Company law revision question and answer

Explain the ways in which a person would:
i. Become a member of a registered company.
ii. Cease to be a member of a registered company.
(b) Henry, a sole trader carrying on a business in the printing industry has asked Tumaini Bank Ltd. to advance him Sh. 500,000 as an additional working capital. The bank is prepared to advance the money on condition that Henry offers a security. Henry has a share certificate for 5,000 shares issued Bright Star Company Limited. Henry wants to know whether he can use the shares whose value is Sh. 650,000 as a security for the loan. He further seeks to know whether he would still receive dividends even after he has charged the shares to the bank.
Advise Henry.
(a) (i)
• Subscribing to the memorandum of association of the company.
• Transfer i.e. purchase of shares from a willing seller.
• Allotment the company pursuant to an application.
• Transmission death.
• Transmission bankruptcy.
• Qualification shares of direction.
• Estoppel: a person who holds himself out as a member of a company or knowingly permits himself to be held out as a member a company is estopped from denying the apparent membership for the sake of third parties.

• Transfer of shares to a third party.
• Valid surrender of the shares
• Forfeiture of the shares
• Sale the company in exercise of alien.
• Death of the member.
• Bankruptcy of the member.
• Repudiation an infant.
• Rescission of contract
• Redemption of redeemable preference shares
• Winding up of the company

• This problem is based on mortgage of shares and the consequences thereof.
• Henry is entitled to use his shares as a security to borrow from Tumaini Bank Ltd as long as the bank is agreeable.
• This is because shares are items of property and can therefore be used as collateral.
• Whether or not Henry would still receive dividend depends on the type of contract entered into. The mortgage transaction may be legal or equitable.
• In the case of a legal mortgage Henry would transfer his shares to Tumaini Bank Ltd which would be the temporal owner with all the rights of a holder i.e. dividend, attendance of general meetings of the company and voting. As a consequence Henry would loose the right to dividend unless modified the mortgage transaction.
• In the case of an equitable mortgage, Henry would only execute the transaction, hand over the share certificate to Tumaini Bank Ltd but retain membership of the company. He would thus be entitled to dividend.

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