Under Section 56 (1) of the Companies Act, it is generally unlawful for a company whether directly or indirectly and whether means of a loan, guarantee or the provision of security to give any financial for the subscription or purchase of its shares or those of its holding subsidiary.
This section exemplifies the rule in Trevor v Whitworth. However, a company may lawfully finance the purchaser or acquisition of its shares in the following circumstances:
Where lending of money is part of the ordinary business of the company and the same is lent in the ordinary course of business.
Where the company enforces a scheme to advance loans to trustees to enable them to
purchase its fully paid shares for the benefit of its employees including salaried directors.
Where the company has in force a scheme to advance loans to all its bona fide employees other than directors to enable them purchase its fully paid shares way of beneficial ownership.
Non-compliance with this section renders the company and every officer in default liable to a fine not exceeding KShs.20, 000.