AN INVESTIGATION ON THE LEGAL REGIME OF UNLIMITED COMPANIES IN KENYA
ROSE NYANCHOKA OTERI
BBM 400: COMPANY LAW
TERM PAPER SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD DEGREE OF BACHELOR OF BUSINESS MANAGEMENT (BUSINESS INFORMATION SYSTEMS OPTION) IN MOI UNIVERSITY
TABLE OF CONTENTS
TOC o “1-2” h z u 1.ABSTRACT PAGEREF _Toc528948857 h 32.INTRODUCTION PAGEREF _Toc528948859 h 33.UNLIMITED COMPANIES PAGEREF _Toc528948860 h 53.1Formation of Unlimited Companies PAGEREF _Toc528948861 h 53.2Advantages of Unlimited Companies PAGEREF _Toc528948862 h 63.3Disadvantages of Unlimited Companies PAGEREF _Toc528948863 h 64.CONCLUSION PAGEREF _Toc528948864 h 75.REFERENCES PAGEREF _Toc528948865 h 8
ABSTRACTUnlimited Companies are types of companies which are registered and governed under the Kenya’s Companies Act, 2017. This paper primary investigates the reasons as to why the existence of such companies are rare, evaluating their formation process, advantages and disadvantages.INTRODUCTIONThe Companies Act, 2015 which came into effect on 15 September 2015 repealing the previous Companies Act (CAP 486) Laws of Kenya is a landmark statute whose main role was to consolidate and reform the law relating to the incorporation, registration, operation, management and regulation of companies with a view to boosting Kenya’s economy by encouraging investors- both local and foreign- to register companies and transact business through the introduction of less stringent rules and regulations. The Kenya’s Companies Act, 2015 is borrows heavily on the UK Companies Act of 2006, hence a similarity between Kenyan and English Laws in relation to Companies. Generally, various Companies Acts in different jurisdictions provide for a number of different forms of registration of Companies that are classifiable by reference to certain characteristics that include:
Separate Legal Entity
The most important formation of a company is that it is regarded as being a legal person in its own right and as such, the company has a legal identity of its own which is separate from its owners. The company can sue and be sued in case of a litigation and this is a can be demonstrated in the case of Macaura vs Northern Assurance Ltd (1925): Macaura owned almost all the shares in the company. Macaura insured the company’s timber in his own name and two weeks later, the timber was destroyed by fire and Macaura claimed on his insurance. It was held that Macaura could not claim on the insurance policy as he did not own the timber but the company and it was a rule of insurance law that only the owner of the goods could insure them.
This is the legal responsibility conferred to shareholders of a company for its acts or omissions that arise during the course of business. The nature of responsibility can be limited: where shareholders are not personally accountable for the company’s debts and obligations and unlimited: where members settle all the debts that have been accrued by the company through seizure of personal assets in events such as bankruptcy.
Companies can continue with existence indefinitely and death of a shareholder does not warrant cessation of the company as the shares can be transferred or inherited causing continuity.
Companies can own property in their own name regardless of who the owns the shares and this may be used as security for loans by the entities.
Companies have the power to enter into contractual obligations and can sue and be sued and assume the rights and liabilities which the contracts create.
The business environment in Kenya is coupled by the steady growth in Gross Domestic Product which has seen the rise of many business and companies in Kenya. Majority of Companies registered in Kenya fall under the ‘Private Limited’ category, while the rest fall under the ‘Private Unlimited’ category. Why are private unlimited Companies unpopular in comparison to their limited liability counterparts? What endears the majority of business people to register private limited entities as opposed to unlimited ones? This paper investigates the reasons as to why formation of unlimited companies is rare.
UNLIMITED COMPANIESSection 8 of the Kenya’s Companies Act, 2015, defines these companies as having no limitation on the liability of its members and the Certificate of Incorporation should state that the liability of its members is unlimited. Unlimited Companies can be set-up with or without share capital. The Act only permits formation of unlimited private companies with restrictions on the exemption to file financial statement with the Companies Registrar (Companies Act, 2015: Section 689 (1). Formation of these companies are very rare and the simple reason being the risk of uncapped liability for corporate debts.
Formation of Unlimited CompaniesTypically, Unlimited Companies are formed either through incorporation/registration or where an existing company needs to be converted through continuance subject to the set out conditions as per the following sections in the Companies Act, 2015:-
Division 2 – Formation and Registration of Companies
Division 4 – Conversion of Private Limited Company into Unlimited Company
Division 6 – Conversion of Public Company into Unlimited Private Company with share capital
Globally, Unlimited Companies have been espoused in jurisdictions such as Kenya, United Kingdom, India, Ireland, Canada, Hong Kong, Pakistan, Nigeria, Australia, New Zealand amongst others where the Company Law is derived from English Law. Examples include the following:-
Studiengruppe Luftfahrt Africa Unlimited – Kenya
Free Press Unlimited – Kenya
GlaxoSmithKline Services Unlimited (UK Company No. 01047315)
C. Hoare & Co. (UK Company No. 00240822), England’s oldest private bank founded in1672.
Janssen Pharmaceuticals Sciences UC (Ireland Company No. 572261), as subsidiary of the US Company Johnson ; Johnson
Mobil Producing Nigeria Unlimited, a subsidiary of Exxon Mobil
Texaco Overseas (Nigeria Petroleum Company Unlimited
Entities such as the aforementioned have taken the legal status of an Unlimited Company which shows this mode of formation can be used for setting up business due to the following advantages:-
Advantages of Unlimited CompaniesEffective Management – Directors and Shareholders of an unlimited Company need to trade cautiously taking into consideration aspects of risk management in their business dealings to avoid incurring massive losses in case of liquidation.
Creditor Confidence – Directors and Shareholders have put in place cautionary measures coupled with higher risk control thus creating assurance to creditors in the company and its liabilities.
Flexibility – Unlimited Companies as compared to Limited Companies have the flexibility in undertaking capital reductions and in carrying out share redemptions.
Secrecy – Financial affairs of an unlimited company are not disclosed as the nature of such entities do not require mandatory statutory filings of financial statements with the Registrar of Companies..
Less Registration Formalities – the companies have less procedures to comply with during registration/formation.
Disadvantages of Unlimited CompaniesLiability Concerns – The shareholders have no protection in case of liquidation of the company.
Missed Opportunities – Due to the unlimited nature of the company, shareholders may avoid taking high risk opportunities. This cautious approach may slow down the development of the company and also potentially scare shareholders seeking favourable returns.
Lack of knowledge on set up and operation – Potential business owners are not aware of existence of such companies and their formation processes including their compliance requirements with the law.
Overly Hyped Benefits – The secrecy that is attached to such companies may pose some challenges including, mismanagement, unrepaid loans/borrowings, sustainability on long term basis as there is no full disclosure on the company status to attract potential investors.
CONCLUSIONIn conclusion, in as much as Unlimited Companies can be used as a mode of formation of setting up a business, they pose high risks that are attached to the uncapped liability of debts making shareholders of such companies liable in instances of insolvency. The current business environment in Kenya and increased rate of corporate insolvencies have magnified these risks.
Also lack of knowledge on set up and operation of such companies is limited and not easily available for potential investors to review and evaluate prior to settling on the preferred option for a company structure/type. As a result, formation of Unlimited Companies is very rare as business owners try to minimise any risks exposures that would be detrimental to the business.
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