Cpa section 3: company investigations

This is governed by Part XXX of the 2015 Companies Act.

Appointment of the Inspector

According to Section 786, the Court may appoint one or more competent inspectors to investigate the affairs of a company on application by the membership as follows:

a) At least 200 members for a company with share capital; or
b) Holders of at least 10% of the nominal value of the company’s share capital; or
c) At least 20% of members of a company not having share capital.

Before the Court grants the application for investigation, the applicants (members) must:

a) Demonstrate good reasons for requiring the investigation
b) Give security (financial deposit) of KES 500,000 towards meeting the costs of the investigation.

Additionally, Section 787 (1) provides that the Court may appoint one or more competent inspectors to investigate the affairs of a company if the Company so directs by special resolution.

Section 787 (2) also provides for the Court to appoint one or more competent inspectors to investigate the affairs of a company if there are circumstances suggesting an investigation is required from a report prepared by the Attorney General.

These circumstances include:

a) The company’s business is being conducted fraudulently or unlawfully with an intent to defraud the creditors or in a manner oppressive to its members
b) The company was formed for a fraudulent or unlawful purpose
c) That persons responsible for the company’s formation or the management of its affairs are or have been guilty of fraud, misfeasance or other misconduct towards it or towards its members;
d) That the company’s members have not been given all the information with respect to its affairs that they might reasonably expect to have been given; or
e) That it would be in the public interest to do so.

NB: An inspector appointed to investigate the affairs of a company may also investigate the affairs of another body corporate that is related to the company (Holding Company or Subsidiary) if the inspector considers that the results of the investigation are or could be relevant to the investigation of the affairs of the company – S. 788

Once appointed, the inspector enters upon his obligations without undue delay and commences the investigation.

Generally and under Section 789, the Court has power to give directions on the appointed inspector on:

• how to conduct the investigation
• matters to be reviewed
• actions to be taken by the inspector
• the format and contents of the report
• the date of the report

S.790 also authorizes the Court to direct that the investigations be terminated if:

• matters have come to light in the course of the inspector’s investigation that suggest that a criminal offence has been committed; and

• those matters have been or are in the process of being referred to the Director of Public Prosecutions.

Removal of the Inspector

1. Resignation by due notice
2. Revocation of appointment by the Court
3. Death

Duties of Company Management during Investigation

S.793 provides that every officer and agent of a company subject to investigations shall:

a) Produce to the inspector all documents of the company as well as its related entities
b) Present themselves before the inspectors when required to do so; and
c) Give to the inspector all assistance in connection with the investigation which they are reasonably able to give.
d) Be liable to examination under oath by the inspector, which examination shall be recorded

Failure to comply is tantamount to contempt of court as espoused by S.794.

The Inspector’s Report

This captures the findings of the investigation and acts as a formal written record of the same.

The inspector may be required to prepare interim and/or a final report of the investigations to the Court – S.797.

As soon as practicable after an interim report, or the final report, is submitted to the Court, the Court shall:

a) submit a copy of the report to:
i. the Attorney General; and
ii. the company concerned and its related entities if necessary;
b) on being requested to do so and on payment of the prescribed fee (if any)—send a copy of the report to:
i. any member of that company or body corporate;
ii. the auditors of that company or body corporate;
iii. any person whose conduct is referred to in thereport;
iv. any other person whose financial interest is affected by the report
v. the applicants, if not the AG.

The Court may also order that the report be published in such publications (including a website) as it may direct.

The Court may, under S.798, submit a copy of the report to the office of the DPP if it appears, from the investigations and the attendant report, that a person has committed an offence for which the person is criminally liable.

Powers of the Inspector

1. An inspector is empowered to investigate the holding or subsidiary company of the company under investigation if such investigation is necessary.
2. The inspector also has the power to administer oath to witnesses e.g. company members and officials.
3. Examine persons under oath.
4. Require officers of the company to produce books and furnish such information or explanation as may be necessary.
5. Apply to the Court to have persons whom he can’t examine, examined by the Court for purposes of the investigation.

Expenses of Investigations

Section 799 is clear that the costs of investigation shall be borne by:

1. The AG, who may be reimbursed by persons of interest in the investigations including but not limited to:

• Any person convicted on criminal prosecution instituted by the AG on the basis of the report;
• Any person who is held liable in damages or to restore company property on the basis of proceedings instituted by the report;
• The company in whose name proceedings are instituted;
• The company being investigated; or
• The applicants for the investigations.

2. Any other person so specified by the Court

Investigations into Company Ownership – S.800

If satisfied that there are reasonable grounds for doing so, the Attorney General shall appoint one or more competent inspectors to investigate and report on the membership of a company for the purpose of determining the persons:

a) who are or have been financially interested in the success or failure, real or apparent, of the company; or
b) who are able to control or materially influence the policy of the company.

Proceedings on the Inspector’s Report

a. Criminal prosecution – S.798
If the Court is of the opinion that a criminal offence has been committed, a copy of the report is forwarded to the Office of the DPP, who may institute the appropriate criminal prosecution. It is the duty of the officers of the company to assist the AG in the prosecution.

b. Petition for winding up.
If it appears to the AG that the company ought to be wound up, he may petition for its winding up on the ground that it is just and equitable to do so.

c. Civil proceedings – S.814
Under S.814, the AG may initiate civil proceedings on behalf of the company if from a report made by the Inspector after investigating company affairs for:

1. The recovery of damages in respect of fraud, misfeasance or other misconduct in the promotion, formation or management of the company
2. The recovery of company property that has been misapplied or wrongfully retained

The Attorney General must consider that such proceedings are in the public interest.

Applicable offences

S.818	a)      Destroying, mutilating, or falsifying company documents.   b)      Making a false entry in company documents   c)       Fraudulently making an omission on company documents	Fine not exceeding KES 1M; or   Imprisonment not exceeding 7 years; or   Both
S.819	a) Knowingly providing false information   b) Recklessly providing false information	Fine not exceeding KES 500,000, or   Imprisonment for a term not exceeding 2 years; or   Both

Investigation by the Registrar of Companies under CAP486

1. Noncompliance with provisions of the Act: If the Registrar has reasonable cause to believe that the provisions of the Act are not being compiled with by the company, he may initiate an investigation into the Company’s affairs.

2. Incomplete documents: If a document submitted to the Registrar does not disclose a full and fair statement of the matters it relates to, the Registrar may initiate an investigation where he directs the company to produce books and furnish him with information or explanations as he may specify.

The same must be produced or furnished within the stipulated duration. It is the duty of the officers and agents of the company to produce the books and furnish him with information and explanations. If on examining the books and consideration of the information and explanation an unsatisfactory state of affairs is disclosed, the Registrar must make a report to the Court.

3. Ownership of shares and debenture: If there is good reason, the Registrar is empowered to investigate the ownership of any shares or debentures of a company by demanding information from persons who are or have been interested in the securities or have acted as agents or advocates for the interested parties.
Such persons must give the Registrar such information as is reasonably in their possession.
However, if the information is not forthcoming, the Registrar is empowered to place restrictions on the shares involved in which case:
• Any transfer of the shares is void.
• The right to vote on the shares is not exercisable.
• The sums due on the shares are not payable.
• No other shares can be issued in respect of those shares.