Chapter 1

Part A: The company and its formation

Nature and classification of companies

Last updated November 20264 sectionsabout 18 min read

Key takeaways

Separate personality: from incorporation a company is a legal person separate from its members and directors: it owns its own property, makes its own contracts and can sue and be sued (section 19; Salomon v A Salomon and Co Ltd).
Limited liability: a member of a company limited by shares is liable only for any amount unpaid on the shares, and a member of a company limited by guarantee only for the amount undertaken on a winding up.
Private and public: a private company restricts share transfers, may not invite the public to subscribe and needs one director, while a public company needs at least two directors, a qualified secretary and a trading certificate, and its name ends in PLC.
The corporate veil: the veil of incorporation stays down unless a statute lifts it or the company is a sham used to evade an existing obligation (Gilford Motor Co Ltd v Horne, Prest v Petrodel Resources Ltd).
Other business forms: a partnership is not a legal person, so its partners own the assets and owe the debts without limit, while a company trades privacy for limited liability and perpetual succession.

A company is a person the law invents. Once the Registrar issues a certificate of incorporation, a new legal person exists, separate from the people who own and run it, able to own property, make contracts, sue and be sued and outlive every one of its members. That idea, separate legal personality, is the foundation of the whole paper: every rule on shares, directors, meetings and winding up follows from the fact that the company is a person in its own right.

This chapter sets out:

what a company is;
the types the Companies Act, 2015 allows;
the doctrine of the corporate veil, and the occasions when courts and the Act look behind it; and
how a company differs from the other ways of carrying on business.

Statutory references

The Companies Act, 2015: section 5 (companies limited by shares or by guarantee) and the sections that follow it on unlimited, private and public companies, section 19 (effect of registration: a body corporate with perpetual succession), section 128 (a private company has at least one director, a public company at least two) and section 129 (at least one natural person as a director); Salomon v A Salomon and Co Ltd [1897] AC 22 for separate legal personality, applied in Kenya under section 3(1)(c) of the Judicature Act (Cap 8); the Partnership Act, 2012 and the Limited Liability Partnership Act, 2011 for the forms a company is distinguished from.

Characteristics of a company

A company is an association of persons registered under the Companies Act, 2015 (or an earlier Companies Act) and thereby made a body corporate. Section 19 states the effect of registration: from the date of incorporation the subscribers to the memorandum, together with everyone who later becomes a member, are a body corporate by the name in the certificate, capable of exercising all the functions of an incorporated company, with perpetual succession.

The characteristics examiners ask for, each a consequence of that one section:

Separate legal personality

The company is a legal person distinct from its members and directors. Three consequences follow:

Property: it owns its own property, so a shareholder has no insurable interest in the company's assets and no right to use them.
Contracts: it makes its own contracts, so a director who signs for the company is not personally bound.
Proceedings: it can be sued and can sue, and it can be convicted of an offence.

The principle was settled in Salomon v A Salomon and Co Ltd, where a one-man company was held to be a separate person from the man who held nearly all its shares and its debentures.

Limited liability

Limited liability is a consequence of separate personality (the debts are the company's, not the members') and it is what makes it possible to raise capital from the public, since an investor risks only the investment. How far a member's liability for the company's debts reaches depends on the kind of company:

Company limited by shares: it is limited to any amount unpaid on the member's shares. Once the shares are fully paid the member owes nothing more, whatever the company owes.
Company limited by guarantee: it is limited to the amount the member has undertaken to contribute on a winding up.

Perpetual succession

The company continues to exist until it is dissolved by the process the Act prescribes, however often its membership changes and whether or not any original member survives. The death, bankruptcy or withdrawal of a member does not end it. Kilifi Cement PLC has outlived several generations of shareholders; a partnership dissolves when a partner dies unless the partners have agreed otherwise.

Transferability of shares

A share is a form of personal property and can be transferred, subject to the articles.

Public company: a share is freely transferable and can be listed and traded on the Nairobi Securities Exchange.
Private company: the articles restrict transfer, typically by giving the directors a discretion to refuse registration or the other members a right of first refusal.

Capacity to own property and to sue

The company holds its assets in its own name and is the proper claimant when it is wronged. Two things follow:

A member cannot sue on the company's behalf without the leave the derivative action provisions require (see the chapter on membership).
Property transferred to a company belongs to the company, and a member who takes it commits theft.

Management by directors

A company acts through human agents, so ownership and control are separated. That separation is the problem that directors' duties and the protection of minorities, covered in the chapters on directors and meetings, exist to manage. Power is divided like this:

The members: appoint directors.
The board: the articles vest management in it.
The general meeting: retains only the powers the Act and the articles reserve to it.

Common seal and formality

A company acts, and accounts for itself, with formalities a sole trader does without:

Execution: a company may execute documents under a common seal, though since section 37 of the Act it may instead execute by the signatures of two authorised signatories or a director in the presence of a witness.
Compliance: it is bound by the Act's requirements of registration, returns, registers and audited financial statements, which a sole trader is not.

Salomon v A Salomon and Co Ltd [1897] AC 22 (House of Lords)

A company duly incorporated is a legal person separate from its members, even where one member holds almost all the shares and controls it. Mr Salomon, as a secured debenture holder, ranked ahead of the company's unsecured creditors on its winding up, because the company, not he, had incurred the debts.

Macaura v Northern Assurance Co Ltd [1925] AC 619 (House of Lords)

A shareholder has no insurable interest in the company's property. Mr Macaura, who owned nearly all the shares of a timber company, could not recover under a fire policy he had taken out in his own name over the company's timber: the timber was the company's, not his.

Lee v Lee's Air Farming Ltd [1961] AC 12 (Privy Council)

Because the company is a separate person it can contract with its own controller. Mr Lee, the sole governing director and principal shareholder, was also the company's employee under a contract of service, so his widow recovered workers' compensation from the company when he was killed flying for it.

English cases in Kenya

These cases are English decisions.

Decided before 12 August 1897: part of the common law received under section 3(1)(c) of the Judicature Act (Cap 8).
Decided later: persuasive, not binding, in Kenyan courts.
In your answer: the Companies Act, 2015, which was modelled on the United Kingdom's Companies Act 2006, codifies many of the rules they established. Where the Act now states a rule, cite the section first and the case as the origin of the principle.

Types of companies

The Companies Act, 2015 classifies companies by the liability of their members and by whether they may offer shares to the public. Every company registered under it falls into one of the classes below, and the class decides the rules that apply:

how many directors and members it needs;
whether it must have a secretary;
whether it may invite the public to subscribe; and
how its accounts are published.

By the liability of members:

Company limited by shares

Members' liability is limited to the amount, if any, unpaid on their shares (section 5). The ordinary trading company: Mwangi's Bakery Limited and Kilifi Cement PLC are both companies limited by shares.

Company limited by guarantee

Members undertake to contribute a stated amount to the company's assets if it is wound up while they are members or within a year afterwards, and are liable for nothing beyond that. Used for clubs, professional bodies, schools and charities that do not distribute profits and have no share capital.

Unlimited company

Members have no limit on their liability for the company's debts on a winding up. Rare, because the point of incorporation is usually to limit liability, but chosen where secrecy about accounts or a specific regulatory regime makes it attractive.

By whether shares may be offered to the public:

Private company

A company whose articles restrict the transfer of its shares, limit its membership (the Act sets the ceiling for a private company, and a single member is enough) and prohibit any invitation to the public to subscribe for its shares or debentures. What it needs:

Directors: at least one director (section 128).
Secretary: only if its paid-up capital is five million shillings or more (section 243).
How common: most Kenyan companies are private.

Public company

A company whose certificate of incorporation states that it is a public company, which may offer its shares and debentures to the public and, if it meets the Capital Markets Authority's requirements, list them. Its name ends in PLC. What it needs:

Directors: at least two directors (section 128).
Secretary: a qualified secretary (sections 244 and 246).
Capital: a minimum allotted share capital.
Trading certificate: one before it starts business.
Annual general meeting: held within six months of its accounting reference date (section 310).

Special cases:

State-owned and other special companies

Some companies carry a second status, and some bodies called societies are not companies at all:

State corporation: a company in which the government holds shares is a state corporation under the State Corporations Act (Cap 446) as well as a company under the Companies Act.
Single-member company: a company owned by a single member is a single-member company with its own procedural rules.
Bodies formed under other Acts: companies formed under other Acts (co-operative societies, building societies) are not companies within the Act at all.

Private and public companies compared under the Companies Act, 2015

Feature	Private company	Public company
Minimum members	One	One, but shares may be offered to the public
Minimum directors	One (section 128)	Two (section 128), at least one a natural person (section 129)
Company secretary	Required only if paid-up capital is five million shillings or more (section 243)	Required, with the qualifications in section 246
Offer of shares to the public	Prohibited	Permitted, under the Capital Markets Act where listed
Transfer of shares	Restricted by the articles	Free; listed shares traded on the NSE
Annual general meeting	Only if the articles require one	Within six months of the accounting reference date (section 310)
Notice of general meeting	At least 21 days (section 281)	21 days for the AGM, 14 for any other (section 281)
Written resolutions	Permitted (sections 262 to 273)	Not permitted; resolutions passed at meetings
Name ends	Limited or Ltd	Public Limited Company or PLC

The veil of incorporation

The veil of incorporation is the metaphor for the separation Salomon established: the law looks at the company and not at the persons behind it. Lifting or piercing the veil means disregarding that separation to reach the members or directors, and it is done in two ways:

By statute: where the Companies Act or another Act makes members or officers liable.
By the courts: in a narrow set of situations that the cases define.

The starting point is always that the veil stays down; a candidate who lifts it because the result seems fair has missed the point of Salomon.

Lifting the veil by statute

Fraudulent trading: an officer who carried on the company's business with intent to defraud creditors is personally liable and commits an offence, under the Insolvency Act, 2015 and the Companies Act's offence provisions.
Wrongful trading: a director who let the company continue trading when there was no reasonable prospect of avoiding insolvent liquidation can be ordered to contribute to its assets under the Insolvency Act, 2015.
No trading certificate: a public company trading without a trading certificate, and its directors, become liable for its obligations.
Group accounts: a parent must consolidate its subsidiaries (sections 642 and 644), treating the group as one economic entity for reporting.
Tax and competition: the Income Tax Act treats connected companies as one for transfer pricing and thin capitalisation, and the Competition Act, 2010 treats a group as a single undertaking.
Disqualified directors: disqualified directors and undischarged bankrupts who act as directors are personally liable for the company's debts incurred while they did so.

Lifting the veil by the courts

The cases define where the courts will, and will not, disregard the separation.

Courts pierce the veil where the company is:

a mere facade or sham used to evade an existing legal obligation; or
the alter ego of a person engaged in fraud.

They do not pierce it merely because:

a group of companies is run as one enterprise; or
the result of respecting separate personality is hard on a creditor.

The English cases below mark the boundary and Kenyan courts follow them.

Gilford Motor Co Ltd v Horne [1933] Ch 935 (Court of Appeal)

A former managing director bound by a covenant not to solicit his old employer's customers formed a company to do the soliciting for him. The company was a sham, a cloak to evade the covenant, and an injunction was granted against both him and the company.

Jones v Lipman [1962] 1 WLR 832

A vendor who had contracted to sell land transferred it to a company he controlled to escape specific performance. The company was a device and a mask, and specific performance was ordered against both.

Adams v Cape Industries plc [1990] Ch 433 (Court of Appeal)

A parent company is not liable for its subsidiary's torts merely because the group is run as an economic unit; the veil is pierced only where the company is a facade concealing the true facts. A group may lawfully structure itself so that liability falls on a subsidiary.

Prest v Petrodel Resources Ltd [2013] UKSC 34 (Supreme Court)

The veil may be pierced only where a person deliberately evades an existing legal obligation or liability by interposing a company under their control (the evasion principle), and only where no other remedy will do; in most cases the result is reached instead through ordinary law such as trusts and agency.

English cases in Kenya

These cases are English decisions.

Decided before 12 August 1897: part of the common law received under section 3(1)(c) of the Judicature Act (Cap 8).
Decided later: persuasive, not binding, in Kenyan courts.
In your answer: the Companies Act, 2015, which was modelled on the United Kingdom's Companies Act 2006, codifies many of the rules they established. Where the Act now states a rule, cite the section first and the case as the origin of the principle.

Kenyan courts apply exactly this restraint, and a recent decision is worth citing because it shows the veil staying down rather than coming up.

Ukwala Supermarket v Jaideep Shah & another [2022] KEHC 2207 (KLR)

Judgment creditors applied to pierce the veil of the judgment debtor company so as to reach the personal assets of those behind it. The High Court refused. It restated Salomon and Lord Macnaghten's words that the company is at law a different person altogether from its subscribers, noted that the law expressly permits incorporation for the very purpose of letting shareholders and directors escape personal liability, and held that the evidence before it did not fall within the recognised grounds for piercing. Cite it for the proposition that in Kenya, as in England, the exception is narrow and the burden is on the party asking the court to disregard the separation.

Companies and other business forms

The choice of business form is a choice of legal consequences: who is liable, who owns the assets, how the business is taxed, how it is managed and how it ends. The Otieno family deciding whether to run their hardware business as a partnership, a limited liability partnership or a company are choosing among the columns of the table below, and an exam question that describes such a family expects the columns as its answer.

Business forms compared

Feature	Sole proprietorship	Partnership (Partnership Act, 2012)	Limited liability partnership (LLP Act, 2011)	Company (Companies Act, 2015)
Legal personality	None; the owner is the business	None; partners are jointly and severally liable	A body corporate separate from its partners	A body corporate separate from its members
Liability of owners	Unlimited	Unlimited (limited partners excepted)	Limited to the partner's contribution	Limited to unpaid share capital or the guarantee
Formation	Business name registration only	Agreement, and registration under the Act	Registration with the Registrar	Registration and a certificate of incorporation
Ownership of assets	The owner	The partners jointly	The LLP	The company
Management	The owner	All partners, per the agreement	The partners, per the LLP agreement	The directors; members act through general meeting
Continuity	Ends with the owner	Dissolves on death or withdrawal unless agreed otherwise	Perpetual succession	Perpetual succession
Transfer of interest	Sale of the business	Needs every partner's consent	Per the agreement	Shares transferable, subject to the articles
Taxation	Owner's income at individual rates	Partners taxed on their shares	Partners taxed on their shares	Corporation tax, then withholding tax on dividends
Public disclosure	None	None	Annual return; accounts not published	Annual return, registers, and for public companies audited accounts filed

Two distinctions carry most marks:

Legal personality: a partnership is not a legal person. The Limited Liability Partnership Act, 2011 gives a limited liability partnership personality but leaves an ordinary partnership as a relationship between people, so the partners own the assets and owe the debts.
The price of the veil: incorporation trades privacy and simplicity for limited liability and continuity. The company must file returns, keep registers and, if public, publish audited accounts.

Salomon first, then the exceptions

Any question with a one-person or family company behind it is a Salomon question. State the principle and its three consequences (the company owns the assets, owes the debts and makes the contracts), apply it, and only then consider whether a statutory provision or a sham makes this one of the narrow cases for lifting the veil. Candidates who start with the exceptions lose the marks for the rule.

Self-check

Wanjiru runs a hardware business as a sole trader. She incorporates Wanjiru Hardware Limited, transfers the stock and premises to it, takes all the shares but one (held by her son), lends the company KES 2 million secured by a debenture over its assets, and is appointed managing director. Two years later the company fails owing KES 5 million to unsecured suppliers and KES 2 million to Wanjiru.

(a) Advise the suppliers whether they can hold Wanjiru personally liable for the company's debts, and how the KES 2 million debenture ranks. (10 marks)

(b) Would your answer differ if Wanjiru had formed the company solely to evade a covenant she had given her former employer? (4 marks)

(c) State three differences between the company and the partnership Wanjiru could have formed with her son instead. (6 marks)

Show worked answer

(a) On incorporation the company became a separate legal person (section 19 of the Companies Act, 2015; Salomon v Salomon). The debts to the suppliers are the company's, and Wanjiru's liability as a member is limited to any amount unpaid on her shares (section 5), which are paid up: she is not liable (4 marks). Her debenture is a valid secured loan by a separate person to the company, and as a secured creditor she ranks ahead of the unsecured suppliers, exactly as Mr Salomon did, provided the charge was registered under section 878 (3 marks). The suppliers could reach her only under a statutory exception, such as fraudulent or wrongful trading under the Insolvency Act, 2015 if she traded knowing the company could not pay, and nothing in the facts suggests it (3 marks).

(b) Yes. A company formed as a device to evade an existing obligation is a sham, and the court pierces the veil to enforce the obligation against both her and the company: Gilford Motor Co v Horne, Jones v Lipman, and the evasion principle in Prest v Petrodel (4 marks).

(c) A partnership is not a separate legal person, so Wanjiru and her son would own the assets and owe the debts personally and jointly (2 marks); their liability would be unlimited rather than limited to their shares (2 marks); the partnership would dissolve on the death or withdrawal of either unless the agreement provided otherwise, whereas the company has perpetual succession (2 marks).