Reforms to Kenyas Corporate Law and Practice Essays

Reforms to Kenyas Corporate Law and Practice Essays Reforms to Kenyas Corporate Law and Practice Essay Reforms to Kenyas Corporate Law and Practice Essay The Companies ACTA (hereinafter referred to as the Act) Is based extensively on the united Kingdoms Companies Act 1948. This law has been in existence for the past 60 years with very minimum developments. It is imperative that laws should not be static but should change in tandem with the societal changes. Therefore, there is need to modernize Jennys company law to make it responsive to the currents needs by taking into consideration emerging trends in corporate affairs around the globe. Such emerging trends include modern means of communication, modern patterns of exultation and ownership as well as current trends of globalization and regional integration. A modern company law regime will support a competitive economy and spur Jennys economic growth as envisaged by Vision 2030. Amendments to the company law as It Is will definitely keep It In stride with the changing modes of corporate law and practice. It Is of Interest to note that the Auks Companies Act 1948 which our very own Act Is based on has undergone considerable changes. This same law has been discarded in most commonwealth countries. In UK, the changes have illuminated into the enactment of the Companies Act of 2006. An Anally Limited v. Attorney Generate, it was Lord Dinings view that: The common law cannot be applied in a foreign land without considerable qualification. Just as with an English oak, so with the English Common law. You cannot transplant to the African continent and expect it to have the same character it has in England. It will flourish indeed, but it needs careful tending The common law cannot fulfill this obligation except with considerable qualification Taking into consideration Lord Dinings words about moon law as stated above, we submit that with reference to an imported Act, It has to be tailored towards a Jurisdictions needs before or after importation. Therefore, such an Imported law needs to be updated from time to time so as to keep along with the changing circumstances In the local Jurisdiction. It is against this background that this part of our paper proposes reforms to Jennys Corporate Law and Practice. Proposed Reforms to Jennys Corporate Law and Practice (a) Company insolvency provisions The Company Act as it is today contains provisions relating to winding up of impassions. Whereas we acknowledge that such a state of affairs makes the Act a one stop shop for all company matters, it is our view that this increases the complexity of the same Act. In light of this, it is our recommendation that insolvency related provisions be expunged from the companies legislation. Insolvency related provisions should be contained In an Act specifically meant for insolvency. (b) Rehabilitation of Insolvent Companies Whenever a company becomes insolvent under the Act, it almost always leads to bringing to an end the existence of a company. This leads to loss of employment by former employees of such a company thus leading to high levels of employment which the Kenya government is grappling with. It is our view that an insolvent company should only be wound up where circumstances do indicate that the company cannot be brought back to its feet. We therefore, recommend that where there are reasons to believe that an insolvent company is capable of corporate rescue, such a company should not be wound up but it should be rehabilitated. 5 This reform has been Justified as crucially relevant to Jennys vision twenty thirty6 which seeks to transform Kenya into a competitive and prosperous middle income economy. It is thus implicit that this proposed reform has as its inherent object the reinforcement of the poverty reduction strategies through a rehabilitation and rescue procedure whose effective implementation would save Jobs and revenue in the long term (c) Preferential treatment of creditors The Act, during a Companys winding up process, puts preference to the government as a creditors as opposed to other creditors. It is against this background that we propose for an equal treatment of all company creditors during winding up. Many bona fide creditors of insolvent companies do lose the opportunity to recover their money because of the consideration of the government as a preferential creditor. This policy is detrimental to the growth of other businesses that are not classified as secured creditors. Where businesses are unable to recover the money owed to them, they may also experience financial difficulties and eventually suffer liquidation as well with the effect that a series of receivership occur and the momentum continues to build for more business failures. Government loss in the short term will certainly e compensated when the businesses have recovered and begin to pay taxes. (d) Enhancement of monetary penalties/values The Act contains various offences which carry monetary penalties. For instance, where a liquidator fails to comply with section 269 (3) of the Act, he is liable to a fine not exceeding one hundred shillings for every day during which he is in default. On the other hand, an offence committed by a director under section 276(3) makes one liable to imprisonment for a period not exceeding twelve months or to a fine not exceeding twenty thousand shillings or to both. Further, under part VI of the Act, a bet of at least asks. 1000 owed by a company to a debtor is sufficient ground for commencement of winding up proceedings if such a debt remains unpaid for three weeks upon demand. It is our view that the monetary values highlighted above were set taking into consideration Jennys economic circumstances during the sass. We propose that all monetary values under the Act be enhanced to reflect the current economic trends. Act cannot serve as a deterrent. Offenders who are well endowed economically might commit offences at will knowing so well that consequences for such conduct are not rave. We propose enhancement of penalties and fines for offences under the Act. For instance, where a director is found guilty of a misconduct under the Act, he should be barred for life from holding a seat as a director in any other company. This reform will rid the corporate world of fraudsters masquerading as directors. (e) Need to accommodate and adopt modern business communication practices The Act demands those engaged in the formation of a company to submit hard copies of the documents required for registration of a company to the registrar. Submission of he hard copies to the registrar also involves the physical presence of whoever submits the documents at the company registry. Further, the documents are usually presented and registered solely at the Company registry situate at the State Law Offices in Nairobi. A companys annual returns are also required to be submitted to the registrar in a hard copy. The existence of a single company registry leads to long queues and congestion at the company registrars office. A single company registry in the whole country causes mobility difficulties for people resident in far flung areas eke Alloying, Hajji, Mandela, Van and Chances. We recommend that the Company Act should be amended so as to allow online registration of companies. Online registration of companies will reduce the agony and difficulties experienced by Kenya resident in far flung areas. There is need to adopt and recognize electronic communication and the use of websites for a companys communications. Online registration and submission of annual returns by companies, payment of taxes and other related issues should be done online other than the current manual and physical practices of filing the said documents at the company registry. In the event that Kenya lacks the machinery to deal with technological challenges or cyber fraud likely to arise from the proposed online reforms, it is our alternative recommendation that County Company Registries be established in all the counties. Decentralization of the Company Registry will go a long way in fulfilling the Constitution of Kenya, 2010 objects. Company registries should be established in all the regional state law offices spread across the country. (f) One Member Company Section 4 of the Act provides that a public company shall be formed by seven or more errors whereas a private company shall be formed by 2 to 50 members. We argue that there are individuals with the economic wherewithal to promote and form a company single handedly . This kind of people should not be subjected to the troubles of looking for additional people to aid them in becoming members of a company. It is our suggestion that the law should be amended to allow a single individual to form a company provided the register of Members includes the name and address of that member and a statement that the company has only one member. There should be no restrictions on increasing the number of members to ore than one other than the company ensuring that the additional details of members are entered in its register of members. (g) Company Secretaries The current Act requires that every company shall have a secretary who is qualified in accordance with section 20 of the Certified Public Secretaries Act, 1988. In our nominal capital results to an extra-economic burden to small private companies. Whereas we acknowledge that the hiring of a Company Secretary by each company instills professionalism within the corporate world, the economic implication of this requirement on small private companies should not be ignored. It is against this backdrop that we suggest an amendment to the Act in order to allow private companies with a nominal capital of less than Five Million Shillings (EKES. ,000,000) not to hire a secretary qualified in accordance with section 20 of the Certified Public Secretaries Act, 1988. Instead, a director or any authorized person may fulfill the duties of a secretary. On the part of private companies with a nominal capital of at least asks. 5,000,000, we recommend that they should hire company secretaries registered with the Institute of Certified Public Secretaries of Kenya (SKIPS). This will accelerate professionalism and proper accountability in company matters. H) Stan dard of proof in fraud Another difficulty with the Act is the lifting of the corporate veil. In Re William Letch Brose Ltd, the court gave the word fraud a very liberal definition and noted that, where a Company continues to carry on business and incurs debts at a time when to the knowledge of the Directors, no reasonable prospects of the Creditors ever receiving payment of these debts, it is, in general a proper inference that the Company is carrying on business with the intent to defraud and in that case, the reporter veil can be lifted. Section 323 of the Act is to the effect that the shareholders and directors can be held liable for the debts and liabilities of the Company if it is proved that they were fraudulent in their dealings. In both fraudulent conduct highlighted above, there is always a difficulty in proving fraud. The degree of proof required is higher than a balance of probabilities but not beyond reasonable doubt. This state of affairs demands a lot of evidence so as to prove fraud yet in most instances there is never enough evidence to prove it. We recommend the incorporation of Shareholders Agreements within the Act. The Shareholders Agreement can practically make any provision for any conceivable eventuality in their relationship and thereby address in advance most of the issues which lead to disputes, litigation and even winding up of the Company. 11 With a Shareholders Agreement, the need to prove fraud shall be dispensed with as one is at liberty to sue for breach of the agreement instead of raising fraud issues. O)Reforms as to memos and articles Under the Act, members are obligated to set out all the objects of the company in the memorandum, with the consequence of lengthy and bulky memos. We propose that the Act provides for submission of a simplified memorandum of association. This can be achieved by reducing the information the memos need to contain. The Act requires that where a company adopts any model articles within the Catch, members must register articles with the registrar of companies. We recommend that a company to which model articles apply should not register the articles with the registrar. The requirement to register model article only contributes to the Conclusion It is our view that the reforms highlighted above should be incorporated into the Act. Allowing communication of a companys information in electronic form and through websites will ease communication and facilitate the efficient operation of companies. The simplification of the memorandum of association and the exemption from registering articles of association for companies to which model articles apply will make formation of a company easier and faster. As such, if incorporated into the Act, the proposed reforms will simplify and demystify the formation and operation of companies.