A memorandum of association under Kenya law is a
document which sets out the constitution of the company and is really
the foundation on which the structure of the company is based. It contains the fundamental conditions upon which alone the company is allowed to be incorporated.
A company pursues only such objects and exercises only such powers as are conferred expressly in the memorandum. A company cannot depart from the provisions contained in its memorandum, however great the necessity may be. If it does, it would be ultra vires the company and therefore wholly void.
The
purpose of the memorandum is to enable the shareholders, creditors and
those who deal with the company to know what the permitted range of the
enterprise is. It defines as well as confines the powers of the company.
Lord Cairns in
Ashbury Railway Carriage Co. Ltd vs. Riche pointed out that, the
memorandum as it were the area beyond which the action of the company
cannot go; inside that area the shareholders may make such regulations
for their own government as they may think fit.
Case Law: Ashbury Railway Carriage Co Ltd vs. Riche
A company was registered under Companies Act 1862 and the objects clause was defined as follows:
The
objects for which the company is established are to make and sell, or
lend on hire, railway carriages and wagons, and all kinds of rail plant,
fittings, machinery and rolling stock; to carry on the business of
mechanical engineering and general contractors; to purchase and sell, as
merchants, timber, coal, metals and other materials and to buy and sell
any such materials on commission or as agents.
The directors
agreed to purchase a concession for making railway in Belgium; and form a
company in Belgium called Societe Anonyme to work the concession and it
was further agreed that Mr. Riche commence the work. Later
difficulties arose and the shareholders of Ashbury Co. disapproved of
what had been done in the matter of the railway, and required the
directors to take over the company’s interest therein and to indemnify
the shareholders. The directors, however on behalf of the shareholders
repudiated the contract for the construction of the railway, as being
ultra vires the company and Mr. Riche sued the company for damages for
breach of contract.
It was held
that the contract was ultra vires (beyond the powers of) the company and
that accordingly the company was not liable to Mr. Riche. Lord
Cairns said that the contract was entirely beyond the objects in the
memorandum and was thereby placed beyond the powers of the company to
make the contract. If so, it is not a question whether the contract ever was ratified or was not ratified. If it was a contract void at its beginning, it was void because the company could not make the contract.
If every
shareholder of the company had been in the room and every shareholder of
the company had said that this contract which we desire to make, which
we authorize the directors to make, to which we sanction the placing of
the seal of the company, the case would not have stood in any different
position from that in which it stands now. The
shareholders would thereby by unanimous consent have been attempting to
do the very thing which, by the Act of parliament they were prohibited
from doing.
Contents of a Memorandum of Association
Section 5 of the Act states the following six clauses of the memorandum of association:-
(a) Name clause
(b) Registered office clause
(c) Objects clause
(d) Liability clause
(e) Capital clause
(f) Association clause
(a) The Name clause
The promoters
of a proposed company have freedom to choose its name, but the freedom
is limited by section 19(2) of the Act which provides that “no name
shall be reserved and no company shall be registered by a name which
consists of abbreviations, initials or which, in the opinion of the registrar is “undesirable” e.g. Malaya.
The registrar
of companies has not issued any circular explaining the criteria likely
to be used in deciding whether a proposed name is undesirable under the
section. However, corresponding
to English Companies Act 1948 to which Kenya’s companies Act was
formed, regards a proposed name as undesirable if;-
(i) It is like the name of an existing company.
(ii) It is misleading for
example, if the name of a company likely to have small resources
suggests that it is going to trade on a greet scale over a wide field.
(iii) It suggests some connection with the crown or members of the royal family, for example, Queens and Princes.
(i) It includes words which might be trademarks, unless a trade mark clearance has been obtained.
No company shall be registered by a name which is identical or which resembles the name of an existing company. Where
a company is registered by a name so similar to that of another company
that the public are likely to be deceived, the court will grant an
injunction restraining it from using that name.
Case Law: Ewing vs. Buttercup Margarine Co. Ltd
The
plaintiff, who carried on business under the trade name of the
Buttercup Dairy Company, was held entitled to restrain a newly
registered company from carrying on business under the name of the
Buttercup Margarine Company Ltd on the ground that the public might
reasonable think that the registered company was connected with his
business.
However, if
the company’s business is different from that of the complaining party,
confusion is not likely to arise and an injunction will not be granted.
To avoid the
risk of choosing a name that ultimately turns out to be desirable, the
promoters should enquire from the registrar whether the name they intend
to give the company is “too like” that of a company already in the
register of companies. After
obtaining confirmation that the name is a registerable one they should
immediately make a written application for its reservation under section
19(1) of the Act. Any such
reservation shall remain in force for a period of 30 days or such longer
period, not exceeding 60 days as the Registrar, for special reasons may
allow.
Every public
company must write the word “limited” after its name and every private
limited must write the word “private limited” after its name. Companies whose liabilities are not limited are prohibited from using the word “limited”.
(b) The Registered office clause
Section 5(1)
(b) provides that the memorandum of association shall state that, “The
registered office for the company is to be situated in Kenya”
The registered office clause is important for two reasons:-
(i) It ascertains the domicile and nationality of a company.
(ii) It
is the place where various registers relating to the company must be
kept and to which all communications and notices must be sent. A company need not carry on its business at its registered office.
The primary
function of the registered office is to act as the company’s official
address. It provides a convenient place where legal documents, notices,
and other communications can be signed.
The following registers and documents are kept at the company’s registered office;-
(i) The register of members.
(ii) The register of directors and secretaries.
(iii) The company’s register of charges.
(iv) The register of debenture holders.
(v) The register of directors interests in shares.
(vi) The minute books of general meeting.
The above registers and documents are subject to inspection by the following:-
(a) The company’s members can access and inspect them free of charge during business hours for at least two hours each day.
(b) Debenture holders of the company can inspect free of charge during business hours.
(c) Any member of the public can inspect on payment of prescribed fee not exceeding Sh. 2 for each inspection.
(c) The Object clause:
Section 5(1) (c) requires the memorandum of association to state the objects of the company.
The
object clause defines the sphere of the company’s activities, the aims
that its formation seeks to achieve and the kind of activities. If
anything is undertaken outside the objects stated in the memorandum
then such shall be considered ultra vires and hence not binding the
company.
The objects clause is intended to serve the following purposes:-
(a) To protect subscribers who learn from it the purpose to which their money can be applied
(b) To protect persons who deal with the company and who can infer from it the extent of the company’s powers.
In choosing the company’s objects, the following should be noted;
(i) The
objects should not be illegal or against the general law of the
country, for example, gambling is prohibited and therefore the objects
should exclude such.
(ii) The object should not include anything in contravention of the Act.
(iii) They should not include anything against public policy e.g. trading with alien enemies.
The statement
Lord Cairns in 1875 in Ashbury Railway Co. Ltd vs. Riche to the effect
that a contract beyond the objects of the company in the memorandum of
associations, is beyond the powers of the company give the impression
that a company has no legal power to do anything which is not written in
the memorandum. That
would be a starting proposition because, in practice, companies have to
do so many things in the course of their business that if all those
things were to be written down in the memorandum, the memorandum would
be such a gigantic document that nobody would read it. The
judges will not regard a transaction undertaken by a company as ‘ultra
vires’ merely because it is not written in the company’s memorandum of
association as one of the company’s objects.
They would infact regard the transaction as ultra vires by implication if:-
(a) It was reasonably incidental to any of the objects which have been written in the company’s memorandum.
(b) It was undertaken for the sole purpose of effectuating, or achieving the written objects.