Management of a Company,Company Law, Law of Business Associations 2

COMPANY MANAGEMENT.

WHAT IS MANAGEMENT?• Management in businesses and organizations is the function that

coordinates the efforts of people to accomplish goals and objectives by using available resources efficiently and effectively.

• Management includes planning, organizing, staffing, leading or directing, and controlling an organization to accomplish the goal. Resourcing encompasses the deployment and manipulation of human resources, financial resources, technological resources, and natural resources. Management is also an academic discipline, a social science whose objective is to study social organization.

COMPANY MANAGEMENT.• Most companies articles have the provisions that regard to the delegation

of powers pertaining to the company's management.

• Table a, article 80 of the Company Act provides that "the business of a company shall be managed by the directors."

• Aberdeen Railway Co. V Balkie Bros, Lord Cranworth described directors as "a body to whom is delegated the duty of managing the general affairs of the company.

NUMBER OF FIRST DIRECTORS.• Every public company shall have at least 2 directors, and every company

that has been registered before 1962 shall have at least one director.• Every private company shall have at least one director. – s.177

• The number of directors and their names would initially be decided by writing by the subscribers of the memorandum Of association, or a majority of them, and they shall be the companies 1st directors.- table A, article 75.

• The company, from time to time by ordinary resolution is allowed to increase or reduce the number of directors- table A, article 94.

APPOINTMENT OF DIRECTORS.• If there are no provisions on the appointment of directors in the

company's articles, the directors shall be appointed according to the provisions I table A.

• After appointment, their names must be publicized in the companies registry, it's registered offices and letterheads.

SUBSEQUENT DIRECTORS.• Appointed by the members in a general meeting. This is done from the

beginning of the first annual general meeting, where all the first directors retire from the office and the members are given the first opportunity to elect the directors of their own choice.

• At the 2nd annual G.M one third of the directors have to retire from office, generally these are the directors that have stayed the longest in office since their last election.

• The retired directors shall be determined by lot.• 1/3 of the board, shall retire annually.

CASUAL APPOINTMENTS.• The board of directors can from time to time appoint directors to fill a

vacancy or to get an additional director to join the board, provided that the appointment does not exceed the limit imposed by the articles.

• The appointed person, shall hold office until the next annual G.M. He shall then be eligible for re-election, but won't be considered among the directors chosen to retire. Article 95.

RESTRICTIONS OF APPOINTMENT1. Appointment by articles. S. 182(1)A person cannot be appointed by virtue of the companies articles unless, before registering the articles, he has or by his agent authorized in writing, signed and delivered a consent to act as a director to the registrar for registration and either: Signed a Memorandum for the no of shares not less than his qualification

shares, ortaken from the company and paid or agreed to pay for his

qualification shares, if any; or signed and delivered to the registrar for registration an undertaking

in writing to take from the company and pay for his qualification shares, if any; or

made and delivered to the registrar for registration a statutory declaration to the effect that a number of shares, not less than his qualification, if any, are registered in his name.

2.QUALIFICATION OF SHARES.• 183 (1)- it shall be the duty of every director who is by the

articles of the company required to hold a specified share qualification, and who is not already qualified, to obtain his qualification within two months after his appointment, or such shorter time as may be fixed by the articles.

• 183 (3) the director shall vacate his office if he fails to obtain his share qualifications or ceases to hold the required number of shares.

• R v. Camps case.

3.AGE LIMIT.• S. 186- you cannot be appointed as a director of a public or a private

company ( subsidiary of a public co) if at time of appintment: He has not attained the age of 21orHe has attained the age of 70.If the companies provide otherwise, or if there is a special notice of the resolution to appoint the director, the above provision does not apply.With regards to a special notice, the company must give the members a notice too and state the age of the proposed directors.

4. UNDISCHARGED BANKRUPTS.• S.188- If any person who has been declared bankrupt or insolvent

by a competent court in Kenya or elsewhere and has not received his discharge acts as director of, or directly or indirectly takes part in or is concerned in the management of, any company except with the leave of the court, he shall be liable to imprisonment for a term not exceeding two years or to a fine not exceeding ten thousand shillings or to both.

5. FRAUDULENT PERSONS.• S.189 (1) a court can make a restraining order from a person being

appointed or acting as a company's director for a period not exceeding 5 years if;

The person has been convicted of any offense with regards to the promotion, formation or management of the co; or

In the course of winding up, the person has been guilty of fraud trading or has been guilty to the same.

6. INDIVIDUAL VOTING.• S. 184 (1)- appointment shall be voted on individually, unless a motion of

appointment of two or more directors by a single resolution was agreed upon by the meeting without any vote being given against it.

• Purpose- prevent a company's members being forced to vote for directors whom they do not want for fear of rejecting those whom they want.

DEFECTS IN APPOINTMENT.• S.181- The acts of a director or manager shall be valid

notwithstanding any defect that may afterwards be discovered in his appointment or qualification.

• This can be seen in the case R.v Camps where there was a failure to obtain the share qualification by a director.

ALTERNATE DIRECTOR.• Is a person appointed by a director to attend and vote at any board

meeting which the director himself is unable to attend. He can be an internal director or an outsider.

• Under the doctrine- delegatus non potest delegare, "one to whom power is delegated cannot himself further delegate that power".- a director has no authority to appoint an alternate unless the articles empower him to do so and be exercised within limits.

CORPORATE DIRECTORS.• There are statutory restrictions when appointing directors, however, it has

been noticed that directors appoint themselves directors of their subsidiary companies due to security and so as to have full control over the subsidiary co.

• There has been no provision rejecting that practice.• A body corporate, once appointed director can act through a natural

person whom it has formally authorized to attend board meetings on its behalf.

• S.201(2)b- in the case of a corporation, its corporate name and registered or principal office and postal address must be entered in the register of directors and secretaries.

ASSOCIATE DIRECTORS.• Companies may appoint some of its employees to their boards of

directors, so that they can express their views on the company's operations, programmed or policies.

• These employees appointed are called associate directors,

• Their position is ceremonial.

NATIONALITY.• S.201(2)- in the case of an individual, his present Christian name

and surname, any former Christian name or surname, his postal address, his nationality and, if that nationality is not his nationality of origin, his nationality of origin, his business occupation, if any, particulars of all other directorships held by him and, in the case of a company subject to section 186, the date of his birth.

• It is not mandatory for a director to be a Kenyan citizen.

DISQUALIFICATION OF A DIRECTOR

• Table A article 88 provides that the office of the director shall be vacated if a) ceases to be a director by virtue of section 183 or 186 of the Act; which is a failure to obtain his share qualification within 2 months from his appointment date or failure to attain the age of 21(b) becomes bankrupt or makes any arrangement or composition with hiscreditors generally; orbecomes prohibited from being a director by reason of any order madeunder section 189 of the Act; which aims at restraining fraudulent persons from managing companies or.

• (d) becomes of unsound mind; or• (e) resigns his office by notice in writing to the company; or• (f) shall for more than six months have been absent without permission of

the directors from meetings of the directors held during that period

LATCHFORD PREMIER CINEMA AND CO. V ENNION

• A companies articles of association provided that the office of a director should Ipso Facto be vacated if by notice in writing to the company he resigned his office. Two of the directors tendered their resignation at the annual general meeting of the company and their registrations were accepted at the meeting. It was held that a verbal notice of resignation which is given to, and accepted by, the general meeting is effective and cannot be withdrawn.

• A person could also cease to be a director for other reasons such asa)Deathb)Retirement by rotation under Table A article 89c)Dissolution by the company

REMOVAL OF DIRECTORS• Sec 185 (1) states that a company may by ordinary resolution remove a

director before the expiration of his period of office not withstanding any agreement between him and the company. Special notice must be given of any resolution to remove the director or to appoint another director in his place

• On receipt of such special notice, the company must send a copy to the directors concerned who is entitled , if he so wishes, to make written representations to the company. If the director requests, the company must send the representations to the members with notice of a meeting. The representation will then be read out in the meeting and the director would be entitled to be heard.

COMPENSATION FOR REMOVAL• 185(6) states that nothing in the section shall be taken as depriving a

removed director of compensation or damages payable to him in respect of the termination of his appointment as director or of any appointment terminating with that as director

• This provision would enable a managing director to sue the company for damages for wrongful dismissal if the effect of his removal as director was to prematurely terminate his appointment as managing director and was inconsistent with the contract.

DIRECTORS REMUNERATION• Since directors are not regarded as servants or employees of the

company of which they are directors, they have no right to be paid for their services unless there is a provision for payment in the articles.

• Table A article 76 provides that the remuneration of the directors shall from time to time be determined by the company in the general meeting.

RE :DUOMATIC LTD• Payments were made by a company by way of remuneration to directors

without complying with the company’s articles of association in that no resolution authorizing the directors to receive remuneration had ever been passed in a general meeting of the company or at all.

• It was held that provisions in the articles authorizing payment of directors remuneration does not, per se, give the right to be paid any specific amount. There must also be a resolution passed by the company in authorization of the payment

COMPENSATION FOR LOSS OF OFFICE

• Article 192 (1) It shall not be lawful for a company to make to any director of the company

any payment by way of compensation for loss of office, or as consideration for orin connection with his retirement from office, without particulars with respect to theproposed payment (including the amount thereof) being disclosed to members ofthe company and the proposal being approved by the company in general meeting.

• The purpose of this is to give the company members present at the general meeting the opportunity to consider the facts surrounding the proposed payment and to fix the amount payable

• Sec 193 (1) It shall not be lawful in connection with the transfer of the whole or any

part of the undertaking or property of a company for any payment to be madeto any director of the company by way of compensation for loss of office, or asconsideration for or in connection with his retirement from office, unless particularswith respect to the proposed payment (including the amount thereof) have beendisclosed to the members of the company and the proposal approved by thecompany in general meeting.

• This deals with a situation where the companies directors are acting for the company in the sale of the companies property and in so acting, receive some compensation for loss of office

Section 194(1) deals with a situation where the shares of the company are being transferreda) an offer made to the general body of shareholders;(b) an offer made by or on behalf of some other body corporate with aview to the company becoming its subsidiary or a subsidiary of itsholding company;(c) an offer made by or on behalf of an individual with a view to hisobtaining the right to exercise or control the exercise of not less thanone-third of the voting power at any general meeting of the company.

• If a payment is made to a director as compensation for loss of office or on his retirement in any of the above, he must take reasonable steps to ensure that the particulars of the proposed payments are included in or sent with any notice of offer given to the shareholders. If this is not done, the director holds the payment on trust for the persons who have sold their shares as a result of the offer.

LOANS TO DIRECTORS• Sec 191(1) (1) It shall not be lawful for a company to make a loan to any person who isits director or a director of its holding company, or to enter into any guarantee orprovide any security in connection with a loan made to such a person as aforesaidby any other person:Provided that nothing in this section shall apply either—(i) to anything done by a company which is for the time being a privatecompany; or(ii) to anything done by a subsidiary, where the director is its holdingcompany; or

(iii) subject to subsection (2), to anything done to provide any such personas aforesaid with funds to meet expenditure incurred or to be incurredby him for the purposes of the company or for the purpose of enablinghim properly to perform his duties as an officer of the company; or(iv) in the case of a company whose ordinary business includes thelending of money or the giving of guarantees in connection with loansmade by other persons, to anything done by the company in theordinary course of that business.

DUTIES OF DIRECTORS. Ms Zubeida.

THE MAIN TYPES OF DUTIES• Duties of care and skill at common law• Fiduciary duties as enunciated by courts of equity.

DUTIES OF CARE AND SKILL• Developed by case law.• To establish directors liability in negligence ,• For the manner in which they conducted company’s affairs.

DUTIES AS SUMMARISED IN RE: CITY EQUITABLE FIRE INSURANCE CO LTD.

1)A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.

• Partly objective –the standard of the reasonable man .• Partly subjective –the reasonable man is deemed to have the knowledge and

experience of the particular director.• Foolish director-foolish decisions-loss-not liable for negligence : unreasonable

to expect otherwise • cf Dorchester Finance Co. Ltd v Stebbing (1977)(professional accountant)

• Its important to note that, the law does not prescribe any qualifications for directorship. However, it expects a director to serve the company HONESTLY AND TO THE BEST OF HIS ABILITY.

• Cf Re Marquis of Bute’s Case –a director became a director at the age of 6n months by inheriting the office from his father.

RULE NO 22)A director is not bound to give a continuous attention to the affairs of his company.• His duties are of an intermittent nature to be performed at periodical board

meetings, and at meetings of any committee of the board upon which he happens to be placed.

• Note ; he is not bound to attend all meeting, only when in the circumstances, he is reasonably able to do so.

• RE Marquis of Bute’s Case; D attended only one meeting in 38 years.• Held : per Stirling, J. “neglect or omission to attend meetings is not, in my opinion, the

same thing as neglect or omission of a duty which ought to be performed at those meeting” Not liable for negligence.• The company, however, can impose a duty on the directors to attend all board meetings

within a certain period of time and to prescribe the consequences of a breach of the duty under its Articles of association.

RULE NO 3• In respect of all duties that, having regard to the exigencies of business,

and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.• Liability of a director is only on the basis of his personal negligence.• Can delegate responsibilities to employees of company-with no records of

distrust or suspicion.• The rationale : Dovey v Cory, the court stated that a business cannot be

carried on upon principles of distrust. Men in responsible positions must be trusted by those above them, as well as by those below them, until there is reason to distrust. The court agreed that care and prudence do not involve distrust.

• cf Re: City Equitable Fire Insurance Co. Ltd.

RE: CITY EQUITABLE FIRE INSURANCE CO. LTD

• The facts :• The company lost £1,200,000 in failure of investments and the large scale fraud of the

chairman, Mr Bevan, ‘a daring and unprincipled scoundrel’. The liquidator sued the other directors for negligence. The auditors were sued too, but the Court of Appeal held they were honest and exonerated by provisions in the company’s articles.

• Romer J held ; that some of the directors did breach their duty of care. But they were not liable to reimburse, because an exclusion clause for negligence was valid( by their own wilful neglect or default). And even in absence of exclusion clauses, in his view, ‘for a director acting honestly himself to be held legally liable for negligence, in trusting the officers under him not to conceal from him what they ought to report to him appears to us to be laying too heavy a burden on honest businessmen.’ Though he felt ‘some difficulty’ with the distinction, negligence would need to be ‘gross’ to visit liability.

• However, such provisions have been invalidated by Companies Act 1948, s205 –s206 Kenyan Company Act (Cqp 486)

FIDUCIARY DUTIES• Arises from the directors fiduciary relationship to the company.• A fiduciary duty is a legal duty to act solely in another party's interests. Parties

owing this duty are called fiduciaries. The individuals to whom they owe a duty are called principals.

• Two main provisions by the courts;1) A director is not to put himself in a position where his interest and duty conflict

Cf Bray v Ford –the above not founded upon principles of morality, but based on the consideration that human nature being what it is , there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty and thus prejudicing those whom he was bound to protect.

2) A director is not, unless otherwise expressly provided, entitled to make profit.• Cf Boston Deep Sea Fishing Co v Ansell (72). Restatement of the fundamental rule of law of

agency. An AGENT MUST NOT MAKE SECRET PROFIT. NOTE :The fiduciary duty is owed solely to the company and not its members.

ABERDEEN RLY CO V BLAIKIE BROTHERS (69)

• Duty of Disclosure : A director who is in any way interested in a contract with the company to declare the nature of his interest at a board meeting.

• This is must be done in the first meeting at which the contract is to be discussed. If he develops an interest afterwards, then he must disclose the same at the first board meeting after his interest arose.

• Supplemented by Article 84 of Table A.• The director shall not vote in respect of the contract. If he does vote, his vote will not be counted.• The director shall not be counted in the quorum present at that meeting.

• The disclosure must be to the whole board of directors.• Cf Guinness Plc V saunders and Another (1990)

• Declared nature of his interest to a committee of the board which consisted of him and other two directors.

• Held not incompliance with the statutory requirement of it to be made “at a meeting of the directors of the co.

• Liable to the company as constructive trustee for the amount paid to them under the contract, 5.2million pounds.

...CONTINUED.• In the case of a sole director, the declaration must be a formal one which is minuted. Why?

• This Re Neptune (vehicle Washing Equipment ) Ltd (1995) –this is to compel director to spend some time mediating seriously on the possible consequences of the proposed contract and there is the hope that he might be restrained by his conscience from entering into the contract.

• Cf Industrial Development Consultants Ltd V Cooley (70)• The directors would be held liable even if they make the company more profit than the

company would have made otherwise. Regal (Hastings) v Gulliver (1942).• Except if

• The profits had been approved by the Co. in general meetings. This is irrespective of how the approval was procured.

• The board of directors had considered the prospective investment and had bona fide come to the conclusion that it was investment which the co ought to make.

Cf Peso Silver Mines Ltd v Cropper (1966) and Queensland Mines Ltd V Hudson (1978). Director not accountable for benefiting as a result of his a position as a D, if the company acquiesced.

• Directors of a company can be made to surrender the benefits of a contract, which was intended to be for the company.• This is regardless of their legal intention of forming the company. i.e for the

purpose of obtaining the contract. The contract belonged to the company in equity.

INSIDER DEALING.

• The conduct of Company director (cmnd 7037) 1997.• Covers broadly situations where, a person buys or sells securities when he,

but not the other party to the transaction, is in possession of confidential information which affects the value of those securities. This is because of their connection with the Co. or their position in the Co.

• Prohibited by s33 of the Capital Market Authority Act whose objective is to promote and facilitate the development of an orderly , fair and efficient capital market in Kenya.

THE SECTION• Applies to natural persons as well as body corporate acting through an

officer who is a prohibited person,• Prohibits dealing in all types of securities and not restricted to

securities which are listed on the stock exchange ,• Imposes criminal liabilities and gives a statutory right to an aggrieved

shareholder to claim compensation if he suffers loss from the transaction.

Note: If a person found guilty under s 33 profited from the offence but those harmed cannot reasonably and practicably be determined the compensation payable shall be made to the Investor Compensation Fund Established under s 18(1) of the act.

WHO IS NATURAL PERSON?• S 33 (9)

• He is an officer of the body corporate or of a related body corporate; or• He is a substantial shareholder in that body corporate or in a related

corporate; or• He occupies a position that may reasonably be expected to give him access

to ‘price sensitive information by virtue of;• Any professional or business relationship between himself and that corporate body or

related.• His being an officer or substantial shareholder in that body corporate or related.

SECTION 33 (4) & 33 (5)• s33 (4)a ‘connected person’ who is precluded from dealing in a

company’s securities is prohibited from causing or procuring any other person to deal in those securities.

• S33(5) prohibits the person from communicating that information to any other person whom he knows, or has reason to believe, will make use of the said information to deal in listed securities.• Rationale : prevent ‘tipping’ of another person with the intention that the

‘tipped’ person shall deal or cause another person to deal in the relevant securities.

• S33(12) a person-including a director or an officer of body corporate, who contravenes s33 shall be liable to a fine not exceeding 5,00,000. or 1.5m for a body corporate. Doubles with subsequent convictions.

COMPENSATION.

• s 33(13) any action for compensation must be commenced within six years after the date of completion of the transaction in which loss occurred.

• s 34 (4) the amount of compensation is the amount of loss sustained by the person claiming the compensation or,• In the event that the harm has been done to the securities market as a

whole, the amount of iilegal gains received or the loss adverted as a result of the iilegal actions as determined by the court.

RELIEF FROM LIABILITY.

• s 402(1) the court has the power in action against an officer fro breach of duty to grants relief where, although the officer is in breach, it appears that he has acted honestly an reasonably and, having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused for negligence, default, breach of duty or breach of trust.

• Re: D’Jan of London Ltd (1993).• D partly relieved from liability although he was found negligent for failing to read

an insurance proposal form which costed the Co. 174,000 pounds, because he had acted honestly and reasonably.

BAR TO RELIEF

The court is unlikely to make the order if the director did not obtain any legal or other professional advice in order to determine whether the proposed action would occasion a breach of his fiductory or other duties to the Co. cf Re: Doumatic Ltd (16)

DIRECTORS POWERS.• Equity regards directors as holding their power in trust for the Co.• This power can only be exercised for the benefit of the Co. otherwise,

• The exercise will be regarded as Ultra Vires and Invalid • The transaction would be regarded as having been entered into for an ‘extraneous

purpose’.• Case ilustration-

• Re : Roith Ltd (74) – proposed payments considered widows welfare rather than the Co.

• Hogg V Cramphorn (76) D desire to pre-empt take-over bid for personal gains and not for benefit of the Co.

• See also ; Hutton v West Cork Railways Co. (75)

REGISTER OF DIRECTORS’ SHAREHOLDING.

• S 196(1) requires every Co to keep a register showing the number, description and amount of any shares or debentures which are held by or in trust for the director, or of which he has any right to become the holder(whether on payment or not) in –

• The company,• The company’s subsidiary or holding company,• A subsidiary of the company’s holding company.

• Register shall be – • kept at the company’s registered office.• Open to inspection of any member or debenture holder during business hours

during the period beginning 14 days before the date of the co annual general meeting and ending 3 days after the conclusion of the meeting.