Company law revision question and answer

A CPA Part II candidate taking the paper has requested you for advice on the issues listed below. Advise him.

(a) A company has established an employee share scheme and a number of employees including two directors wish to borrow money from the company to enable
them purchase shares in the company. (6 marks)
(b) The same group of employees and the two directors have requested additional loans from the company to enable them buy additional shares in the company. (6 marks)
(c) The company is proposing to offer shareholders the option of receiving shares in the company in lieu of dividend. (4 marks)
(d) The company is proposing to co-opt John Omwami to the Board of Directors and the board is proposing to lend him Sh. 100,000 to purchase qualification shares.

• This problem is based on the provisions of section 56 (1) of the companies Act which prohibit a company from financing the purchase of its shares. However, if it has an employee share scheme in place, it is lawful for the company to advance loans to trustees to enable them subscribe for fully paid shares of the company for the benefit o its employees including salaried directors.
• In this case the proposed transaction is lawful.
• If the company‟s scheme is to advance loans to all bonafideemployees of the companyto enable them subscribe for fully paid shares of the company to hold way of beneficial ownership the two directors are excluded.

• In the absence of an employee share scheme, neither the directors nor the members are entitled to the additional loans to purchase additional shares.
• This is because the scenario before us is not captured any of the exceptions to section 56 (1) of the Companies Act.

• This is referred to as script dividend and may be resorted to in the distribution of the final dividend a company.
• It is perfectly in order for a company to do so if authorized its articles.
• Any person who qualifies for appointment as a director may be appointed members if they so resolve ordinary resolution.
• If the articles of a company require a person to take up qualification shares, for appointment as director, the same must be taken within 2 months of appointment or such shorter time as the articles may prescribe failing which the person ceases to be a director.
• In this case, the board of directors of the company is proposing to lend John Omwami Kshs. 100,000 to enable him purchase the shares.
• It is apparent that this is contrary to the provisions of the Companies Act as the lending at hand is not covered the exceptions outlined section 191 (1) of the companies Act.
• The proposed transaction is unlawful.

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