Change in corporate laws in Kenya welcome

On September 11th, 2015 President Uhuru Kenyatta assented to the Companies Act 2015, and set the Kenyan record for adopting the most voluminous law in the country. The Act comprises 1022 pages and has 1026 sections. It repeals the antiquated Act of 1948 having 46 sections and 571 pages.

The preamble to the Act boasts that the new legislation is aimed at consolidating and reforming the law relating to incorporation and requisition; operation, management and regulation of Companies and to provide for appointment and functions of auditors.

The objects of the Act are to facilitate commerce industry and other socio-economic activities by enabling one or more natural persons to incorporate as entities with perpetual succession, with or without limited liability, and to provide for the regulation of those entities in the public interest, and in particular in the interest of its members and creditors.

It can arguably be stated that the new law largely adopts the English Companies Act 2006 and brings corporate law in line with modern but western methodology and ideology of conducting business.

Though the Act is said to have commenced on the date of assent, the full Act must come into force within nine months gestation period and the law states that if this is not done then, parliament may bring into operation such of these provisions as have not yet been commenced.

The transitional task of moving from the regimes of old to the new will take years logistically, and commercially the herculean task of reform involving thousands of existing companies must be appreciated. It will have a colossal impact on majority of the commercial entities.

The new Act provides for the lodging and management of certain documents electronically. This will, if executed in the correct manner, make the work of those dealing with the Companies Registrar much easier.

In theory, these reforms are intended to compliment other governmental e-systems such as the i-tax regime and make the formation, running and organisation of business in Kenya easier. The aim at the end of the day is to attract foreign investment and stimulate local business, though implementation will be an uphill task.

Foreign Investment, while encouraged must be balanced against the promotion of local entrepreneurs. The new law introduces a requirement that a foreign company is required to have at least 30 percent of the companies shareholding held by Kenyan citizens.  This means all companies incorporated outside Kenya desiring to do business in Kenya will be forced to effect a share allotment or share transfer to a Kenyan individual. Though appealing, the implementation of this provision on a commercial scale is destined for complexities in terms of expense and alteration of business structures.

In contrast to the repealed Act, the new Companies Act also introduces the concept of a single member company. This means that a single person can form a private company and, acting as both a sole shareholder and sole director, effectively manage the company by making all decisions.  Companies with an inactive second member will be able to reduce their shareholding to one person. This may see a decline in sole proprietorships.

More conducive to smaller businesses is Section 243 of the Act, which removes the requirement of having a Company Secretary for small companies with paid up capital of less than Sh5 Million.

A company's objects will be unrestricted subject only to restrictions expressly provided for in the company's articles of association. This provides the much needed flexibility when it comes to what a company can or cannot do.

It is important to note that the Companies Act does not provide for Winding Up processes. Winding Up of companies is now provided for under the Insolvency Act, 2015.

So what happens at the time of enactment? Section 1025 of the Act enumerates in its 15 page schedule the transitional provisions essentially sustaining the status quo of the acts already done or intended to be done as at the time of enactment of the new law.

The new legislation is inevitably likely to create massive change over problems and whether the rundown and most inefficient Companies Registry will be up to the task of developing a new work ethic remains to be seen.

Going by previous legal changes as in land matters (Registered Land Acts in 1962 was supposed to apply uniformly in the country within 18 months and that exercise was never ever completed!) the fear of the commercial world is that Kenyan red-tape is not sufficiently geared up for an efficient running of registries under the docket of the Attorney General.

The Act envisages enactment of long-winded rules and regulations as subsidiary legislation. Whether this will be accomplished efficiently and with greater thinking to give greater muscle to the principal Act remains to be seen.

Whether largely English law should have been kenyanized is another matter. In Kenya the battle continues between theoretically sound legislation vs. practical implementation. Will the relevant stakeholders, whether governmental, commercial or private be able to cope with these changes?