Riara Law School Students examine the law regarding Membership and Securities (for example transfer of shares,debentures) in Kenyan Companies. Law of Business Associations 2

2.  Transfer of shares is generally the transfer of
ownership of shares
 Section 75 of the Companies Act provides: the
shares of any member in a company “shall be
movable property transferable in manner
prescribed by the articles of the company.”
 NB: a member has the right to transfer his/her shares
which are prima facie transferable.

3.  Re Smith & Fawcett Ltd:
 Prima facie right of a shareholder is not to be cut down
by any uncertain language or doubtful implications.
 The right if it is to be cut down, must be done so by
cutting down with satisfactory clarity.
 Articles if appropriately framed are allowed to cut down the right
of transfer to any extent which the articles on their true
construction permit.
 Restrictions on transferability of shares, if any, depend solely on
the provisions of the company’s articles and may take any form.

4.  In the case of companies whose articles
correspond with Table A the extent of the
restrictions depend on the type of the company
i.e. public or private.

5.  “The directors may decline to register the
transfer of a share (not being fully paid) to a
person of whom they shall not approve and
they may also DECLINE to register the transfer
of a share on which the company has lien.”
Article 24 of Table A, part 1.

7.  Article 24 of Table A, Part 1 may be explained
as follows:
a) Re Smith & Fawcett Ltd. The directors must
exercise their discretion bona fide in what they
consider not what the courts consider.
b) Directors may only decline to register a transfer
to a person of whom they shall not approve (on
personal grounds). They cannot decline on
other grounds. Re Bede Steam Shipping Co.

8. c) if the company has lien over the relevant shares,
the directors may refuse to register a transfer.
NB: Registration cannot be refused on grounds
other than those stated in the article. Re Smith &
Fawcett Ltd
If the directors wrongfully fail to exercise their
power of refusal, the transferee may apply to the
court for rectification of the register and entry of
his name therein. Re Hackney Pavillion Ltd.
Moodie v Shephard (Bookbinders) Ltd

10.  Article 24 has been excluded by Article I and II
and is replaced by the following provision for
those private companies that have adopted
table A:
“the directors may, in their absolute discretion
and without assigning any reason therefore,
decline to register any transfer of any share,
whether or not it is a fully paid share.” Re
Smith & Fawcett Ltd

11.  Directors power of refusal must be done within
a reasonable time from the receipt of the
transfer.
 Section 80 (1): the reasonable time is limited to
a period of sixty days after the date on which
the transfer is lodged with the company.
 What doctrine is this?

13. The transfer depends on the provisions of the company’s articles.
Companies that have adopted table A, the procedure is as follows:
1. The transferor completes the transfer form, or if a transfer form is
not used, he/she prepares a document which corresponds to a
transfer form
2. Tranferor signs the transfer form or document usually in the
presence of a witness
3. Transferor gives the transfer form of document and relevant share
certificate to the transferee
4. Transfree signs the form or document in the presence of a witness
who also signs it.
5. Stamp duty is affixed by the transferee on the form rdocument and
lodges it and the share certificate with the company for
registration. Art 25.
6. The transfer is considered and aproved by the BOD

14. 7) company secretary makes out a new share
certificate in the name of the transferee and affixes
the company seal on it after it is signed by one of
the directors and countersigned by the secretary or
another director.
8) transferee’s name is entered on the company’s
register of members in place of the transferor’s
name.
9) new certificate is delivered, or sent, to the
transferee.
section 82(1) (a)
section 118

16.  A certification is necessary where:
a) The transferor is transferring only part of his/her holding
b) Transferor is transferring all his shares to two or more
tranferees
c) Transferor has not yet received a certificate from the
company but has been issued with a document of title to the
shares e.g. an allotment letter
d) transferee is not satisfied with the transferor’s title to the
shares e.g. the name on the certificate does not correspond
with the transferor’s name
NB: In any of these circumstances, the transferor or his/her
broker will forward the transfer form or document together
with the certificate, to the company for certification.

17.  Section 81 (3) (c) provides that a certification shall
be deemed to be signed by any person if:-
i. It purports to be authenticated by his signature or
initials (whether handwritten or not), and
ii. It is shown that the signature or initials was or
were placed there neither by himself nor by any
person authorised to use the signature or initials
for the purpose of certificating on the company’s
behalf.
The transferor will deliver the certified transfer to
transferee who will then lodge it with the
company for registration.

18.  Bishop v Balkis Consolidated Co
Certification must amount to representation

20.  Section 81 (2) provides: “where a person acts on
the faith of a false certification by a company made
negligently, the company shall be under the same
liability to him as if the certification has been made
fraudulently.”
 If a company’s agent makes a fraudulent
certification the company will be bound by it.
Kleinwort v Associated Automatic Machine
Corporation Ltd
 If a person was not authorised to certificate
transfers on the company’s behalf, the company is
not liable.

21.  Ms. Miriam

22. Effect of Transfer.
-A transfer is a contract of sale that is
effected through the agency of a stock holder
and is evidenced by a purchase contract
note and a sale contract note.
-These documents are issued by the stock
broker.
-The property in the shares is not vested in
the transferee unless and until his name is
entered in the company’s register of members
**see S 28 (2)**

23. In the Interim…
1. Partly paid for shares;
If a call is made, the transferor is legally
liable and must pay the amount required,
but ask for an indemnity from the
transferee.
2. If dividends are declared;
The transferor is paid in person, as
according to the company’s records he is
entitled. He however holds them in trust
for the transferee

24. 3. If a meeting by the company is convened
and the transferor decides to attend, his
right to vote will be dictated by whether he
has been fully paid for those shares.
- If he has, he votes as the transferee directs.
- If he has not, he would have the prima facie
right to vote in respect of those shares.
- See the considerations set out by Russell J
in Musselwhite V CH Musselwhite & Son Ltd.

25. Competing claims in shares.
 Shropshire Union Railways & Canals Co V R
 1. ** The transferee’s legal title to the
shares will prevail over the creditor’s
earlier equitable title**
 Rationale? Doctrine

26.  2. The First in Time Rule.
Applied in instances where the equities as
between successive transferees of shares
are equal.
See Joyce J in Peat v Clayton.

27. A Company’s Lien.

28.  Right of Lien; Implies power on the part of the
creditor to retain the property of his debtor
which is in his possession as security as payment
for a debt.
 This right does not however confer power to sell
the property retained.
 In the case that a company wishes to sell the
shares without a court order…
 -it must insert a suitable clause in the articles.
 Art 12. gives a company the power to sell in such
manner the directors think fit, any shares that
the company has lien, but subject to specified
conditions.

29. Legal Nature of a company’s Lien.
 1. A company, unlike an unpaid seller is not in
“possession” of the shares and thus cannot
“retain” them.
 2. The ownership and notional possession of
the shares is still vested in the registered
holder.
 The company can only refuse to allow the
registered holder to transfer then to a 3rd party.
 This right does not arise unless the registered
holder incurs a debt with the company.

30. Related Case Law.
 1. Mackereth V Wigan Coal & Iron Ltd
 Where a company has prior notice of a 3rd
party’s equitable interest, and despite this
deals with the shares for its own benefit,
the 3rd party’s equitable interest will take
precedence over the company’s Lien.
2. Bradford Banking Company v Briggs and
Co.

31. Oral Transfers.
The registration of transfer of shares will
only be done unless a proper
instrument of transfer has been
delivered to the company.**section 77**
This is notwithstanding the provisions of
the Articles of a company.
Oral transfers are illegal and Void.
Rationale?

32.  Re;Green…the primary object of this
section is to scotch the then prevalent
practice of registering oral transfers of
shares to the great detriment of the
Revenue Authorities...(stamp duty payable
on the transfer of shares)
 If the company does register an oral
transfer, the transfer would not acquire
title of those shares.

33. Void Transfers.
 1. S 76(a)
 If shares are transferred to a body
corporate that was not registered with
the written approval from the treasury
thereto, the transfer shall be void, if it
is disapproved by treasury.
 2. S29(1)
 Subsidiary companies cannot hold
shares in their parent companies.

34. Forged Transfers.

35.  A transfer is forged when a person steals
another person’s share certificate with the
intention of having the relevant shares
registered in his name so that he may
thereafter transfer them to a third party.
 Available Remedies.
 1. Restoration of the real owners name to
the register and payment of dividends paid
during the period in which his name was not
in the register.

36.  2. The person that lodged a forged
transfer for registration must indemnify
the company against any loss it suffers
as a consequence of the registration.
 The fact that he might have been
innocent on the matter and that the
company may have issued him a share
certificate is irrelevant.
 3. Estoppel.
 Where the company is estopped from
denying the transferee’s title to the
shares even though under a forged
certificate if he sells them to a 3rd party.

37.  See also the position of the Law as
established in Sheffield Corporation V
Barclay
 The Effect of innocent misrepresentation.
 Fry V Smellie
 The Private limitation of authority cannot
be pleaded against a 3rd party who was
not aware of it.

38.  Judy

39. MORTGAGE OF SHARES
A shareholder who intends to borrow money
on the security of his shares may do so by way of a
legal or equitable mortgage of his shares.

40. Legal Mortgage
To effect a legal mortgage of shares the legal ownership
of shares must be transferred to the lender.
This is done by the registration of a form of transfer
with the company concerned.
Terms of the loan are incorporated in a loan agreement
which will also contain a clause in which the lender
undertakes to transfer the shares
when the loan is repaid in full.
What Doctrine in Mortgage law is this?

41. Equitable Mortgage
There are no legal formalities prescribed.
Intention to mortgage the shares shall suffice.
The common options include:
To deposit share certificate(s) with the lender
without executing a transfer.
To deposit the share certificates plus blank transfer
with the lender.

42. Priorities
If a person who has borrowed money on the security of an equitable mortgage,
by a fraudulent misrepresentation, induces the company to issue him with another
share certificate and used the certificate to sell the shares to an innocent 3rd party
who then obtains registration, that purchaser will have priority over the mortgagee.
What doctrine is this?

43.  BONA FIDE PURCHASER FOR VALUE
WITHOUT NOTICE

44. Share Certificates
S. 82(1) provides that within sixty days after the date on which a transfer is lodged
with a company, the company must have ready for delivery a certificate of the
shares transferred.
In the event of non-compliance with this provision, the company and every officer
of the company who is in default shall be liable to a default fine.

45. By s.82(3) A person aggrieved by the company's failure to issue a share certificate as
provided by s.82(1) may serve the company with a notice requiring the company's
compliance with the section.
If the company does not do so within fourteen days after service of notice
an order may be issued by the court directing the company to issue the certificate.
Cost is borne by the company responsible.

46. The provisions of section 82 (1) are reproduced in Table A, article 8 with
the following provisions;
a)One certificate is to be issue to the member for all shares without payment,
or if more than one certificate is issued, the member shall pay Kshs. 2.50
for every certificate after the first.

47. b.)every certificate shall be under the seal of the company and shall specify
the shares to which it relates and the amount paid up thereon.
c.) the company is not bound to issue more than one certificate in respect of a share
or shares held jointly by several persons
d.) if one certificate is issued in respect of a share or shares held jointly by several
persons the delivery of a certificate to one of the joint holders shall be
sufficient delivery to all the holders.

48. Form of Certificate
The form and layout of share certificates vary as between different companies
since it is not governed by any statutory provisions.
Different classes of shares are usually different in design or colour.
Usually, only the address of the senior holder is stated.

49. Share Certificate
Certificate no Number of shares
Ordinary Shares
Juju Shoe-shiners Co Ltd
Incorporated under the Companies Act
……………………….
Capital 10,000,000 shillings
Divided into 1,000,000 shares of 10/= each
………………….
This is to certify that …………of……………….is the registered holder
of………Ordinary shares of 10/= each fully paid, in Juju Shoe-shiners Co
Ltd, subject to the Memorandum and Articles of Association of the said
Company .
Given under the seal of this company, this….. Day of ……..
Signed 1)…………………………Director
Signed 2)………………………....Security

50. Effect of Certificate
Section 83 provides that “a certificate, under the common seal of the company,
specifying any shares held by any member shall be prima facie evidence of the
title of the member to the shares.

51. Estoppel by Share Certificate
If the company negligently issues a certificate that is incorrect in some
material particulars it may be estopped from denying the correctness of the stated
facts if a third party changes his position in reliance on them.

52. Illustrations:
1.) Re: Bahia & San Francisco Railway Co.
2.) Burkinshaw v Nicolls
3.) Balkis Consolidated Co. v Tomkinson

53. If the company becomes aware of an incorrect statement in a share certificate before
the shareholder sells the shares,
it would be entitled to recall the certification for cancellation
so as to issue another one.

54. Forged Certification
The principle of estoppel does not apply when the certificate relied upon
was issued fraudulently and without the authority of the board of directors.
This may be so if the secretary wrongly affixed the company's seal an forged
the signature attesting it, or where, although the signatures are genuine,
they were made as part of a fraudulent design of the signers
See: Ruben v Great Fingall Consolidated

55. Share Warrants
s.85(1) provides that a company limited by shares, if so authorized by its articles,
may, with respect to any fully paid up shares, issue under its common seal a
warrant stating that the bearer of the warrant is entitled to the shares,
therein specified.
The warrant may provide for the payment by coupons or otherwise,
of the future dividends on the shares included in the warrant.

56. s.85(3) provides that a share warrant shall entitle the bearer thereof to the shares
therein specified which may be transferred by the delivery of the warrant.
s.114(1) provides that on the issue of a share warrant the company shall strike
out of its register of members the name of the member then entered therein as
holding the shares specified in the warrant as if he had ceased to be a member.

57. s.114(2) provides that the bearer of the share warrant shall be entitled,
on surrendering it for cancellation, to have his name entered as a member
in the register of members.
By s.144(5) the bearer of the warrant may, if the articles so provide be deemed
to be a member of a company to a full extent or for any purposes
defined in the articles.

58. Nature of Share Warrant
A share warrant is a 'warranty' that the bearer is the holder of the shares
therein specified.
Secondly, it is a negotiable instrument which is transferable by simple delivery
and a bona fide transferee for the value of the warrant is not affected by any
defect in the title of the transferor.

59.  Faizah Ali

60. There is no precise legal definition of a debenture.
In levy v Abercorris Slate & Rubber Co, the judge stated that
he could not find any precise legal definition of the term
debentures.
It is derived from latin word Debenture Mihi, opening words of
certain documents which is used to be issued by English
companies in 1980s as acknowledgement of loan the
companies had received from the persons to whom the
document was issued.
Section 2 of the Act defines a debenture as including
debenture stock, bonds and any other securities of the
company, whether constituting a charge on the assets of the
company or not.
• Legal
definition ,A promissory note or bond offered by a corporation

61.  Although with time debentures was define as document issued by
registered company to acknowledge or evidence an indebtedness.
 A debentures is the traditional name given to a loan agreement where
the borrower is a company. Typically, a debenture will set out the terms
of the loan: the amount borrowed, repayment terms, interest, charges
securing the loan, provisions for protecting and insuring the property
etc., and terms for enforcement if the company defaults.
 The directors have power to issue debentures according to Table A,
Article 79 provides that, the directors may exercise all the powers of
the company to borrow money and to issue debentures, debenture
stock and other securities”.
 Debenture stock
A type of stock that makes fixed payments at scheduled intervals of time. Debe
nture stock differs from a debenture in that it has the
status of equity, not debt, in liquidation.
 Debentures are usually secured by charges on the company's property.
 Debentures as such do not have to be registered, but charges securing
them do.
 There are different types of charges
 When unsecured, it is called a bare debenture or naked debenture;
when secured by a charge on a specific property, it is called a mortgage

62. The company receives cash to fund its capital expenditures,
and the investor receives guaranteed interest and principal
payment.
Debentures are usually a formal document in printed form
The types of debentures the company can issue are:
1-A single debentures: Its formal document in printed form
and sealed. It is usually issued when a company obtains a
loan from a single lender, bank. the company signs and seals
one of the bank standard form of debenture which only will be
in favour of the company but would also give the bank certain
power in relation to the charged property.
2-Debentures issued as series: If the company decides to
borrow money from different lenders on different dates but in
such a way that the lenders will rank equally in their right to
repayment and in any security given to them.
3-Debenture Stock: is created when a public company issues
debentures stock certificate to a class of debentures holders,
evidencing the portion of the total to which each of them is
entitled.
Each lender have the right t be repaid the capital and the
agreed amount of interest at due time.

63. 1. Debentures is usually one of a series or
class which is similar to class of shares.
2. They are long term investment in the
company and are transferable in the same
manner.
3. Issued in the same way through a
prospectus issues.

64. SHARES
1. Shareholder is a member.
2. A Shareholder has an
interest in the company but
not in the property.
3. A shareholder can attend
the meeting of the company
and vote.
4. Shareholder cannot insure
the company property.
5. Dividends paid when the
company makes the profit.
6. Cannot be paid out of the
capital.
7. Company cannot purchase
its own shares.
8. Shares cannot be issued at
a discount
Debentures
1. Debentures holder is a
creditor.
2. Has interest in the
property not the company
3. Debenture holder cannot
do so.
4. Can insure the company
property.
5. Interest must be paid even
if the company does not
make profit.
6. Paid out of the capital
7. Can purchase its own
debentures.
8. Debentures may be issued
at discount.

65. S.82(1) provides that debentures or debenture stock
certificates must be completed and must be ready for
delivery within 60 days.
TRUST DEEDS:
When debentures are offered for public subscription
the company usually enters into a trust deeds with
trustee.
The trustee are appointed and paid by the company
to act on behalf of debenture holders.
The charges securing the debentures is made in
favour of trustee who holds it on trust for the
debenture stock holders. The main function of trustee
is implementing safety measures in the interest of
debenture holders.
Trustee cannot be a person who has possession of
company shares. but it can be bank carrying on
money making actions, body corporate, any financial
institution or insurance company.

66. 1) A covenant (promise) by the company to pay to by the
debenture holders the agreed installment of the accrued
interest.
2) A description of the property charged ,whether specifically
or floating charge.
3) The event in which the security is to becomes enforceable,
such as failure to pay the principal sum or interest as
agreed.
4) A clause empowering the trustee to take possession of the
property charged in the event of the security becoming
enforceable, and to carry on the business and to sell the
property charged.
5) Appointment of receiver.
6) Meeting of debenture holders
7) Covenants by the company to insure the property charged
and to keep the property charged in good repair.

67. a) The circumstances in which the principal sum may
become repayable are clearly spelt out.
b) The appointment of trustee facilities the efficient
administration of the trust since they are there to exercise
continuous supervision of the debentures holders right an
to take prompt action if need arises.
c) The trustee is empowered to appoint receiver to carry on
the business incase of urgency.
d) Covenant are entered into by the company for insurance
,repair and other matters which can be enforced by the
trustees.
 Liabilities of trustees: Trustee for debenture holders owe
the same duties to their beneficiaries as are owed by
trustee in general.
 S.90(1) provides provision in trust deeds .in particular, the
trustee cannot purchase the debentures without the
consent of all the debenture-holders.

68. This usually includes the power such as;
i. To appoint a receiver to carry on the business or sell
the charged property.
ii. To sue as creditor for arrears of interest or principal
or both,
iii. To petition the High court for winding up order.
iv. To apply to the court for the appointment of a
receiver or for an order in the sale if there is no
power in the trust deed
 s.88(1),requires every company which issues a series of
debentures to keep at its registered office a register of
holders of such debenture.

69. A company can issue secured and unsecured debentures. If
the debentures are not secured by the assets of the company,
the debenture holders position is that of an unsecured
creditor. Secured debentures are issued by creating a charge
on the assets of the company.
Charges means Interest, It may either be a specific (fixed)
charge or a floating charge.
Fixed charges: If it is a mortgage of ascertained or specific
property such as plant and machinery or uncalled capital. A
fixed charge is created in respect of a definite and ascertained
property and this prevents the company from dealing with that
property without the consent of debenture holders. . In the
event of winding up of a company, debenture holder secured by
a specific charge is in the highest ranking class creditors.
it may be legal or equitable.
Floating charges: A floating charge is an equitable charge
which does not fasten on any ascertained or definite property
and as such can deal with any of its assets in the ordinary
course of business.

70.  floating charges has the following characteristics:
• 1-it is charge on a class of assets of a company, present
and future.
• 2-the class is one which charges from time to time in the
ordinary course of the company business.
• 3-It is contemplated by the charges that, until some event
occurs which cause the charges to crystallize, the
company may use the assets charged in the ordinary
course of its business.
Under Kenyan and English law a floating charge cannot
be issued by a partnership or sole trader.

71.  A floating charge may crystallize or become fixed in any
of the following ways:-
A. When the company ceases to carry on business.
B. When the company defaults and the debenture holders
take steps to enforce their security, either by
appointing a receiver or applying to the court.
C. The company is put into liquidation, in this case, no
action by the debenture holder is necessary. The
charge crystallize because the authority of the
company to deal with the assets charged is subject to
the implied condition that it carries on business.

72. Advantages (Company point of
view)
I. The company is free to
deal with the assets
charged as if they had not
been charged.
II. It enables the company to
charge property which
otherwise would not have
been charged.
Disadvantages (lenders point
of view)
I. The value of assets charged
is uncertain since no
particular assets are
charged.
II. It is postponed to a later fixed
charge.
III. The charges may be
avoided, during the company
liquidation ,S.314 of the act .
IV. Where a seller of goods
reserve title until the payment
a floating charge will not on
crystallization attach to these
goods.(Illustrated by
Aluminium industrie vaaseen

74. The priority between charges is as follows:-
(a) Legal fixed charges rank according to their order of creation.
(b) If an equitable fixed charge is created first and a legal charge over the
same property is created later, the legal charge takes priority over the
equitable charge.
(c) A floating charge will be postponed to a later fixed charge over the
same property.
(d)If two floating charges are created over the general assets of the
company, they will rank in the order of creation.
(e)If a company creates a floating charge over a particular kind of assets,
for example book debts, the charge will rank before an existing floating
charge over the general assets.
The floating charge would however have priority over the fixed
charge if: -
(i)The floating charge contained a clause prohibiting the company from
creating fixed charges with priority over it.
(ii)The holder of a fixed charge actually knew about the prohibition.

75. • S.96(1) requires the prescribed particulars of specified charges
on company’s property to be delivered to the register for
registration within 42 days after the date on which the charge
was created.
• The specified charges are:
a) A charge to secure an issue of debentures.
b) A charge on uncalled share capital.
c) A charge created by an instrument which, if executed by an
individuals would require registration .
d) A charge on land
e) A charge on books debts of the company.
f) A floating charge.
g) A charge on calls made but not paid.
h) A charge on goodwill, a patent, copyright or trade mark.

76. The prescribed particulars of registered charges are enumerated
in form No 214 and are:
I. The date and description of the instrument creating or
evidencing the mortgage or charge.
II. The amount secured by the mortgage or charge.
III. Short particulars of the property charged.
IV. Names, postal address and description of the persons
entitled to the charge.(if any)
V. Amount of rate per cent of commission, allowance or
discount paid.
The purpose of registering is to enable would -be creditor to
know the company existing indebtedness and the assets
available for their settlement.
S.99 requires the register to give certificate of registration of any
specified charges. certificate it is evidence that statutory

77. • S.96(1) provided that if any of the specified charges are not
registered within the prescribed period of 42 days the charges
will be void against the liquidator and any creditor of the
company.
• Although the charges become void but;
I. The money secured become immediately repayable.
II. The court is empowered by s.102 to extend the time for
registration of the charge on being satisfied that the omission
to register the charge within the prescribed time was
accidental or other sufficient cause provided that neither
creditors nor shareholders would be prejudiced by the
extension.
s.97(1) permits the registration to be effected on the application
of any person interested in the charge. The person can recover
from the company the amount paid by him to the register.

78. • s.105(1) provides that every limited company shall keep its
registered office a register of charges and enter therein:
a. A short description of the property charged.
b. The amount of the charge
c. The names of the persons entitled to the charges.
Failure to comply the officers of the company responsible for the
omission shall be liable to a fine not exceeding one thousand
shillings.