLOTMENT

   Issue of shares

   The issue of shares refers to the creation and availability of new shares by a company for subscription or purchase. Companies may issue new shares to raise capital, fund expansion, acquire assets, or for other business purposes.

   The issue of shares may require shareholder approval, particularly if it involves a significant increase in the company’s authorized share capital or if it involves the issuance of shares with special rights or preferences.

    

   Allotment of shares:

   Allotment is the process of allocating or assigning the newly issued shares to specific individuals or entities who have applied for or agreed to purchase the shares.

   Allotment is usually conducted by the company’s board of directors or by a designated committee with the authority to make allotments.

   The allotment process involves reviewing applications or purchase agreements, verifying compliance with applicable laws and regulations, and determining the allocation of shares based on the terms and conditions of the share issuance.

   The allotment decision is typically communicated to the applicants, and the allotted shares are reserved for the successful applicants.

    

   NOTE;

   1. Share issuance and allotment must comply with the legal requirements and regulations of the jurisdiction in which the company operates.
   2. The process may involve obtaining necessary approvals from regulatory authorities, such as securities commissions or stock exchanges, depending on the nature and size of the share issuance.
   3. Companies may choose to issue shares publicly through an initial public offering (IPO) or privately through a private placement or rights offering.
   4. The terms of the share issuance, including the price per share, the number of shares being issued, any special rights or preferences attached to the shares, and the timeline for payment and share delivery, are typically set out in the offer documents or subscription agreements.
   5. After the allotment of shares, the company usually prepares share certificates or electronic statements to evidence the ownership of the allotted shares by the shareholders.
   6. Shareholders who have been allotted shares may be required to make the necessary payment for the shares within a specified timeframe as per the terms of the share issuance.

    

   4.5 TRANSFER AND TRANSMISSION

   Transfer of shares

   1. Transfer of shares refers to the process of transferring ownership of shares from one shareholder to another.
   2. Shareholders may choose to transfer their shares for various reasons, such as selling them to another investor, gifting them, or transferring them as part of a business transaction.
   3. The transfer of shares involves a change in legal ownership, but the shares remain with the same class and rights as originally issued.
   4. The transfer process is typically initiated by the transferor (seller) and requires the transferor to execute a share transfer form or instrument, which is then delivered to the company or its registrar.
   5. The company or its registrar updates the register of members to reflect the transfer and issues a new share certificate or updates the electronic shareholding record for the transferee (buyer).

    

   Transmission of shares:

   1. Transmission of shares refers to the transfer of shares due to the death, bankruptcy, or insolvency of a shareholder.
   2. In the case of transmission, the shares pass to the legal representative or successor of the deceased or bankrupt shareholder.
   3. The transmission process is governed by the relevant laws and regulations, as well as the company’s articles of association or constitution.
   4. The legal representative or successor is required to provide the necessary legal documentation, such as a death certificate, probate order, or court order, to establish their entitlement to the shares.
   5. The company or its registrar updates the register of members to reflect the transmission and issues a new share certificate or updates the electronic shareholding record for the new shareholder.

    

   Note:

    

   • Both transfer and transmission of shares require compliance with the company’s constitutional documents, applicable laws, and regulations.
   • The transfer or transmission process may involve notifying the company or its registrar, completing the necessary forms or instruments, and providing supporting documentation.
   • Companies may have specific procedures and requirements for share transfers or transmissions, including any restrictions on transferability outlined in the articles of association or shareholders’ agreements.
   • It is common for companies to charge a fee for processing share transfers or transmissions to cover administrative costs.
   • Shareholders should ensure that they follow the prescribed procedures and seek legal advice if necessary to ensure a smooth and legally valid transfer or transmission of shares.

    

   4.6 TRANSFER OF SHARES UNDER CENTRAL DEPOSITORY SYSTEM

   Transfer of shares under a Central Depository System (CDS) refers to the process of electronically transferring ownership of shares between buyers and sellers through a centralized depository. The CDS is a system that facilitates the electronic holding, transfer, and settlement of securities, including shares.

   How the transfer of shares works under a CDS:

   1. Opening a CDS account:

   To participate in share transfers through the CDS, investors need to open a CDS account with a registered depository participant (DP).

   The DP is an intermediary authorized to provide CDS services and maintain investor accounts.

   2. Initiation of transfer:

   The transfer of shares is initiated by the seller (transferor) who instructs their DP to transfer the shares to the buyer (transferee).

   The transfer instruction includes details such as the buyer’s CDS account number, the number of shares being transferred, and any relevant transaction information.

   3. Verification and settlement:

   The transfer instruction is verified by the transferor’s DP to ensure that it complies with the rules and regulations of the CDS.

   4. Updating share ownership:

   After the transfer is settled, the CDS updates its records to reflect the change in ownership.

   5. Reporting and Confirmation:

   The CDS provides confirmation of the share transfer to both the transferor and transferee, typically in the form of electronic statements or transaction reports.

   The confirmation includes details such as the transferred share quantity, transaction date, and the respective CDS account numbers.

    

   4.7 MORTGAGING AND CHARGING OF SHARES

   Mortgaging of shares

   – Mortgaging of shares refers to the process of creating a mortgage over shares to secure a loan or debt.

   – The shareholder who owns the shares pledges them as collateral to a lender or creditor.

   By creating a mortgage, the shareholder grants the lender a security interest in the shares, and in the event of default, the lender may have the right to sell the shares to recover the outstanding debt.

   – The terms and conditions of the mortgage, including the repayment terms, interest rates, and events of default, are usually outlined in a mortgage agreement or deed.

    

   Charging of shares

   – Charging of shares is a similar concept to mortgaging and involves using shares as security for a debt or obligation.

   – When shares are charged, the shareholder grants a charge or lien over the shares to the creditor.

   The charge gives the creditor the right to sell the shares or enforce the security interest if the debtor fails to fulfill their obligations.

   – The terms and conditions of the charge, such as the amount secured, repayment terms, and enforcement procedures, are typically set out in a charge agreement or deed.

    

    

   CHAPTER 5

   SHARE CAPITAL

   Learning outcomes

   On completion of this topic, you should be able to; 1. Meaning and types of share capital 2. Raising of share capital 3. Prospectus/information memorandum 4. Maintenance of capital 5. Alteration and Consolidation of share capital 6. Dividends

    

   5.1 MEANING AND TYPES OF SHARE CAPITAL

   Share capital refers to the total value of the shares issued by a company, representing the ownership interest of its shareholders. It is the capital raised by the company through the issuance of shares.

   Types of share capital

   1. Authorized share capital:

   Authorized share capital, also known as authorized capital or nominal capital, represents the maximum value of shares that a company is authorized to issue as per its constitutional documents (e.g., memorandum of association). It sets the limit on the amount of capital that the company can raise from the issuance of shares.

   2. Issued share capital:

   Issued share capital refers to the portion of authorized share capital that has been issued by the company and allocated to shareholders. It represents the actual shares held by shareholders.

   3. Subscribed share capital:

   Subscribed share capital refers to the portion of the issued share capital that has been subscribed to or agreed to be taken up by shareholders. It represents the shares for which shareholders have made a commitment to purchase but may not have fully paid for yet.

   4. Paid-up share capital:

   Paid-up share capital refers to the portion of the subscribed share capital that shareholders have actually paid for. It represents the amount of money that shareholders have contributed to the company in exchange for their shares.

    

   5.2 RAISING OF SHARE CAPITAL

   Raising share capital refers to the process of increasing the funds available to a company by issuing new shares to investors. It is a common method used by companies to raise funds for various purposes, such as expansion, acquisitions, debt repayment, or working capital.

   Ways in which companies can raise share capital:

   1. Public Issue/Initial Public Offering (IPO):

   A company can raise share capital by making an initial public offering (IPO) and listing its shares on

   2. Rights Issue:

   A rights issue allows existing shareholders of a company to purchase additional shares in proportion to their existing shareholdings.

   3. Private Placement:

   A private placement involves offering shares to a select group of institutional or accredited investors, rather than to the general public.

   4. Venture Capital and Private Equity:

   Companies in their early stages or high-growth phases may raise share capital through venture capital (VC) or private equity (PE) investments.

   5. Crowdfunding:

   Crowdfunding platforms allow companies to raise share capital by soliciting investments from a large number of individuals, often through online platforms.

   6. Convertible Debt:

   Companies may raise share capital by issuing convertible debt instruments, such as convertible bonds or convertible notes.

    

   5.3 PROSPECTUS/INFORMATION MEMORANDUM

   A prospectus (also known as an information memorandum or offering memorandum) is a legal document prepared by a company seeking to raise funds from the public through an initial public offering (IPO) or a public issue of securities. It provides potential investors with detailed information about the company, its business operations, financials, risks, and terms of the offering.

    

   Purpose:

   – The primary purpose of a prospectus is to provide potential investors with all relevant information necessary for making an informed investment decision.

   – It aims to ensure transparency and disclosure of material facts about the company, its operations, and the securities being offered.

    

   Contents:

   – It contains information about the company’s history, business model, products or services, management team, financial performance, risk factors, and future prospects.

   – It includes details about the securities being offered, such as the number of shares, their price, and any rights or restrictions associated with them.

   – It may also include information about the offering process, underwriters, legal and financial advisors, and the intended use of the proceeds.

    

   5.4 MAINTENANCE OF CAPITAL

   Maintenance of capital refers to the legal principle that governs the protection of a company’s share capital and restricts certain actions that could result in the reduction or depletion of that capital. The aim of this principle is to safeguard the interests of the company’s creditors and shareholders.

    

   Capital preservation

   The principle of capital preservation requires a company to safeguard its share capital and prevent it from being distributed or diminished in a way that could prejudice the interests of creditors.

    

   Prohibited reduction of capital

   Companies are generally prohibited from reducing their share capital unless certain legal procedures and requirements are followed. Reduction of capital may involve canceling shares, reducing their nominal value, or returning capital to shareholders.

    

   Distribution restrictions

   Companies must comply with restrictions on the distribution of capital to shareholders, including dividends and other forms of distributions. Dividends or distributions can only be made out of profits or distributable reserves, ensuring that the company remains financially sound and able to meet its obligations.

    

   Solvency and financial tests:

   Some jurisdictions require companies to meet solvency or financial tests before making distributions or reducing capital. Solvency tests typically assess the company’s ability to pay its debts as they become due and determine whether the distribution or reduction would negatively impact its financial viability.

    

   Regulatory compliance

    

   Companies are required to comply with relevant laws, regulations, and accounting standards related to the maintenance of capital.

    

   Consequences of non-compliance:

   Failure to comply with capital maintenance requirements can result in legal consequences, including liabilities for directors, challenges to distributions or reductions, and potential invalidation of transactions.

    

   5.5 ALTERATION AND CONSOLIDATION OF SHARE CAPITAL

   Alteration and consolidation of share capital refer to the changes made to a company’s existing share capital structure. These changes may involve increasing or decreasing the nominal value of shares, reorganizing share classes, or consolidating shares.

   Alteration of share capital

   – Alteration of share capital involves making changes to the existing share capital structure of a company.

   – It may include increasing or reducing the nominal value of shares, altering the rights attached to shares, or reclassifying shares into different classes.

   – Alterations are typically made through a special resolution passed by the shareholders and may require regulatory approvals or court sanction, depending on the jurisdiction.

    

   Consolidation of share capital:

   – Consolidation of share capital refers to the process of reducing the number of shares in circulation while increasing their nominal value proportionally.

   – The purpose of consolidation is to improve the marketability and trading of shares by reducing the number of outstanding shares.

   – For example, if a company consolidates its shares in a ratio of 1 new share for every 10 existing shares, it will result in reducing the number of shares by a factor of 10 while increasing their nominal value by a factor of 10.

    

   5.6 DIVIDENDS

   Dividends refer to the portion of a company’s profits that is distributed to its shareholders. They represent a way for the company to share its financial success with its owners.

   Types of dividends

   1. Cash dividends: These are dividends paid in the form of cash to shareholders, usually based on the number of shares they own.
   2. Stock dividends: Sometimes, companies may distribute additional shares to shareholders instead of cash. These are known as stock dividends or bonus shares.
   3. Property dividends: In certain cases, companies may distribute assets or property to shareholders as dividends.
      

   CHAPTER 6

   DEBT CAPITAL

   Learning outcomes

   On completion of this topic, you should be able to; 1. Borrowing powers of a company 2. Company assets that can secure a company’s borrowings 3. Company debentures 4. Company charges 5. Meetings and resolutions in respect of debt capital 6. Registration of charges 7. Remedies for debenture holders

    

   6.1 BORROWING POWERS OF A COMPANY

   The borrowing powers of a company refer to its ability to raise funds through borrowing, either from financial institutions, individuals, or other entities. These powers are typically outlined in the company’s constitution, specifically in its memorandum and articles of association.

   If a loan (or any portion of a loan) is ultra vires the company, it is void, even if it is ratified by the members in general meeting. However, in such circumstances, the lender may have the following remedies.

   • If the money has not been spent, he can obtain an injunction restraining the company from parting with it and he can recover it.
   • He can bring an action against the directors for breach of warranty of authority.
   • If money has been used to pay creditors, the lender may stand in the place of such creditors (this is known as subrogation), but he/she will not get any priority which may have attached to such creditors’ interest.

   Ultra vires

   Where a company has no borrowing powers or where the Memorandum or Articles fix a limit to the borrowing powers of the company, any borrowing in the one case, and any borrowing in excess of such limit in the other case, is ultra vires. If a company borrows money beyond its powers, the borrowing is ultra vires the company and is void.

    

   6.2 COMPANY ASSETS THAT CAN SECURE A COMPANY’S BORROWINGS

   When a company borrows funds, it may be required to provide security or collateral to the lender to secure the borrowing. This collateral serves as a guarantee for the lender that, in the event of default by the company, they have a claim on specific assets to recover their loan.

   The types of assets that can secure a company’s borrowings can vary, but here are some common examples:

   1. Real estate: The lender may require a mortgage or charge on the property, giving them the right to sell the property to recover their loan if the company defaults.
   2. Equipment and machinery: Companies that own valuable equipment, machinery, or other assets necessary for their operations may use these assets as security for borrowing.
   3. Inventory; Companies with substantial inventory levels may pledge their inventory as collateral for borrowing.
   4. Accounts receivable: Companies with outstanding invoices or accounts receivable can sometimes use these future cash flows as security for borrowing.
   5. Intellectual property: Companies that own valuable intellectual property, such as patents, trademarks, or copyrights, can use these assets as collateral for borrowing.

    

   6.3 COMPANY DEBENTURES

   Debentures are debt instruments issued by a company to raise funds from investors.

   They are usually issued for a fixed term and carry a specified interest rate, known as the coupon rate, which is paid to debenture holders periodically.

   Debentures are typically unsecured, meaning they are not backed by specific assets of the company. However, some debentures may have security or collateral attached to them, known as secured debentures.

   Types of debentures

   1. Secured debentures: These debentures are backed by specific assets of the company.
   2. Unsecured debentures: They are not secured by any specific assets. In case of default, the debenture holders have a claim on the general assets of the company.
   3. Convertible debentures: These debentures can be converted into equity shares of the company at a predetermined conversion ratio and within a specified time period.
   4. Non-convertible debentures: These debentures cannot be converted into equity shares and remain as fixed-income instruments until maturity.

    

   6.4 COMPANY CHARGES

   Company charges refer to a form of security interest or lien created by a company over its assets to secure the repayment of a debt or obligation. These charges provide a measure of protection for lenders and creditors by granting them a claim on specific assets of the company in case of default.

   Types of charges

   1. Fixed charges: They are created over specific assets of the company that are identified and defined in the charge document.
   2. Floating charges: They are created over a class of assets that may change in nature and value over time.

   Crystallization of floating charges

   A floating charge “crystallizes” upon the occurrence of specific events defined in the charge document, such as default on the loan, insolvency of the company, or other trigger events.

    

   6.5 MEETINGS AND RESOLUTIONS IN RESPECT OF DEBT CAPITAL

   When it comes to debt capital, companies may need to convene meetings and pass resolutions to address matters related to borrowing, repayment, and other debt-related issues.

   Key points regarding meetings and resolutions in respect of debt capital:

   1. General meetings:

   Companies may convene general meetings, such as annual general meetings (AGMs) or extraordinary general meetings (EGMs), to discuss and approve matters related to debt capital.

   2. Debt issuance resolutions:

   Before a company can issue debt securities, such as debentures or bonds, it typically needs to pass a resolution at a general meeting to authorize the issuance.

   The resolution may include details such as the maximum amount of debt to be issued, the terms and conditions of the securities, and any security or collateral provided.

   3. Approval of loan agreements:

   In certain cases, depending on the company’s constitution or relevant laws, shareholders’ approval may be required for significant loan agreements.

   4. Amendments to debt agreements:

   If the terms of existing debt agreements need to be modified, such as changes to interest rates, repayment terms, or covenants, the company may need to convene a meeting and pass a resolution to approve the amendments.

   5. Debt repayment resolutions:

   When it is time for the company to repay the debt, a resolution may be required to authorize the repayment and to approve the necessary funds for repayment.

   6. Board resolutions:

   Apart from general meetings, the board of directors may pass resolutions related to debt capital without requiring shareholder approval.

   7. Notice and quorum:

   Adequate notice must be given to shareholders or debenture holders regarding meetings where debt capital-related matters will be discussed. The meetings must have the necessary quorum, as defined in the company’s constitution or applicable laws, for the resolutions to be valid.

    

   6.6 REGISTRATION OF CHARGES

   Registration of charges refers to the process of registering security interests or liens created by a company over its assets with the appropriate government authority. The purpose of registration is to provide public notice of the charges and establish their priority in case of the company’s insolvency or liquidation.

    

   Timeframe for registration

   The timeframe for registration often ranges from 21 to 30 days from the creation of the charge, although it can vary depending on the jurisdiction.

    

   Charge documents

   – To register a charge, the company must submit the relevant charge documents to the registration authority.

   – The charge documents typically include the charge instrument, such as a debenture or a charge deed, which outlines the terms and conditions of the charge and identifies the assets or property subject to the charge.

   – Additional supporting documents, such as board resolutions, copies of the charge instrument, and other relevant agreements, may also be required for registration.

    

   Amendments and discharge of charges:

   – If there are amendments or changes to the charge, such as alterations to the charged assets or modifications to the terms, the company may need to register these amendments with the registration authority.

   – Similarly, when a charge is fully discharged or satisfied, the company should file the necessary documents with the registration authority to update the public register and remove the charge from the records.

    

   6.7 REMEDIES FOR DEBENTURE HOLDERS

   Debenture holders are individuals or entities that hold debentures, which are debt instruments issued by a company. If a company fails to fulfill its obligations towards debenture holders, there are several remedies available to protect the rights and interests of the debenture holders.

   Remedies for debenture holders:

   1. Legal action

   Debenture holders have the right to take legal action against the company to enforce their rights and seek remedies for any breach of the debenture agreement. This may involve filing a lawsuit in court to recover the outstanding principal amount, interest, or any other payments due under the debenture.

   2. Appointment of receiver

   In cases where the debenture is secured by specific assets of the company, debenture holders may have the right to appoint a receiver. A receiver is a professional appointed by the debenture holders to take control of the secured assets and manage them on their behalf. The receiver’s role is to protect the interests of the debenture holders and realize the value of the assets to recover the outstanding debt.

   3. Foreclosure or sale of security:

   If the debenture is secured by specific assets, such as property or equipment, debenture holders may have the right to foreclose on the security or force a sale of the assets to recover their debt.

   The foreclosure process involves taking legal action to seize and transfer ownership of the secured assets to satisfy the outstanding debt.

   4. Enforcement of Guarantees:

   If the debenture is guaranteed by a third party, such as a parent company or a personal guarantor, debenture holders can seek to enforce the guarantee.

   This involves taking legal action against the guarantor to recover the outstanding debt in case the company fails to fulfill its obligations.

   5. Insolvency Proceedings:

   If the company becomes insolvent or goes into liquidation, debenture holders may participate in the insolvency proceedings to recover their debt.

   Depending on the jurisdiction and the type of debenture held, debenture holders may have a preferential claim over other unsecured creditors, providing them with a higher priority for repayment.

   6. Negotiation and Restructuring:

   In some cases, debenture holders may choose to negotiate with the company to restructure the debt or modify the terms of the debenture.

    

    

    

    

   CHAPTER 7

   COMPANY MEETINGS

   Learning outcomes

   On completion of this topic, you should be able to; 1. Nature and classification of company meetings 2. Types of company meetings held to execute various functions of company meetings 3. Methods of holding company meetings 4. Essentials of a valid physical, virtual and hybrid meeting Voting 5. Resolutions 6. Drafting resolutions 7. Protection of minority shareholders

    

   7.1 NATURE AND CLASSIFICATION OF COMPANY MEETINGS

   Company meetings are gatherings of shareholders, directors, or other stakeholders of a company to discuss and make decisions on various matters related to the company’s affairs. Meetings play a crucial role in corporate governance and provide a platform for communication, decision-making, and accountability.

    

   Nature of company meetings

   – Company meetings are formal gatherings held according to legal requirements, the company’s constitution, and relevant regulations.

   – They provide a forum for shareholders and other stakeholders to exercise their rights, express their opinions, and participate in decision-making processes.

   – Meetings serve as a means of ensuring transparency, accountability, and proper governance within the company.

    

   Classification of Company Meetings:

   1. Shareholders’ Meetings:
   2. General Meetings: These include the Annual General Meeting (AGM) and Extraordinary General Meeting (EGM).
   3. AGM: It is held annually and provides an opportunity for shareholders to receive company reports, approve financial statements, elect directors, and address other matters required by law or the company’s constitution.
   4. EGM: It is called for specific purposes outside the regular AGM, such as approving special resolutions, making significant changes to the company’s constitution, or considering urgent matters.
   5. Class meetings: These are specific meetings held for shareholders of a particular class of shares, allowing them to discuss and vote on matters affecting their class rights, such as changes to dividend preferences or other class-specific issues.

    

   1. Board Meetings:

   Directors’ Meetings: These are meetings of the board of directors, where they discuss and make decisions on company matters.

   Board Committees: Committees formed by the board, such as audit committees or remuneration committees, may hold separate meetings to address specific areas of responsibility assigned to them.

   1. Creditors’ Meetings:

   Creditors’ meetings may be held in specific situations, such as during a company’s insolvency or restructuring process, where creditors come together to discuss and vote on matters affecting their interests.

   1. Other Meetings:

    

   Meetings may also be held with other stakeholders, such as employees, suppliers, or customers, to address specific issues or gather input on relevant matters.

    

   7.2 TYPES OF COMPANY MEETINGS HELD TO EXECUTE VARIOUS FUNCTIONS OF COMPANY MEETINGS

   Annual General Meeting (AGM)

   The AGM is a mandatory meeting held by public and private companies once a year.

   Functions:

   1. Presentation and approval of annual financial statements and reports.
   2. Election or reappointment of directors.
   3. Appointment of auditors.
   4. Declaration of dividends.
   5. Discussion of company performance and future plans.
   6. Shareholders’ question and answer session.

    

   2. Extraordinary General Meeting (EGM)

   The EGM is held outside the regular AGM to discuss and decide on specific matters that require immediate attention.

   Functions:

   1. Approving special resolutions for significant changes to the company’s constitution.
   2. Approving major corporate actions like mergers, acquisitions, or disposals.
   3. Issuing new shares or altering share capital structure.
   4. Authorizing the company to borrow or provide guarantees.
   5. Resolving disputes or making decisions on critical matters.

    

   3. Class meetings

   Class meetings are held for specific classes of shareholders, particularly when their rights or interests are affected.

   Functions:

   1. Voting on matters that specifically impact a particular class of shares.
   2. Discussing and deciding on changes to class rights or preferences.
   3. Approving resolutions related to class-specific issues like dividend preferences or liquidation preferences.

    

   4. Board meetings

   Board meetings are held by the company’s board of directors.

   Functions:

   1. Strategic decision-making and policy formulation.
   2. Reviewing financial performance, budgets, and management reports.
   3. Approving major transactions and contracts.
   4. Discussing and resolving operational issues.
   5. Monitoring compliance with legal and regulatory requirements.
   6. Evaluating and approving business plans and strategies.

    

   5. Committee meetings

   Committee meetings are held by specific committees formed by the board, such as audit committees, remuneration committees, or nomination committees.

   Functions:

   1. Conducting detailed reviews and assessments in specific areas of responsibility.
   2. Making recommendations and providing guidance to the board.
   3. Monitoring compliance and governance in their respective domains.
   4. Undertaking specialized tasks assigned by the board.

    

   Creditors’ meetings

   Creditors’ meetings are held in specific circumstances, typically during insolvency or restructuring processes.

   Functions:

   1. Discussing and voting on matters related to the company’s financial restructuring or insolvency proceedings.
   2. Reviewing proposals for debt repayment or debt restructuring.
   3. Appointing or approving the appointment of administrators or liquidators.
   4. Addressing the interests and concerns of creditors in the insolvency process.

    

   7.3 METHODS OF HOLDING COMPANY MEETINGS

   1. Physical meetings

   Traditional physical meetings involve participants gathering at a specific physical location.

   Participants attend in person and engage in face-to-face discussions and voting.

   This method allows for direct interaction and immediate feedback among participants.

   2. Virtual meetings

   Virtual meetings are conducted online using video conferencing or web conferencing tools.

   Participants join the meeting remotely from different locations using their computers or mobile devices.

   3. Hybrid meetings

   Hybrid meetings combine elements of both physical and virtual meetings.

   Some participants attend the meeting in person at a physical location, while others join remotely through video conferencing.

   4. Postal or written resolutions:

   In certain cases, instead of holding a meeting, decisions can be made through written resolutions.

    

   7.4 ESSENTIALS OF A VALID PHYSICAL, VIRTUAL AND HYBRID MEETING VOTING

   Physical meeting voting

   1. Quorum: The meeting must have the minimum number of participants required by the company’s constitution or applicable laws to form a valid quorum.
   2. Notice: Adequate notice must be provided to the participants, informing them of the meeting date, time, location, and agenda.
   3. Conduct: The meeting should be conducted according to the rules outlined in the company’s constitution and applicable laws. The chairperson should ensure fairness, transparency, and adherence to proper meeting procedures.
   4. Voting Process: Voting can take place through show of hands or by poll. The method of voting and the majority required for a resolution to pass should be specified in the company’s constitution or applicable laws.
   5. Minutes: Detailed minutes of the meeting should be recorded, documenting the voting results, resolutions passed, and any discussions or decisions made during the meeting.

    

   Virtual meeting voting

   1. Technology and platform: The virtual meeting should be conducted using a reliable and secure video conferencing or web conferencing platform. Participants should have access to the necessary technology and ensure a stable internet connection.
   2. Verification of participants: The participants’ identities should be verified before allowing them to vote. This can be done through attendance registration, login credentials, or other methods of participant verification.
   3. Notice: Similar to physical meetings, participants must receive proper notice, specifying the meeting details, agenda, and instructions for accessing the virtual meeting.
   4. Voting process: The chairperson should explain the voting procedure to the participants, including how to cast their votes electronically or by other means. The voting process should be clear, transparent, and allow for participation and counting of votes.
   5. Recording: The virtual meeting should be recorded to maintain an accurate record of the proceedings, including the voting process and results.
   6. Minutes: Detailed minutes should be prepared, summarizing the discussions, resolutions passed, and the outcome of the voting.

    

   Hybrid meeting voting

   1. Hybrid meetings involve both physical and virtual participants. The essentials for voting would generally depend on the specific format and arrangements made for the hybrid meeting.
   2. Notice: Participants must receive proper notice, indicating whether they will attend physically or virtually, and providing instructions for both types of participants.
   3. Voting process: The voting process should accommodate both physical and virtual participants, ensuring that all participants have an equal opportunity to cast their votes.
   4. Technology and platform: For virtual participants, a reliable and secure video conferencing or web conferencing platform should be used to facilitate their remote participation and voting.
   5. Recording and minutes: Similar to virtual meetings, the hybrid meeting should be recorded, and detailed minutes should be prepared, capturing the discussions, resolutions, and the voting results.

    

   7.5 RESOLUTIONS

   Resolutions are formal decisions made by a company’s shareholders or board of directors. Resolutions are an important part of the decision-making process in corporate governance.

   Ordinary resolutions

   Ordinary resolutions are passed by a simple majority of votes cast by the shareholders or directors.

   They are used for routine matters and general business decisions that do not require a higher level of approval.

    

   Special resolutions

   Special resolutions require a higher majority of votes to be passed, typically at least two-thirds or a specified majority of votes cast.

   Special resolutions are used for significant decisions that have a more substantial impact on the company’s operations or structure.

   Examples of matters typically decided by special resolutions include amending the company’s constitution, changing the company’s name, approving share buybacks, or authorizing a reduction of share capital.

    

   Written resolutions

   In addition to resolutions passed during meetings, companies may also use written resolutions.

   Written resolutions are resolutions that are circulated among the shareholders or directors, who then sign and return the document indicating their approval or disapproval.

    

   Notice and documentation

   Resolutions, whether ordinary or special, are usually proposed and discussed during company meetings.

   Proper notice of the meeting and the resolution to be voted upon must be provided to the participants.

    

   7.6 DRAFTING RESOLUTIONS

   Drafting resolutions involves preparing the text and content of the resolution document in a clear and concise manner.

   Steps to consider when drafting resolutions

   1. Title and introduction

   Start with a clear and descriptive title for the resolution, indicating the purpose or subject matter.

   Include an introductory paragraph that sets the context and provides a brief background or explanation of the resolution.

   2. Resolving clause

    

   The resolving clause is the core part of the resolution where the decision or action to be taken is stated. Use clear and unambiguous language to express the intended decision.

   3. Statement of reasons or purpose

   Depending on the nature of the resolution, it may be helpful to include a statement of reasons or purpose. This section explains the rationale or justification for the proposed decision.

   4. Detailed provisions

   If the resolution involves specific actions, amendments, or provisions, provide a detailed description of what is being proposed.

   Be specific, clear, and precise in outlining the details and scope of the proposed actions or changes.

   Include any relevant conditions, timelines, or restrictions associated with the resolution.

   5. Voting requirements

   Clearly state the voting requirements for the resolution to be passed.

   Specify the majority or percentage of votes needed for approval (e.g., simple majority, two-thirds majority, etc.).

   Ensure the voting requirements comply with the company’s constitution and applicable laws.

   6. Effective date and implementation

   Indicate the effective date of the resolution, especially if it differs from the date of the meeting or signing.

   If the resolution requires further implementation steps, outline the necessary actions or processes to be undertaken.

    

   7.7 PROTECTION OF MINORITY SHAREHOLDERS

   Protection of minority shareholders refers to the safeguards and measures put in place to ensure that minority shareholders’ rights and interests are respected and protected within a company. Minority shareholders are those who hold a minority stake in a company and do not have controlling or majority voting power.

   Aspects of protecting minority shareholders

   1. Statutory protections

   Many jurisdictions have laws and regulations specifically designed to protect minority shareholders. These laws may include provisions related to the rights of minority shareholders, disclosure requirements, and restrictions on abusive practices by majority shareholders.

   2. Shareholder agreements

   Minority shareholders can protect their rights through shareholder agreements. These agreements can be negotiated and drafted to address specific concerns and protect the interests of minority shareholders.

   3. Independent directors

   Appointing independent directors to the board can help ensure that the interests of minority shareholders are taken into account.

   5. Proxy voting

   Proxy voting allows minority shareholders to appoint someone to represent and vote on their behalf at company meetings.

   This mechanism enables minority shareholders to have a say in decision-making, even if they are unable to attend the meeting in person.

   6. Shareholder activism and engagement

   Minority shareholders can engage in shareholder activism to raise concerns and advocate for their rights and interests.

   7. Legal remedies

   Minority shareholders have the right to seek legal remedies if they believe their rights have been violated or they have been unfairly treated.

   Legal options may include filing a lawsuit for breach of fiduciary duty, oppression, or other forms of shareholder misconduct.
   

   CHAPTER 8

   COMPANY DIRECTORS

   Learning outcomes

   On completion of this topic, you should be able to; 1. Qualifications, appointment and disqualification 2. Powers and duties of directors 3. Removal and vacation of office 4. Register of directors 5. Remuneration of directors 6. Loans to directors 7. Compensation for loss of office 8. Disclosure of director’s interest in contracts 9. The rule in Turquand’s case/Indoor Management rule 10. Insider dealing

    

   8.1 QUALIFICATIONS, APPOINTMENT AND DISQUALIFICATION

   Company directors are individuals who are appointed or elected to serve on the board of directors of a company.

    

   Qualifications of directors:

   1. Legal age: Directors must be of legal age, which is typically 18 years or older.
   2. Mental capacity: Directors must have the mental capacity to fulfill their duties and responsibilities.
   3. Consent: Directors must provide their consent to act as a director of the company.
   4. Good standing: Directors should not have a history of disqualification or be subject to any legal restrictions or disqualifications that would prevent them from acting as directors.
   5. Skills and Experience: Depending on the nature and complexity of the company’s business, directors may be expected to possess certain skills, knowledge, or experience relevant to the company’s industry or sector.

    

   Appointment of directors

   1. Shareholder appointment: Directors are usually appointed by the shareholders of the company.
   2. Board appointment: In some cases, directors may be appointed by the existing board of directors, subject to approval by the shareholders.
   3. Election: Directors may also be elected by the shareholders during the company’s annual general meeting or other designated meetings.
   4. Term of office: Directors are typically appointed for a specific term, which may be defined in the company’s constitution or bylaws. At the end of the term, directors may be reappointed or replaced.

    

   Disqualification of Directors

   1. Breach of fiduciary duties: Directors can be disqualified if they breach their fiduciary duties, such as acting in bad faith, engaging in self-dealing, or misusing company assets.
   2. Criminal convictions: Directors may be disqualified if they are convicted of certain criminal offenses, particularly those related to dishonesty or fraud.
   3. Insolvency: Directors who are declared bankrupt or are subject to insolvency proceedings may be disqualified.
   4. Regulatory violations: Directors who violate specific regulatory requirements, such as securities laws or corporate governance regulations, may face disqualification.
   5. Court orders: Directors can be disqualified if a court issues an order disqualifying them from acting as a director due to misconduct or incompetence.

    

   8.2 POWERS AND DUTIES OF DIRECTORS

   Powers of directors

   1. Decision-making: Directors have the power to make decisions on behalf of the company, including approving strategic plans, major investments, acquisitions, and financial transactions.
   2. Appointment and removal: Directors have the power to appoint and remove key executives, such as the CEO or company secretary.
   3. Delegation: Directors can delegate certain responsibilities to committees, executives, or employees of the company while retaining ultimate accountability.
   4. Representation: Directors may represent the company in various capacities, including in legal proceedings, negotiations, and external relations.
   5. Financial Management: Directors have the authority to manage the company’s finances, including approving budgets, financial statements, and dividend distributions.

    

   Duties of directors

   1. Fiduciary duties: Directors owe fiduciary duties to the company, which include the duty of care, duty of loyalty, and duty of good faith.
   2. Compliance: Directors have a duty to ensure the company complies with applicable laws, regulations, and governance standards.
   3. Strategic oversight: Directors are responsible for providing strategic oversight and guidance to the company’s management.
   4. Risk management: Directors should identify and assess the risks faced by the company and implement appropriate risk management strategies and controls.
   5. Accountability and reporting: Directors are accountable to the shareholders and other stakeholders of the company. They have a duty to provide accurate and timely financial and non-financial information to shareholders and regulatory authorities.

    

   8.3 REMOVAL AND VACATION OF OFFICE

   1. Resignation: A director may voluntarily resign from their position by submitting a written resignation to the company.
   2. Expiration of term: If a director’s term of office has a specific duration, their position may automatically come to an end upon the expiration of that term.
   3. Removal by shareholders: Shareholders may have the power to remove a director from office by passing a resolution at a general meeting.
   4. Removal by the board: In some cases, the board of directors may have the power to remove one of its members. This power is typically granted by the company’s governing documents or applicable laws.
   5. Disqualification or bankruptcy: A director may be automatically disqualified or required to vacate their office if they become bankrupt, are convicted of certain offenses, or become subject to legal restrictions or disqualifications.
   6. Court order: In certain circumstances, a court may order the removal or vacation of office of a director. This can occur, for example, if the director has engaged in misconduct, breached fiduciary duties, or is found to be unfit to hold the position.

    

   8.4 REGISTER OF DIRECTORS

   A register of directors is a record maintained by a company that contains important information about its directors.

   1. Director’s name: The full name of each director should be recorded in the register.
   2. Director’s address: The residential address or service address of each director should be recorded.
   3. Director’s nationality: The nationality or citizenship of each director may be recorded in the register.
   4. Director’s date of birth: The date of birth of each director may be included in the register to confirm their age and eligibility for appointment.
   5. Director’s occupation: The occupation or profession of each director may be recorded to provide additional information about their background and expertise.
   6. Date of appointment: The date on which each director was appointed to the position should be recorded in the register.
   7. Date of resignation or removal: If a director has resigned or been removed from office, the date of resignation or removal should be noted in the register.
   8. Details of other directorships: If a director holds directorship positions in other companies, this information may be recorded in the register to provide a comprehensive view of their directorship roles.
   9. Details of shareholding: The register may include information about the shares held by each director in the company, including the number of shares and any changes in shareholdings over time.
   10. Register maintenance: The register should indicate the dates when updates or changes are made, ensuring that the information remains accurate and up to date.

    

   8.5 REMUNERATION OF DIRECTORS

   The remuneration of directors refers to the compensation or payment provided to directors for their services and responsibilities in managing and overseeing the affairs of a company.

   Important factors to consider regarding the remuneration of directors:

   1. Determination: The determination of director remuneration is typically done by the company’s shareholders or a committee authorized by the shareholders. This may be outlined in the company’s articles of association or bylaws.
   2. Remuneration committee: Larger companies often establish a remuneration committee, comprised of non-executive directors, to make recommendations on director remuneration.
   3. Types of remuneration: Director remuneration can be in the form of a salary, fees, bonuses, stock options, pension contributions, or other benefits. The specific structure and components of remuneration may be determined based on the company’s policy, industry practices, and legal requirements.
   4. Disclosure: Companies are usually required to disclose details of director remuneration in their annual financial statements or annual reports. This includes the total remuneration paid to each director and any additional benefits or incentives.
   5. Independent advice: In some jurisdictions, companies may be required to obtain independent advice to ensure that director remuneration is fair and reasonable, especially in cases where there is a potential conflict of interest.
   6. Shareholder approval: In many cases, the remuneration of directors, particularly executive directors, requires approval by shareholders. This is typically done through a resolution at the company’s annual general meeting or a special meeting.

    

   8.6 LOANS TO DIRECTORS

   Loans to directors refer to the provision of financial assistance, such as loans or credit facilities, by a company to its directors.

   Key considerations regarding loans to directors:

   1. Legal and regulatory framework: Companies are typically subject to laws and regulations that govern loans to directors. These rules aim to prevent conflicts of interest, protect shareholders’ interests, and ensure proper corporate governance.
   2. Prohibited or restricted transactions: In many jurisdictions, there are restrictions on loans to directors. For example, certain jurisdictions may prohibit or restrict loans to directors, unless specific conditions or exceptions are met.
   3. Shareholder approval: In cases where loans to directors are permitted, obtaining shareholder approval is often required. Shareholders typically need to be informed about the terms and purpose of the loan and have an opportunity to vote on the transaction.
   4. Arm’s length terms: Loans to directors should generally be provided on arm’s length terms, meaning the terms and conditions should be fair and commercially reasonable.
   5. Disclosure and reporting: Companies are often required to disclose loans to directors in their financial statements or annual reports.
   6. Director’s fiduciary duty: Directors have a fiduciary duty to act in the best interests of the company. When considering loans to directors, directors should carefully assess the impact on the company’s financial health, independence, and reputation.
   7. Non-executive directors: Some jurisdictions may have different rules or exemptions for loans provided to non-executive directors who are not involved in the day-to-day management of the company.

    

   8.7 COMPENSATION FOR LOSS OF OFFICE

   Compensation for loss of office refers to the financial compensation provided to directors or officers of a company when their employment or directorship is terminated.

   1. Contractual obligations: The entitlement to compensation for loss of office is often outlined in the employment contract or service agreement between the director or officer and the company.
   2. Termination without cause: In cases where a director or officer is terminated without cause, they may be entitled to compensation for loss of office.
   3. Change in control: If there is a change in control of the company, such as a merger or acquisition, compensation for loss of office may be triggered for certain directors or officers.
   4. Calculation of compensation: The calculation of compensation for loss of office can include various elements, such as a severance payment, continuation of salary or benefits for a specified period, bonus entitlements, stock options, or pension contributions.
   5. Clawback provisions: In some cases, compensation for loss of office may be subject to clawback provisions.
   6. Shareholder approval: In some jurisdictions, the payment of compensation for loss of office may require shareholder approval, particularly if it exceeds certain thresholds or if it is deemed excessive.
   7. Disclosure and transparency: Companies are generally required to disclose details of compensation for loss of office in their financial statements or annual reports.

    

   8.8 DISCLOSURE OF DIRECTOR’S INTEREST IN CONTRACTS

   The disclosure of a director’s interest in contracts refers to the requirement for directors to disclose any personal or financial interests they may have in a contract or proposed contract entered into by the company.

   Here are some key points to consider regarding the disclosure of director’s interests in contracts:

   1. Legal requirement:
   2. Duty of fidelity and loyalty
   3. Types of interests
   4. Timing of disclosure
   5. Content of disclosure
   6. Board review and decision
   7. Record-keeping
   8. Disclosure in financial statements

    

   8.9 THE RULE IN TURQUAND’S CASE/INDOOR MANAGEMENT RULE

   The rule in Turquand’s Case, also known as the Indoor Management Rule or the Rule of Constructive Notice, is a legal principle that provides protection to third parties who enter into transactions with a company. The rule essentially states that outsiders dealing with a company are entitled to assume that the internal management and decision-making processes of the company have been properly followed, even if there may have been irregularities or breaches of internal procedures.

    

   Rule in Royal British Bank vs. Turquand case

   In this case the Articles empowered the directors to borrow money provided they were authorized by a resolution passed at the general meeting of the Company.

    

   Facts

   Mr Turquand was the official manager (liquidator) of the insolvent Cameron’s Coalbrook Steam, Coal and Swansea and Loughor Railway Company. It was incorporated under the Joint Stock Companies Act 1844. The company had given a bond for £2,000 to the Royal British Bank, which secured the company’s drawings on its current account. The bond was under the company’s seal, signed by two directors and the secretary. When the company was sued, it alleged that under its registered deed of settlement (the Articles of Association), directors only had power to borrow up to an amount authorised by a company resolution. A resolution had been passed but not specifying how much the directors could borrow.

    

   Judgement

   Sir John Jervis CJ, for the Court of Exchequer Chamber ruled that the bond was valid, so the Royal British Bank could enforce the terms. He said the bank was deemed to be aware that the directors could borrow only up to the amount resolutions allowed. Articles of association were registered with Companies House, so there was constructive notice. But the bank could not be deemed to know which ordinary resolutions passed, because these were not registrable. The bond was valid because there was no requirement to look into the company’s internal workings. This is the indoor management rule, that the company’s indoor affairs are the company’s problem.

    

   Exceptions to Rule in Turquands case

   1. Knowledge of the irregularity – a person dealing with Company will not be entitled to protection under this rule if he has noticed that the prescribed procedure as laid down in articles has not been complied with by company.
   2. Forgery – the rule does not protect a person where forgery is involved. Company cannot be held liable for forgeries committed by its officers.

    

   8.10 INSIDER DEALING

   Insider dealing, also known as insider trading, refers to the illegal practice of trading securities (such as stocks, bonds, or derivatives) based on material, non-public information about the company. It involves individuals who have access to confidential information about a company, typically due to their position within the company, using that information to make profits or avoid losses by trading in the company’s securities.

   • Directors of the company
   • Employees of the company
   • Professionals with links to company e.g. auditors, brokers
   • Friends and relatives of directors, employees and professionals.

    

   Insider trading is a criminal offence and persons guilty of the offence shall be liable to a penalty;

   1. In case of individuals, a  fine up to Ksh.2.5m
   2. In case of a body corporate, a fine up to Ksh.5m

   NB: The fines are doubled in case subsequent conviction

    

    

   CHAPTER 9

   THE COMPANY SECRETARY

   Learning outcomes

   On completion of this topic, you should be able to; 1. Qualification, appointment and removal 2. Powers and duties of the Company Secretary 3. Liability of the Company Secretary 4. Register of Secretaries

    

   9.1 QUALIFICATION, APPOINTMENT AND REMOVAL

   A secretary is an officer of the company.

   The company secretary is responsible for the efficient administration of a company, particularly with regard to ensuring compliance with statutory and regulatory requirements and for ensuring that decisions of the board of directors are implemented.

    

   Qualification

   1. Professional Qualifications: In some jurisdictions, there may be specific professional qualifications or certifications for company secretaries. These qualifications may be obtained through professional bodies or institutes that offer specialized courses or examinations.
   2. Knowledge and Experience: A company secretary is typically expected to have a strong understanding of company law, corporate governance principles, and regulatory requirements.

    

   Appointment

   1. Board appointment: The company secretary is usually appointed by the board of directors.
   2. Formal resolution: The appointment of a company secretary is typically formalized through a board resolution. The resolution should clearly state the individual’s name, position, and the effective date of their appointment.
   3. Notification and filing: After the appointment, the company secretary’s details, including their name and position, may need to be filed with the relevant government authorities or regulatory bodies as per the legal requirements of the jurisdiction.

    

   Removal

   1. Board decision: The removal of a company secretary is generally within the discretion of the board of directors.
   2. Notice and termination: The company secretary should be provided with a formal notice of termination or removal, specifying the effective date of the termination.
   3. Legal compliance: When removing a company secretary, the company should ensure compliance with any contractual obligations, statutory requirements, and employment laws governing termination and severance.

    

   9.2 POWERS AND DUTIES OF THE COMPANY SECRETARY

   1. Compliance and corporate governance: The company secretary is responsible for ensuring the company’s compliance with applicable laws, regulations, and corporate governance standards.
   2. Board support: The company secretary provides support to the board of directors in various ways, including:
   3. Preparing and distributing board meeting agendas, board papers, and minutes of meetings.
   4. Facilitating effective communication between the board, management, and shareholders.
   5. Assisting in the organization and administration of board meetings and shareholder meetings.
   6. Advising the board on governance matters, director duties, and board composition.
   7. Shareholder relations: The company secretary manages communications with shareholders, ensuring compliance with legal requirements and facilitating smooth shareholder interactions. Their duties may include:
   8. Issuing notices of meetings, including annual general meetings and extraordinary general meetings.
   9. Managing share transfers and maintaining the register of members.
   10. Responding to shareholder queries and facilitating the exercise of shareholder rights.
   11. Assisting with the preparation and distribution of annual reports and other shareholder communications.
   12. Record-keeping and documentation: The company secretary is responsible for maintaining accurate and up-to-date records and documentation related to the company’s operations. This includes:
   13. Maintaining statutory registers and records required by law.
   14. Ensuring proper record-keeping of board and committee minutes, resolutions, and other important corporate documents.
   15. Coordinating the safekeeping and authentication of important company documents, such as the memorandum and articles of association.
   16. Corporate secretarial functions: The company secretary performs various administrative tasks and corporate secretarial functions, including:
   17. Handling the formation and incorporation of the company and managing any changes to the company’s structure or constitution.
   18. Filing necessary documents and returns with government authorities and regulatory bodies.
   19. Assisting in the preparation and filing of annual financial statements and other statutory reports.
   20. Ensuring compliance with corporate policies and procedures.

    

   6. Advisory role: The company secretary may provide advice and guidance to the board, senior management, and employees on legal, regulatory, and governance matters. They may help interpret laws and regulations, offer insights on best practices, and provide recommendations for improving corporate governance.

    

   9.3 LIABILITY OF THE COMPANY SECRETARY

   The liability of a company secretary can vary depending on the jurisdiction, the specific circumstances, and the legal framework in which the company operates. While I can provide a general overview, it is important to note that the liability of a company secretary may be subject to specific laws and regulations applicable in the relevant jurisdiction.

   1. Legal duties: The company secretary has legal duties and responsibilities to fulfill, which may vary depending on the jurisdiction. Common duties include ensuring compliance with statutory requirements, maintaining accurate records, providing support to the board, and facilitating proper corporate governance.
   2. Statutory compliance: The company secretary is responsible for ensuring compliance with applicable laws, regulations, and corporate governance standards.
   3. Personal liability: In certain situations, a company secretary may be held personally liable for their actions or omissions.
   4. Duty of care and skill: The company secretary is expected to exercise a reasonable standard of care, skill, and diligence in performing their duties. They should possess the necessary qualifications, knowledge, and expertise to carry out their responsibilities effectively.
   5. Indemnification and Insurance: In some cases, the company may provide indemnification to the company secretary to protect them against liabilities incurred in the course of their duties, subject to applicable laws and the company’s articles of association.

    

   9.4 REGISTER OF SECRETARIES

   The Register of Secretaries is a statutory register maintained by a company to record details of its company secretaries.

   The register of secretaries typically includes the following information:

   • Name and any former names of the secretary.
   • Residential address.
   • Nationality.
   • Date of appointment as secretary.
   • Date of cessation (if applicable).
   • Details of any qualifications or professional memberships held by the secretary (if required by law).

   Access and inspection

   Typically, the register can be inspected by company officers, shareholders, and regulatory bodies, as specified by the laws and regulations of the jurisdiction.

   Maintenance and updates

   The company is responsible for keeping the register of secretaries up to date and accurate. Any changes in the details of the company secretary, such as appointments, resignations, or changes in personal information, should be promptly recorded in the register.

   Retention period

   The register should be maintained for a specified period as mandated by the applicable laws or regulations. Companies should comply with the legal requirements regarding the retention and preservation of company records, including the Register of Secretaries.

    

    

   CHAPTER 10

   AUDITORS

   Learning outcomes

   On completion of this topic, you should be able to; 1. Qualification, appointment and removal 2. Remuneration of auditors 3. Powers and duties 4. Rights and liabilities

    

   10.1 QUALIFICATION, APPOINTMENT AND REMOVAL

   Qualification

   1. Professional qualifications
   2. Independence and Ethics

    

   Appointment

   1. Shareholder Approval: The appointment of auditors is generally subject to the approval of the shareholders. The appointment is typically proposed by the board of directors or the audit committee.
   2. Annual General Meeting (AGM): In many jurisdictions, the appointment of auditors is confirmed or reappointed at the AGM of the company, where shareholders have the opportunity to vote on the appointment.
   3. Term of appointment: The appointment of auditors is usually for a specific term, typically one year. However, longer terms may be allowed in some jurisdictions, subject to legal requirements and shareholders’ approval.
   4. Rotation of auditors: Some jurisdictions impose mandatory rotation requirements for auditors to promote independence and fresh perspectives. This means that after a certain period, the company must change its auditors or engage a different audit firm.

    

   Removal

   1. Resignation: Auditors may voluntarily resign from their position by providing a notice to the company.
   2. Removal by shareholders: Shareholders have the authority to remove auditors before the expiration of their term.

   Regulatory intervention: Regulatory bodies overseeing auditing and accounting practices may have the authority to remove auditors if there are serious breaches of professional conduct, non-compliance with regulations, or other misconduct.

    

   10.2 REMUNERATION OF AUDITORS

   Determination of remuneration

   The remuneration of auditors is typically determined by the company’s board of directors or the audit committee. The process of determining the remuneration may involve considering various factors such as the size and complexity of the company, the scope of the audit, the experience and expertise of the auditors, and prevailing market rates.

    

   Shareholder approval

   In many jurisdictions, the remuneration of auditors may require shareholder approval, especially if it is considered significant or if it is proposed to be paid to a related party or affiliated entity.

    

   Basis of remuneration

   The remuneration of auditors can be based on different methods:

    

   1. Fixed fee: The auditors are paid a predetermined fixed fee for their audit services, regardless of the time and effort required.
   2. Hourly rate: The auditors are remunerated based on the number of hours spent on the audit engagement, multiplied by an agreed-upon hourly rate.
   3. Fee scale: Some jurisdictions may have prescribed fee scales or guidelines that provide a framework for determining auditor remuneration based on the size or complexity of the company.
   4. Performance-based: In certain cases, the remuneration may include performance-based components, such as bonuses or incentives linked to the quality of the audit work or achievement of specific objectives.

    

   10.3 POWERS AND DUTIES

   1. Access to information
   2. Examination and verification
   3. Audit procedures
   4. Independence and objectivity
   5. Opinion and audit report
   6. Reporting of irregularities
   7. Communication and recommendations
   8. Compliance with standards

    

   10.4 RIGHTS AND LIABILITIES

   Rights of auditors

   1. Access to information: Auditors have the right to access all books, records, documents, and other relevant information of the company necessary to perform their audit.
   2. Professional judgment: Auditors have the right to exercise professional judgment in conducting the audit and forming their opinion on the financial statements.
   3. Professional confidentiality: Auditors have the right to maintain confidentiality regarding the information they obtain during the audit process.
   4. Fair remuneration: Auditors have the right to receive fair and reasonable remuneration for their services.

    

   Liabilities of Auditors

   1. Professional negligence: Auditors can be held liable for professional negligence if they fail to exercise the level of care, skill, and diligence expected of a reasonably competent auditor.
   2. Breach of duty: Auditors have a duty of care to the company and its shareholders.
   3. Legal and regulatory compliance: Auditors have a responsibility to comply with applicable laws, regulations, and professional standards.
   4. Reliance on misrepresentation: Auditors may be held liable if they rely on false or misleading representations made by management or other individuals within the company that lead to an incorrect audit opinion.
   5. Liability to third parties: Auditors may have potential liability to third parties who rely on their audit reports.

    

    

    

   CHAPTER 11

   COMPANY ACCOUNTS

   Learning outcomes

   On completion of this topic, you should be able to; 1. Books of accounts 2. Form and content of accounts 3. Group accounts 4. Director’s report

    

   11.1 BOOKS OF ACCOUNTS

   Company accounts refer to the financial records and statements that provide information about the financial performance and position of a company.

   Books of accounts are the primary records where companies maintain their financial transactions and other relevant information. These books provide a detailed and organized account of the company’s financial activities and serve as a basis for preparing financial statements.

   Key books of accounts commonly maintained by companies:

   1. General ledger
   2. Cash book
   3. Sales journal
   4. Purchase journal
   5. Accounts receivable ledger
   6. Accounts payable ledger
   7. Inventory records
   8. Fixed assets register

    

   11.2 FORM AND CONTENT OF ACCOUNTS

   The form and content of accounts refer to the structure and information presented in financial statements and other financial reports. The form and content should comply with applicable accounting standards and regulations to ensure the accuracy, transparency, and comparability of financial information.

   Aspects to consider regarding the form and content of accounts:

   1. Financial Statements: Financial statements are the main component of company accounts. They typically consist of the following statements:
   2. Income Statement (or Profit and Loss Statement): It summarizes the company’s revenues, expenses, gains, and losses for a specific period, usually one fiscal year. It shows the company’s net profit or loss by deducting expenses from revenues.
   3. Balance Sheet (or Statement of Financial Position): It provides a snapshot of the company’s financial position as of a specific date, typically the end of the fiscal year. It presents the company’s assets, liabilities, and shareholders’ equity.
   4. Cash Flow Statement: It reports the company’s cash inflows and outflows during a specific period, categorizing them into operating, investing, and financing activities. It provides insights into the company’s liquidity and cash management.
   5. Statement of Changes in Equity (or Statement of Shareholders’ Equity): This statement shows the changes in shareholders’ equity during a specific period, including the impact of net profit or loss, share issuances or repurchases, and other equity-related transactions.

    

   2. Accounting Policies: The financial statements should disclose the accounting policies applied by the company. This includes the methods and principles used to recognize, measure, and present financial transactions, such as revenue recognition, expense allocation, and inventory valuation.
   3. Notes to the Financial Statements: The financial statements are accompanied by detailed explanatory notes that provide additional information about significant accounting policies, assumptions, estimates, and disclosures.
   4. Presentation and Disclosure Requirements: Companies need to comply with presentation and disclosure requirements outlined in relevant accounting standards or regulations.
   5. Consistency and Comparability: To ensure meaningful analysis and interpretation, the form and content of accounts should enable users to compare the financial performance and position of the company over time and with other companies.
   6. Compliance with Regulatory Requirements: Companies need to adhere to specific reporting requirements set by regulatory authorities, such as government agencies or stock exchanges.

    

   11.3 GROUP ACCOUNTS

   Group accounts, also known as consolidated financial statements, refer to the financial statements prepared by a parent company to present the financial performance and position of a group of companies under its control. Group accounts consolidate the financial information of the parent company and its subsidiaries into a single set of financial statements.

    

   Subsidiaries to be included in the group accounts are identified based on the concept of control. Control is generally determined by the parent company’s ownership of more than 50% of the voting rights or through other contractual arrangements that provide control.

    

   Consolidated financial statements

   The consolidated financial statements typically include the following:

   1. Consolidated balance sheet: It presents the group’s assets, liabilities, and equity as of a specific date. It combines the individual balance sheets of the parent company and its subsidiaries.
   2. Consolidated income statement: It shows the group’s revenues, expenses, gains, and losses for a specific period. It combines the individual income statements of the parent company and its subsidiaries.
   3. Consolidated cash flow statement: It presents the group’s cash inflows and outflows from operating, investing, and financing activities. It consolidates the cash flow statements of the parent company and its subsidiaries.
   4. Notes to the consolidated financial statements: These notes provide additional information and disclosures specific to the consolidated financial statements, such as details of subsidiary companies, significant accounting policies, and any non-controlling interests.

    

   11.4 DIRECTOR’S REPORT

   A director’s report is a significant component of a company’s annual report, providing an overview of the company’s operations, performance, and prospects. It is prepared by the directors of the company and is intended to provide shareholders and other stakeholders with key information about the company’s activities during the reporting period.

   The content of a Director’s Report may vary depending on the specific requirements of the jurisdiction and the industry in which the company operates. However, it typically includes the following information:

   1. Business review
   2. Financial performance
   3. Strategic initiatives
   4. Corporate governance
   5. Risk management
   6. Social and environmental responsibility
   7. Outlook and future prospects:

    

    

    

   CHAPTER 12

   AUDIT OF COMPANY ACCOUNTS

   Learning outcomes

   On completion of this topic, you should be able to; 1. Auditor’s report 2. Annual returns

    

   12.1 AUDITOR’S REPORT

   The Auditor’s Report is a document prepared by an independent external auditor upon completion of an audit of a company’s financial statements. The report provides an opinion on the fairness, accuracy, and compliance of the financial statements with relevant accounting standards and regulations.

   Content

   The content of an Auditor’s Report typically includes the following sections:

   1. Title: The report is usually titled “Independent Auditor’s Report” or a similar designation to indicate the independent nature of the auditor’s opinion.
   2. Addressee: The report is addressed to the shareholders, the board of directors, or other relevant parties, depending on the jurisdiction and the company’s governing documents.
   3. Opinion: The opinion section expresses the auditor’s conclusion on the financial statements.
   4. Basis for opinion: This section explains the basis on which the auditor formed their opinion.
   5. Key audit matters: In some jurisdictions, the auditor’s report may include a separate section highlighting the key audit matters that the auditor considered to be of most significance during the audit.
   6. Other reporting responsibilities: The report may include additional reporting responsibilities, such as disclosing any material misstatements identified during the audit, the auditor’s evaluation of the company’s internal controls, or any other required disclosures.
   7. Auditor’s signature and date: The report is typically signed by the external auditor, indicating their responsibility for the audit and the date of the report.

    

   Types of Opinions

   The auditor’s report can express different types of opinions based on the auditor’s findings:

   1. Unqualified opinion: It indicates that the financial statements are free from material misstatements and present a true and fair view.
   2. Qualified opinion: This opinion indicates that the financial statements are materially misstated in specific respects but are otherwise presented fairly.
   3. Adverse opinion: This opinion indicates that the financial statements are materially misstated and do not present a true and fair view.
   4. Disclaimer of opinion: This opinion is issued when the auditor is unable to form an opinion due to limitations or lack of sufficient evidence

    

   12.2 ANNUAL RETURNS

   Annual returns refer to the regular filings that companies are required to submit to the relevant regulatory authorities, typically on an annual basis. These returns provide key information about the company’s activities, structure, and financial position.

   The purpose of filing annual returns is to ensure transparency, accountability, and compliance with legal and regulatory requirements. Annual returns provide a snapshot of the company’s current status, helping regulatory authorities, shareholders, and other stakeholders stay informed about the company’s activities.

    

   Filing requirements

   The specific filing requirements for annual returns vary by jurisdiction, but they typically include information such as:

   1. Basic company information: This includes the company’s name, registered address, company number, and details of its directors and secretary.
   2. Shareholder information: Annual returns may require information about the company’s shareholders, including their names, addresses, and the number and types of shares they hold.
   3. Financial statements: In some jurisdictions, companies are required to include their financial statements as part of their annual returns. These financial statements provide an overview of the company’s financial performance and position.
   4. Changes in company details: Companies must disclose any changes in company details, such as changes in registered address, directors, shareholders, or share capital during the reporting period.

    

    

    

    

   CHAPTER 13

   COMPANY INVESTIGATION

   Learning outcomes

   On completion of this topic, you should be able to; 1. Investigation of company affairs 2. Appointment and powers of inspectors 3. Inspector’s report

    

   13.1 INVESTIGATION OF COMPANY AFFAIRS

   – The investigation of company affairs refers to a formal examination or inquiry conducted into the operations, management, financial position, or any other aspects of a company. The purpose of such investigations is to uncover any irregularities, misconduct, or breaches of laws or regulations within the company.

   – An investigation of company affairs can be initiated by various parties, including regulatory authorities, shareholders, creditors, or the company’s board of directors.

   – The investigators are typically granted powers and authority to carry out their investigation effectively. This may include the power to access company records, interview employees or stakeholders, and request information from relevant parties. In some cases, investigators may be empowered to seize documents or assets if necessary.

   – Once the investigation is completed, a report is prepared detailing the findings and conclusions. The report may identify any misconduct, breaches of laws or regulations, weaknesses in internal controls, or recommendations for improvement.

   – Depending on the findings of the investigation, legal and regulatory consequences may follow.

   – The investigation may lead to recommendations for remedial actions to address the identified issues. These actions may involve changes to internal controls, management practices, or corporate governance processes to prevent future misconduct or irregularities.

    

   13.2 APPOINTMENT AND POWERS OF INSPECTORS

   Appointment of Inspectors

   1. Regulatory authority: inspectors are usually appointed by a regulatory authority, such as government agencies, regulatory bodies, or courts.
   2. Grounds for appointment: Inspectors may be appointed based on various grounds, such as suspected misconduct, breaches of laws or regulations, concerns about the company’s operations, or upon request by stakeholders with a valid interest.
   3. Appointment process: The appointment process varies by jurisdiction, but it typically involves the issuance of an official order or warrant by the relevant authority.
   4. Qualifications and independence: Inspectors are usually professionals with expertise in relevant areas, such as forensic accounting, auditing, or legal matters.

    

   Powers of inspectors

   1. Access to information: Inspectors are granted broad powers to access relevant documents, records, books, and other information necessary for the investigation.
   2. Compulsory attendance and examination: Inspectors have the power to summon individuals and require them to attend the investigation and provide information under oath or affirmation.
   3. Seizing documents and assets: In certain circumstances, inspectors may be empowered to seize documents or assets that are relevant to the investigation.
   4. Examination of persons: Inspectors may conduct interviews and examine individuals who are relevant to the investigation.
   5. Reporting and recommendations: Once the investigation is completed, inspectors prepare a report that outlines their findings, conclusions, and recommendations.
   6. Legal and regulatory consequences: The findings of the inspector’s report may lead to legal and regulatory consequences.

    

   13.3 INSPECTOR’S REPORT

   An inspector’s report is a document prepared by an inspector appointed to investigate the affairs of a company or other corporate entity. The report presents the findings, conclusions, and recommendations based on the inspector’s examination and inquiry.

   Content:

   The content of an Inspector’s Report typically includes the following sections:

   1. Introduction: The report begins with an introduction that outlines the purpose of the investigation, the scope of the inquiry, and the relevant background information.
   2. Investigation process: This section describes the methodology used by the inspector during the investigation. It may include details about the documents reviewed, interviews conducted, site visits, or other methods employed to gather information.
   3. Findings: The findings section presents the key observations and discoveries made during the investigation. It highlights any irregularities, misconduct, breaches of laws or regulations, or other significant matters identified by the inspector.
   4. Analysis and conclusions: The report provides an analysis and evaluation of the findings, drawing conclusions based on the evidence and information gathered. This section may include an assessment of the implications of the findings and the impact on the company or relevant stakeholders.
   5. Recommendations: The report includes recommendations for actions or measures that should be taken based on the inspector’s findings. These recommendations may address specific areas of concern, such as changes in management practices, improvements in internal controls, legal actions, or other remedial measures.
   6. Legal and regulatory compliance: If any breaches of laws or regulations are identified during the investigation, the report may address the legal and regulatory consequences. It may recommend appropriate actions to be taken to ensure compliance and accountability.
   7. Appendices: The report may include appendices that provide supporting documentation, evidence, or detailed data relevant to the investigation. These appendices add transparency and credibility to the report.

    

    

    

   CHAPTER 14

   CORPORATE RESTRUCTURING

   Learning outcomes

   On completion of this topic, you should be able to; 1. Need for restructuring 2. Mergers 3. Post – merger reorganisation of a company’s share capital 4. Takeovers and acquisitions 5. Mergers and divisions of public companies 6. Compromises, arrangements, reconstructions and amalgamations

    

   14.1 NEED FOR RESTRUCTURING

   Corporate restructuring refers to the process of making significant changes to a company’s organizational structure, operations, or financials in order to improve its overall performance, efficiency, and competitiveness. It involves various strategies and actions aimed at adapting to changing market conditions, optimizing resources, and maximizing shareholder value.

   Common reasons why companies may consider restructuring:=

   1. Financial distress
   2. Changes in market conditions
   3. Operational inefficiencies
   4. Organizational alignment
   5. Mergers and acquisitions
   6. Regulatory compliance
   7. Strategic focus

    

    

   14.2 MERGERS

   Mergers refer to the combination of two or more companies into a single entity, often with the goal of achieving synergies, expanding market presence, or enhancing competitiveness.

   Types of mergers

   1. Horizontal merger: In a horizontal merger, companies operating in the same industry and at the same level of the value chain merge to gain market share, eliminate competition, or achieve economies of scale.
   2. Vertical merger: A vertical merger occurs when companies operating at different levels of the value chain, such as suppliers and distributors or manufacturers and retailers, merge to streamline operations, improve efficiency, or control costs.
   3. Conglomerate merger: Conglomerate mergers involve the combination of companies operating in unrelated industries. These mergers are driven by diversification strategies, expanding the product portfolio, or entering new markets.
   4. Reverse merger: A reverse merger is a transaction where a private company merges with an existing public company, enabling the private company to become publicly traded without undergoing an initial public offering (IPO).

    

   14.3 POST – MERGER REORGANISATION OF A COMPANY’S SHARE CAPITAL

   Post-merger reorganization of a company’s share capital refers to the restructuring of the shareholding structure and capitalization of a company following a merger or acquisition. It involves making changes to the company’s shares, share classes, ownership percentages, and other related aspects to align with the new ownership structure and capital requirements of the merged entity.

   Share capital consolidation

   In a post-merger reorganization, the share capital of the merged entity is often consolidated to streamline the ownership structure. This may involve canceling or exchanging existing shares of the merging companies for new shares in the merged entity based on the agreed-upon conversion ratios.

   Conversion or exchange of shares

   Shareholders of the merging companies may be given the option to convert or exchange their shares for shares of the merged entity.

   Share class restructuring

   Following a merger, the merged entity may restructure its share classes to align with the post-merger business objectives and ownership structure. This may involve merging or eliminating certain share classes, creating new share classes, or modifying the rights and privileges associated with existing share classes.

   Adjustments in ownership percentages

   The merger or acquisition may result in changes in the ownership percentages of the pre-merger shareholders. Shareholders of the merging companies may see adjustments in their ownership stakes based on the exchange or conversion ratios agreed upon during the merger.

   Capital Reduction or Increase: Post-merger reorganization may involve a capital reduction or increase to adjust the share capital of the merged entity. This may include reducing the share capital to eliminate any excess or to absorb losses from the merger process. Conversely, the merged entity may increase its share capital to raise additional funds for future growth or capital requirements.

   Regulatory and shareholder approval

   Post-merger reorganization of share capital often requires regulatory approvals and, in some cases, the consent of the shareholders. The company must comply with applicable laws, regulations, and stock exchange requirements to ensure the legality and transparency of the reorganization process.

   Communication and disclosure: The merged entity is responsible for communicating the post-merger share capital reorganization to its shareholders and other stakeholders. This typically involves issuing notices, holding shareholder meetings, and providing relevant disclosure materials that outline the details of the reorganization and its implications.

    

   14.4 TAKEOVERS AND ACQUISITIONS

   Takeovers

   A takeover occurs when one company acquires a controlling interest or ownership stake in another company, often by purchasing a majority of its shares. The acquiring company gains control over the target company’s operations, assets, and management. Takeovers can be friendly (with the consent and cooperation of the target company) or hostile (without the consent or against the wishes of the target company’s management).

    

   Acquisitions

   Acquisitions refer to the broader concept of one company acquiring another company, which includes takeovers as a subset. Acquisitions can be made through various methods, including purchasing shares, assets, or the entire business of the target company. Acquisitions can be friendly or hostile, depending on the nature of the transaction and the consent of the target company.

    

   Motivations for takeovers and acquisitions

   1. Strategic expansion: Companies may pursue takeovers and acquisitions to expand their geographic reach, enter new markets, or diversify their product or service offerings
   2. Synergies: Acquisitions can create synergies by combining resources, capabilities, or market positions of the acquiring and target companies.
   3. Access to resources: Takeovers and acquisitions can provide access to critical resources such as technologies, patents, intellectual property, distribution networks, or skilled workforce.
   4. Financial gain: Companies may pursue acquisitions to enhance financial performance, increase profitability, or generate economies of scale.
   5. Risk diversification: Acquisitions can be a strategy to diversify business risks by entering new industries, product lines, or markets.

   Prior to completing a takeover or acquisition, the acquiring company typically conducts due diligence to assess the financial, legal, operational, and commercial aspects of the target company. This evaluation helps the acquiring company evaluate risks, opportunities, and potential synergies associated with the transaction.

    

   14.5 MERGERS AND DIVISIONS OF PUBLIC COMPANIES

   Merger

   A merger involves the combination of two or more separate companies into a single entity.

   Mergers are typically classified as follows:

   1. Horizontal merger: This type of merger occurs between companies operating in the same industry and at the same stage of the production or distribution chain. Horizontal mergers aim to achieve economies of scale, enhance market power, or eliminate competition.
   2. Vertical merger: Vertical mergers involve companies operating at different stages of the production or distribution process. This type of merger allows for better integration and coordination of operations, reduced costs, and improved efficiency.
   3. Conglomerate merger: Conglomerate mergers involve companies operating in unrelated industries. These mergers aim to diversify business interests, spread risks, or capitalize on new growth opportunities outside the company’s core business.

    

   Divisions

   A division, also known as a spin-off or demerger, involves the separation of a portion or subsidiary of a company into an independent entity. This process allows the parent company to focus on its core operations while providing greater autonomy and growth opportunities for the spun-off entity. Divisions can take different forms:

   1. Partial spin-off: In a partial spin-off, the parent company distributes a portion of its shares in the subsidiary to its existing shareholders, effectively creating a new independent entity.
   2. Total spin-off: A total spin-off involves the complete separation of a subsidiary or business unit from the parent company, resulting in a new independent entity with its own shares and ownership structure.
   3. Carve-out: A carve-out is similar to a partial spin-off, but instead of distributing shares to existing shareholders, the parent company offers shares of the subsidiary to the public through an initial public offering (IPO), creating a separate publicly traded company.

   Both mergers and divisions of public companies require careful planning, due diligence, and compliance with legal and regulatory requirements. Shareholder approval, regulatory clearances, and appropriate communication with stakeholders are important considerations in executing these transactions. Professional advice from legal, financial, and tax experts is often sought to ensure the smooth execution and successful outcomes of mergers and divisions.

    

   14.6 COMPROMISES, ARRANGEMENTS, RECONSTRUCTIONS AND AMALGAMATIONS

   Compromises, arrangements, reconstructions, and amalgamations are legal processes that allow companies to restructure their operations, financials, or ownership structure. These processes are commonly used to address financial difficulties, facilitate business combinations, or achieve operational efficiencies.

   Compromises

   A compromise involves reaching an agreement between a company and its creditors or shareholders to settle outstanding obligations or disputes. It allows the company to negotiate and restructure its debt or financial obligations, often through the rescheduling of payments, debt reduction, or changes in terms and conditions. Compromises require approval from the creditors or shareholders through a formal voting process.

    

   Arrangements

   Arrangements are legal mechanisms that enable companies to propose and implement a plan for reorganizing their affairs, business, or capital structure. They involve obtaining approval from the court or relevant regulatory authorities. Arrangements can be used to restructure debt, alter share capital, consolidate business operations, or facilitate mergers and acquisitions. They require approval from the affected parties, such as creditors or shareholders, and are subject to court scrutiny.

    

   Reconstructions

   Reconstruction refers to the reorganization or restructuring of a company’s operations, assets, or share capital to improve efficiency, profitability, or competitiveness. It may involve changes to the corporate structure, management, business model, or strategic direction of the company. Reconstruction aims to optimize resources, enhance performance, or adapt to changing market conditions.

    

   Amalgamations

   Amalgamations, also known as mergers or consolidations, involve the combination of two or more companies into a single entity. Amalgamations can be horizontal (between companies in the same industry), vertical (between companies at different stages of the production or distribution chain), or conglomerate (between companies in unrelated industries).

    

    

   CHAPTER 15

   RECEIVERSHIP, ADMINISTRATION, LIQUIDATION AND DISSOLUTION OF COMPANIES

   Learning outcomes

   On completion of this topic, you should be able to; 1. Meaning of receivership, administration and dissolution 2. Appointment and vacation of office by the Official Receiver 3. Powers and duties of a receiver 4. Termination of receivership 5. Appointment of an administrator 6. Functions and powers of an administrator 7. Process of administration 8. Termination of appointment and replacement of administrators 9. Company voluntary arrangements 10. Meaning of liquidation 11. Types of liquidation 12. Appointment, powers and duties of liquidators 13. Discharge of liquidators 14. Distribution of assets and dissolution of companies

    

   15.1 MEANING OF RECEIVERSHIP, ADMINISTRATION AND DISSOLUTION

   Receivership

   Receivership is a legal process in which a receiver is appointed by a creditor or a court to take control of a company’s assets, operations, and finances. It typically occurs when a company fails to repay its debts or breaches its financial obligations. The receiver’s role is to protect the interests of the secured creditor and maximize the recovery of funds owed to them.

    

   Administration

   Administration is a formal insolvency procedure that aims to protect a company’s assets and maximize the chances of business survival or achieve a better outcome for creditors. It involves the appointment of an administrator, who takes control of the company’s operations and manages its affairs. The administrator’s primary objective is to rescue the company as a going concern, sell it as a whole, or achieve a better result for creditors than in a liquidation scenario.

    

   Dissolution

   Dissolution refers to the process of legally winding up and terminating the existence of a company. It can occur voluntarily or involuntarily. Voluntary dissolution happens when the shareholders and directors of a solvent company decide to cease its operations and wind up its affairs. Involuntary dissolution can occur when a company fails to comply with legal and regulatory requirements, faces insolvency, or is ordered by a court to be dissolved. During dissolution, the company’s assets are liquidated, debts are paid, and any remaining funds are distributed to shareholders in accordance with legal priorities.

    

   15.2 APPOINTMENT AND VACATION OF OFFICE BY THE OFFICIAL RECEIVER

   Appointment

   1. Automatic appointment: In some jurisdictions, the official receiver is automatically appointed as the receiver or liquidator of a company when it becomes insolvent. This automatic appointment occurs upon the initiation of insolvency proceedings, such as bankruptcy or compulsory liquidation.

    

   2. Court appointment: In other cases, the official receiver may be appointed by a court. This typically happens when a creditor or the company itself applies to the court for the appointment of a receiver or liquidator, and the court decides to appoint the official receiver.
   3. Appointment by relevant authority: The official receiver may also be appointed by a relevant authority responsible for overseeing insolvency proceedings, such as a government department or agency.

    

   Vacation of office

   1. Completion of duties: The official receiver will continue to hold office until their duties are completed. This includes managing the affairs of the insolvent company, investigating its financial affairs, recovering assets, and distributing funds to creditors in accordance with the applicable laws and regulations.
   2. Replacement by an insolvency practitioner: In some cases, the official receiver’s role may be temporary, and they may be replaced by a licensed insolvency practitioner. The insolvency practitioner is typically appointed by creditors or the court and takes over the responsibilities of the Official Receiver to further manage the insolvency proceedings.
   3. Termination or resignation: The official receiver’s office may be terminated or the Official Receiver may resign from their position. This could occur when the insolvency proceedings are completed, or if there are any conflicts of interest, inability to perform duties, or other reasons that warrant the termination or resignation.

    

   15.3 POWERS AND DUTIES OF A RECEIVER

   Powers of a receiver

   1. Taking control of assets: A receiver has the authority to take possession and control of the assets, properties, and business operations that are subject to the receivership. This includes managing, protecting, and preserving the assets to ensure their value is maximized.
   2. Managing and operating the business: In cases where the receiver is appointed to manage a business, they may have the power to make decisions regarding the day-to-day operations of the business. This can include hiring and firing employees, entering into contracts, and making strategic decisions necessary to maintain or improve the business.
   3. Collecting and managing receivables: A receiver can collect outstanding receivables owed to the company and take appropriate action to recover funds or assets from debtors. This may involve pursuing legal action, negotiating settlements, or implementing collection strategies.
   4. Selling assets: A receiver may have the power to sell or dispose of assets to generate funds to repay creditors. This can include selling real estate, inventory, equipment, or other assets in a manner that maximizes their value.
   5. Accessing information and records: Receivers have the authority to access all relevant information, records, and financial data necessary for their duties. They can review books, records, contracts, and other documents to assess the financial position of the company and make informed decisions.

    

   Duties of a receiver

   1. Duty of care: Receivers have a duty to act diligently, honestly, and in good faith while carrying out their responsibilities.
   2. Duty to maximize value: Receivers are obligated to act in the best interests of the creditors. They have a duty to take reasonable steps to maximize the value of the assets, preserve their worth, and minimize losses.
   3. Reporting and communication: Receivers have a duty to provide regular reports to the court, creditors, and other relevant parties.
   4. Compliance with laws and regulations: Receivers must comply with all applicable laws, regulations, and court orders. They should ensure that their actions and decisions align with legal requirements and avoid any conflicts of interest.

    

   15.4 TERMINATION OF RECEIVERSHIP

   The termination of a receivership occurs when the appointed receiver’s duties and responsibilities come to an end. The exact process and requirements for terminating a receivership can vary depending on the jurisdiction and the specific circumstances of the receivership.

   Factors that may lead to the termination of a receivership:

   1. Fulfillment of objectives: A receivership may be terminated when the objectives for which the receiver was appointed have been achieved. This could include satisfying the secured creditor’s debt, selling the assets, or completing the tasks outlined in the appointment order.
   2. Court order: In some cases, the court that appointed the receiver may issue an order for the termination of the receivership. The court will consider factors such as the successful completion of the receiver’s tasks, compliance with legal requirements, and any other circumstances deemed relevant.
   3. Creditor agreement: If the receivership was initiated by a secured creditor, the termination may occur when the creditor and the receiver reach an agreement regarding the repayment of the debt or the settlement of the financial obligations. Once the creditor’s claims are satisfied, they may provide consent for the receivership to be terminated.
   4. Insufficient assets: If there are no remaining assets or insufficient funds to justify the continuation of the receivership, it may be terminated due to a lack of resources to cover the costs of the receivership or to provide meaningful recoveries for the creditors.
   5. Resignation or removal: In certain cases, a receiver may resign from their position voluntarily, or they may be removed by the court or the appointing authority. This could occur due to personal reasons, conflicts of interest, or concerns about the receiver’s performance or conduct.

    

   15.5 APPOINTMENT OF AN ADMINISTRATOR

   The appointment of an administrator refers to the process of appointing an insolvency practitioner to act as an administrator for a company that is facing financial difficulties. The appointment is typically made through a formal legal process and is governed by insolvency laws and regulations.

   Steps involved in the appointment of an administrator:

   1. Decision to appoint: The decision to appoint an administrator can be made by different parties, including the company’s directors, creditors, or the court. The decision is usually based on the company’s financial distress, insolvency, or a belief that administration will be beneficial for the company’s stakeholders.
   2. Notice of intention to appoint: Prior to the formal appointment, the company or its directors may issue a notice of intention to appoint an administrator. This notice provides a legal protection period during which no legal action can be taken by creditors to enforce their claims against the company.
   3. Formal appointment: The administrator is formally appointed through one of the following methods:
   4. Directors’ appointment: The directors of the company can initiate the appointment of an administrator by filing the necessary application and documents with the relevant insolvency authority. The appointment takes effect once the application is accepted.
   5. Creditors’ appointment: Creditors, such as banks or major creditors, can also initiate the appointment of an administrator by holding a meeting and passing a resolution to appoint an administrator. The creditors’ resolution must meet the specified legal requirements, including the required majority vote.
   6. Court appointment: In certain circumstances, such as urgent cases or when there is a dispute between parties, the court may appoint an administrator upon the application of the company, its directors, or its creditors.

    

   4. Administrator’s powers and duties: Once appointed, the administrator takes control of the company’s affairs, assets, and operations. Their primary duty is to act in the best interests of the company’s creditors as a whole. The administrator will assess the company’s financial position, develop a plan of action, and work towards achieving the objectives of administration.
   5. Notification and reports: The administrator is responsible for notifying the relevant parties, including the company’s creditors, shareholders, and employees, about their appointment. They will also prepare and submit reports to the court, creditors, and other interested parties, providing updates on the progress of the administration, financial information, and proposed actions.

    

   15.6 FUNCTIONS AND POWERS OF AN ADMINISTRATOR

   Key functions and powers of an administrator:

   1. Management and operation of the company: The administrator takes over the management and operation of the company during the administration period.
   2. Investigation and assessment: The administrator conducts a thorough investigation into the company’s affairs, financial position, and prospects.
   3. Formulation of proposals and plans: Based on the findings of the investigation, the administrator formulates proposals and plans to achieve the objectives of administration.
   4. Communication and engagement with stakeholders: The administrator is responsible for communicating with the company’s creditors, shareholders, employees, and other stakeholders.
   5. Realization of assets: The administrator has the power to sell or dispose of the company’s assets to generate funds for the benefit of creditors.
   6. Proposal to creditors: The administrator prepares a proposal for a formal arrangement or restructuring plan to be presented to the company’s creditors.
   7. Voting on proposals: The administrator convenes meetings of the company’s creditors to vote on the proposed arrangements or restructuring plan.

    

   15.7 PROCESS OF ADMINISTRATION

   A general outline of the key steps involved:

   1. Appointment of the administrator:
   2. Decision to appoint: The decision to appoint an administrator can be made by the company’s directors, creditors, or the court.
   3. Notice of intention: In some jurisdictions, the company or its directors may issue a Notice of Intention to Appoint an administrator. This notice provides a legal protection period during which no legal action can be taken by creditors to enforce their claims against the company.
   4. Formal appointment: The administrator is formally appointed through the directors’ appointment, creditors’ appointment, or court appointment process, as explained earlier.

    

   2. Investigation and assessment:
   3. Initial assessment: The administrator conducts an initial assessment of the company’s financial position, operations, and prospects.
   4. Investigation: The administrator undertakes a detailed investigation into the company’s affairs, reviewing financial records, contracts, and other relevant documents.
   5. Statement of affairs: The administrator prepares a Statement of Affairs, which provides a comprehensive overview of the company’s assets, liabilities, and creditors.

    

   3. Formulation of proposals:
   4. Development of a plan: Based on the investigation and assessment, the administrator develops proposals and plans to achieve the objectives of administration.
   5. Proposal for creditors: The administrator prepares a formal proposal outlining the proposed treatment of creditors’ claims, the expected financial outcome, and the administrator’s recommendations for achieving the objectives of administration.

    

   4. Communication and meetings:
   5. Communication with stakeholders: The administrator communicates with the company’s creditors, shareholders, employees, and other stakeholders to provide updates on the administration process and seek their input.
   6. Creditors’ meetings: The administrator convenes meetings of the company’s creditors to present the proposals, allow creditors to vote on the proposals, and seek their approval.

    

   5. Implementation:
   6. Execution of the plan: If the proposals are approved by the creditors, the administrator implements the approved plan, which may involve restructuring debt, selling assets, renegotiating contracts, or pursuing other actions to achieve the objectives of administration.
   7. Realization of assets: The administrator sells or disposes of the company’s assets to generate funds for the benefit of creditors. This may involve negotiating sales, conducting auctions, or pursuing legal action to recover assets or funds owed to the company.

    

   6. Reporting and compliance:
   7. Reports to stakeholders: The administrator prepares and submits reports to the court, creditors, and regulatory authorities, providing updates on the progress of the administration, financial information, details of asset realizations, and the distribution of funds to creditors.
   8. Compliance with legal requirements: The administrator ensures compliance with all relevant legal and regulatory requirements, including court orders and insolvency laws applicable in the jurisdiction.

    

   7. Conclusion of administration:
   8. Exit from administration: Once the objectives of administration are achieved, the administrator concludes the administration process.
   9. Handover or winding up: Depending on the circumstances, the administrator may hand back control of the company to the directors, facilitate a transfer of ownership, or commence the process of winding up the company.

    

   15.8 TERMINATION OF APPOINTMENT AND REPLACEMENT OF ADMINISTRATORS

   1. Completion of administration:

   Termination: The administrator’s appointment may be terminated upon the successful completion of the administration objectives. This occurs when the proposed plan is implemented, assets are realized, and creditors’ claims are satisfied to the extent possible.

   Exit strategy: The company may be handed back to the directors, or ownership may be transferred to new owners, depending on the specific circumstances.

    

   2. Court or Creditor Decision:

   Replacement by court order: The court may order the termination of the current administrator’s appointment and the appointment of a new administrator. This could be due to concerns about the performance, conduct, or conflicts of interest of the existing administrator.

   Replacement by creditors: Creditors with sufficient voting power may pass a resolution to replace the existing administrator with a new administrator. This may occur if creditors have lost confidence in the current administrator or if there are disputes or conflicts among stakeholders.

    

   3. Resignation or Removal:

   Resignation: An administrator may choose to resign from their position voluntarily, citing personal reasons or conflicts of interest. Proper notification and compliance with legal procedures may be required for an effective resignation.

   Removal: The court or relevant authorities may remove an administrator if there are concerns about their performance, misconduct, or failure to fulfill their duties. Removal may be initiated by creditors, stakeholders, or regulatory bodies.

    

   4. Company Voluntary Arrangement (CVA):

   Replacement for CVA implementation: In cases where a Company Voluntary Arrangement (CVA) is approved, the administrator’s role may transition to that of a supervisor who oversees the implementation and management of the CVA. This change in role may involve the appointment of a new supervisor.

   5. Death, Illness, or Incapacity:

   Unforeseen circumstances: If an administrator passes away, falls seriously ill, or becomes incapacitated, their appointment may be terminated, and a replacement administrator may be appointed to continue the administration process.

    

   15.9 COMPANY VOLUNTARY ARRANGEMENTS

   A Company Voluntary Arrangement (CVA) is a legally binding agreement between a financially distressed company and its creditors. It allows the company to reach a compromise or arrangement to repay its debts over a specified period of time.

   1, Initiation

   Proposal: The company, its directors, or a licensed insolvency practitioner can propose a CVA to the company’s creditors. The proposal outlines the terms of the arrangement, including how the company will repay its debts.

   Nominee’s report: A licensed insolvency practitioner is appointed as a nominee to review the proposed CVA and prepare a report. The nominee assesses the viability of the arrangement and provides an independent opinion on its likelihood of success.

    

   2. Approval Process:

   Creditors’ meeting: A meeting of the company’s creditors is held to vote on the proposed CVA. The creditors may include secured creditors, unsecured creditors, and shareholders. For the CVA to be approved, it requires a majority vote from the creditors in terms of value.

   Approval threshold: The CVA must be approved by at least 75% in value of the voting creditors present (in person or by proxy) at the meeting.

    

   3. Implementation and supervision:

   Supervisor appointment: If the CVA is approved, a supervisor is appointed to oversee and implement the terms of the arrangement. The supervisor is typically an insolvency practitioner.

   CVA terms: The CVA sets out the agreed-upon terms, which may include reduced debt repayments, extended repayment periods, changes to interest rates, or other modifications to the company’s obligations.

   Repayment plan: The company makes regular payments to the supervisor as per the agreed-upon repayment plan. The supervisor then distributes these payments to the creditors in accordance with the terms of the CVA.

    

   CVA is a complex process that must comply with the relevant laws and regulations of the jurisdiction in which the company is incorporated.

    

   15.10 MEANING OF LIQUIDATION

   Liquidation, also known as winding-up or dissolution, refers to the process of bringing a company’s affairs to an end, realizing its assets, and distributing the proceeds to its creditors and shareholders.

    

   15.11 TYPES OF LIQUIDATION

   1. Voluntary liquidation

   It occurs when a company’s shareholders or directors make a voluntary decision to wind up the company’s affairs. It is typically initiated when the company is insolvent or when the shareholders no longer wish to continue operating the business. There are two main forms of voluntary liquidation:

   1. Members’ Voluntary Liquidation (MVL): This type of liquidation is applicable to solvent companies. It is initiated when the shareholders determine that the company has fulfilled its purpose or is no longer viable.
   2. Creditors’ Voluntary Liquidation (CVL): A CVL is initiated when the company is insolvent and unable to pay its debts as they become due. In this case, the directors or shareholders hold a meeting and pass a resolution to wind up the company. A liquidator is appointed to sell the company’s assets, and the proceeds are distributed to creditors in a prescribed order of priority.

    

   2. Compulsory liquidation:

   It is a type of liquidation that is ordered by a court. It occurs when a creditor, shareholder, or regulatory authority files a petition with the court, stating that the company is unable to pay its debts or has acted in a manner prejudicial to the interests of creditors or the public. The court reviews the petition and, if it is satisfied, makes an order for the company to be liquidated. A liquidator is appointed by the court to oversee the process. The liquidator sells the company’s assets, and the proceeds are distributed to creditors according to the prescribed order of priority.

    

   15.12 APPOINTMENT, POWERS AND DUTIES OF LIQUIDATORS

   Appointment

   1. Members’ Voluntary Liquidation (MVL):

   In an MVL, the shareholders appoint a liquidator through a resolution passed at a general meeting of the company. The liquidator must be a licensed insolvency practitioner.

   2. Creditors’ Voluntary Liquidation (CVL)

   In a CVL, the directors convene a meeting of the shareholders to propose the liquidation, and the shareholders pass a resolution to appoint a liquidator. The liquidator must be a licensed insolvency practitioner.

   3. Compulsory Liquidation

   In compulsory liquidation, the court appoints a liquidator, who is often an official receiver or a licensed insolvency practitioner.

    

   Powers and duties

   1. Investigation and asset realization

   Liquidators have the power to investigate the company’s affairs, examine its books and records, and determine the company’s assets and liabilities.

   2. Collection and distribution of funds:

   Liquidators collect funds from the sale of the company’s assets, outstanding debts, or any legal actions pursued on behalf of the company.

   3. Communication and reporting:

   Liquidators communicate with creditors, shareholders, employees, and other stakeholders regarding the progress of the liquidation.

   4. Legal proceedings:

   Liquidators have the power to initiate or defend legal actions on behalf of the company, if necessary, to recover assets or pursue claims against third parties.

   5. Investigations and reports on directors’ conduct:

   Liquidators may investigate the conduct of the company’s directors, particularly if there is suspicion of wrongful or fraudulent trading.

    

   15.13 DISCHARGE OF LIQUIDATORS

   The discharge of liquidators refers to the process by which a liquidator’s role and responsibilities come to an end. The discharge can occur when the liquidation process is completed and all necessary tasks and duties have been fulfilled.

   1. Completion of liquidation process: The discharge of a liquidator typically occurs when the liquidation process is complete. This involves the realization of the company’s assets, distribution of funds to creditors, settlement of outstanding claims, and resolution of any remaining matters related to the liquidation.
   2. Final accounts and reports: Before the discharge, the liquidator prepares and submits final accounts and reports to the relevant stakeholders, including creditors, shareholders, regulatory authorities, and the court. These documents provide an overview of the liquidation process, details of asset realizations and distributions, and any other relevant information.
   3. Consent of creditors and stakeholders: In some cases, the discharge of a liquidator may require the consent or approval of the company’s creditors and/or shareholders. This is particularly applicable in voluntary liquidations, where the creditors’ or shareholders’ approval may be sought before the liquidator is discharged.
   4. Court approval: In certain jurisdictions or circumstances, the discharge of a liquidator may require court approval. The court may review the liquidator’s final accounts, reports, and any outstanding issues before granting the discharge.
   5. Legal obligations and formalities: The liquidator must ensure that all legal obligations and formalities are fulfilled before seeking discharge. This may include the filing of necessary documents, settling outstanding tax and regulatory obligations, and complying with any reporting requirements.
   6. Finalizing the liquidation: Once the liquidator has completed all necessary tasks, received necessary approvals, and fulfilled all legal obligations, they can seek their discharge. This signifies the end of their role and responsibilities in the liquidation process.

    

   15.14 DISTRIBUTION OF ASSETS AND DISSOLUTION OF COMPANIES

   The distribution of assets and dissolution of a company occur as part of the winding-up process, whether through voluntary liquidation or compulsory liquidation.

   Steps involved in the distribution of assets and dissolution of a company

   1. Asset Realization: The liquidator’s primary responsibility is to identify, value, and sell the company’s assets. This can include physical assets such as property, inventory, equipment, and vehicles, as well as intangible assets like intellectual property or contractual rights.
   2. Payment of Expenses: Before distributing the assets to creditors and shareholders, the liquidator must settle any outstanding expenses related to the winding-up process. These expenses can include the costs of the liquidation process, professional fees, employee wages, taxes, and any other valid claims against the company.
   3. Priority of Payments: The distribution of assets follows a specific order of priority. The order typically involves the following categories:
   4. Secured Creditors: Secured creditors, such as those holding mortgages or liens on specific assets, have priority in the distribution of proceeds from the sale of those assets. They are entitled to recover their debts up to the value of the secured assets.
   5. Preferential Creditors: Certain creditors are given preferential status and are entitled to be paid ahead of unsecured creditors. This can include employees’ unpaid wages, certain tax obligations, and contributions to employee benefit schemes.
   6. Unsecured Creditors: Once secured and preferential creditors have been paid, any remaining assets are distributed among unsecured creditors. Unsecured creditors typically include trade suppliers, service providers, lenders without security, and other creditors who do not have priority status.
   7. Shareholders: After satisfying the claims of all creditors, any remaining assets are distributed among the shareholders according to their rights and shareholding proportions. However, in many cases, shareholders may not receive any distribution if there are insufficient assets remaining after satisfying the claims of creditors.
   8. Dissolution: Once all assets have been realized, and the distribution of funds to creditors and shareholders is completed, the company proceeds to dissolution. Dissolution is the legal process that formally terminates the existence of the company as a legal entity. The liquidator files the necessary documents and notifications with the relevant authorities, and the company is struck off from the register of companies.

    

    

   CHAPTER 16

   FOREIGN COMPANIES

   Learning outcomes

   On completion of this topic, you should be able to; 1. Process of registering a company 2. Certificate of registration 3. Power to hold land 4. Registration of charges 5. Accounts of foreign companies 6. Service of process and notices on foreign companies 7. Returns 8. Penalties 9. Cessation of business

    

   16.1 PROCESS OF REGISTERING A COMPANY

   Foreign companies, also known as overseas companies or non-resident companies, are entities that are incorporated or registered in a jurisdiction outside of the country where they conduct business or have operations.

   A general overview of the process;

   1. Determine the company structure and name

   Decide on the structure of the company, such as a limited liability company (LLC), corporation, partnership, or sole proprietorship. Choose a unique name for the company that complies with the naming regulations of the jurisdiction. Check for availability and ensure it is not infringing on any existing trademarks.

   2. Articles of incorporation/registration:

   Prepare the necessary documents for company registration, such as the Articles of Incorporation or Registration. Include key information about the company, such as its name, registered office address, share capital, details of directors/shareholders, and the company’s purpose or business activities.

   3. Appoint Directors/Officers:

   Identify and appoint directors and officers who will manage the company’s affairs.

   Ensure they meet any legal requirements, such as age restrictions or residency requirements, if applicable in the jurisdiction.

   4. Registered office and registered agent:

   Determine the registered office address of the company, which is the official address for receiving legal and official correspondence. In some jurisdictions, you may need to appoint a registered agent who will act as a representative for the company and receive official documents on its behalf.

   5. Share capital and shareholders:

   Determine the share capital structure of the company, including the number and types of shares to be issued. Identify the initial shareholders of the company and their respective shareholdings.

   6. Filing and documentation:

   Complete the required registration forms and submit them to the appropriate government authority or registrar. Include the necessary supporting documents, such as identification documents for directors and shareholders, consent forms, and any other required information.

   7. Paying fees and taxes:

   Pay the registration fees and any applicable taxes or levies associated with the company registration process. Familiarize yourself with the ongoing compliance requirements and annual fees to maintain the company’s legal status.

   8. Obtain certificates and permits:

   Once the registration documents are reviewed and approved, you will receive a Certificate of Incorporation or Registration, confirming the legal existence of your company. Apply for any additional permits or licenses required to conduct specific business activities, if applicable.

    

   16.2 CERTIFICATE OF REGISTRATION

   A certificate of registration is a legal document issued by the appropriate government authority or registrar upon the successful registration of a company or business entity. It serves as proof that the company has been officially incorporated or registered and is recognized as a legal entity in the jurisdiction where it operates.

   Contents

   1. It typically contains important information about the company, including its registered name, registration number, date of incorporation, registered office address, and details of directors or officers.
   2. It may also include other relevant information depending on the jurisdiction, such as the company’s share capital or any specific conditions or restrictions imposed on the company.

    

   Issuance

   After completing the company registration process and submitting the necessary documentation, the government authority or registrar reviews the application.

   If the application is approved and meets all requirements, a Certificate of Registration is issued to the company.

    

   Duration and renewal

   The certificate of registration is valid for a specific period, usually indicated on the document itself.

   In many jurisdictions, companies are required to renew their registration periodically, either annually or at specified intervals, by filing annual returns or paying renewal fees.

    

   16.3 POWER TO HOLD LAND

   The power to hold land refers to the legal authority of a company to own, possess, and deal with real estate or land. The ability to hold land is an important aspect of a company’s operations, as it allows the company to acquire and utilize properties for its business purposes.

   Legal capacity

   A company’s power to hold land is determined by its constitutional documents, such as the Memorandum and Articles of Association or equivalent documents.

   The constitutional documents specify the company’s objects or purposes, and if the power to hold land is included, the company has the legal capacity to acquire and hold real estate.

    

   Types of land ownership

   A company can hold land through various forms of ownership, including freehold, leasehold, or by entering into agreements, such as licenses or easements.

   Freehold ownership grants the company complete ownership and control over the land indefinitely.

   Leasehold ownership allows the company to hold the land for a specified period under the terms of a lease agreement.

    

   Land acquisition

   Companies can acquire land through purchase, lease, gift, or other legal means, depending on the jurisdiction’s laws and regulations.

   The acquisition process typically involves negotiating the terms and conditions of the transaction, conducting due diligence, and completing the necessary legal documentation.

    

   Legal formalities

   The acquisition and holding of land by a company often require compliance with specific legal formalities, such as registering the company’s interest in the land with the relevant land registry or authority.

   Compliance with local laws and regulations related to land ownership, zoning, planning permissions, and environmental regulations is essential.

   Land transactions and disposal

   Companies with the power to hold land can engage in various land transactions, such as selling, leasing, mortgaging, or otherwise disposing of the land.

   These transactions may require additional legal documentation, approvals, or consents depending on the jurisdiction and nature of the transaction.

    

   Legal restrictions

   Some jurisdictions may impose certain restrictions on companies’ power to hold land, particularly for specific types of land, such as agricultural land, protected areas, or government-owned land.

   Companies may need to comply with land use regulations, obtain permits or licenses, or meet specific eligibility criteria to acquire or hold certain types of land.

    

   16.4 REGISTRATION OF CHARGES

   Registration of charges refers to the process of registering the details of a company’s charges or security interests with the relevant government authority or registrar. This process is typically required to create and establish the priority of charges over the company’s assets.

   Creation of charges

   A charge is a form of security interest granted by a company to a creditor to secure a debt or obligation. It can be in the form of a mortgage, debenture, pledge, or other types of security arrangements.

   Filing timeframe

   Companies are usually required to register charges within a specified timeframe after their creation to ensure their validity and priority.

   Registrar or government authority

   Companies are required to file the necessary documents and information related to the charge with the designated registrar or government authority.

   The registrar maintains a register of charges, which is a public record accessible to interested parties.

   Required documentation

   The company must prepare and submit the appropriate documents for registration, which typically include a charge registration form and supporting documents describing the nature of the charge, details of the parties involved, and the secured obligations.

   Consequences of non-registration

   Failure to register charges within the prescribed timeframe may result in the charge being deemed void or unenforceable against certain parties, such as the company’s liquidator, creditors, or subsequent charge holders.

   Amendment and discharge of charges

   If there are any changes or modifications to the registered charge, such as its terms or the amount secured, the company must file the appropriate amendments or updates with the registrar.

    

   16.5 ACCOUNTS OF FOREIGN COMPANIES

   Accounts of foreign companies refer to the financial records and statements maintained by companies incorporated and operating outside a specific country. These companies conduct business activities in different jurisdictions, and their accounts provide information about their financial performance, position, and cash flows.

   Common elements typically found in these accounts, include;

   1. Balance sheet: The balance sheet presents the financial position of a company at a specific point in time. It includes assets (such as cash, inventory, property, and equipment), liabilities (such as loans, accounts payable, and accrued expenses), and shareholders’ equity (the company’s net worth).
   2. Income statement: The income statement, also known as the profit and loss statement, shows a company’s revenues, expenses, gains, and losses over a specific period. It provides information about the company’s profitability and whether it has generated a net profit or loss.

    

   3. Cash flow statement: The cash flow statement tracks the inflows and outflows of cash and cash equivalents during a particular period. It categorizes cash flows into operating activities, investing activities, and financing activities, providing insights into how a company generates and uses its cash.
   4. Notes to the financial statements: These accompanying notes provide additional details and explanations about specific items in the financial statements. They disclose accounting policies, assumptions, contingent liabilities, and other relevant information necessary for a complete understanding of the company’s financial position and performance.

    

   16.6 SERVICE OF PROCESS AND NOTICES ON FOREIGN COMPANIES

   Service of process and notices on foreign companies refers to the legal procedure of delivering official documents, such as lawsuits, court summons, or other legal notices, to companies that are incorporated and operate outside the jurisdiction where the legal action is taking place. It ensures that foreign companies receive proper notification of legal proceedings and have an opportunity to respond or defend themselves.

    

   The specific rules and procedures for serving process and notices on foreign companies can vary depending on the jurisdiction and the international treaties or agreements in place. However, here are some common methods used:

   1. Hague service convention: Many countries, including the United States and numerous other signatories, are party to the Hague Service Convention. This convention establishes a standardized process for serving judicial and extrajudicial documents internationally. Under the convention, the Central Authority of each member country acts as a channel for the service of process.
   2. Letters rogatory: In jurisdictions that are not party to the Hague Service Convention or in cases where the convention does not apply, letters rogatory may be used. A letter rogatory is a formal request from a court in one country to a court in another country to facilitate the service of process. The court in the receiving country assists in serving the documents on the foreign company according to its own legal procedures.
   3. Direct service: In some cases, service of process on a foreign company may be allowed through direct methods, such as by mail or courier, if permitted by the laws of the jurisdiction where the legal action is taking place. However, direct service can be challenging, as it may require compliance with specific requirements or the use of certified translations.
   4. Service through a registered agent or representative: In certain jurisdictions, foreign companies are required to appoint a registered agent or representative who can accept legal documents on their behalf. Service of process can be made by delivering the documents to the registered agent or representative designated by the company.
   5. Electronic service: With the advancement of technology, some jurisdictions allow for the service of process and notices on foreign companies through electronic means, such as email or fax. However, the permissibility of electronic service depends on the laws and regulations of both the sending and receiving jurisdictions.

    

   16.7 RETURNS

   Returns in foreign companies can refer to the financial gains or profits generated by companies incorporated and operating outside a specific country. These returns can be achieved through various business activities, investments, or operations conducted by the foreign company.

   The calculation and presentation of returns in foreign companies are similar to those in domestic companies. Here are some key aspects to consider:

   1. Financial statements: Foreign companies prepare financial statements, including income statements, balance sheets, and cash flow statements, which provide information about their financial performance. These statements reflect the revenues earned, expenses incurred, and resulting profits or losses.
   2. Currency conversion: Foreign companies often operate in their local currency, which may differ from the reporting currency of the country where the financial statements are presented. In such cases, returns are usually reported in both the local currency and the reporting currency after converting the financial figures using appropriate exchange rates.
   3. Accounting standards: Foreign companies may follow different accounting standards, such as International Financial Reporting Standards (IFRS) or country-specific Generally Accepted Accounting Principles (GAAP). The application of these standards can impact the measurement, recognition, and presentation of returns in the financial statements.
   4. Dividends and distributions: Returns in foreign companies can include dividends or distributions made to shareholders. These represent the portion of profits distributed to owners or investors. The timing and amount of dividends may vary depending on the company’s policies, local regulations, and market conditions.
   5. Tax considerations: Returns in foreign companies should also take into account tax implications. The foreign company may be subject to taxes in its home country and may also have tax obligations in the countries where it operates. Tax laws, rates, and regulations can affect the net returns received by the company and its shareholders.

    

   16.8 PENALTIES

   Penalties refer to the punitive measures or consequences imposed on companies incorporated and operating outside a specific country for non-compliance with the laws, regulations, or contractual obligations of that country. The penalties can vary depending on the jurisdiction in which the violation occurred and the nature of the violation itself.

   Here are some key considerations regarding penalties for foreign companies:

   1. Jurisdiction-specific penalties: Each jurisdiction has its own laws and regulations governing penalties for non-compliance. When foreign companies operate in a particular country, they are subject to the laws and regulations of that country. Penalties may include fines, sanctions, business restrictions, or other punitive measures imposed by the local authorities or regulatory bodies.
   2. Cross-border enforcement: In cases where a foreign company violates laws or regulations in a host country, there may be mechanisms for cross-border enforcement. This can involve cooperation between the authorities of the host country and the home country of the foreign company to enforce penalties or share information relevant to the violation.
   3. International treaties and agreements: Some countries may have entered into international treaties or agreements that facilitate cooperation in enforcing penalties against foreign companies. These agreements may outline specific procedures and mechanisms for penalty enforcement or provide guidelines for resolving cross-border legal issues.
   4. Extraterritorial reach: In certain situations, the laws of a country may have extraterritorial reach, allowing penalties to be imposed on foreign companies even if the violation occurred outside the country’s jurisdiction. This can happen if the violation has a direct impact on the country’s interests, such as cases involving bribery, corruption, or international trade regulations.
   5. Reputation and business consequences: Penalties imposed on foreign companies can have significant reputational and business consequences. Negative publicity, loss of customer trust, and damage to business relationships are some of the potential impacts that can result from non-compliance and penalties. These consequences can extend beyond the specific jurisdiction where the violation occurred and affect the company’s global operations.

    

   16.9 CESSATION OF BUSINESS

   Cessation of business in foreign companies refers to the process of terminating or winding down operations of a company incorporated and operating outside a specific country. When a foreign company decides to cease its business activities, there are several key considerations and steps to be followed:

   1. Compliance with local laws: The foreign company must comply with the laws and regulations of the country where it operates regarding the cessation of business. This may involve filing necessary notifications, permits, or documents with the local authorities and ensuring the fulfillment of any statutory requirements.
   2. Board resolution and shareholder approval: The company’s board of directors typically approves the decision to cease business operations. Shareholder approval may also be required, depending on the jurisdiction and the company’s legal structure.
   3. Settlement of obligations: Before closing down, the foreign company must settle its financial obligations, including payment of outstanding debts, taxes, and employee salaries. It should also ensure that all contractual obligations are fulfilled or properly terminated according to the terms of the agreements.
   4. Employee considerations: If the foreign company has employees, it must comply with labor laws and regulations regarding employee termination or redundancy. This includes providing appropriate notice periods, severance payments, and complying with any legal requirements related to employee benefits or entitlements.
   5. Asset disposition: The company may need to dispose of its assets, such as property, equipment, or inventory, as part of the cessation process. This can involve selling assets, transferring ownership, or liquidating them to satisfy outstanding debts or distribute remaining assets to shareholders.
   6. Tax and legal filings: The foreign company is typically required to file certain tax and legal documents to notify the authorities about the cessation of business. These filings may include tax clearance certificates, deregistration forms, or other relevant documents specified by the local authorities.
   7. Dissolution and deregistration: The final step in ceasing business operations is the formal dissolution and deregistration of the foreign company. This process involves filing the necessary documents with the local regulatory bodies to officially terminate the company’s legal existence.