New law puts company bosses on a tight leash

Kenya has moved to enhance corporate governance by setting a jail term of up to two years for directors who break company rules and regulations, as well as a ban from holding office for a period of 15 years. The Companies Act 2015 is expected to reduce company failures and protect investors’ interests. PHOTO | FILE 

By JAMES ANYANZWA, The EastAfrican

In Summary

• Kenya has moved to enhance corporate governance by setting a jail term of up to two years for directors who break company rules and regulations, as well as a ban from holding office for a period of 15 years.
• The latest measures are part of a wide range of measures that the country has adopted to enhance corporate governance in the management of both quoted and unquoted companies, reduce company failures and protect investors’ interests.
• Among the offences that will put directors on the wrong side of the law are a failure to keep proper accounting records and failure to submit returns, financial statements or other documents of companies with the registrar.

Kenya has moved to enhance corporate governance by setting a jail term of up to two years for directors who break company rules and regulations, as well as a ban from holding office for a period of 15 years.

Directors and company secretaries who preside over financially distressed (insolvent) companies will also be declared unfit to take part in the management of other companies for 15 years.

The latest measures are part of a wide range of measures that the country has adopted to enhance corporate governance in the management of both quoted and unquoted companies, reduce company failures and protect investors’ interests.

On the spot are directors who commit fraud in their companies, or commit a breach of duty as office holders.

Among the offences that will put directors on the wrong side of the law are a failure to keep proper accounting records and failure to submit returns, financial statements or other documents of companies with the registrar.

Directors who fail to keep proper books of accounts will be imprisoned for two years and or pay a fine of Ksh1 million ($9,609.38), while the individual companies will be charged Ksh2 million ($19,218.8).

The decision of a company to sanction the conduct of a director as amounting to negligence, default, breach of duty or breach of trust in relation to the company will be taken by board members and approved through an ordinary resolution.

“It is not the auditors’ responsibility to keep proper books of accounts. This is the duty of the directors and officers of the company,” said Rosa Nduati-Mutero, a partner at the Anjarwalla & Khanna law firm.

“The auditor’s responsibility is to audit the accounts prepared by the company, which is the direct responsibility of the directors.”

Under the Companies Act (2015), companies shall also be required to keep minutes of each meeting of its directors for at least 10 years from the date of the meeting.
The law sets out various penalties depending on which of the directors’ duty has been breached.

The new law also allows the formation of “single” person companies and gives listed companies the opportunity to buy back their shares from the market as part of stock price management.

Last week, Attorney General Githu Muigai released a timetable for the operationalisation of the new Companies Law in two phases, starting from November 6.

“As part of enhancing good corporate governance, provisions have been introduced to enhance accountability by directors and the company’s officers,” said Prof Muigai.

Ugandan law

In Uganda, the Companies Act (2012), which came into force on July 1, 2013,  also allows the incorporation of single-member companies.

According to the Ugandan law, a director who fails to keep proper accounting records, prepare and file accounts, send returns to the registrar of companies, file tax returns and pay tax and allows a company to trade while insolvent is banned from holding office for three years.

The Act also seeks to protect minority shareholders from oppression by providing that a complaint be lodged by the aggrieved member to the registrar instead of the High Court.

In Tanzania, the current Companies Act (2002) came into force on March 1, 2006, replacing the Companies Act (212) which was enacted in 1929.

The Act provides additional protection to minority shareholders  by providing procedures in situations of unfair prejudice and the institution of derivative actions—the right of persons  to seek legal justice in the event of “unfair” treatment by majority shareholders.