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30May2017

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Scribe Registrars Services Blog

Scribe Registrars Services Blog (1)

The Companies Act 2015 was passed by parliament and assented to by the President on 11th September 2015.  This Act is intended to consolidate and reform the law relating to the incorporation, registration, operation, management and regulation of companies and to provide for the appointment and functions of auditors, among other related matters.  It is a voluminous document with no less than 1026 sections!

Only Section 1 has commenced while the remaining Sections will be operationalised through Gazette Notice(s) to be issued by the Cabinet Secretary within 9 months from the date of assent failing which, the two houses of parliament may resolve to bring into operation such provisions.  Even then, subsidiary legislations to regulate various sections must first be in place. Until then, the provisions of the Companies Act (Chapter 486) of the laws of Kenya remain in force.

The new law is a mixed bag: On one side it will modernise our company law especially as regards technology, and best corporate practice while on the other it has provided thresholds that may impact negatively on governance, commerce and foreign investment.  Barely two months after the assent, Government has stated that the provision requiring 30% shareholding of foreign companies intending to be registered to be held by Kenyan citizens by birth is an error.  Are there other such errors?

This Act is a build-up on the old companies law, and is probably overly detailed.  For instance, the First Schedule (Table A, B, C, D and E) and the Sixth Schedule (Accounts) to the old law are contained as provisions in the new law, with amendments.  Therefore, there is much of the old and a handful of new surprises.  The following is a highlight of the salient changes:

What is in a name?

It will now be possible to distinguish between a public and a private company, by the name.  The former will have suffix “Plc” and the later “Ltd” or “Limited”.
The old law was terse on why a name could be rejected – that it was undesirable.  There is an effort in the new law to expound which names are indeed undesirable.

Consent of Directors and Secretaries

As of now, anyone can be appointed as a Director or Secretary of a company without his/ her knowledge.  The potential for fraud under this scenario is monumental.  Luckily, the new law places a control measure by requiring individual consent of the appointed person.

Purchase own shares

When the new law is operationalised, companies will be able to purchase their own shares.  Well, not so easily! The process is regulated and involves approvals from the Capital Markets Authority.  

One Man Show

Company means “in association with” or “the condition or fact of being with another or others”.  It therefore made sense why in order to incorporate a company two or more shareholders were required. Not anymore.  Under the new law, an individual will be able to incorporate a company as the sole director and shareholder.

Under Eighteen?

The old law exempted private companies from the minimum and maximum age limits – raising questions such as on the contractual capacity of the under-aged directors.  The new law brings with it clarity - you must be eighteen years of age and above. Period!

Fixed Abode

Previously, directors needed to provide their postal address only.  In the new dispensation, the residential address for directors shall be registered but this information will not be available to the public.  

Declaration of interest

The new law has expounded on the manner in which interest is to be declared – not surprising given our peculiar habits around this matter.

Company Secretary

Previously, every company was required to appoint a company secretary.  Well, not any more unless yours is a public company or your paid up capital is Kshs five million and above.  There has been much debate on this prescribed threshold given that share capital is notional and does not necessarily correlate with the size of business – probably the reason why as per the Hansard of 9 July 2015 the debate digressed to “turnover” but at cross-purpose.
The sheer number of the prescribed requirements and corresponding hefty and stiff sanctions in event of default indicate a law geared towards enhancing corporate governance.  This should require more (not less) of the company secretary.  Indeed, in cognisance of this, the Act cautions public companies (which are required to have a qualified company secretary) to ensure the secretary is a person who appears to them to have the requisite knowledge and experience to discharge the functions of a secretary of the company.  
Every board (where appointment of the secretary is exempt) will therefore have to make a judgement call: whether to appoint a qualified secretary to manage compliance matters and leave the board to concentrate on its core mandate; or on its own navigate through the compliance labyrinth and risk default.  

Audits

A dormant company or a small company with turnover not exceeding Kshs 50 million and net assets not exceeding 20 million is exempted from audit of accounts.  Companies under the small companies regime are exempted from numerous provisions.  If compliance outside this regime proves expensive, it will naturally make business sense to refuse to grow beyond these limits in order to remain within the regime.  In a country with so much focus on growing the small and medium enterprises (SMEs), this law may appear to be going against the grain.  Indeed, many joint ventures, even from a governance perspective only, may demand audits even though exempted under the law.  

Directors’ duties and liabilities

It is written!  Directors’ fiduciary duties (as we know them under common law) have now been coded in the new Act.  Taking up directorship will also result in accepting a great deal of responsibility - making the role less attractive. There will probably be less jostling and canvasing for directorships in future and fewer individuals with multiples of directorships.

Written Resolutions

Round robin/ circular resolutions are now provided for in law, but for private companies only. Such companies can dispense with holding a physical meeting if iy is expedient and convenient to do so. The Act also clarifies that the chair at a meeting, or that of the next meeting, may authenticate the minutes of the former meeting – a small matter but previously overly debated.

Others

  • Quoted companies are required to maintain a website and also to post prescribed information on it.
  • Public companies are required to have a minimum authorised share capital of Kshs 6.75 million.
  • Accounting records are to be maintained for 7 years while minutes are to be retained for 10 years.
  • The accounting reference periods are determined by the accounting reference date which is the last day of the month on which the anniversary of its incorporation occurs.
  • Directors will now be required to sign their names on the balance sheet, while the report on directors’ remuneration must be signed.  A business review must be included to the financial statements.
  • At least one director must be a natural person.
  • Financial statements are required to be filed with the Registrar within 9 months of the accounting reference date for private companies and 6 months for public companies.  Unlimited companies are exempted.
  • The registrar must be notified in case of resignation by the auditor, and if the auditor resigns before the end of the term notice must also be given to ICPAK.
  • Shareholders of a quoted company have a right to query accounts.

Enhanced compliance, hefty fines and jail terms

There are numerous provisions requiring compliance with one thing or another, and failure to comply attracts hefty fines, penalties and even jail terms.  Just to illustrate this, below is a list of some compliance requirements and the corresponding fines for non-compliance:
KShs 200,000/= fine and KShs 20,000/= for each day of default for each day of default after the first conviction for failure to:

  • Notify the Registrar on amending articles.
  • File special resolutions and other prescribed resolutions.
  • To change name if so directed by the Registrar
  • KShs 500,000/= fine for failure to:
  • Provide a member a prescribed document upon request by the member
  • Index the register of members where there are 50 or more members
  • Have a common seal engraved as prescribed (where the company has a seal).
  • To display company name and other prescribed information at the registered office or on letterhead.
  • To maintain a register of members
  • To keep the register of members at the registered office
  • Maintain the name of a former member on register before expiry of 10 years
  • Keep minutes for at least 10 years
  • To prominently display on a notice convening a meeting the right to appoint a proxy

KShs 750,000/= fine for failure to keep register of members or index open for inspection
KShs 1,000,000/= fine per officer, for failure to guard against falsification of documents.

The laxity in compliance associated with the old law may soon become a thing of the past because of the heavy sanctions in the new Act.  This new law has clarified certain areas and also coded the law on directors’ fiduciary duties.  However, the various thresholds prescribed are considerably high and this may impact adversely on corporate governance and commerce in the long run.  Even so, by and large, it appears to be a good law that we can live with.

ENDS…………………………………………………………………………………………©Scribe Services

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