Gratuitous payments are gifts or donations and charities made by companies gratuitously. At common law, gratuitous payments are invalid unless made for the benefit of the company.
In Huton V. West Cork Railway Co. (1883), the company had disposed off its entire undertaking and only existed for purposes of winding up. Shareholders in general meeting solved to spend some of the purchase money to compensate salaried employees at the company and to pay directors for past services. A dissatisfied shareholder challenged the resolution and it was held that the proposed payments were invalid. Bawel L. J. observed,
“The law does not say that there are to be cakes and ale, but there to be no cakes and ale except such as are required for „the benefit of the company‟. Cases decided after this held that all gratuitous payments were invalid even if provided for in the objects clause. The courts were of the view that the payments are a wastage of the corporate assets.
For example in Parke V. Daily News Ltd and in Re Roith where the objects clause empowered the companies to make gratuitous payments. It was held that the payments were invalid since they were not made for the benefit of the company.
In re Behrens Co. Ltd (1932). It was held that the gratuitous payments. It was held that the payments were invalid since they were not made for the benefit of the company.
In re Lee Behrens Co. Ltd. (1932). It was held that the gratuitous payments proposed by the company was invalidity of gratuitous payments.
1. Is the transaction reasonably incidental to the carrying of the company‟s business?
2. Is it a bonafide transaction?
3. Is it for the benefit and to promote prosperity of the company?
This test was disqualified by the court of Appeal in Rolled Steel case (1980). However, English law has since changed and a company may be incorporated for the purpose of making gratuitous payments.
In re Horsley and Weight Ltd the court of appeal observed, “The objects of a company need not be commercial, they can be charitable or philanthropic, indeed they can be whatever the original incorporators wish provided that they are legal”.
In the Horsley and Weight Ltd the court of appeal observed, “The objects of a company need not be commercial, they can be charitable or philanthropic, indeed they can be whatever the original incorporators wish provided that they are legal”.
The common law relating to gratuitous payments though made applicable by Section 3(11)(c) of the Judicature Act, does not apply in Kenya since the circumstances of Kenya encourage donations by companies and individuals to worthy causes.