CPA I1.3 COMPANY LAW Study Manual

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INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS
OF
RWANDA
Intermediate 1.3
I1.3 Company Law
First Edition 2012
This study manual has been fully revised and updated
in accordance with the current syllabus.
It has been developed in consultation with experienced lecturers.
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BLANK
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CONTENTS
Study Unit Title Page
Introduction to the Course 7
1 Nature and Classification of Companies 11
Definition of Company 12
The Company as Contract 13
Shares 14
Vocation to Profits Sharing 15
Affectio Societatis 16
Company as Institution 16
Forms of Business Organisation 17
Distinction between companies and other Business Organisations 18
Legal Status of Companies 19
Companies Moral Personality 30
2 Registration of Companies 33
Public Limited Company 34
Formation of the Public Limited Company 34
Substantive Requirements 35
Procedural Requirements 36
Office of the Registrar General (ORG) 36
Memorandum and Articles of Association 37
Promoters 39
Legal Consequences of Incorporation 42
Constituent Ordinary Meeting 43
The main differences between a private and a public company 44
3 Share Capital 45
Subscription of Share Capital 46
Payment of Shares 46
Types of Share Capital 47
Raising Share Capital 50
Variation of Shareholder’s Rights 52
Rights and Obligations of the Shareholders 53
Prospectuses 56
Alteration, maintenance and reduction of Share Capital 57
The Acquisition and Redemption by a Company of its own Shares 59
Financial Assistance by a Company for the Purchase of its own Shares 60
Dividends 60
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Study Unit Title Page
4 Debt Capital 61
Debentures 62
Charges 66
Registration of Charges 68
Remedies for Debenture Holders 68
Comparison between a share-holder and a debenture-holder 69
5 Membership of a Company 71
Becoming a Member 72
Register of Members 72
Rights, Obligations and Liabilities of Members 72
Termination of Membership 73
6 Shares 75
Classes of Shares 76
Issue and Allotment 76
Transfer and Transmission 76
Share Warrant 77
7 Meetings 79
Classification of Meetings 80
Notice of Meeting 82
Agenda 82
Proxies 82
Quorum 82
Proceedings at the Meeting 83
Resolutions 83
Minutes 84
8 Directors 85
Management of Companies 86
Appointment of Directors 87
Qualification, Disqualification and Removal of Directors 89
Powers and Duties of Directors 90
Remuneration or Compensation for Loss of Office 91
Loans to Directors 91
Register of Directors 91
Disclosure of Directors’ in Contracts 92
The Turquand’s Rule 93
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Study Unit Title Page
9 The Secretary 95
The Company Secretary 96
Qualification, Appointment and Removal 97
Liability of a Secretary 97
Removal of a Secretary 98
Register of Directors and Secretary 98
10 Auditors 99
Qualification, Appointment and Removal 100
Remuneration 101
Powers and Duties 101
Liability of Auditors 101
Dismissal of Auditors 102
11 Company Accounts, Audit and Inspection 103
Form and Content of Accounts 104
Books of Account 104
Group Accounts 104
Directors’ Report 105
Auditor’s Report 106
Investigation by the Registrar General 106
Appointment and Powers of Inspectors 107
Inspector’s Report 108
12 Corporate Insolvency 109
The Disappearance of Legal Personality 110
Winding up by the Courts 113
Voluntary Winding Up 113
Liquidators: Appointment and Duties 114
Release of Liquidators 115
Offences relation to Liquidation
13 Alternatives to Winding Up 117
Reconstruction 118
Amalgamation, Mergers and Take-overs 119
Schemes of Arrangement 119
Rights of Shareholders 120
Rights of Creditors 120
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Study Unit Title Page
14 Foreign Companies 121
Definition 122
Registration of Foreign Companies 122
Obligations applicable to foreign companies 123
Cessation of foreign company activities 123
15 Dormant Company 125
Dormant Company 126
16 Removal from Register of Companies and Penalties 127
Removal from Register of Companies 128
Solvency and company’s inability to pay 128
Pertinent provisions in relation to the removal from the register of companies 129
Penal Provisions 130
17 Accounting Records and Audit 131
Definition 132
Financial Statement and Annual Report 135
Mandatory Investigation 137
Amalgamation of Companies 139
Alteration of the nature of companies 143
Appendix 1 145
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INTRODUCTION TO THE COURSE
Stage: Intermediate Level
Subject Title: I1.3 – Company Law
Aim
This subject aims to ensure that students understand the key aspects of business and
commercial law to business organisations and recognise issues that require the advice of a legal
professional. In addition they must understand, apply and advise on the regulatory and
governance requirements applicable to business organisations.
Company Law as an Integral Part of the Syllabus.
The legal principles learnt in this subject will be relevant to students throughout their
professional accountancy studies. In particular this subject is an integral component for the
study of Financial reporting, Managerial Finance, Auditing, Advanced Financial reporting,
Advanced Corporate Finance and Audit Practice & Assurance Services.
Learning Outcomes
On successful completion of this subject students should be able to:-
• Understand how to form a company
• Distinguish between companies and other business organisations
• Understand appointment of Directors, Secretary, Auditor
• Understand Company Accounts
• Understand procedures to be applied to Corporate Insolvency
• Understand a apply alternative procedures to winding up
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Syllabus:
1. Company Law
• Nature & Classification of Companies
• Forms of business organisations
• Distinction between companies and other business organisations
• Law relating to other business organisations such as co-operative societies
2. Registration of a Company
• Memorandum and Articles of Association
• Promoters
• Legal consequences of incorporation
3. Share Capital
• Types of Share Capital
• Raising Share Capital
• Variation of shareholders rights
• Prospectuses
• Alteration, maintenance and reduction of capital
• The acquisition and redemption by a company of its own shares
• Financial assistance by a company for purchase of its own shares
• Dividends
4. Debt Capital
• Debentures
• Charges
• Registration of charges
• Remedies for debenture holders
• Borrowing powers of a company
5. Membership of a company
• Ways of becoming a member
• Register of members
• Rights and liabilities of members
• Termination of membership
6. Shares
• Classes of shares
• Issue and Allotment
• Transfer and transmission
• Mortgage of Shares
• Share Warrant
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7. Meetings
• Classification of Meetings
• Notice of Meetings
• Agenda
• Proxies
• Quorum
• Proceedings at the meeting
• Resolutions
• Minutes
8. Directors
• Appointment of directors
• Qualification, disqualification and removal of directors
• Powers and duties of directors
• Compensation for loss of office
• Loans to directors
• Register of directors
• Disclosure of directors’ interests in contracts
• The Turquand’s rule
• Investor Protection
• Insider Dealing
9. The Secretary
• Qualification, Appointment and removal
• Position and duties
• Liability of a secretary
• Removal of a secretary
• Register of directors and secretary
10. Auditors
• Qualification, appointment and removal
• Remuneration of auditors
• Powers and duties
• Vacation of office
11. Company Accounts, Audit and Inspection
• Form and content of accounts
• Books of account
• Group Accounts
• Directors’ report
• Auditor’s report
• Investigation by the registrar
• Appointment and powers of inspectors
• Inspector’s report
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12. Corporate Insolvency
• Winding up by court
• Voluntary winding up
• Liquidators: Appointment and duties
• Release of liquidators
• Offences relating to liquidation
13. Alternatives to winding up
• Reconstruction
• Amalgamation
• Mergers and takeover
• Schemes of arrangement
• Rights of shareholders
• Rights of creditors
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Study Unit 1
Nature and Classification of Companies
Contents
A. Definition of Company
B. The Company as Contract
C. Shares
D. Vocation to Profits Sharing
E. Affectio Societatis
F. Company as Institution
G. Forms of Business Organisation
H. Distinction between companies and other Business Organisations
I. Legal Status of Companies
J. Companies Moral Personality
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COMPANY LAW
The expression “company law” may be defined as a branch of law governing the companies. It
deals with all aspects relating to companies, such as incorporation of companies, allotment of
shares and share capital, memberships in companies, borrowing by companies, management
and administration of companies, winding up of companies. Thus, the company law is that law
which exclusively deals with all matters relating to companies.
A. DEFINITION OF COMPANY
In Rwanda, commercial companies are governed by the N°07/2009 of 27/04/2009 relating to
companies.
The concept of commercial company is defined on article 2, 12° of company law as a corporate
body composed of one or more persons for making profit. Thus, is legal sense, a company is
one which is formed and registered under the companies’ law aforementioned.
It may be noted that legally, a company is regarded as a person, which has rights and duties at
law. However it is not a natural person as human beings are. It is only a legal or artificial
person, recognized by the law. Since, the company is created by the law i.e by registration
under the law, it is known as a legal person, and as it has no body, no soul or conscience, no
physical existence except in the eyes of law.
According to the legal definition of the company under Rwandan law, it is evident from this
definition that the contractual character is not more compulsory for companies. Article 3 of the
law goes on to say that a company is a legal entity which is made up with one physical person
or corporate person for commercial purposes and after filling in a form thereto related and
basing up on the provisions of this Law. The company shall be formed by filling in the form
attached herewith as Appendix I.
In addition article 2, 16° defines a corporation by eliminating all categories of persons which
are not regarded by this as body corporate, they include:
a) a statutory corporation;
b) a sole proprietorship;
c) a registered co-operative society;
d) a trade union;
e) a registered organization;
At the face of the above list, one sum up the list of exclusion as follows: the first element
corresponds to a government company which may be a trader such as RECO RWASCO or
ONATRACOM. The second category excluded from corporation merely because the trader in
this category is a real person (not a group of individuals putting together their credit and
assets). The last three categories are rather civil society organizations.
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The contractual conception of the company prevailed for a long time. It has been followed then
by another tendency that considered the company like a mixture of both the notions of contract
and moral person to some extent depending on the type of companies. The present conception
has the tendency to become gradually a combination of two notions but with a predominance of
the institutional conception of a company.
B. THE COMPANY AS CONTRACT
Insofar as a company is a contract, it supposes a minimum of two parties and thus complies
with general conditions of validity of the contracts with regard to its incorporation: consent of
the parties, capacity to inter into agreement, actual object and legal cause.
However, besides the above conditions common to all contract, a company contract has
particular conditions. The mere contractual explanation is indeed insufficient insofar as the
legislator regulates in an imperative way conditions to create a commercial company.
In the same way a company legally comes into existence after its compliance with an
administrative formality of registration with the Office of the Registrar General (art.4).
As with regard to company contract, the shareholders agree to put in together the values, goods
or how know in order to share the profits.
The content of this agreement governs the functioning of the company. There is no company
contract unless there is a combination of the following elements:
• The shares from one or several shareholders;
• The vocation of all to the profits;
• The affectio societatis.
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C. SHARES
In order to contribute to the formation of a share capital of the company, every shareholder
must commit to make a share and is debtor of the share that he vowed to give. He owes to the
company a guarantee similar to that of the seller in case of eviction. The share differs from a
sale in that in return to the good of which it property transferred, a shareholder doesn't receive a
price, but titles representing the share capital of the company which is the beneficiary of shares.
Besides, to the difference of the sale that is a commutative contract, the share has an uncertain
character because even though a shareholder knows the value of that he brings, he ignores the
value of the share that he receives in return.
The company contract implies therefore putting together shares by each of the contracting
parties. The share indeed, is the good which is transferred to the company by the shareholder
in trade of which he is entitled some shares. In other words, it is good that the shareholder
commits to put at the disposal of a company for a common exploitation. The notion of shares is
instrumental to the constitution of a company, especially when it comes to corporations, where
without share the whole idea of a company lacks substance. Article 31 of company law states
Share capital shall mean all the shares received whether paid or not. The same article refers to
other types of shares other than in cash without précising whether they are physical or know
how as it was the case in the previous law.
A contract involving shares implies two kinds of successive contract:
• the commitment to issue a share: the subscription
• the actual performance of the obligation which entails the dispossession of share to the
profit of company: fulfillment.
In principle, the proportion of share capital which must be availed at the time of the
subscription and that of the date of the calls for the outstanding is determined by articles of
association. In return for his contribution, the shareholder gets some shares. Article 77 of
company law provides, any shares created or issued after the commencement of this Law may
either be of par value or of no par value.
1. The share par value
The share is said to be paid in cash or par value when the contribution is nothing other than
money; which is the most usual and simplest of the shares.
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2. The share no par value
It consists in a contribution of a physical or incorporeal good. In other words, it is any share
apart from those paid in money or in industry. The rule is that any goods that are legally in
trade may be object of a share.
D. VOCATION TO PROFITS SHARING
The company is constituted to achieve profits which will be thereafter shared between
members. Thus, the decisive criterion is not the search of profits but the sharing of profits
between members. It is this criterion that distinguishes a company from an association. With
the latter, profits are not shared between the members.
The term profit has three possible significances:
• to begin with, it has been considered as a way of making money or a positive gain;
• then profit their benefit when there is an economy out of an expense;
• finally the profit is any pecuniary or material gain that is added to the fortune of the
shareholders.
The profits and the modes of payment depend on the contractual will of the shareholders. The
shareholders can adopt in the articles of association modes of distribution, but when the articles
of association are mute, distribution of profits is proportionate to shares held by every
shareholder.
Indeed, their profits should be measured against the involvement in investment. Also
shareholders commit to contribute to losses.
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E. AFFECTIO SOCIETATIS
Two essential elements at stake are estate sharing and vocation to the profits, it is necessary to
add an intentional element which is in Latin "affectio societatis ".
This notion is multiform, as it is subject to several doctrinal definitions. The least common
denominator is the will of all shareholders to collaborate, on an equal footing to the success of
the common enterprise; this common will must not exist at the time of the creation of the
company only, but must also continue during the whole social life. The affectio societatis is
often strong in small size company but inexistent in the immense majority of companies ranked
in stock market.
In short, the affectio societatis must be understood as the shareholders desire to unite in order
to collaborate to the common enterprise success without any subordination to one another
while accepting common risks. Some authors estimate that affectio societatis is of no value,
since the contract of company requires the consent. It is therefore obvious that this contract
implies the intention to create a company. The affectio societatis is however more of a feeling
than a legal concept.
F. COMPANY AS INSTITUTION
Once formed, a company must appear as, a living organism, oriented toward a profit meant for
its shareholders.
In order to achieve that, the company is provided with organs to allow it decide without
requiring its shareholders consensus.
What is evident is that the company contract doesn't have for main effect to create the
subjective rights and obligations, but rather create that of its shareholders and issues rules to
such group. It is that organization that is referred to as an institution.
The institutional theory is enshrined by the law, since article 2, 12 of company law defines a
company as being a legal entity.
It is necessary to underline however that neither of these two theories, contractual or
institutional, is satisfactory enough in itself to exclude the other. This is how the legislator took
into consideration both aspects.
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G. FORMS OF BUSINESS ORGANISATION
Civil law distinguishes in the first place between a combination of individuals for the purpose
of profit and a combination for some other purpose. The business association is termed a
company, whereas any other combination is termed an association.
COMMERCIAL ACTIVITIES
General notions (Generalities)
The Decree of August 2nd, 1913 on Traders and the Proof of Commercial Agreements uses the
expression “commercial activities” without defining it. It is almost impossible to have a unique
notion of lucrative (commercial) activity because of the diversity of its forms.
Although it is next to impossible to enlist all possible commercial activities, the decree of 1913
has attempted an exhaustive list of what might be regarded as commercial activities under
Rwandan law.
It is important to bear in mind that this list must not be interpreted strictly for two reasons:
Commercial activities are both changing and limitless and
The Decree law that is being referred to was enacted more than 85 years ago.
All commercial activities present a common character; they are made in order to gain a profit.
The spirit of lucre must characterise the commercial operation. Without this, the activity is not
commercial.
Enumeration of commercial activities
According to the provisions of article 2 of the decree of August 2nd, 1913, commercial
activities can be divided into three broad categories:
• Commercial activities by nature;
• Commercial activities by form;
• Commercial activities by relation or by the theory of accessory.
• Very often, mixed commercial activities are considered but they do not constitute
another category; they are merely a modality of commercial activities. They are
activities, which present commercial character for one of the parties.
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COMMERCIAL ACTIVITIES BY NATURE
Some activities are commercial even when they are isolated and others must be repeated
(theory of enterprise or “venture”).
Definition of a commercial organisation
The commercial company is a legal person which is the result of a contract ofseveral persons
who agree to contribute their assets in cash, in kind or in the form of services to an activity for
the purpose of sharing profits or benefits or losses arising there from.
H. DISTINCTION BETWEEN COMPANIES AND OTHER
BUSINESS ORGANISATIONS
Rwanda law recognizes five types of commercial companies:
1. General partnership;
2. Limited partnership;
3. Partnership limited by shares;
4. Private limited company:
5. Public limited company.
These commercial companies are commonly separated into two groups: partnership or
companies where the liability is not limited and a company or partnership who’s liability is
limited by shares. The former includes the companies of the first, second and fourth types, in
which, in principle, the interests of the participants are neither assignable nor heritable, The
rationale for the interest of the participants not being assignable nor heritable is that the
personality of the participants is of paramount importance. The organisation with shares, on the
other hand, which comprise, the third and fifth types, fulfil the same functions as the public
limited company.
The company being the result of a contract comprising several persons, a couple i.e., husband
and wife may by themselves or in association with other persons be partners in the same
company and take part together or not in the management of the company. However a husband
and wife may not be partners in the same partnership or private company in which they shall
be jointly and severally liable without limit for the debts of the organisation.
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I. LEGAL STATUS OF COMPANIES
Every company shall be a public company unless it is stated in its application for incorporation
that it is a private company.
Type 5 above – a Public Limited Company shall be:
1. a company limited by shares;
2. a company limited by guarantee;
3. a company limited by both shares and guarantee;
A company limited by shares and by guarantee may be public or private. However, a company
limited only by guarantee or an unlimited company shall not be public.
Where the liability of the shareholders of a company is limited, the registered name of the
company shall end with the word "Limited" or the abbreviation "Ltd".
PRIVATE LIMITED COMPANY
The private limited company must have at least two members and a maximum of 100
members, Employed or formerly employed not included (Article 8). The minimum capital
required is 500.000frw and the capital must be entirely subscribed and paid up. The capital
shall be divided into equal shares whose face value shall not be less than 1000 Frw.
The public are not invited to be shareholders, no prospectus is to be issued
Company name: The company’s name may either be one descriptive of its business or one
composed of the names of one or more of its members, In either case the name must be
immediately followed by the words Limited.
Limited Liability: As the name suggests the liability of members is limited to the amount of
their contributions.
Management: Management is insured by a Board of Directors (BoD) or managers. It is by the
law that on the BoD, there must be a minimum of 3 up to a maximum of 12 directors.
Transferability of shares: Shares cannot be offered to the public., except the articles of
association provide otherwise. Shares may be freely transferred between shareholders, the
spouse of the transfer, the deceased shareholder orthird party as prescribed by the articles of
association.
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Dissolution: The death, bankruptcy, incapacity or retirement of a member does not involve the
dissolution of the company unless the articles of association so provide.
PUBLIC LIMITED COMPANY:
According to Article 7 of Law 7/2009 - “ Every company shall be a public company unless
it is stated in its application for incorporation that it is a private company”.
In order that a public limited company is validly constituted there must be a minimum of seven
members. There are two types of public limited companies: a public limited company that does
not offer its shares to the public and one that offers its shares to the public. In the former case
the minimum share capital required is 100.000.000frw while 200.000.000 frw is required in the
latter.
Company Name: It is forbidden for the name of a shareholder to appear in the company name.
The name of the company must be followed by Limited or Ltd.
Liability: As the name suggests the liability of the shareholders is limited to the amount of their
contributions.
The incorporation procedure for a company that offers its shares to the public requires the
completion of a series of acts. Drawing up and publication of the draft articles of association in
the Official Gazette (OG), publication of the prospectus, subscription of the share capital and
payment for shares. In the second place, there must be a statutory meeting of the shareholders
with a notary attending. This meeting (i.e. statutory or constituent meeting applies to both
types of limited company) must appoint not less than three and not more than twelve persons,
adopt the Memorandum of Association and, if there are to any, the articles of association. It
must also appoint one or more auditors whose function is to watch over the accounts in the
shareholders’ interest.
The acceptance of their office by the directors and auditors marks the birth of the company. But
it is still essential for the details of the company to be registered with the Office of the
Registrar General before the company can start doing business. The company must also
comply with publication requirements.
It is a condition of valid incorporation that where the share contribution is in kind this must be
entirely paid up at the time the company goes operational while where the contribution is cash
1/3 must be paid up when the company goes operational and the balance within two years of
the company’s existence
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THE LEGAL STATUS OF COMMERCIAL COMPANIES
When commercial companies have been constituted they are required in law) to register with
the Office of the Registrar General before commencing any commercial activity in Rwanda.
Upon registration a commercial company acquires legal personality. This is to say that it is
treated as an entity separate and distinct from that of its owners. Hence it is capable of
enjoying rights and of being subject to duties which are not the same as those enjoyed or borne
by its members except to the extent and in the manner provided by law. The consequences of
legal personality are that the commercial company possesses
• a name;
• domicile;
• nationality;
• patrimony.
• One or more shares
• Limited or Unlimited liability
• One or more diretcors
• A business occupation – Memorandum and Articles of Association
1. The company has a name
All commercial companies must have a name. Commercial companies of which the liability of
its partners is unlimited i.e. partnerships (general and limited partnerships) have a firm name
which comprises the names of all the partners or of some of them. As regards commercial
companies having shares the name of the company must be followed Limited or Ltd. Note that
although the owners of a commercial company are at liberty to choose a name for their
company, the name must not be identical or too similar to the name of an already registered
company.
2. The company has a domicile
A commercial company also has a domicile, which is distinct from that of its individual
members. The domicile is the place where the commercial company has its principal place of
business i.e. its registered office. The registered office is the place where the company has,
principally, its legal, administrative, financial and technical office as opposed to where it
merely does business (irrespective of its importance and the presence of a secondary
administrative or ex[ploitation unit).
The distinction between the registered office and the exploitation office is important for it is the
registered office that determines the territorial competence of the court, in the event where
someone institutes proceedings against the company, the place where an action in bankruptcy
can be instituted, including the nationality of the company.
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3. The company has a nationality
A commercial company has a nationality, which is determined by the laws of the country,
which regulates its organisation and functioning (definition of powers of management,
procedure of shareholders meetings, rules as to liquidation etc.).
4. The commercial company has a patrimony
The commercial company has a patrimony, which is constituted by its assets and liabilities
distinct from that of its members. Although the members of the company make a contribution
which constitute the patrimony of the company they do not have ownership rights over
company property, all they have during the life time of the company is a right to a claim during
the distribution of the assets of the company. Note that the patrimony of a company serves as
security to its creditors.
5. The commercial company acts through its legal representatives
Although the commercial company possesses a legal personality, as it is not a human being, it
cannot act for itself.
It is represented in its daily activities by human beings - managers. It is through these persons
that the company can acquire and dispose of property, institute legal proceedings as well as
defend an action against the company However, the company is liable for the wrongful acts
committed by its legal representative as far as civil matters are concerned.
THE DISAPPEARANCE OF LEGAL PERSONALITY
When a commercial company acquires a legal personality the personality does not persist for
life i.e., it is not permanent, some day it will end. The disappearance of legal personality is the
consequence of dissolution of the company, which entails the dissolution and distribution of its
patrimony among shareholders (partners).
1. Causes of Disappearance
The causes of disappearance are of two types, the one is applicable to all commercial
companies; the other relates to individual partners and is restricted to those companies in which
the personality of the participant is fundamental.
a) General Causes
There are four general causes:
1. A commercial company established for a certain and defined period of time dissolves at
the end of that period in the absence of a resolution extending its life.
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2. A decision taken by the shareholders (partners) to dissolve the company before the time
agreed upon.
3. Loss of the object or impossibility of performance
4. If the object has been attained
b) Peculiar causes
The causes peculiar to an individual do not apply to all commercial companies. They relate
exclusively to partnerships. Accordingly the death, incapacity or insolvency of a partner will
result in dissolution.
However in practice, partnership agreements usually contain a provision (clause) making it
possible for the partnership to continue doing business not withstanding any of the above
causes that may lead to its dissolution.
A partnership cannot be dissolved by the unilateral will of one partner except if he acts in good
faith. The last cause for dissolution, which is applicable to all types of commercial companies,
is the dissolution for just cause. Here dissolution may be requested by an individual
shareholder or partner. The just cause is left to the appreciation of the court. Some of the
factors, which may be considered as just cause, include failure by a partner to respect his
obligations, permanent disability of a partner, antagonism that makes it impossible for the
partners to work together etc.
Note that the regular transformation of a commercial company from one form into another
shall not entail the creation of a new legal entity. The same shall apply to an extension of the
existence of a company or any other amendment of its Articles of Association (partnership
Agreement) with formalities of publication both at the time of constitution (formation) to any
amendment of its Articles of Association (partnership Agreement)
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COMMERCIAL LAW
INTRODUCTION
Law is a social science: it has to provide for the changing needs of a developing Community
and consequently is inseparably bound up within the community it has to serve. For a thorough
understanding of the law, it is essential to have knowledge not only of the community in which
it functions, but also of its history and of the factors, which led to its origin and development.
This is one of the reasons why every study of the law includes a study of the history of the law.
Another reason is that a knowledge of legal history helps in evaluating probable trends of
future development.
Rwandan commercial law, unlike for example most European continental legal systems, is not
codified (that is recorded in one comprehensive piece of legislation) a knowledge of the law
applying in the Republic is based on Roman-Germanic law. This means that our system finds
its roots in Roman as well as in Germanic law. Although Rwandan commercial law is based on
Romanic law, we shall not analyse the Romanic law instead, we shall concentrate on basic
principles of Rwandan commercial law.
Commercial law or business law is in essence part of private law and regulates legal
relationships, which are commonly found in commercial life.
DEFINITION
The term Commercial law known as Mercantile Law may be defined as that branch of law,
which comprises laws concerning trade, industry and commerce. It is an ever-growing branch
of law with the changing circumstances of trade and commerce.
With the increasing complexities of the modern business world, the scope of commercial law
has enormously widened. It is generally understood to include the laws relating to contracts,
sale of goods, partnership, companies, negotiable Instruments, insurance, insolvency, carriage
of goods, and arbitration.
The commerce is the exchange of merchandises or services especially on a large scale: buying
and selling. Commercial law can be defined as a body (corpus) of judicial rules relating to the
commerce. This means that it is the law which governs traders and commercial related
activities.
Commercial rules only apply to a determined category of persons, traders, for activities
performed in case of their professional activity; To different transactions (operations) or
activities to which the legislator has attributed a commercial character.
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The commercial law is part of private/civil law which regulates matters between individuals. It
is a branch of civil law that deals exclusively with the juridical implications of commercial
activities either among traders themselves or between traders and their customers. The
commercial law is thus a special law distinct from the civil law which constitutes its basis:
some provisions (articles) apply where the commercial law or commercial usages do not settle
a case.
Commercial activities are primarily governed by a collection of several laws1 dealing with
different aspects of commercial law. It is important to keep in mind that commercial law is
neither autonomous nor self sufficient (i.e. it must not be understood that commercial law
provides answers and deals with every aspect of commercial and industrial activities), but
applies within the general scope of civil law.
Business law is different from commercial law. Business law, may be defined as a branch of
private law which by derogation from civil law, regulates in a specific manner activities of
production, distribution and services.
Business law is seen by a majority as being more extensive than commercial law, which was
traditionally perceived as the private law of commerce. Business law encompasses questions
which are under public law (intervention of the state in the economy) such as tax law, labour
law etc. Business law also encroaches into civil law, notably in the protection of consumers. In
addition, business law applies not only to traders, but also applies to non-traders such as farmer
and members of the liberal profession.
NECESSITY OF COMMERCIAL LAW
The exercise of commerce cannot always follow rules of the private law because:
It requires conditions of:
• Promptness: the speed of commercial operations and their frequent repetition require a
minimum of formalities that is not necessary in private law:
• Credit (or loan): hence the creation of documents allowing the raising of debts
(credits);
• Guarantee: with regards to the importance of credit the guarantee of debts must be
provided. In this case, dispositions of commercial law will have to be more rigorous
(hash) than those of civil law.
• Its proper institutions require a particular regulation. Here, we should notice that till
now the institution of commercial tribunal does not exist in Rwanda.
• It uses certain practices which require a certain control.
1 Such as:
- The Decree of August 2nd, 1913 relating to Traders and the Proof of commercial agreements;
- The Decree of April 24th, 1924 relating to Marriage Settlements of Traders.
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• It was thus necessary to have a commercial law adapted to the needs and usages of
commerce.
In addition to the above, commercial law facilitates planning. This function of law is very
important as business is concerned, e.g. contract and sales law. In making the courts available
to enforce contracts, the legal system ensures that the parties to the contract will either carry
out their promises or be liable for damages. For example, through contracts, a manufacturing
company can count on either receiving the raw materials and machinery it has ordered or else
getting money from the contracting supplier to cover the extra expense of buying substitutes.
Commercial law is also used as an instrument to promote social justice. For example, tax laws
seek not only to raise revenue for government expenditure but also to redistribute wealth by
imposing a higher income tax on wealthy people. The antitrust laws seek to prevent certain
practices that might reduce competition and thus increase prices. Similarly, consumer laws
among others seek to prohibit the sale of unsafe products.
SOURCES OF COMMERCIAL LAW
The Rwandan law consists of a number sources. Some sources are authoritative while others
merely have persuasive authority. Actually, the sources of commercial law are the same as the
sources of other aspects of Rwandan law. The sources of Rwandan commercial law, in the
order in which they are usually consulted, are the followings:
In order i.e.
• legislation (written law),
• custom,
• the general principles of law and equity,
• courts’ decisions (case law) and
• scholarly opinions (doctrine).
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STATUTE LAW OR COMMERCIAL LEGISLATION
Legislation is the making of law by competent authority. Today, legislation is the most
important source of the law. The law is to be found in statutes enacted by parliament and
provincial legislatures.
With Rwandan Commercial law, there is no commercial code in Rwanda. In 1967, there was
an attempt, which resulted in a draft of commercial code. However, until now the process of
elaboration of a commercial code stagnates. The commercial legislation is made up of scattered
legal instruments (texts), which have been introduced in Rwandan law during the Belgian
mandate and trusteeship. It is really time for the legislator to enact rules and regulations, which
take into account the evolution of commercial profession.
However with all the attempts mentioned above, Legislation may be defined as the setting
down of binding rules of law in a formalised way, by an authority, such as that vested in
Parliament, or subordinate, such as that vested in administrative authorities.
Parliament may pass any law, subject to the constitution. It may also pass laws allowing other
bodies to make certain laws for certain purposes. In this way, Parliament gives administrative
authorities the capacity to pass regulations called subordinate or delegated legislation because
they are subject to the laws passed by Parliament. If there is any conflict between the law
passed by Parliament and any subordinate legislation, the law passed by Parliament will
prevail.
Legislation consists of the Civil Code and statutes (law voted by Parliament) together with
provisions of legislative acts of subordinate authorities, such as presidential decree and that of
other administrative authorities. These constitute the primary source of business law.
CIVIL (PRIVATE) LAWS
As said above, commercial law is not self-sufficient. It does not contain a complete regulation
of all aspects of commercial and industrial activities. The civil law must apply to commercial
matters as long as an express disposition does not exclude it. If it happens that there is a
conflict between the civil law and the commercial law the latter is applied (Specialia
generalibus derogant) special things derogate from the general one.
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CUSTOMS, THE GENERAL PRINCIPLES OF LAW AND
EQUITY
Certain rules of conducts are observed because it has become customary in a particular group
of people to respect such usages. Customary law does not consist of written rules, but develops
from the habits of the community and is carried down from generation to generation.
In modern communities where the rate of development is very rapid, custom has less
opportunity to develop into law. Once the need for a particular legal rule arises, the legislature
simply steps in and lays down such a rule. Yet, even today it may still happen that custom
develops into law.
In order for the custom to be recognised as a customary rule:
• It must be reasonable
• It must have existed for a long time
• It must be generally recognised and observed by the community
• The contents of the customary rule must be certain and clear.
It is generally understood that in matters not provided for in the existing law, Rwandan
tribunals and courts have to apply local customs and general principles of law and equity.
Furthermore, article 98 of the Rwandan Constitution of 1991 calls for the application of
customs provided the custom in question meets certain conditions. These conditions are:
• An existing law has not modified it:
• It does not contradict the Constitution and/or any other laws, rules and regulations:
• It is not against public order and good morality.
Article 201 of the 2003 Rwandan constitution also recognises the applicability of customary
law. Article 201(3) states that “ unwritten customary law remains applicable as long as it has
not been replaced by written laws, is not inconsistent with the constitution, laws and
regulations, and does not violate human rights, prejudice public or offend public decency and
morals”.
Customs generated by trade activities may provide the legal basis for matters not covered by
the legislation. For example, certain usages within a particular type of trade can become part of
the expectations of those engaged in trading activities. The same might apply on some simple
activities of buying and selling.
There are two types of customs: contractual customs and binding customs.
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Contractual customs are not mandatory; they may be discarded by agreement of the parties. For
this reason, it is said that they derive their authority from the theory of contractual freedom.
Accordingly, if the parties have not expressly excluded a custom, they are deemed to have
adopted it. Note that a custom will supplement a contract when the law is silent on a point.
Binding customs are those that do not depend on the law or the free will of the contracting
parties because they are mandatory in character. We find these customs in commercial law as
opposed to civil law. A binding custom supplements the law. For instance, there is a
presumption of joint liability of creditors as opposed to the Civil Code which provides that
there is no presumption of joint liability of creditors.
INTERNATIONAL CONVENTIONS
The implications of international conventions on commercial law have been compounded by
recent developments and increasing interdependence in international commercial activities.
Some might even argue that the result of these developments might have had same or uniform
(unified) international law. The implications of international conventions on Rwandan
commercial law are both direct and indirect.
Direct implication happens when a convention or an agreement becomes part of domestic law
or provides the basis for domestic law of similar content (e.g. the decree of December 10th,
1951 which deals with cheques and the decree of July 28th, 1934 which deals with the bill of
exchange the promissory note and protests). The content of both laws are based on the Geneva
Conventions of June 7th, 1930 and of March 19th, 1931, which deals with cheques and bills of
exchange.
Indirect implication of international conventions can be found in the adoption of Rwanda of the
Vienna Convention on the International Sale of Goods of April 1980, which deals primarily
with external trade relations.
CASE LAW (JURISPRUDENCE) OR DECIDED CASES
The courts and tribunals through their traditional role of judicial interpretation of laws,
represent a significant source for both the understanding and application of commercial law
rules. It is through this role that different areas of the law are clarified and resolved.
By decided cases we mean a judicial determination of an issue of law in a uniform and
consistent manner, such that it has a declaratory force (persuasive weight) in any other case. It
does not establish rules of law which are binding in a formal sense, they only possess
persuasive authority.
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SCHOLAR OPINIONS (DOCTRINE)
Although the doctrine is not considered as a formal source of law it can be consulted in order to
create new concepts or to suggest some solutions, which can be followed by the jurisprudence
or the legislator.
Doctrine has to do with the opinions of academic lawyers to be found in textbooks, learned
journals and the notes to cases reported in law reports. It depends on its capacity to persuade
the judges and through them legal practitioners; and its persuasiveness depends, not only on the
prestige of the individual academic lawyer, but also on the extent to which the individual judge
is willing to be persuaded.
USAGES OR MERCANTILE PRACTICES
The importance of commercial usages comes from the fact that the commercial law must adapt
itself to new concepts and the world of business create some relations between professionals
and those relations become sometimes habits or usages. The commercial custom and practice
can be regarded as one of the essential sources of commercial law.
J. COMPANIES MORAL PERSONALITY
The object of this part is to shed light on the notion of companies’ legal personality, show the
government position concerning recognition of company moral personality, as well as
determine its attributes.
GENERAL NOTIONS ON MORAL PERSONALITY
The legal technique assigns the status of recipients of right to an entity created by man aiming
at the realization of different interests to those of natural persons who enliven it. Even though
the moral personality is man's work, its conditions of existence can only be determined by the
law.
The moral personality likewise the natural personality is nothing else than the faculty to
become a recipient of rights and obligations. It consists therefore in assigning to a group of
people or goods legal personality.
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The modern doctrine considers the notion of moral person as a mere technique devised by
jurists in order to succeed in achieving some desirable results only. A moral person has no
actual will of its own, but people lend it the will of its organs. The moral person however is
entitled to rights and assumes liability as in the case of natural persons despite the existence of
its members.
STATE’S POSITION CONCERNING RECOGNITION OF
COMPANIES’ MORAL PERSONALITY
States are free to recognize or refuse moral personality to such group so that its propensity to
granting or refusal differs from a State to the other.
ATTRIBUTES OF THE MORAL PERSONALITY
Legal persons of companies like natural persons stems from several features that one can
legally group in two points:
- Anything that serves to identify a company as compared to other companies (a name, an
address, a commercial activity, etc.)
- Patrimonial autonomy and the legal capacity of companies.
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BLANK
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Study Unit 2
Registration of Companies
Contents
A. Public Limited Company
B. Formation of the Public Limited Company
C. Substantive Requirements
D. Procedural Requirements
E. Office of the Registrar General (ORG)
F. Memorandum and Articles of Association
G. Promoters
H. Legal Consequences of Incorporation
I. Constituent Ordinary Meeting
J. The main differences between a private and a public company
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The partnership agreement, Memorandum of Association or Articles of Association must be
drawn up and or signed by a notary or witness – see Appendix 1.. From the foregoing it is
evident that the contract establishing the commercial company must be in writing. The nullity
must be pronounced by a court. Where nullity of the company has been pronounced it produces
effects as from the date the nullity was pronounced. Accordingly it puts an end to the execution
of the contract but does not have retroactive effect. Note that as soon as the nullity has been
pronounced by the courts the commercial company shall be dissolved immediately and
liquidation shall follow.
The decision pronouncing the annulment of the company is required to be published in the
Official Gazette (OG) as well as in one or several newspapers designated by judge. The
essence of the publication is to notify all those who may be personally affected by the
information (publication). The categories of persons who may be interested in the publication
are: the shareholders (partners), creditors of the company and the personal creditors of the
shareholders. Note that the cost of publication of the court’s decision is the responsibility of
the company and in case of need by the promoters.
However neither the company nor its members may rely on a nullity as against third parties
until the 30th day subsequent to the publication of the decision of the court in the OG, except
where the company can establish that the 3rd party knew that the company had been annulled
by a decision of the court.
A. PUBLIC LIMITED COMPANY
A public limited company shall be a company formed by natural persons or corporate bodies in
which the liability is limited to the amount of their contribution in the capital of the company
and the company shares are represented by negotiable instruments called shares. The number
of shareholders in the public limited company must not be inferior to seven.
A public limited company shall be known by a company name, which shall immediately be
preceded or followed by the words “public limited company” abbreviated Limited or Ltd. It is
forbidden for the name of the shareholders to appear in the company name. This may be
explained by the fact that the identity of the shareholders will be changing just as often as the
company shares change hands.
B. FORMATION OF THE PUBLIC LIMITED COMPANY
In order for the public limited company to be validly formed it must satisfy both substantive
and procedural requirements.
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C. SUBSTANTIVE REQUIREMENTS
The substantive requirements correspond to the general conditions of validity of a contract:
Consent, capacity, object and purpose; requirements common to all companies: shares must be
in cash or in kind; participation of each shareholder in the profits and losses of the company;
and to the conditions of validity peculiar to the public limited company: number of
shareholders, nominal (face) value of shares and the paying up of shares.
The Memorandum of Association and the Articles of Association, if any, should contain the
following information - See Appendix I
1. a description of the promoters
2. The name of the company
3. The company does/does not have articles of association
4. The address of the registered office and the exploitation office
5. The person to be managing director
6. The object (s)
7. The amount of subscribed capital
8. The amount of paid up capital
9. A table showing the name and details of each subscriber/promoter, the number of
shares subscribed and a signature
The articles of association may also include
1. For each category of shares, the number, nominal or face value, their nature (cash, kind)
and the rights attached thereto:
2. A description of each contribution in kind, the value attributed to such share and the
mode of evaluation; if the contribution is in the form of a building the conveyance for
valuable consideration it has been subjected to for
3. The modalities for the distribution of profits
4. The manner of appointment and number of organs charged with the administration and
control of the company:
5. The rules relating to the holding of general meetings;
6. The duration of the company
7. The beginning and end of the financial or accounting year
8. The estimated cost of the formation of the company;
9. The cause and special benefits given to the promoters.
10. The authority limits of the Directors (Managers)
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D. PROCEDURAL REQUIREMENTS
As regards procedural requirements the formation of the public limited company results from
the completion of a series of formalities. The rules applicable to the formalities of formation
depend on whether the limited company is offering its shares to the public or not.
A company is said to be offering its shares to the public if its shares are listed on the stock
exchange or the shares are deposited with a bank or financial institution for publicity purposes.
The procedural requirements concern:
• Drawing up and publication of the draft memorandum of association in the Official
Gazette
• Publication of the prospectus
• Subscription of share capital
• Payment for shares.
E. OFFICE OF THE REGISTRAR GENERAL (ORG)
Drawing up and submitting the Memorandum of Association and, if any, the Articles of
Association to the Office of the Registrar General (ORG)
As per Article 14, an application for registration of a company shall be sent or delivered to the
Registrar General, and shall be :
1. in the prescribed form;
2. accompanied by :
a) a memorandum of association See Appendix I of this manual
b) the articles of association, if any;
The promoters have the obligation to ensure that the draft memorandum and articles of
association are in writing and witnessed or authenticated (notarised) which should be published
in the Official Gazette.
The rationale for the publication of the draft articles of association is to provide prospective
subscribers with information concerning the characteristics of the proposed corporation. Note
that the publication of the draft articles of association does not exonerate the company from
subsequently publishing the articles of association in the OG as soon as the formalities for the
formation of the company have been completed i.e. when the company is born.
Publication of the draft articles of association serves an important purpose. It renders it difficult
for the promoter or founding member to alter the original draft articles of association during
the period of formation.
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F. MEMORANDUM & ARTICLES OF ASSOCIATION
The constitution of a commercial company consists of one or two documents, namely:
1. The memorandum of association which contains the most important provisions setting
out the sort of activities which the company can carry on. It is of interest to the
outsiders who wish to deal with the company.
2. Also articles of association in some instance are necessary to outsiders since they
contain the powers of the directors.
A memorandum of association for a company limited by guarantee shall indicate that liability
is limited. A memorandum of association for a company limited by guarantee shall also state
that every member shall undertake to contribute to the assets of the company in the event of its
being wound up.
For the case of a company with share capital, the memorandum of association shall state the
following:
1. the amount of share capital;
2. the number of shares making the share capital unless where the company is an
unlimited company;
3. the full name and the number of shares of every shareholder.
See Appendix I for the forms of Memorandum of Association
Any company may have or may not have articles of association. Article 54
Where a company has articles of association, the rights, powers, duties, and obligations of the
company, the Board of directors, each director, and of each shareholder of the company shall
be those set out in this Law except to the extent that they are restricted, limited or modified by
the constitution of the company in accordance with the Law.
Where a company does not have articles of association, the rights, powers, duties, and
obligations of the company, the Board of directors, each director, and of each shareholder of
the company shall be those set out in the Law No. 7/2009 of 27/04/2009 Relating to
Companies.
Articles of association of a company shall :
1. be a document signed by the applicant for registration of the company;
2. be a document that is adopted by company shareholders as its articles of association.
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Articles of association contain rules governing the internal management of the company such
as the appointment of directors and the powers of the board, the rights of different classes of
shareholders and the holding of meetings of the company.
The limited company carries on business under a company name, which may be either one
descriptive of its business or if a private company composed of the names of one or more of its
members. In either case the name must always be followed by the words “ limited company”
abbreviated Ltd .
Requirement for publicity
There is also the requirement for publicity, which is common to other commercial company:
registration in the ORG and publication of the articles of association in the Official Gazette.
Substantive Requirement
In addition to the procedural requirements the law also prescribes certain substantive
requirements, which are specific to the limited company.
1) Objects of the Company
In the first place the limited company should not be constituted to undertake an illegal
business. In as much as the objects of the limited company must be lawful. There are certain
businesses, which cannot be undertaken through the instrumentality of a limited company
because of the inadequate guarantees which this type of business entity offers. The businesses
are: insurance, banking, savings bank or issuance of debentures.
2) Conditions relating to Shareholders
For private limited companies there must be a minimum of two and a maximum of 100
shareholders who may be natural persons or corporate bodies in order that a private limited
company is validly constituted. This number excludes employees or former employees
In a public company there must be a minimum of
In addition the shareholder must give his consent to become a shareholder either in person or
through his agent. The shareholder must also posse’s legal capacity. As such in principle,
minors and persons who suffer from incapacity are excluded from the membership of a private
limited company.
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3) Conditions relating to the Capital and shareholding
The law prescribes that the share capital of a private limited company shall
be at least 500,000 RWF and that the share capital must be entirely subscribed and paid up. The
capital shall be divided into equal share whose face value shall not be less than 1000 RWF.
Each share confers an equal right to the distribution of profit as well as the bonus subsequent to
liquidation. A certificate is issued to represent the shares, which constitute evidence of
ownership. It follows that there is only one type of share in the limited company viz.,
registered shares (that exclude bearer shares and warrants).
4) Conditions relating to duration
The articles of association can define the duration of the company. In practice the duration is
usually not too short because an extension of the life of the company implies the payment of a
new registration tax. It has become fashionable for the duration of the company to be fixed at
99 years.
On the other hand if the duration of the company is indefinite, then, any shareholder may at his
pleasure call for the dissolution of the company after notifying the other shareholders.
G. PROMOTERS
A promoter is a person who takes the preliminary steps to the founding or organization of a
company. He finds people who are willing to finance it - buy shares, lend money. Contracts
must be made for building or leasing space, buying or renting equipment, advertising and
whatever else is required for the early operation of the business.
Any company wishing to offer shares shall issue a prospectus. It will be issued by a
promoter.
A prospectus is a notice, circular, advertisement or request inviting applications or offers from
the public to subscribe for or purchase, a share in or debenture of a company or proposed
company;
No person shall have the right to issue, circulate or distribute any form of application for shares
or debentures unless :
1. the form is accompanied by a prospectus whose date of publication is a date within the
period of six months immediately preceding the date on which the form was issued,
circulated or distributed;
2. a copy of the prospectus and particulars of the issue, circulation or distribution shall
have been lodged with the Registrar General ;
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3. the company or proposed company undertakes, in its prospectus that it will, within two
(2) months after receiving the money, issue to that person a document to acknowledge
receipt of the money. Articlwe 65
Every company shall keep a copy of every share application form at its registered office within
seven (7) days after the prospectus is lodged and shall keep every such copy, for a period of at
least six (6) months after the lodging of the prospectus, for the inspection by company’s
members and creditors.
Where a company has accepted any money as a deposit or loan, it shall within 2 months after
the acceptance of the money, issue to that person a document which acknowledges or
evidences or constitutes an acknowledgement of the indebtedness of the company in respect of
that deposit or loan.
Every advertisement which is issued, circulated or distributed and which offers or calls
attention to an offer or intended offer of shares in, or debentures of a company or proposed
company to the public for subscription or purchase, shall be treated as a prospectus if it
contains the following:
1. the number and description of the shares or debentures concerned;
2. the name and date of registration of the company and its paid-up share capital;
3. a concise statement of the main objective and main business of the company;
4. the names, addresses and description of -
a) the directors or proposed directors;
b) the brokers or underwriters to the issue;
c) the debenture holders' representatives;
5. the name of the stock exchange, if any, of which the brokers or underwriters to the issue
are members;
6. particulars of the opening and closing dates of the offer and the time and place where
copies of the prospectus and forms of application for the shares or debentures may be
obtained;
7. statements with respect to the sale price of shares, the yield there from or other benefits
received or likely to be received by holders of shares, in relation to an authorised
mutual fund.
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Every prospectus shall comply with the form and content prescribed by instructions of the
Registrar General
The prospectus shall :
1. be printed in type of a font size approved by the Registrar General;
2. be dated and that date shall, unless the contrary is proved, be taken as the date of issue
of the prospectus;
3. be signed by every director or person named in the prospectus as a proposed director, or
by his or her agent authorised in writing;
4. state that a copy has been lodged with the Registrar General
5. and also state immediately after that statement that the Registrar General assumes no
responsibility as to its contents.
COMMITMENTS MADE ON BEHALF OF A COMPANY UNDER
FORMATION
Acts done and commitments entered into by the founder (promoters) on behalf of the company,
under formation are required to be taken over by the company prior to its registration
In the register of commercial companies similarly acts done or commitments entered into on
behalf of the company during its formation may also be taken over by the company after its
registration in the RC. However, if the acts and commitments are not taken over by the
company within two (2) months from the date of its registration, the persons who made them
(promoters) shall have unlimited liability for the obligations they entail. Similarly, if company
is not constituted within two years from the date the obligation was contracted, the promoters
shall be personally liable. Once ratified contracts concluded by promoters are considered as
having been signed originally by the commercial company.
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H. LEGAL CONSEQUENCES OF INCORPORATION
Every company shall always have a registered office in Rwanda to which all communications
and notices may be addressed and which shall constitute the address for service of legal
proceedings on the company.
The Board of Directors of a company may, at any time, change the registered office of the
company. The change of the registered office shall be notified to the Registrar General.
A company shall keep at its registered office the following records:
1. the memorandum and articles of association;
2. minutes of all meetings and resolutions of shareholders within the last ten (10) years;
3. an interests register for directors;
4. minutes of all meetings and resolutions of directors and directors‟ committees within
the last ten (10) years;
5. certificates given by directors under this Law within the last ten (10) years;
6. the full names and addresses of the current directors;
7. copies of all written communications to all shareholders or all holders of the same class
of shares during the last ten (10) years, including annual reports;
8. copies of all financial statements ,for the last ten (10) years completed accounting
periods;
9. the accounting records for the last ten (10) years;
10. the shares register;
11. the copies of instruments creating or evidencing charges required to be registered under
this Law.
The documents for the company’s current and previous financial years shall be kept at the
company’s registered office. Other documents for the previous years may be kept in any other
place and notice of which shall be given to the Registrar General.
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I. CONSTITUENT ORDINARY MEETING
The final stage in the formation process is the holding of a constituent ordinary meeting.
Where there are articles of association all the promoters/founding members shall participate in
signing the articles of association either in person or through their authorized agents. A
constituent ordinary meeting grouping all the promoters or their nominees must be held. This
meeting shall appoint not less than 3 and not more than 12 persons to be directors or ratify their
appointment by the articles of association; it must also appoint one or more auditors whose
function is to watch over the accounts in the interest of shareholders. The acceptance of their
office by the directors and auditors marks the birth of the company. But it is still important for
the legal validity of that birth that the company shall be entered in the ORG.. Finally the
principal documents must be published in the official gazette.
Note that as far as the private limited company that does not offer its shares to the public is
concerned only some of the procedural requirements examined above are applicable: drawing
up of an authenticated articles of association (not draft articles) payment for shares and the
holding of a constituent ordinary meeting.
As regards a public limited company that offers its shares to the public, the business of the
constituent ordinary meeting comprises:
1. Verification of the substantive requirements for the formation of the company;
2. Adoption of the final text of the articles of association, which it shall amend by special
resolution of all the members being the subscribers and promoters;
3. Approval of the evaluation of shares in kind and the benefits given to the promoters
which it shall be amended by a majority of the votes attached to the shares subscribed
by the subscribers present excluding promoters;
4. Appointment of the organs of administration (directors) and control (auditors) and fix
their remuneration;
5. A vote on the final formation of the company requiring a majority of the votes attached
to the shares subscribed by the subscribers present excluding promoters.
The acceptance of their office by the directors and auditors marks the birth of the company. As
it is the case with other commercial companies there must be registered in the ORG;
The memorandum and articles of association and minutes of the constituent ordinary meeting
and a list of shareholders must be filed with the registrar of the CIF within whose jurisdiction
the company proposes to establish its registered office. Finally the principal documents must be
published in the Official Gazette.
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The promoters are, notwithstanding any clause to the contrary jointly and severally liable
towards third parties:
1. For the eventual difference between the share capital and the minimum capital as well
as that part of the share capital which shall not be validly subscribed, they shall be deem
to be the subscribers for that part;
2. The effective payment for shares in accordance with the law;
3. Liable to pay damages which is the consequence of either the nullity of the company or
inaccuracy in the wording of the articles of association or overvaluation of any shares in
kind or insufficiency of capital;
J. THE MAIN DIFFERENCES BETWEEN A PRIVATE AND
A PUBLIC COMPANY
1. Purpose: public company and private companies fulfill different economic purposes.
The purpose of a public company is to raise capital from the public to run the enterprise.
This ability to offer shares to the public is now the only advantage of a public company.
The purpose of a private company is to confer separate legal personality on the business
of a sole trader or partnership.
2. Issue of capital: A private company may not raise capital by issuing its securities to the
public. There is no restriction on the offer of securities by a public company. A public
company must, however, issue a prospectus ( a document which gives minimum
essential information to potential members).
3. Transferability of shares: the shares of a public company are freely transferable. A
private company will, in contrast, wish to remain under the control of the family or
partners concerned. Its articles will therefore contain a clause restricting the right to
transfer shares.
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Study Unit 3
Share Capital
Contents
A. Subscription of Share Capital
B. Payment of Shares
C. Types of Share Capital
D. Raising Share Capital
E. Variation of Shareholder’s Rights
F. Rights and Obligations of the Shareholders
G. Prospectuses
H. Alteration, maintenance and reduction of Share Capital
I. The Acquisition and Redemption by a Company of its own Shares
J. Financial Assistance by a Company for the Purchase of its own Shares
K. Dividends
L. Other considerations related to Shares
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A. SUBSCRIPTION OF SHARE CAPITAL
Subscription is the acceptance by the subscriber of the offer to subscribe for shares made by the
promoters or their agents (usually a bank). By subscribing the subscriber promises to take up
the number of shares subscribed. The shares may be paid for in cash or in kind, but never in the
form of services, because the capital of a company is conceived as a security (collateral) to
creditors of the company who can never proceed against shareholders personally for the debts
of the corporation beyond their investment. The exception is where the company has unlimited
liability – see 3.23 below
Note that by virtue of subscription promoters are bound to either constitute the company or
reimburse the amount of subscription if the company is not constituted within six months from
the date the proposed company account was opened at a bank.
For their part, subscribers may not withdraw their subscription; they must honour their promise
to take up shares. The option open to a subscriber who no longer desires to become a
shareholder is for him to assign (transfer) his undertaking (promise) to take up shares
B. PAYMENT OF SHARES
a) Share Capital
The share capital of the public limited company varies depending on whether the company is
offering its shares to the public or not. For a company that does not offer its shares to the public
the minimum capitalization requirement is 100 million RWF and 200 million RWF for a
company that offers its shares to the public.
b) Payment for Shares
To subscribe is a promise to make payments for the shares subscribed. The shares have to be
paid for so as to ensure that the company is born. If the shares are to be paid for in cash, at least
1/3 of the amount representing the share capital must be paid up and the remainder within two
years from the birth of the company. Payment may be effected in cash, certified cheque or
Treasury bill.
Note that payment in cash is required to be lodged in a special account opened at a bank in the
name of the company being formed. The organs of management of a company cannot draw
from this account except the notary who was present during the constituent ordinary meeting
informs the bank in writing that the articles of association have been adopted.
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On the other hand, if payment is to be effected in kind then all the shares representing the share
capital in kind must be entirely paid up. The evaluation of the shares in kind is admissible after
corroboration by experts appointed by the promoters. In addition, within 6 months from the
date of birth of the company the manager and auditors are required, on pain of their joint and
several liabilities, to verify the evaluation of the payments in kind. Should the verification
reveal an over valuation the managers and auditors shall without prejudice to whatever action
that may be taken against the defaulting shareholders, proceed to adjust the share capital and a
suppression of the redundant shares
Note that as long as the verification has not been undertaken by the manages and auditors, the
shares cannot be negotiated (transferred)
C. TYPES OF SHARE CAPITAL
Ordinary shares
Debentures
COMPANY SECURITIES
One of the major reasons that promoters select the corporate form of business is the variety of
funding sources available to the public limited companies. An important source of financing is
the sale of company securities. A security is evidence of a debt or property (ownership), such
as a share, or debenture. The basic legal distinction between them is that a share constitutes the
holder a member of the company whereas the debenture holder is a creditor of the company but
not a member of it.
SHARES
Rights in a company are represented by negotiable instruments called shares. A share may be
defined as "the interest of a shareholder in the company measured by a sum of money, for the
purpose of liability in the first place, and of interest in the second, but also consisting of a
series of natural covenants entered into by all the shareholders inter se”. The contract contained
in the articles of association is one of the original incidents of the share.
A share is not a sum of money… but is an interest measured by a sum of money and made up
of various rights contained in the contract, including the rights to a sum of money of a more or
less amount".
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The shares of each shareholder represent a fraction of the share capital of the company. Certain
rights are attached to these shares, they are:
1. The right to vote during general meetings (annual or special);
2. Right to dividends;
3. Rights to return of capital on a winding up i.e., liquidation (or authorized reduction of
capital.
a) Right to vote:
A shareholder has a right to attend meetings and to vote. The right to vote attached to shares
must be proportional to the fraction of capital it represents – 1 share = 1 vote. Nevertheless, the
right to vote attached to shares whose contribution is in kind is suspended if the shares have not
been entirely paid up.
b) Right to dividend
If at the end of a financial year shows an excess of profit over losses, this excess constitutes
profits for the financial year and is available for distribution to the partners/shareholders as
dividends proportional to the capital it represents. Once distributed, dividends, corresponding
to the profits realized by the company, are finally vested in the shareholders. As such, if in a
subsequent financial year the company does not make profits, the creditors of the company
cannot compel the shareholders to restore to the company the sums as dividends, which were
paid in accordance with the law.
However, if profits are not realized at the end of the financial year, the company is not
competent to pay dividends. The payment of fictitious dividends amounts to a reduction of the
share capital of the company. We stated earlier that the capital of a company constitutes a
security (collateral) to company creditors. Accordingly, if fictitious dividends are distributed
to shareholders creditors have a right to protect their interest by requesting the court to nullify
the distribution and compel the shareholders to restore to the company the sums paid as
dividends in violation of the law.
c) Right to return of capital on liquidation (or authorised reduction of capital)
The liquidation of a company requires the distribution of losses or the surplus of liquidation as
the case may be to the shareholders. In the case of an authorised reduction of capital
shareholders are entitled to part of the capital to the extent of the reduction.
Types of Share Contributions
Contributions to the capital of a company may be made in cash or in kind. If the contribution is
in the form of cash at least 1/3 of the amount due must be paid at the time of the formation of
the company and the balance within two (2) years from the date the company is formed. If the
contribution is in kind it must be entirely paid up at the time of formation of the company.
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Negotiability of shares
Negotiability of shares means the transfer of shares. We stated that shares are negotiable
instruments issued by the company in return for the contribution of the shareholder to the
capital of the company. In principle, shares issued by a public limited company are freely
transferable. The procedure to be followed depends on the nature of the share is whether it is a
registered share or bearer share
a) Registered shares
The registered share is represented by registration in the register of shareholders maintained by
the company at the registered office (headquarters). Upon registration the director issues a
certificate to the member (shareholder) certifying that he is the holder of a specified number of
shares (giving their distinguishing numbers if they have them and stating the extent to which
they are paid up). The purpose of this is to give the shareholder some document, which he can
use as evidence of his title. It also provides the company on a check on the identity of the
registered holder and the company will not normally register any dealing unless the certificate
is produced.
Note that the holder’s legal rights depend not on the certificate but upon entry in the register,
and the certificate is merely a declaration by the company stating what these rights are and
affording prima face evidence of them.
Registration may be made by the party himself or a director and the certificate should be
delivered within one month of registration. A certified copy of the registrations in the register
is required to be deposited by the directors within one month of registration at the ORG.
Negotiation of registered shares shall be effected by transfer on the registers of the company,
the holder’s rights resulting from the single registration on the company’s register.
b) Bearer shares
In contradistinction to a registered share is the bearer share. It is represented by a piece of
paper paginated and detached from a counterfoil book carrying a number of indications but the
most important characteristic is the absence of a name. A least two directors must sign the
paper.
The holder’s rights depend on the mere possession of the paper. Consequently, negotiation is
by simple delivery of bearer shares. The bearer of the share shall be deemed to be the owner.
Dividends, if any are due and payable, are paid on physical presentation of the bearer share at
the company’s registered offices to the person holding the bearer share. Because the bearer
share has no name, the owner cannot be notified of any meetings or when dividends are due.
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c) Restrictions on the transfer of shares
Although shares (registered or bearer) are freely transferable, they can only be transferred after
the company has acquired legal personality i.e., after registration in the Commercial Register.
Furthermore, the articles of association may low down certain limitations to the transfer of
shares, e.g., transfer to the company’s competitors or a certain class of persons.
Note that if a company allows bearer shares the holder is at liability to convert his bearer
shares into registered shares and vice-versa
D. RAISING SHARE CAPITAL
DIFFERENT TYPES OF CONTRIBUTIONS
In order to qualify as a shareholder of a company each partner must contribute to the capital of
the company. In return for their contribution the partner shall receive shares issued by the
company.
A partner may contribute to the company:
1. Money, as a contribution in cash;
2. Rights on moveable or immovable tangible or intangible property, as a contribution in
kind:
3. Services as a supply of labour.
1) Contributions in cash
Contribution in cash is required to be effected by the partner (shareholder) transferring to the
company the ownership of the amount of money that he has pledged to contribute. The date of
payment depends on the type of company. For partnerships, the partnership agreement may
stipulate the time within which payment (contributions) is to be effected. As regards the SARL
i.e., private limited company contributions in cash must be fully paid up at the time of the
formation of the company. Cash contributions are said to be fully paid up when the company
has acquired ownership and the contributions are fully and finally paid up.
As regards the SA, i.e., public limited company a minimum of 1/3 of the contribution is
required to be paid up at the time of formation of the company and the balance within 2 years
from the day the company is formed.
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Note that in case of delay in payment, the balance due to the company shall automatically bear
interest at the official rate from the date payment became due.
Contributions for shares not in the form of cash
From Article 31
Where a share is issued for consideration other than cash, the Board of directors shall
determine the cash value of that consideration for the purposes of sub-paragraphs 1° or 2° of
paragraph 2 of this article.
Where a share involves an obligation other than the obligation to pay, and that such obligation
is met by the shareholder:
1. the Board of directors shall determine the cash value, if any, of that performance;
2. the cash value of that performance shall be deemed to be a call which has been paid on
the share for the purposes of sub-paragraphs 1° or 2°of paragraph 2 of this article.
2) Contributions in kind
Contributions in kind is made by the transfer of the property or rights to use the property
contributed and the effective conveyance to the company of the property to which those rights
are attached. It is mandatory for contributions in kind to be fully paid up at the time of
formation of the company.
Where the contribution is in the form of property the contributor shall stand warranty (security)
for the company as a vendor for the buyer.
However the risk of the property passes to the company on the day of the transfer. On the
other hand if contribution is in the form of a mere right to use the property contributed i.e., the
contribution is in the form of a leasehold, the contributor shall guarantee the company
undisturbed use of the property contributed, like a lesser for lessee. However, the risk of the
property remains with the shareholder (partner).
3) Contribution in the form of services
Contribution may also be in the form of services. Where contribution is in the form of services
the contributor is obliged to render services in the form of labour to the company. In the
absence of a provision or clause as to the time frame within which such services is to be
rendered, the presumption is that the services will be supplied during the life time of the
company. Article 31 sub para 2 may be read as to imply that the service in lieu of cash
payment has been performed.
Previously, thecontribution in the form of services could only be made to companies whose
shareholders (partners) had unlimited liability. Thus, contribution in the form of services is
available to partnerships and not to “companies”. The rationale for the exclusion of companies
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may be explained by two factors. The one, is that, since share contributions are required to be
entirely paid up either at birth or within two years of the existence of the company,
contributions in the form of services cannot satisfy this requirement. Secondly, the capital of a
company is conceived as security (collateral) to creditors of the company, as such, services
cannot serve as security.
Note that a shareholder’s (partner’s) contribution may be in the form of aclaim. In the event
where the contribution is in the form of aclaim all that is required of the contributor is to
establish the existence of the debt and not the solvency of the debtor
Subject to the constitution of the company, different classes of shares may be issued in a
company. Article 76
Shares in a company may :
1 be redeemable;
2 confer preferential rights to distributions of share capital or income;
3 confer special, limited, or conditional voting rights;
4 not confer voting rights.
E. VARIATION OF SHAREHOLDERS’ RIGHTS
Any existing company may at any time, convert any class of shares of the company into shares
of no par value provided that seventy five per cent (75%) of shareholders vote for the
resolution. Notice of the terms of the conversion is given to the Registrar General for
registration within forteen (14) days of the approval of the conversion.
The shares converted shall not affect the rights and liabilities attached to such shares. In
particular, such conversion shall not affect:
1 any unpaid liability on such shares;
2 the rights of the holders of the shares in respect of dividends, voting or repayment on
winding up or a reduction of share capital.
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F. RIGHTS AND OBLIGATIONS OF THE SHAREHOLDERS
RIGHTS OR POWERS OF THE SHAREHOLDERS
The law chose the expression powers instead of rights. This difference in terminology doesn't
present a big interest especially as the rights and the powers are synonymous.
Articles 140 to 142 of the law articulate responsibilities of the shareholders in these terms.
The powers conferred to the shareholders of a company shall be exercised :
1. at a meeting of shareholders;
2. by a resolution of shareholders in lieu of a meeting;
3. by a unanimous resolution;
4. by a unanimous shareholder agreement.
The power conferred to shareholders may be exercised by an ordinary resolution. An ordinary
resolution shall be a resolution that is approved by a simple majority of the votes of those
shareholders entitled to vote and voting on the matter which is the subject of the resolution.
The shareholders exercise a power to:
1. adopt articles of association , if it has , to alter or to revoke them ;
2. approve a major transaction;
3. approve an amalgamation of the company;
4. put the company into liquidation;
Such power shall be exercised by special resolution.
With regard to the modification of the rights, the article 149 provides: Where the share capital
of a company is divided into different classes of shares, a company shall not take any action
which varies the rights attached to a class of shares unless that variation is approved by a
special resolution.
Where the variation of rights attached to a class of shares is approved and the company
becomes entitled to take the action concerned, the holder of a share of that class, who did not
consent to or cast any votes in favor of the resolution for the variation, may apply to the Court
for an order against acts that are prejudicial to a shareholder, or may require the company to
purchase those shares.
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"When the share capital of a company is distributed in different categories of Shares, the
company cannot take any Share that modifies the rights bound to a category of Shares, unless
this modification is approved by special resolution.
Note wording of article 146, Where the Board of directors agrees to the purchase of the shares
by the company, it shall, within seven (7) days of issuing the notice:
1. state a fair and reasonable price for the shares to be acquired;
2. give written notice of the price to the shareholder.
It is important to note that article 156 talks about rights of shareholders to the dividends in
these terms: " The shareholders, who are entitled to receive dividends, exercise pre-emptive
rights to acquire shares or any other right or receive any other benefit under this Law or the
article of association, shall be required to attend a meeting on the date fixed by the Board of
Directors".
The shareholders of a company may, by unanimous resolution or by unanimous shareholder
agreement, approve any payment, provision, benefit, assistance or any other distribution
provided that there are reasonable grounds to believe that, after the distribution, the company is
likely to satisfy its solvency test (art.209).
A company shall make available for inspection by a shareholder of the company or by a person
authorized in writing by a shareholder any documents of the company, except those documents
regarded as confidential for the company if they suspect any misdeeds by managers. This
should be by written notice of intention to inspect the records served to the company (art. 270).
OBLIGATIONS OR “LIABILITIES” OF SHAREHOLDERS
Liability of shareholders is addressed by articles 137 to 139. Indeed, article 137 limits the
liability of the shareholders, the article 138 talks about liability for call, whereas article 139
exempts shareholders from some liabilities in case of alteration of articles of association.
In fact, according to the article 137, a shareholder shall not be liable for an obligation of the
company by reason only of being a shareholder. The liability of a shareholder shall be limited
to: 1. any amount unpaid on a share held by the shareholder;
2. any liability to repay a distribution received by the shareholder to the extent that the
distribution is recoverable;
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3. any liability expressly provided for in the constitution of the company.
Regarding liabilities for call, article 138 states that Where a share renders its holder liable to
calls, or otherwise imposes a liability on its holder, that liability shall attach to the holder of the
share for the time being, and not to a prior holder of the share, whether or not the liability
became enforceable before the share was registered in the name of the current holder.
In case a shareholder has not agreed in writing to be bound by the alteration Article 139, makes
it clear that he shall not be bound by an alteration of the constitution of a company which:
1. requires the shareholder to acquire or hold more shares in the company than the number
held on the date the alteration is made;
2. increases the liability of the shareholder in the company.
Relevant Rules of General assemblies of shareholders
The shareholders have the right and the duty to sit at the general assemblies (ordinary or
extraordinary).
Annual general assembly
The general meeting of shareholders is annually convened by the Board of directors as per
article 151 of the law which adds the following precisions: not more than once in each year; not
later than 6 months after the balance sheet date of the company; and not later than fifteen (15)
months after the previous annual meeting.
A company may not hold its first annual meeting in the calendar year of its incorporation but
shall hold that meeting within eighteen (18) months of its incorporation. The company shall
hold the meeting on the date on which it is called to be held.
The business to be transacted at an annual meeting shall deal with the consideration and
approval of the financial statements, the receiving of any auditor’s report, the consideration of
the annual report, the appointment of any directors, the appointment of any auditor and other
issues as may be deemed necessary by the annual meeting (art. 152).
In the same vein article 153 adds, where the financial statements are not approved at the annual
meeting, they shall be presented at a further special meeting called by the Board of Directors
within ninety (90) days.
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Special meeting of shareholders
According to article 154, a special meeting of shareholders entitled to vote on an issue put
before it where : 1° it is called by the Board of Directors or a person who is authorized by the
constitution to call the meeting; 2° it shall be called by the Board of Directors on the written
request of shareholders holding shares carrying together at least 50 per cent of the voting rights
.
Proceedings at the meeting
The provisions specified in an order of the Registrar General shall govern the proceedings at
meetings of shareholders of a company except to the extent that the constitution of the
company provides otherwise (art. 155).
G. PROSPECTUSES
PUBLICATION OF THE PROSPECTUS
An invitation to subscribers is evidenced by a prospectus signed by all the promoters. A
prospectus may be defined as a document published by a corporation or by persons acting as its
agents or setting forth the nature and objects of an issue of shares, debentures, or other
securities created by the company, the investment or risk characteristics of the security and
inviting the public to subscribe to the issue. The prospectus must contain:
a) The draft memorandum of association and reference to the fact that it has been
published in the OG,
b) The place and date of the constituent ordinary meeting;
c) The subscription rate (prices) for shares;
d) The date marking the beginning and end of issuance of shares; and
e) The subscription office
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H. ALTERATION, MAITENANCE AND REDUCTION OF
SHARE CAPITAL
VARIATION OF CAPITAL
A company may by ordinary resolution:
1 divide or subdivide its shares into shares of a smaller amount if the proportion between the
amount paid, and the amount, if any, unpaid on each reduced share remains the same as it
was in the case of the share from which the reduced share is derived;
2 consolidate into shares of a larger amount than its existing shares.
Where shares are consolidated, the amount paid and any unpaid liability thereon, any fixed sum
by way of dividend or repayment to which such shares are entitled, shall also be increased.
Article 88
Where a company has altered its share capital, it shall within fifteen (15) days of the date of the
alteration file a notice to that effect with the Registrar General
Notwithstanding the provisions of the articles of association, where a company issues shares
which rank equally with, or in priority to existing shares as to voting or distribution rights,
those shares shall be offered to the holders of existing shares in a manner which would,
maintain the relative voting and distribution rights of those shareholders. An offer shall remain
open for acceptance for a period, which shall not be more than fifteen (15) days. Article 92
Since the amount of capital is mandatory fixed by the memorandum of association any increase
or reduction of capital necessitates an amendment of the memorandum of association.
a) Increase of Capital
The share capital of a company may be increased by issuing new shares, incorporation of
reserves into the capital or by conversion of debentures into shares.
i. Increase of capital by issuing new shares
If the increase in capital is by issuing new shares the shares may be paid for in cash or in kind.
Note that a company may not be allowed to increase its share capital if the outstanding capital
has not been entirely paid up. The sanction for this restriction is the nullity of the increase.
Nevertheless, this restriction does not apply if the increase results in the issuance of new shares
in kind.
Shares shall carry a pre-emptive right of subscription of increases in capital. Accordingly,
shareholders shall in proportion to their shares, have a pre-emptive right of subscription for
shares issued for an increase in capital. This right is lost after the time limit allowed for the
exercise of this right. Similarly, a shareholder may renounce the exercise of his pre-emptive
right.
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The formalities to be followed when issuing new shares is identical to that during the
formation of the company: publication of prospectus, subscription and paying up of shares.
ii. Increase of capital by incorporating reserves
This increase is effected by the simple transfer of the reserve account to the capital account. All
that is required is a decision of the special meeting. Two methods may be employed to give
effect to this increase following a decision by special resolution at the special meeting:
• By increasing the nominal (face) value of shares:
• By issuing new shares and allocate them gratuitously to existing shareholders in
proportion to the amount of their shares.
iii. Increase in Capital by Converting Debentures into Shares
As earlier stated, an increase in the capital of a company may be the result of the acceptance by
the company creditors to transform their status from that of creditors to shareholders. If there is
an agreement between the company and its shareholders, the agreement is given life by a
decision of the extraordinary general meeting.
b) Reduction of Capital
A reduction of capital is usually justified by losses. The registered capital of a company may
be reduced by decreasing either the face value or the number of shares.
The decision to reduce the share capital is within the competence of the special meeting of
shareholders and must be resolved by special resolution where there is a 75% majority. This
resolution may delegate all the powers to the BOD or managing director as the case may be, to
effect the reduction.
The draft instrument of the reduction of capital shall be communicated to the auditor before the
date of the special meeting, which shall authorize the reduction of capital.
The auditor is required to table before the special meeting a report in which he shall set out his
assessment of the reasons for and condition of the reduction of capital.
Since a reduction of capital reduces the security (collateral) of the creditors the law empowers
the creditors of the company to object to the reduction of the capital where it is not justified by
losses.
The time limit for lodging an objection by creditors to the reduction of capital shall be 30 days
from the date of depositing at the registry of the court of the minutes of proceedings, which
ordered or authorized the reduction of capital.
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Where the objection is admitted, the capital reduction procedure shall be suspended until the
claims are reimbursed or guarantees are provided for creditors where the company offers such
guarantees and where they are considered adequate.
Article 101 gives details conditions and these include the sub paragraph
A company shall not take any action:
1. to extinguish or reduce a liability in respect of an amount unpaid on a share;
2. to reduce its share capital for any purpose unless there are reasonable grounds on which the
directors may determine that, immediately after the taking of such action, the company will
be able to satisfy the solvency test.
I. THE ACQUISITION AND REDEMPTION BY A
COMPANY OF ITS OWN SHARES
A company may request buy back from the shareholders its own shares where the Board of
Directors is satisfied that:
1. the acquisition is in the best interests of the company;
2. the terms of the offer or agreement and the consideration to be paid for the shares are
fair and reasonable to the company;
3. in case where the offer is not made to, or the agreement is not entered into with all
shareholders, the offer or the agreement, is fair to those shareholders to whom the offer
is not made, or with whom no agreement is entered into;
4. shareholders to whom the offer is made have available to them any information which
is material to an assessment of the value of the shares;
5. the company shall immediately after the acquisition satisfy the solvency test. Article
105
Any offer by a company to purchase or otherwise acquire its own shares on a stock exchange
shall be made in accordance with such conditions as prescribed above.
Before an offer is made by a Company to acquire its own shares, it shall send to all its
shareholders a public notice requesting the repurchase of its own shares.
Purchased shares or those shares redeemed by the company shall, immediately upon purchase,
be struck off the company’s register. Shares shall become the property of the company as of the
date on which it has the power to use the rights linked with such shares. Article 107
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A company may hold its own shares but no rights must be accorded to these shares
Share holders have a right of objection to the purchase of shares by the company not
withstanding the resolution was a special rresolution and required a 75%majority who attended
the special meeting.
J. FINANCIAL ASSISSTANCE BY A COMPANY FOR THE
PURCHASE OF ITS OWN SHARES
A company shall not give financial assistance to acquire its own shares, except where the
Board of Directors has previously resolved that:
1. giving the assistance is in the interests of the company;
2. the terms and conditions on which the assistance is given are fair and reasonable to the
company and to any shareholders not receiving that assistance;
3. immediately after giving the assistance, the company shall satisfy the solvency test.
Article 114
A company shall not provide financial assistance exceeding ten per cent (10%) of its share
capital.
K. DIVIDENDS
Dividends can only be paid out of profits.
Dividends to one class of shares can only differ between shareholders where there is an
outstanding liability by the shareholder in respect of those shares – Article 102
The Board of Directors may issue shares to any shareholder who has agreed to accept the issue
of shares, in lieu of a proposed dividend provided that:
1. the right to receive shares, in lieu of the proposed dividend or proposed future dividends
has been offered to all shareholders of the same class on the same terms;
2. all shareholders elected to receive the shares in lieu of the proposed dividend, their
relative voting or distribution rights, or both, would be maintained;
3. the shareholders to whom the right is offered are afforded a reasonable opportunity of
accepting it.
Study Unit 4
Debt Capital
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Contents
A. Debentures
B. Charges
C. Registration of Charges
D. Remedies for Debenture Holders
E. Comparison between a share-holder and a debenture-holder
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Debt capital is generally represented by Debentures.
A. DEBENTURES
Public limited companies have the power to borrow money necessary for their operations by
issuing debt securities (debentures). Unlike shares debentures do not create an ownership
interest in the company. They create a debtor- creditor relationship. Accordingly, the
company’s obligated to pay a periodic interest charge as well as the balance of the debt on
maturity date.
A debenture is a negotiable instrument constituting a long -term debt. Debenture is the term
applied not to the indebtedness itself but to the document evidencing it. It is normally, but not
necessarily, secured by a charge over company property.
CONDITIONS OF ISSUE OF DEBENTURES
Public limited companies shall not be allowed to issue debentures except if they have existed
for three years and have drawn up three balance sheets duly approved by the general meeting
of shareholders.
Furthermore, the issue of debenture is not allowed for companies whose capital is not paid up.
In addition, the amount of debentures issued by the company cannot be superior to the
company’s share capital. Note that the company, which issues debentures, is allowed to reduce
its share capital only to the extent of the reimbursements effected on the debentures.
NEGOTIABILITY OF DEBENTURES
Like shares, debentures are negotiable instruments, which can easily be transferred. The
procedure to be followed depends on the type of debenture i.e., whether it is a registered
debenture or bearer debenture.
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REGISTERED DEBENTURE
Much the same as registered shares, debenturesare represented by registration in a register of
debenture holders. Following registration a certificate is issued certifying that he is a holder of
a certain number of debentures.
Note that the holder’s legal rights depend not on the certificate but upon entry in the register.
The certificate merely states what these rights are and constitutes evidence of these rights.
Registration may be made by the party himself or any of the directors.
Transfer of registered debenture is effected by the transfer in the register of the company, the
holders rights resulting from registration on the company’s register of debenture holders.
BEARER DEBENTURES
Bearer debentures are represented by a piece of paper paginated and detached from a
counterfoil book carrying a number of indications but the most important characteristics is the
absence of a name. The paper must be signed by two directors.
The holder’s rights depend on the mere possession of the paper; consequently, negotiation is by
the simple delivery of bearer debentures. The bearer of such a debenture shall be deemed to be
the owner.
GROUP OF DEBENTURE HOLDERS
Holders of debentures issued at the same time shall as of right be grouped together to defend
their interests.
A representative of debenture holders shall represent the group, according to the decision taken
by the general meeting of debenture holders.
The following may not be chosen to represent the group:
• Organs of the company;
• A parent or relation up to the fourth degree;
• An agent or intermediary of the company.
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GENERAL MEETING OF DEBENTUREHOLDERS
The general meeting of debenture holders of the same group may meet as required by law. The
law recognizes two types of meetings: annual meeting and special meeting.
Annual Meeting
The annual meeting is one convened to do the following acts:
• Appoint and dismiss the representative of debenture holders:
• Determine the emoluments of the trustee, in case of any disagreement the emoluments
shall be fixed by the Court of First Instance:
• Vote the discharge of the representative of debenture holders:
• Deliberate on measures aimed at defending the interests of debenture holders and the
execution of the contract with the company as well as the expenses concerning the
execution of the decisions.
Special Meeting
The special meeting has the following business:
• A modification or suppression of the security;
• The extension or suppression of one or more maturity dates of interest payment, the
reduction of the interest rate and modalities of payment;
• The extension or suppression of one or several amortization schedules, modification of
the amount of amortization and the modalities of payment;
• The substitution of debentures by the shares of the company or of the debentures or
shares of another company.
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Notice of Meetings of debentures
A meeting of debenture holders may be convened by any of the following persons:
• By the directors of the company;
• The representative of debenture holders;
• Debenture holders having at least 1/3 of the debentures
• At least eight (8) days before the holding of the meeting every debenture holder must be
notified of such meeting. The notice convening the meeting shall contain the agenda of
the meeting.
Attendance
The following shall attend meetings of debenture holders with a right to vote: holders of
registered debentures and holders of bearer debentures. On the other hand the representative of
debenture holders and agents of the company provided they are not debenture holders, may
attend the meeting with a consultative voice only.
Quorum and decisions
The quorum required for annual meeting of debenture holders is 1/ 2 of the debentures and
decisions are taken by a simple majority of those voting. As regards a special meeting the
quorum is 1/2 for the first meeting and ¼ for the second meeting. In either case decisions will
be taken by ¾ of those voting.
Note that the decisions of the extraordinary general meeting shall be valid if they are taken in
view of a recent financial situation verified by the auditors and upon a report of the board of
directors justifying the measures proposed.
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B. CHARGES
The present section is about issue of obligations on the one hand, and on the other hand, the
registration of the liabilities.
1. Introduction
The debenture may be defined as a certificate of loan issued by the company, which creates or
acknowledges an indebtedness of the company. The companies have to borrow the money for
their extension or developments. The loan requirements may not be met by single money-
lender. The loan may have to be split into several units. The most usual form of borrowing by a
company in this way is by the issue of debentures. By the issue of debentures, the public is
invited to lend money for a fixed period at a declared rate of interest to be paid on such money
e.g; a company requires one million Rwandan francs. It may be divided into one hundred
thousand units of RFW 1,000 each. A money-lender may purchase as many units as he please.
The company will then issue certificate for the units purchased by a lender. A debenture is,
therefore, a document issued by a company as an evidence of a debt due from the company,
with or without a charge on the assets of the company. The Rwandan companies’ law defines
the debenture under article 2. 17º as ‘a written acknowledgement of indebtedness issued by a
company in respect of a loan made to it or to any other person or money deposited with the
company or any other person or the existing indebtedness of the company or any other person
whether constituting a charge on any of the assets of the company or not’.
2. Relevant provisions of the law in relation with the issue of debentures
The law provides for some requirements in relation to issuing of the debentures depending on
whether or not they are of a same class.
Indeed, article 157, says that where a company issues or agrees to issue debentures of the same
class to more than 25 persons, or to any one or more persons with a view to the debentures or
any of them being offered for sale to more than twenty (25) persons, the company shall before
issuing any of the debentures :
1. sign under its name and unique number;
2. and procure the signature to the deed by a person qualified to act as a debenture holders'
representative.
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Article 158, sheds more lights by clarifying that a debenture shall not be deemed to be of the
same class where:
1. they do not rank equally for repayment when any security created by the debenture is
enforced or the company is wound up;
2. different rights attach to them in respect of:
a) the rate of, or dates for payment of interest;
b) the dates when, or the installments by which, the principal of the debentures shall be
repaid, unless the difference is solely that the class of debentures shall be repaid
during a stated period of time and particular debentures shall be selected by the
company for repayment at different dates during that period by drawings, ballot or
otherwise;
c) any right to subscribe for or convert the debentures into shares or other debentures
of the company or any other company or corporation;
d) the powers of the debenture holders to realize any security.
Where a company has given a debenture to secure advances on a current account, the debenture
shall not be deemed to have been redeemed by reason that the account of the company with the
debenture holder has ceased to be in debit while the debenture remains unsatisfied (article 163).
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C. REGISTRATION OF CHARGES
Article 160 of the law provides that every company which issues debentures shall keep at its
head office a register of debenture holders which shall contain the names and addresses of the
debenture holders and the amount of debentures held by them.
Let's note that the register shall be open to the inspection of a shareholder (art.161).
Concerning the content of the register of debenture holder, it must contain their names and
addresses as well as the amount of the debentures they hold (art. 160).
Where a company has given a debenture to secure advances on a current account, the debenture
shall not be deemed to have been redeemed by reason that the account of the company with the
debenture holder has ceased to be in debit while the debenture remains unsatisfied.
Similarly, where a company has decided to issue debentures and to secure their payment by a
mortgage or floating charge, the inscription of such mortgage or floating charge shall be valid
when kept in the relevant register.
Finally, the company shall, within thirty (30) days after the date on which the security is
provided, with the Registrar General a statement of the particulars of all securities provided.
The particulars required to be given in the statement are the following:
1. the date of its provision;
2. the amount secured by the charge;
3. a description sufficient to identify the property charged;
4. the name of the person entitled to the charge.
D. REMEDIES FOR DEBENTURE HOLDERS
Article 277 states that an investigation by the OGR can be instituted where debenture holders
holding not less than one-fifth (1/5) in nominal value of the issued debentures make an
application to the OGR.
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E. COMPARISON BETWEEN A SHARE-HOLDER AND A
DEBENTURE HOLDER
Share-holder
Debenture-holder
1
He is the member and joint owner of the
company
He is simply a creditor of the company
who has given some loan to the
company
2
He has a right to vote at the meetings of
the company
He has no right to vote at any meeting
of the company.
3
He is entitled to get dividends only out of
profits. The rate of dividends is not fixed.
It varies from year to year depending
upon the profits of the company.
He is entitled to fixed rate of interest
whether there are profits or not.
4
He has full right to control company`s
affairs. In fact, the ultimate destiny of the
company is in the hands of shareholders
He has no right to interfere with the
business of the company. However, in
case of company`s default in paying
their debts, he may enforce their
security.
5
He cannot be paid back so long as the
company is a going concern
He can be paid back unless he is
perpetual debenture-holder.
6
He does not have any charge over the
assets of the company
He generally has a charge over the
assets of the company
7
In case of winding up of the company, he
is paid after satisfying all other claims
In case of winding up, a secured
debenture-
holder is paid prior to the
share-holder.
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Page 71
Study Unit 5
Membership of a Company
Contents
A. Becoming a Member
B. Register of Members
C. Rights, Obligations and Liabilities of Members
D. Termination of Membership
Page 72
The member ship of a company is through the ownership of shares.
A. BECOMING A MEMBER
The shres can be purchased if a promoter invites a prospective member through a private
invitation – for a private company – or through the public advertisement of the prospectus for a
public limited company.
B. REGISTER OF MEMBERS
The company shall maintain a register of shareholders and of debenture holders and this shall
be kept at the registered office or elsewhere as notified to or agreed with the ORG .
These registers should be available for inspection by the members.
The register shall record the shares and their holders.
The format of this register shall be determined by the Registrar General.
C. RIGHTS, OBLIGATIONS AND LIABILITIES OF
MEMBERS
Rights and Obligations of Shareholders
The term shareholder is employed loosely to designate the participants (owners) in all types of
commercial companies A company shall issue shares in return for the shareholder’s
contribution. Such shares shall represent the shareholder’s rights and shall be referred to as
‘shares’.
Company shares are personal property and shall confer on their holders the following rights
and obligations:
1. A right to a share of company profits whenever they are distributed;
2. A right to the company’s net assets when shared following the dissolution of the
company or where the company’s share capital is effectively reduced;
3. The obligation to share in the company’s losses to the limit of the par value of the
shares held
4. The right to participate in and vote on the collective decision of the shareholders.
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And every company shall issue to a shareholder, on request, a statement that sets out:
1. the class of shares held by the shareholder,
2. the total number of shares of that class issued by the company and the number of shares
of that class held by the shareholder;
3. the rights, privileges, conditions and limitations, including restrictions on transfer,
attaching to the shares held by the shareholder;
4. the rights, privileges, conditions and limitations attaching to the classes of shares other
than those held by the shareholder.
Note that the quota (portion) of each shareholder in the profits and losses is within the
exception of General and Limited partnerships proportional to his or her contribution. This,
notwithstanding the partnership deed may provide for the distribution of profits and losses
based on the proportion of a partners share contribution. In addition, any clause, which
attributes to one or some of the shareholders all the profits, is void. Similarly, any clause,
which immunise one or some of the shareholders against the losses, is void. Note that it is
unlawful to be paid dividends if a company does not make profits. Further more, the share of a
partner's dividends whose contribution is in the form of services is equivalent to that of a
partner who has the least contribution in cash or in kind. However, the partnership agreement
may vary this requirement.
In the event where several persons are co-owners of a share, the company is at liberty to
suspend the rights conferred on thei holders, until such a time that the co-owners can designate
a joint representative. However, the co-owners remain jointly and severally liable for the
obligations attached to the shares. On the other hand where a share is an object of a usufruct the
company has a right to suspend the rights attached to the share(s) until such a time that the bare
owner and the usufructuary designate a joint representative. However both the bare owner and
the usufructuary remain jointly and severally liable for the obligations attached to the shares.
Usufruct: The right to use and enjoy the profits and advantages of something belonging to
another as long as the property is not damaged or altered in any way.
Further, where a share is given as a collateral (security) the owner continues to exercise the
rights attached to the shares. In addition the eventual payment of any outstanding contribution
is the responsibility of the owner.
D. TERMINATION OF MEMBERSHIP
Membership is ended when the share is sold and the register is updated with the name of the
new member who has acquired or purchased those shares or when the company has re-
acquitred the sahares and the register has been accordingly updated
Membership is also ended when the company is dissolved or officially put into liquidation
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BLANK
Page 75
Study Unit 6
Shares
Contents
A. Classes of Shares
B. Issue and Allotment
C. Transfer and Transmission
D. Share Warrant
Page 76
A. CLASSES OF SHARES
Shares in a company may :
1. be redeemable;
2. confer preferential rights to distributions of share capital or income;
3. confer special, limited, or conditional voting rights;
4. not confer voting rights.
B. ISSUE AND ALLOTMENT
Upon registration of the company any person named in the application for registration as a
shareholder shall be deemed to have been issued with the number of shares specified in the
application. Article 84
From Article 86 The terms of issuing shares approved by the Board of Directors shall be:
1. consistent with the articles of association of the company, and to the extent that they are
not so consistent, shall be invalid and of no effect;
2. deemed to form part of its constitution and may be amended in accordance with this
Law.
Within fifteen (15) days of the issue of shares under this Law, the company shall give notice to
the Registrar General certifying:
a) the number of shares issued;
b) the amount of the consideration for which the shares have been issued, its value
as determined by the Board of Directors;
c) the amount of the company's share capital following the issue of the shares;
d) and deliver to the Registrar General a copy of any terms of issue approved.
C. TRANSFER AND TRANSMISSION
Shares in public companies are deemed to be transferable subject to any limitation or
restriction on the transfer of shares in the Articles of Association
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D. SHARE WARRANT
A warrant is a document giving the holder the right to buy shares at a fixed price at a given
future date.
Warrants are different from Bearer Shares
A Bearer share is an equity security that is wholly owned by whoever holds the physical stock
certificate. The issuing firm neither registers the owner of the stock, nor does it track transfers
of ownership. The company disperses dividends to bearer shares when a physical coupon is
presented to the firm.
Because the share is not registered to any authority, transferring the ownership of the stock
involves only delivering the physical document.
Bearer shares lack the regulation and control of common shares because ownership is never
recorded. Similar to bearer bonds, these shares are often international securities.
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BLANK
Page 79
Study Unit 7
Meetings
Contents
A. Classification of Meetings
B. Notice of Meeting
C. Agenda
D. Proxies
E. Quorum
F. Proceedings at the Meeting
G. Resolutions
H. Minutes
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A. CLASSIFICATION OF MEETINGS
There are 3 types of meeting
1. The Constituent meeting
2. The Annual Meeting (historically known as the Annual General Meeting or AGM)
3. Special Meeting of Shareholders (historically known as an Extra-ordinary General
Meeting or EGM)
CONSTITUENT ORDINARY MEETING
The final stage in the formation process is the holding of a constituent ordinary meeting.
If the company is not offering it shares to the public the memorandum and articles of
association must be authenticated. In addition all the promoters shall participate in signing the
memorandum and articles of association either in person or through their authorized agents. A
constituent ordinary meeting grouping all the promoters or their nominees and members must
be held. This meeting shall appoint not less than 3 and not more than 12 persons to be directors
or ratify their appointment by the articles of association; it must also appoint one or more
auditors whose function is to watch over the accounts in the interest of shareholders. The
acceptance of their office by the directors and auditors marks the birth of the company. But it is
still important for the legal validity of that birth that the company shall be entered in the ORG.
This is done by filing copies of the articles of association, the minutes of the constituent
ordinary meeting and the list of shareholders. Finally the principal documents must be
published in the official gazette.
Note that as far as the limited company that does not offer its shares to the public is concerned
only some of the procedural requirements examined above is applicable: drawing up of an
authenticated articles of association (not draft articles) payment for shares and the holding of a
constituent ordinary meeting.
As regards a public limited company that offers its shares to the public, the business of the
constituent ordinary meeting, which must be held in the presence of a notary, comprises:
1. Verification of the substantive requirements for the formation of the company;
2. Adoption of the final text of the memorandum and articles of association, is by special
resolution.
3. Approval of the evaluation of shares in kind and the benefits given to the promoters
which it shall amend by a majority of the votes attached to the shares subscribed by the
subscribers present excluding promoters
4. Appointment of the organs of administration (directors) and control (auditors) as well
as fix their remuneration;
5. A vote on the final formation of the company requiring a majority of the votes attached
to the shares subscribed by the subscribers present excluding promoters.
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The acceptance of their office by the directors and auditors marks the birth of the company. As
it is the case with other commercial companies these must be registered in the ORG; the
articles of association and minutes of the constituent ordinary meeting and a list of
shareholders must also be filed with the registrar of the CIF within whose jurisdiction the
company proposes to establish its registered office. Finally the principal documents must be
published in the official Gazette.
The promoters are, notwithstanding any clause to the contrary jointly and severally liable
towards third parties:
1. For the eventual difference between the share capital and the minimum capital as well
as that part of the share capital which shall not be validly subscribed, they shall be deem
to be the subscribers for that part;
2. The effective payment for shares in accordance with the law;
3. Liable to pay damages which is the consequence of either the nullity of the company or
inaccuracy in the wording of the memorandum of association or overvaluation of any
shares in kind or insufficiency of capital;
The Annual Meeting of Shareholders
The Board of directors shall call an annual meeting of shareholders to be held :
1. not more than once in each year;
2. not later than 6 months after the balance sheet date of the company;
3. not later than fifteen (15) months after the previous annual meeting.
A company may not hold its first annual meeting in the calendar year of its incorporation but
shall hold that meeting within eighteen (18) months of its incorporation. The company shall
hold the meeting on the date on which it is called to be held.
A special meeting of shareholders
A special meeting of shareholders can be called by the Board of Directors or a person who is
authorised by the constitution to call the meeting;
Also a special meeting can be called by the Board of Directors on the written request of
shareholders holding shares carrying together at least 50 per cent of the voting rights .
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B. NOTICE OF MEETING
A copy of the annual report shall be sent to every shareholder of the company not less than 15
days before the date fixed for holding the annual meeting of the shareholders.
C. AGENDA
The business to be transacted at an annual meeting shall deal with:
1. the consideration and approval of the financial statements;
2. the receiving of any auditor’s report;
3. the consideration of the annual report;
4. the appointment of any directors;
5. the appointment of any auditor;
6. other issues as may be deemed necessary by the annual meeting.
The business of a special meeting will depend on the reasons given by the diretcors or by the
shareholders requesting the meeting.
D. PROXIES
A Proxy is a person appointed by a shareholder to vote on his or her behalf at shareholders’
meetings either according to instructions or, where specific instructions are not given, as the
Proxy sees fit.
A proxy votes carries the same number votes as if the shareholder had attended the meeting in
person.
E. QUORUM
The Articles of Association states the quorum for meetings but where there is no such
statement, a quorum is usually taken as 1/ 2 of shares and decisions are taken by a simple
majority of those voting.
As regards special meeting the quorum is 1/2 for the first meeting and ¼ for the second
meeting. In either case decisions will be taken by ¾ of those voting.
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F. PROCEEDINGS AT THE MEETING
The provisions specified in an order of the Registrar General shall govern the proceedings at
meetings of shareholders of a company except to the extent that the constitution of the
company provides otherwise.
G. RESOLUTIONS
The powers conferred to the shareholders of a company shall be exercised :
1. at a meeting of shareholders;
2. by a resolution of shareholders in lieu of a meeting;
3. by a unanimous resolution;
4. by a unanimous shareholder agreement.
The power conferred to shareholders may be exercised by an ordinary resolution. An ordinary
resolution shall be a resolution that is approved by a simple majority of the votes of those
shareholders entitled to vote and voting on the matter which is the subject of the resolution.
Article 141
Where the shareholders exercise a power to :
1. adopt articles of association , if it has , to alter or to revoke them ;
2. approve a major transaction;
3. approve an amalgamation of the company;
4. put the company into liquidation;
Such power shall be exercised by special resolution.
A special resolution shall only be rescinded by a special resolution.
At any general meeting at which a special resolution is passed, the chairperson shall make a
declaration as to whether such a resolution is so passed. The special resolution shall be passed
upon the majority vote of three quarters (3/4) of shareholders who voted.
An ordinary resolution shall be a resolution that is approved by a simple majority of the votes
of those shareholders entitled to vote and voting on the matter which is the subject of the
resolution.
A special resolution is a resolution approved by a majority of seventy five per cent (75%) of
the votes of those shareholders entitled to vote and who have voted on the issue under
consideration. The articles of association may require a majority of more than seventy five per
cent (75%);
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A unanimous resolution: a resolution which has the assent of every shareholder entitled to
vote on the matter.
H. MINUTES
The minutes of all meetings and resolutions of shareholders within the last ten (10) years shall
be kept at Head Office;.
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Study Unit 8
Directors
Contents
A. Management of Companies
B. Appointment of Directors
C. Qualification, Disqualification and Removal of Directors
D. Powers and Duties of Directors
E. Remuneration or Compensation for Loss of Office
F. Loans to Directors
G. Register of Directors
H. Disclosure of Directors’ in Contracts
I. The Turquand’s Rule
Page 86
A. MANAGEMENT OF COMPANIES
Although all the shareholders have equal rights in the company it is obvious that they cannot
together participate in its management except where there are a few (two or three)
shareholders. They are, therefore, obliged to entrust the management to one of their numbers or
a few as necessity requires. It is not every shareholder who is competent to manage a company.
As regards partnerships management is usually the preserve of active partners who are
personally liable for the debts of the partnership. For their part limited liability companies are
frequently managed by administrators.
The organs of administration are adorned with all the powers necessary for the achievement of
the objects of the company and to represent the company at law. Although the law gives the
organs of management enormous power for the management of the company these powers may
be curtailed by the Arts, of Ass. While these restrictions of powers may be valid among
shareholders they do not produce any effects vis-a-vis third parties even where they have been
published. In other words, these restrictions cannot be set up by the company to oppose the
interests of third parties.
In addition the Arts of Ass may delegate all the powers of management to one or several
persons acting alone or jointly. Note that the clause delegating powers of management may be
in yoked after 30 days following its publication in the official gazette except the company can
establish that the third party had knowledge of such delegation of powers of management.
The company is linked to third parties through the acts of its representatives (managers) even
where the acts undertaken by management go beyond the objects of the company, except the
company can prove that the third party knew or ought to have known that the act was ultra-
vires the company. Note that mere publication of the Art Ass does not constitute proof of such
knowledge.
When an organ of the company fails to perform the functions entrusted to it by law or to act in
the interest of the company a shareholder may after unsuccessful attempts to get it perform its
duties petition the Court of First Instance to designate (appoint) an ad-hoc agent.
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THE ORGANISATION AND FUNCTIONING OF PUBLIC
LIMITED COMPANIES
The shareholders are the owners of the company. They can affect the way the business is run
through their power to elect directors and amend the articles of association. They do not,
however have the power to make management decisions. That power is given to the directors
by the articles of association.
The functioning of the public limited company is the prerogative of three organs:
• The board of directors
• The general meeting of shareholders
• The committee of auditors.
Board of Directors
The public limited company is administered by a board of directors comprising not less than
three (3) and not more than twelve (12) members. Members of the board of directors may be
natural persons or third parties.
B. APPOINTMENT OF DIRECTORS
The first directors may be appointed by the articles of association or by the constituent general
meeting. During the existence of the company, the directors shall be appointed by the ordinary
general meeting.
The term of office of directors shall not exceed six years but they are eligible for re-election.
Note that following the appointment of directors the company cannot execute a contract of
employment with the directors. Should a contract of employment be concluded with a director
the same shall automatically come to an end the day the director assumes duty. This may be
explained by the fact that directors are not considered in law to be employees of the company,
but as the company’s agent. It is for this reason that a general meeting can at any time dismiss
the directors.
Vacancies
In the event of any vacancy on the board the remaining directors and auditors are given the
powers to appoint an interim director to fill the vacancy. The appointment by the board of
directors and auditors of the interim director shall be submitted to the next annual meeting for
Page 88
ratification. Should the annual meeting refuse to ratify the appointment the decision or acts of
the incomplete board shall nevertheless remain valid.
Powers and Duties of Board of Directors
The board is adorned with all the powers necessary for the attainment of the objects of the
company as well as its representation at law. However, the articles of association may restrict
the powers of the board. While these restrictions may be valid between shareholders they
cannot be set up by the corporation against third parties even if they were published.
Directors do not have the powers to bind the company individually as it’s the case with
partnerships having several managers. They can only bind the company acting collectively i.e.,
to say there is collective management as far as the public limited company is concerned.
Decisions are taken by simple majority of those present as long as the majority of board
members are personally present.
The company is linked to third parties through the acts of its directors even where the acts
undertaken by the directors go beyond the objects of the company except the company can
establish that the third party knew or ought to have known that the act was ultra vires the
company. The publication of the articles of association does not constitute proof of such
knowledge.
Although the management of the company has been entrusted to the board of directors, in
practice, the board generally serves as adviser to the management rather than as business
decision makers. In the result the powers of management is usually delegated to a managing
director or general manager. Even in the event where the powers of management have been
delegated the board is still required to formulate the general policy of the company as well as
supervise its execution.
Remuneration
The annual meeting may freely grant the directors, as remuneration for their activities a fixed
annual duty allowance. The board of directors may also grant its member special remuneration
for the mission and tasks entrusted to them or authorizes the reimbursement of travel and
subsistence costs and expenses incurred in the interest of the company.
Appointment of Directors
They are appointed by the shareholders at the Annual Meeting or at Special Meetings if such a
meeting is called.
If any director is appointed by the Board or the management of the company, his or her
appointment must be ratified at the next annual meeting.
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C. QUALIFICATION, DISQUALIFICATION AND
REMOVAL OF DIRECTORS
CIVIL AND CRIMINAL LIABILITY OF DIRECTORS
As far as civil liability is concerned members of the board are jointly and severally liable to the
company for any wrongs (tort) committed by them in the execution of their functions even if
they had partitioned their responsibilities. Their liability is appreciated within the context of the
law of agency.
Nevertheless, board members may be exonerated from liability for wrong committed in the
exercise of their functions if they can establish that the fault in question cannot be attributed to
them, provided they had disclosed this wrong doing to the general meeting as soon as they
became aware of the same.
Furthermore, in the event of delegation of powers approved by a general meeting and duly
published, the managers who are not part of the unauthorized delegation of powers are liable
on the general policies or the failure to supervise its execution.
The right of action against directors belongs to the general meeting. The general meeting shall
(may) designate one or several agents charged with instituting proceedings in the company’s
interest against the directors.
Similarly, shareholders representing 1/10 of the share capital and who did not vote during the
discharge of the directors may appoint an agent to institute proceedings in the company’s
interest against the directors. Note that the withdrawal of one or more of the said shareholders
in the course of the action shall have no effect on the continuation of the action. In the event
where the action succeeds the shareholders shall receive a refund of the expenses of the action;
if it fails the shareholders will bear the expenses of the action.
As regards criminal liability, the managing director or general manager shall be jointly and
severally liable to the company or third parties either for offences against laws and regulations
concerning companies or for violation of the provisions of the articles of association. Note that
no decision of the general meeting may extinguish an action against the directors or managing
director or general manager for an offence committed in the performance of their duties.
Dismissal of Directors
Shareholders may dismiss a director during the annual meeting for a legitimate cause. For
instance, a director who has failed to or is unable to attend and participate in directors meetings
or who has acted contrary to the interest of the company can be removed for a legitimate
caused. Before being removed for just cause, the director must be given notice and a hearing. If
a director is removed without just cause he will be entitled to damages.
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Note that if a director was appointed by the annual meeting, then the decision removing the
director shall be taken by shareholders representing more than ½ of the share capital. On the
other hand if the appointment is by the articles of association then a vote representing ¾ of the
share capital shall be mandatory given that an amendment of the articles of association shall be
required during a special meeting
D. POWERS AND DUTIES OF DIRECTORS
CONTRACTS CONCLUDED BETWEEN THE COMPANY AND
THE DIRECTOR
1- Contracts prohibited between directors and the company
Directors are forbidden to contract whatsoever loans from the company or for the company to
guarantee a loan on their behalf except the transaction for which the loan is meant is not part of
the object of the company and provided it is submitted to normal conditions. Normal conditions
mean conditions that are applied, for similar agreements not only by the company in question,
but also by the other companies in the same sector of activity.
2-Contracts submitted to authorization and control
Directors cannot without the authorization of the general meeting carry out either for their own
benefit or for the benefit of others any activity, which is similar to that of the company.
The same shall apply to agreements indirectly involving a director or in which he dealt with the
company through a third party. The director shall be bound to inform the board of directors as
soon as he is aware of an agreement subject to authorization. He shall not take part in the
voting on the authorization applied for. Note that all such agreements i.e., those authorized by
the board must be submitted for the approval of the ordinary general meeting.
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E. REMUNERATION OR COMPANSATION FOR LOSS OF
OFFICE
The company shall by ordinary resolution approve the remuneration of the directors and any
benefit payable to the directors, including any compensation to a director for loss of
employment or to a former director. The Board of Dirctors may determine the terms of any
service contract with a managing director or other executive director. The directors may be
paid all travelling, hotel and other expenses properly incurred by them in attending any
meetings of the Board or in connection with the business of the company. Article 206
Decisions that may be approved by the Board of Directors instead of the meeting of
shareholders
The Board of Directors may, instead of the meeting of shareholders of a company and where it
is provided for by the Law, approve:
1. the payment of remuneration or the provision of other benefits by the company to a
director;
2. the payment by the company to a director or former director of compensation for loss of
office.
Any shareholder who considers that the payment was not fair to the company and who holds at
least ten per cent (10%) of the company‟s voting share capital, may, within one month of
knowledge of that payment request the Board to reconsider these payments or request the
Board to call a meeting of shareholders to approve or reject the payment by way of ordinary
resolution. When the payment is not approved, it shall constitute a debt payable by the directors
to the company. Article 207
F. LOANS TO DIRECTORS
A company may make a loan to a director but it must be approved by the meeting of
shareholders of the company in so far as its application concern of the Board of Directors.;
A loan which was granted which is not in compliance with the Articles of Association or is not
approved by the shareholders in meeting shall be cancelled shall be paid back .
G. REGISTER OF DIRECTORS
The list of Directors shall be lodged the with Office of the Registrar General and if thereare
any changes appointments ,resignations or terminations, the ORG must be informed.
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H. DISCLOSURE OF DIRECTORS’ INTERESTS IN
CONTRACTS
A director of a company may have an interest in a transaction that company is interested in
where:
1. It can be shown that he / she may benefit from it financially
2. has relationship with any other person concerned with the transaction;
3. is amember of the Board of Directors, an employee or attorney of the person concerned
with the transaction or
4. that can be interested in it and that is other than:
a) a direct subsidiary company;
b) a subsidiary company;
c) a subsidiary of another subsidiary company;
5. is the parent, the child or the spouse of another party to the transaction and who may
have financial interest in it;
6. is to some extent directly or indirectly interested in the transaction.
A director of a company shall, forthwith after becoming aware of the fact that he/she is
interested in a transaction or proposed transaction with the company, cause to be entered in the
interests register and disclose to the Board of Directors the company:
1. where the monetary value of the director‟s interest is able to be quantified, the nature
and monetary value of that interest
2. where the monetary value of the director‟s interest cannot be quantified, the nature and
extent of that interest.
A transaction entered into by the company in which a director of the company is interested may
be avoided by the company at any time before the expiration of six (6) months after the
transaction is disclosed to all the shareholders. A transaction shall not be avoided where the
company receives fair value under it. The question as to whether a company receives a fair
value under a transaction shall be determined on the basis of the information known to the
company and to the interested director at the time the transaction is entered into.
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I. THE TURQUAND’S RULE
No presumption of knowledge of articles of association.
A person is not affected by, or deemed to have notice or knowledge of the contents of articles
of association of, or any other document relating to a company merely because:
1. the articles of association or that document is registered in a register kept by the
Registrar General;
2. the articles of association or that document are available for inspection at an office of
the company.
Article 35 of Law 7/2009.. relating to Companies
This stems from The Turquand Rule:
Royal British Bank v Turquand (1856) 6 E&B 327 is a UK company law case that held
people transacting with companies are entitled to assume that internal company rules are
complied with, even if they are not. This "indoor management rule" or the "Rule in Turquand's
Case" is applicable in most of the common law world. It originally mitigated the harshness of
the constructive notice doctrine, and in the UK it is now supplemented by the Companies Act
2006 sections 39-41.
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BLANK
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Study Unit 9
The Secretary
Contents
A. The Company Secretary
B. Qualification, Appointment and Removal
C. Position and Duties
D. Liability of a Secretary
E. Removal of a Secretary
F. Register of Directors and Secretary
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A. THE COMPANY SECRETARY
Any company, other than a small private company shall have one or more employees who shall
be designated as Company Secretary
Article 219 as modified by Law 14/2010 of 07/05/2010
The Company Secretary to replace the Employee of a company
The 2009 companies’ law had scattered provisions on employees of a company. The article 219
stated out the duties of that company’s employee in these words:
“Any company, other than a small private company shall have one or more employee whose
duties shall be the following:
1. to advice members of the Board of Directors on their duties and powers;
2. to inform members of the Board of Directors about all the necessary regulations or
those which may affect the meetings of shareholders and of the Board of Directors,
reports thereof and their submission to different relevant organs provided for by the
Law as well as the impact of failure to comply with such regulations;
3. to make sure minutes of the meetings of shareholders or the Board of Directors are well
prepared and registers provided for by the articles of association are accurately kept;
4. to make sure annual balance sheet and other types of required documents are submitted
to the registrar general as provided for by this Law;
5. to make sure copies of annual balance sheet and activity reports where necessary are
submitted to all those provided for by this Law”.
Article 220 mentioned that an office of that employee shall not be left vacant for three (3)
months. The name of such an employee shall be notified to the Registrar General. The
company shall, within thirty (30) days, notify to the Registrar General whether the appointed
employee resigned or was removed from office.
These provisions have since been amended. Art. 219 for example replaced the term
“employee” with company “Secretary” and that article was amended as follows in the May
2010 amendments:
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The duties of the Company Secretary
Article 219 of Law n° 07/2009 of 27/04/2009 relating to companies as modified and
complemented by the May 2010 amendment states the duties of the Company Secretary as
follows:
“Any company, other than a small private company shall have a Company Secretary whose
duties shall be the following:
1. to advice members of the Board of Directors on their responsibilities and powers;
2. to inform members of the Board of Directors about all the necessary regulations or
those which may affect the meetings of shareholders and of the Board of Directors,
reports thereof and submission of all company documents required by the law to
relevant organs as well as consequences due to the failure to comply with such
regulations;
3. to ensure that minutes of the meetings of shareholders or the Board of Directors are
well prepared and that registers provided for by the articles of association are
accurately kept;
4. to make sure annual balance sheet and other types of required documents are submitted
to the Registrar General as provided for by this Law;
5. to ensure that copies of annual balance sheet and activity reports are transmitted to
relevant destinations n accordance with this Law and to any person as provided by the
law”.
He / she is responsible for keeping registers of directors and shareholders and of directors’
interests and keeping the Office of the Registrar General informed as required by law.
B. QUALIFICATION, APPOINTMENT AND REMOVAL
Whilst there are no rules as to qualification, appointment or removal, the office holder should
be a person of suitable standing and hold a properly drawn up contract with the company.
C. LIABILITY OF A SECRATARY
Acts of the secretary in accordance with the agreement bind the company.
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D. REMOVAL OF A SECRATARY
The Company Secretary is an employee and the relevant laws apply.
But in addition to this the office of the Company Secretary shall not be left vacant for three (3)
months .
The name of such an employee shall be notified to the Registrar General.
The company shall, within thirty (30) days, notify to the Registrar General whether the
appointed employee resigned or was removed from office.
E. REGISTER OF DIRECTORS AND SECRATARY
The Company Secretary must keep the ORG informed as required by law.
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Study Unit 10
Auditors
Contents
A. Qualification, Appointment and Removal
B. Remuneration
C. Powers and Duties
D. Liability of Auditors
E. Dismissal of Auditors
Page 100
ORGANS OF CONTROL
The directors render accounts of their management, once each year, before the annual meeting
of shareholders.
They present the statement of accounts for the year under review. In order to control the
authenticity of these figures it is necessary that persons having competence in accounting can
verify the figures. This mission is entrusted to auditors.
A. QUALIFICATION, APPOINTMENT AND REMOVAL
A company shall, at each annual meeting, appoint an auditor.
The appointment of the company is ensured by auditors who may be natural persons or a
corporate body. In addition they may be shareholders or third parties.
The appointment of auditors is the prerogative of the annual meeting of shareholders and never
by the articles of association. The first auditors are appointed by the constituent general
meeting. During the existence of the company, the auditors are appointed by the annual
meeting. The term of office of the auditors shall not exceed six years, but they are eligible for
re-election.
Note that shareholders representing 1/5 of the capital may appoint an auditor of their choice. In
the event of any vacancy the President of the Court of First instance may appoint, upon a
request by the directors or any interested parties, an interim auditor. The final appointment of
an auditor will be made during the next general meeting.
In order to guarantee the independence of the auditors, the legislator has disqualified a category
of persons from being appointed auditors. They are:
1. The directors;
2. The spouses and parents or relations to the fourth degree, directors of a company they
control either directly or indirectly:
3. Employees of the company or former employees who have been working for the
company within the last three years.
Qualifications of an auditor No person shall be appointed or act as auditor of a company,
other than a small private company, unless he/she possesses qualifications of, or equivalent to
those of any institution or association of chartered accountants.
Where at that annual meeting, the company fails to appoint an auditor during that annual
meeting or the post continues to fall vacant for a one month period, the Registrar General shall
have the powers to have the company appoint its auditor within thirty (30) days. Article 238
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B. REMUNERATION
The salary and other expenses for the auditor shall be determined at the annual meeting of
shareholders or the Board of Directors where the constitution so provides.
An auditing firm may be appointed to be the auditor of a company where :
1. at least one member of the firm is ordinarily resident in Rwanda;
2. all or some of the partners including the partner who is ordinarily resident in Rwanda
are qualified for appointment as an auditor ;
3. is indebted to the company;
4. the firm is not
a) one of the companys shareholders,
b) member of the Board of Directors,
c) does not work for the company or for its subsidiary;
C. POWERS AND DUTIES OF AUDITORS
Auditors are clothed with infinite powers for the control of all the operations of the company.
Accordingly they can verify the regularity of all the accounting documents and the correctness
of the information, which the directors have given to the shareholders. They have the power of
investigation and can require officers to give necessary explanations. In the exercise of their
functions they may seek the assistance of experts at their own cost. The auditors may convene a
meeting of shareholders if the directors fail to convene it.
D. LIABILITY OF AUDITORS
The liability of auditors for acts committed in the exercise of their functions of control, as well
as any eventual action against them is determined by the same rules applicable to the liability
of directors.
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E. DISMISSAL OF AUDITORS
An auditor of a company shall be automatically reappointed at an annual meeting of the
company unless :
1. the company passes a resolution at the annual meeting appointing another person to
replace the auditor;
2. a small private company passes a resolution that no auditor shall be appointed;
3. the auditor has given notice to the company that he/she does not wish to be reappointed.
Resignation
Where an auditor gives the Board of Directors of a company written notice that he/she does not
wish to be reappointed, the Board shall, if requested to do so by that auditor :
1. distribute to all shareholders and to the Registrar General, at the expense of the
company, a written statement of the auditor‟s reasons for his/her wish not to be
reappointed;
2. permit the auditor or his/her representative to explain at a shareholders‟ meeting the
reasons for his/her wish not to be reappointed. Article 244
An auditor may resign prior to the annual meeting of the company. This shall, after receiving
the notification thereof, call on the Board of Directors to a special meeting to receive the
auditor‟s notice of resignation. The auditor shall provide a written report which gives to
him/her representative the opportunity to give an explanation why he/she does not wish to be
re-appointed as auditor. Also during that meeting, the Board of Directors or the meeting of
shareholders shall appoint of a new auditor. Article 245
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Study Unit 11
Company Accounts, Audit and Inspection
Contents
A. Form and Content of Accounts
B. Books of Account
C. Group Accounts
D. Directors’ Report
E. Auditor’s Report
F. Investigation by the Registrar General
G. Appointment and Powers of Inspectors
H. Inspector’s Report
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Members of the Board of directors shall provide such information and explanations as are
necessary for auditing process to be conducted.
A. FORM AND CONTENT OF ACCOUNTS
.The Financial statements will include a balance sheet (Statement of Financial Position) as at
the year end and a profit and loss statement (Income Statement)for the period ending the at the
balance sheet date.
The financial statements shall, in the case of companies which are required to comply with the
International Accounting Standards, also include:
1. a statement of changes in equity between its last two balance sheet dates;
2. a cash flow statement.
And in the case of a company not trading for profit, be an income and expenditure statement
for the company in relation to the accounting period ending at the financial statement date;
B. BOOKS OF ACCOUNT
The accounting records shall contain:
1. receipts and expenses with their accounting documents;
2. a record of the assets and liabilities of the company;
3. where the company‟s business involves dealing in goods:
a) a record of bought and sold goods, those who bought them and related invoices;
b) a record of stock held and its variation;
4. where the company‟s business involves providing services, a record of services
provided and relevant invoices
C. GROUP ACCOUNTS
The Board of Directors of every company shall ensure that, within three (3) months following
the end of a financial year, a set of audited accounts shall be submitted to the ORG.
For groups of companies consolidated statements must be prepared in addition to the individual
statements. For companies which are required to meet International Accounting Standards,
must comprise a consolidated balance sheet and a consolidated income statement.
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D. DIRECTORS’ REPORT
The Board of Directors of every company shall, within six (6) months after the company’s
financial statement date, prepare an annual report on the affairs of the company during the
accounting period ending on that date.
A copy of the annual report shall be sent to every shareholder of the company not less than
fifteen (15) days before the date fixed for holding the annual meeting of the shareholders.
The annual report for a company shall be in writing and be dated and shall:
1. describe the state of the company’s affairs and give details especially of any change during
the accounting period in:
a) the nature of the business of the company or any of its subsidiaries;
b) the classes of business in which the company has an interest, whether as a shareholder
of another company or otherwise;
2. include financial statements for the accounting period and any group financial statements
for the accounting period completed and signed
3. include the auditor’s report where this is required
4. state particulars of entries in the interests register made during the accounting period;
5. state the amount which represents the total of the remuneration and benefits by:
a) executive directors of the company
b) the non-executive directors of the company;
6. state the total amount of donations made by the company and other subsidiaries during the
accounting period;
7. state the names of the persons holding office as directors of the company as at the end of
the accounting period and the names of any persons who ceased to hold office as directors
of the company during the accounting period;
8. state the amounts payable by the company to the person or firm holding office as auditor of
the company as audit fees and, as a separate item, fees payable by the company for other
services provided by that person or firm;
9. be signed on behalf of the Board of Directors by two directors of the company or, where
the company has only one director, by that director;
10. disclose related party transactions and full information about the nature and extent of the
conflict of interest;
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E. AUDITOR’S REPORT
The auditor of a company shall prepare an auditing report and submit it to the company’s
shareholders.
It shall state the following:
1. the work done by the auditor;
2. the scope and limitations of the audit;
3. the proof that there is no relationship, no interests and debt which the auditor has in the
company;
4. whether the auditor has obtained all information and explanations he/she needed;
5. whether, proper accounting records have been well kept by the company;
6. whether, in the auditor’s opinion, the financial statements give a true and fair view of
the matters to which they relate, and where they do not, shortcomings are identified;
7. whether, the financial statements comply with the international accounting standards;
8. the auditor‟s opinion and problems that are linked with the company’s management;
9. the auditor makes recommendations with regard to the identified problems.
F. INVESTIGATION BY THE REGISTRAR GENERAL
An investigation can be called where the Minister in charge of companies is satisfied that:
1. for the protection of the public, the shareholders or creditors of a company, it is
desirable that the affairs of a company should be investigated;
2. it is in the public interest that the affairs of a company should be investigated;
3. in the case of a foreign company, the appropriate authority of another country had
requested that an investigation be made under this article in respect of the company;
He/she shall inform the Registrar General of the recommendation that there should be an
investigation into the business of a local company or of a foreign company having its branch in
Rwanda.
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The Registrar General may without recommendation from the Minister of companies institute
an investigation:
1. in the case of a company having a share capital, on the application of:
a) one shareholder or a group of shareholders holding at least one-tenth (1/10) of the
issued shares;
b) debenture holders holding not less than one-fifth (1/5) in nominal value of the
issued debentures;
2. in the case of a company limited by guarantee, on the application of not less than one-
fifth (1/5) in number of the persons on the share register;
3. where he/she considers that the appointment of an inspector is necessary to safeguard
the interests of shareholders or debenture shareholders or is necessary in the public
interest, require an inspector to investigate the affairs of a company or such aspects of
the affairs of a company as are specified in the instrument of appointment and in the
case of a debenture agency deed, the conduct of the debenture holders' representative,
and to make a report on his/her investigation in such form and manner as the Registrar
General may direct.
.
G. APPOINTMENT AND POWERS OF INSPECTORS
An inspector of the business of a company shall be appointed by the Registrar General.
The powers of an inspector shall extend to the investigation of any circumstances which
suggest the existence of an arrangement or understanding which, though not legally binding, is
or was observed or likely to be observed in practice and which is relevant to the purposes of
his/her investigation. See Article 286
Every person concerned shall give to the inspector all assistance in connection with the
investigation which he/she is reasonably able to give for the investigation to be smoothly
carried out.
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H. INSPECTOR’S REPORT
A copy of the inspector's report shall be forwarded to the Registrar General, to the registered
office of the company and to those who requested for it.
The Registrar General may, where he/she is of the opinion that it is necessary in the public
interest to do so, ask the body that requested the investigation to cause the report to be
published.
Where an inspector’s report suggests that any qualified auditor :
1. has been guilty of misconduct;
2. has conducted an audit in a manner that is not appropriate;
the Registrar General shall refer that matter to competent authorities for necessary action.
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Study Unit 12
Corporate Insolvency
Contents
A. The Disappearance of Legal Personality
B. Winding up by the Courts
C. Voluntary Winding Up
D. Liquidators: Appointment and Duties
E. Release of Liquidators
F. Offences relation to Liquidation
Page 110
A. THE DISAPPEARANCE OF LEGAL PERSONALITY
When a commercial company acquires legal personality the personality does not persist for life
i.e., it is not permanent, it will some day end. The disappearance of legal personality is the
consequence of dissolution of the company, which entails the dissolution and distribution of its
patrimony among shareholders (partners).
Causes of Disappearance
The causes of disappearance are of two types, the one is applicable to all commercial
companies; the other relates to individual partners and is restricted to those companies in which
the personality of the participant is fundamental.
a) General Causes
There are four general causes:
1. A commercial company established for a certain period of time dissolves at the end of
that period in the absence of a resolution extending its life.
2. A decision taken by the shareholders (partners) to dissolve the company before the time
agreed upon.
3. Loss of the object or impossibility of performance
4. If the object has been attained
b) Peculiar causes
The causes peculiar to individuals do not apply to all commercial companies, they relate
exclusively to partnerships. Accordingly the death, incapacity or insolvency of a partner will
lead to the dissolution.
However in practice, partnership agreements usually contain a provision (clause) making it
possible for the partnership to continue doing business not withstanding any of the above
causes that may lead to its dissolution.
A partnership cannot be dissolved by the unilateral will of a partner except if he acts in good
faith. The last cause for dissolution, which is applicable to all types of commercial companies,
is the dissolution for just cause. Here dissolution may be requested by an individual
shareholder or partner. The just cause is left to the appreciation of the court. Some of the
factors, which may be considered as just cause, include failure by a partner to respect his
obligations, permanent disability of a partner, antagonism that makes it impossible for the
partners to work together etc.
Note that the regular transformation of a limited company from one form into another shall
not entail the creation of a new legal entity. The same shall apply to an extension of the
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existence of a company or any other amendment of its Articles of Association (partnership
Agreement) with formalities of publication both at the time of constitution (formation) to any
amendment of its Articles of Association (partnership Agreement)
Dissolution of a Company
The dissolution of a company is the termination of its legal existence. Among the causes of
dissolution of companies we may allude to the factors which are general and which apply to all
types of commercial companies and those which that are unique to certain forms of commercial
companies.
a) Causes Common to dissolution of all types of Companies
The factors that may occasion the dissolution of a company are:
1. The expiry of the period for which it was formed;
2. The realisation of the object or where the realisation of the object has become
impossible;
3. On the decision of the shareholders under the conditions provided for amending the
Articles of Association:
4. Upon a decision of the court at the request of a shareholder for a misunderstanding
between shareholders hampering the normal functioning of the company:
5. Where all the shares are united in the hands of a single shareholder / when all the shares
are held by one person;
6. Bankruptcy;
Expiry of the term (Exfluxion of time): If the articles of association provided for definite life
(term) the company automatically terminates at the end of the designated time. However, the
life of a company constituted for a fixed period may be extended by a decision of the
shareholders in conformity with the condition provided for amending the Articles of
Association. In the event where it is deemed necessary to prolong the life of the company, the
managers (directors) are required to submit the question of prolongation to the shareholders at
least six months before the expiry date.
Where a company is established for an indefinite period, then, a shareholder may if acting in
good faith signifies his intention to withdraw from the company by giving the company six
months’ notice. Should that come to pass the other shareholders are required to reimburse the
dissenting shareholder the equivalent of his assets having regard to the situation of the
company as at the time of withdrawal provided that he does not elect to dissolve the company
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Note that where a company is established for an indefinite period the company is a company at
will. Such a company may be dissolved at any time by any shareholder. All that is necessary is
for a shareholder to notify the other shareholders.
Realisation of the object or where realization of the object becomes impossible.
A company that is formed for a certain objective such as to acquire a certain plot of ground and
then to develop and sell residential lots dissolves when that objective is reached. Similarly
where a company is formed for a certain objective and the realization of the object becomes
impossible the company may be dissolved. Impossibility of achieving the objects may be the
result of exhaustion of minerals, withdrawal of administrative concession nationalization etc.
On the decision of the shareholders.
Since a company is created as a result of the decision of the shareholders the shareholders can at any
time decide to terminate the life of the company in accordance with the conditions provided for
amending the Articles of Association
Upon a decision of the court.
A company may also be dissolved upon a decision of the court at the request of a shareholder for a
serious misunderstanding between the shareholders, which leads to a malfunctioning of the company.
Where all the shares are united in the hands of a single shareholder.
When all the shares are held by one person this person can alone decide to dissolve the company. The
person could be not only an individual but another company.
The bankruptcy of accompany is another factor that conduces to the dissolution of accompany.
A company is said to be bankruptcy if it is unable to pay its debts as they are, or become due.
Both bankruptcy and judicial administration are procedures controlled by the court.
LIQUIDATION OF COMPANIES
Liquidation of a company is the process whereby its life is ended and its property administered
for the benefit of its creditors and members. Upon liquidation of a company, a liquidator is
appointed and he takes control of the company, collects its assets, pays its debts and finally
distributes any surplus among the members in accordance with their rights.
There are two types of liquidation: compulsory liquidation under an order of court and
voluntary liquidation under a resolution of the company.
A company shall be under liquidation as soon as it is dissolved for any reason except by
merger. The words "in liquidation" shall be added to the name of the company including
letters, invoices and various publication of the said company.
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The legal personality of the company shall continue to exist for liquidation purposes until the
liquidation procedure is completed.
When a decision ordering the liquidation of the company has been taken the powers of the
board of directors, managing directors or the managers shall end (be suspended) and the
liquidator will assume their functions. The managing directors or managers are required as at
the date of dissolution to establish a balance sheet, profits and loss account and a report, which
shall be submitted to the auditors (if any) for verification and to the shareholders for approval.
The liquidator(s) are, in default of their designation by the articles of association appointed by
the annual meeting. Note that one or more liquidators shall be appointed:
1. Unanimously by the partners in case of a general partnership;
2. Unanimously by the active partners and by the majority in capital in case of a limited
partnership and limited partnership by shares;
3. By the majority capital of shareholders in case of private limited company
4. Under the quorum and majority conditions provided for a special meeting in case of a
public limited company .
As seen before, every company shall be considered to be a commercial company.
It is therefore of paramount importance to discuss some matters relating to commercial
activities, persons who carry out such activities (traders), and any other relevant matter that
might fall within commercial sphere.
B. WINDING UP BY THE COURTS
Upon a decision of the court
A company may also be dissolved upon a decision of the court at the request of a shareholder
for a serious misunderstanding between the shareholders, which leads to a malfunctioning of
the company.
C. VOLUNTARY WINDING UP
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On the decision of the shareholders
Since a company is created as a result of the decision of the shareholders the shareholders can
at any time decide to terminate the life of the company in accordance with the conditions
provided for amending the Articles of Association (i.e. in principle the unanimous decision of
the partners (partnership) and the special majority for companies (SARL and SA).
D. LIQUIDATORS: APPOINTMENT AND DUTIES
Note that a liquidator may be chosen from among the shareholders or third parties. In addition,
the liquidator may be a corporate body.
However, where the shareholders are unable to appoint a liquidator within three month of the
dissolution of the company he may be designated by a court decision at the request of any
interested party. In default, the managers or directors of the company at the time or moment of
dissolution shall, in relation to the third parties, assume any obligation and liabilities of the
liquidators.
Note that in case of nullity e.g. where the Articles of Association does not take the form of a
notarial act it is only the court that is competent to appoint liquidators.
The liquidators are clothed with the widest powers possible to realize the act of liquidation as
well as to represent the company i.e., legal proceedings (liquidation proceedings). However,
the liquidator cannot without the consent of the shareholders (under condition for amending the
articles of association) or authorization of the court, as the case may be, sell real estate, borrow
give secured debts, transfer the assets of the company by private contract), assign or transfer
the assets of the company to another company or stay the execution of a judgment.
Note that the effect of liquidation is to create concurrent rights between creditors of the
company. As such, no cancellation of sale of movable property can be allowed against the
interest of creditors.
The liquidator is empowered to pay creditors. Where the sums allotted to creditors have not
been paid out, they shall be deposited in an account opened at the National Bank of Rwanda.
After paying off the creditors the balance available will then be shared among shareholders and
any property that cannot be shared conveniently shall be handed over to the shareholders
jointly.
In the course of performing his duties the liquidator is required to use the care and skill
required of a paid agent. The liquidator is liable to the company as well as third parties for the
actionable wrong resulting from any errors made by him in the exercise of his duties.
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Each year the liquidator is required to submit to the general meeting a financial statement,
profit and losses account as well as a written report in which he shall give an account of the
liquidation exercise during the year together with reasons hampering the closure of liquidation.
Nonetheless, the general meeting of shareholders or the court may at any time request the
liquidator to submit a written report containing the state of the liquidation exercise and the
reason hindering the closure of liquidation.
E. RELEASE OF LIQUIDATORS
At the close of liquidation it is mandatory for the liquidator to establish a written report on the
liquidation exercise, which shall be submitted to the general meeting, failing this, to the
auditors.
The shareholders shall take a decision on the final accounts, the discharge of the liquidator and
auditors in respect of the performance of their duties. The discharge will be valid if and only if
the report and profit and loss account do not contain errors or omissions.
The foregoing notwithstanding the court may at the request of any interested party pronounce
the termination of liquidation once the liquidation exercise has been concluded. This, it will do
after hearing the liquidator.
Notwithstanding the end of liquidation the court may order the reopening of liquidation at the
request of any interested party:
1. If the decision pronouncing the end of liquidation was actuated by a fraud on his rights;
2. if the liquidators have not shared all that accrued to the company in liquidation
To make known his status of shareholder or creditor.
Should liquidation be reopened the former liquidators will be reinstated, if need be, they may
be replaced.
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PRESCRIPTION OR LIMITATION OF TIME
Prescription relates to the extinction of rights by lapse of time i.e. the time within which if an
action is not instituted in court, the plaintiff’s right of action is lost.
All actions against the company shall lapse after 10years from the date the right of action
accrued. However, the following acts shall be barred after 5years:
1. all actions against the promoters of a company starting from the date of publication of
the memorandum of association;
2. all actions against shareholders starting from the date of publication of their retirement
or dissolution of the company;
3. All actions against the organs of the company for acts committed in the exercise of their
functions starting from the date of such acts or if it was concealed by fraud from the
date of discovery;
4. All actions against a company in liquidation from the date of publication of the closure
of liquidation;
5. all actions for the restitution of dividends unjustly paid from the date of distribution;
6. all actions for the payment of dividends or for the reimbursement of part thereof, from
the date it became due.
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Study Unit 13
Alternatives to Winding Up
Contents
A. Reconstruction
B. Amalgamation, Mergers and Take-overs
C. Schemes of Arrangement
D. Rights of Shareholders
E. Rights of Creditors
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A. RECONSTRUCTION
Transformation, Merger and Cessation
The transformation of a company is the operation whereby a company changes its legal form
by decision of its partners. The transformation of the company does not result in the creation of
a new corporate body. The act of transformation amounts to an amendment of the Articles of
Association (PA) which is subject to the publication formalities seen above. Nevertheless, if
the transformation of a company has the effect of increasing the commitment of a shareholder
in which the shareholders liability is limited to their contributions into one in which their
liability is unlimited the consent of the shareholder in question is required.
Transformation does not destroy the rights of creditors of the company. Accordingly creditors
shall maintain their rights over the company prior to such transformation In addition the
creditors may within three months from the date of publication of the act of amendment
petition the court to nullify the transformation if they fail to obtain sufficient guarantee from
the company.
For its part a merger is the operation whereby two or more companies merge to form a single
company either by creating a new company or by one company acquiring the other (s). All the
companies involved in the merger operation are each required to take and publish the decision
in accordance with the rules regulating amendment of import aspects affecting the company in
default in accordance with the requirements for constituting a new company.
A merger entails the dissolution without liquidation of the disappearing company and the
universal transfer to the beneficiary company of their assets and liabilities in the state in which
they are on the date of wrapping up of the operation.
Note that third parties (creditors) shall maintain their rights over the company prior to the
merger. Furthermore, they may request the court within three months from the date of
publication of the act of merger to declare the merger void if the fail to receive adequate
guarantee from the company.
In addition a company may either alone or together with other companies create a new
company by the partial transfer of its assets to the new company. Note that the decision
transferring part of the assets of the company is taken and published in accordance with the
rules to be observed when amending important aspects of the company. In default the rules
regulating the reduction of the capital of the company must be strictly followed.
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B. AMALGAMATION, MERGERS AND TAKE-OVERS
The transformation of a company is the operation whereby a company changes its legal form
by decision of its partners. The transformation of the company does not result in the creation of
a new corporate body. The act of transformation amounts to an amendment of the Articles of
Association (PA) which is subject to the publication formalities seen above. Nevertheless, if
the transformation of a company has the effect of increasing the commitment of a shareholder
in which the shareholders liability is limited to their contributions into one in which their
liability is unlimited the consent of the shareholder in question is required.
For its part a merger is the operation whereby two or more companies merge to form a single
company either by creating a new company or by one company acquiring the other (s). All the
companies involved in the merger operation are each required to take and publish the decision
in accordance with the rules regulating amendment of import aspects affecting the company in
default in accordance with the requirements for constituting a new company.
A merger entails the dissolution without liquidation of the disappearing company and the
universal transfer to the beneficiary company of their assets and liabilities in the state in which
they are on the date of wrapping up of the operation.
Note that third parties (creditors) shall maintain their rights over the company prior to the
merger. Furthermore, they may request the court of the act of merger to declare the merger
void if the fail to receive adequate guarantee from the company.
C. SCHEMES OF ARRANGEMENT
The transformation of a company is the operation whereby a company changes its legal form
by decision of its partners. The transformation of the company does not result in the creation of
a new corporate body. The act of transformation amounts to an amendment of the Articles of
Association (PA) which is subject to the publication formalities seen above. Nevertheless, if
the transformation of a company has the effect of increasing the commitment of a shareholder
in which the shareholders liability is limited to their contributions into one in which their
liability is unlimited the consent of the shareholder in question is required.
In addition a company may either alone or together with other companies create a new
company by the partial transfer of its assets to the new company. Note that the decision
transferring part of the assets of the company is taken and published in accordance with the
rules to be observed when amending important aspects of the company. In default the rules
regulating the reduction of the capital of the company must be strictly followed.
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D. RIGHTS OF SHAREHOLDERS
The rights of shareholders are safeguarded through Article 142 which states that a major
transaction of amalgamation can only be approved by a special resolution at a meeting of the
shareholders.
A special resolution can only be approved by a majority of 75% of the votes of those
shareholders entitled to vote and who have voted on the issue under consideration.
E. RIGHTS OF CREDITORS
Transformation does not destroy the rights of creditors of the company Accordingly creditors
shall maintain their rights over the company prior to such transformation.
In addition the creditors may petition the court to nullify the transformation if they fail to
obtain sufficient guarantee from the company.
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Study Unit 14
Foreign Companies
Contents
A. Definition
B. Registration of Foreign Companies
C. Obligations applicable to foreign companies
D. Cessation of foreign company activities
Page 122
This chapter deals with general notions on foreign company, obligations incurred by them as
well as some provisions regarding the end of activities of a foreign company.
A. DEFINITION
A foreign company is a company incorporated outside of Rwanda and that has some of its
activities in Rwanda by:
1. establishing a share transfer office or a share registration office in Rwanda;
2. administering, managing or dealing with property in Rwanda as an agent, personal
representative or trustee, whether through its employees or an agent or in any other
manner.
A foreign company has to be registered by the Registrar General. Where it is established that
its name is confusing as far as companies inside the country are concerned, he/she shall require
the name to be changed.
B. REGISTRATION OF FOREIGN COMPANIES
Every foreign company shall, before starting business file the following with the Registrar
General :
1. a duly authenticated copy of its articles of association and the certificate of its
registration delivered by the registration officer;
2. a duly authenticated copy of its certificate of incorporation, articles of association,
memorandum of association depending on where it was established and any other
instrument constituting or defining its being established;
3. a list of its directors residing in Rwanda;
4. a memorandum of or power of attorney to represent the company in Rwanda;
5. notice of its registered office in Rwanda;
6. a declaration made by the authorized agents of the company.
Where a foreign company has complied with the provisions of the law, the Registrar General
shall register the company and shall issue a certificate thereof in the prescribed form.
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C. OBLIGATIONS APPLICABLE TO FOREIGN
COMPANIES
The law sets out obligations related to foreign companies, notably:
• Obligation to file with the Registrar General a court order (art. 328);
• Obligation by the Registrar General to approve changes (article 329);
• Obligation of a foreign company to deposit to the Registrar General has copy of a
Balance Sheet (art. 330);
• Obligation to comply with requirements to local companies Rwanda of (art. 331);
• Obligation to comply with international accounting standards (art. 332);
• Obligation to give Notice by a foreign company of particulars of its business in Rwanda
(art. 333);
• Obligation to keep at the head office, branch registers (art. 334);
• Filing with the Registrar General a notice as to a place where the register is kept (art.
335 and 336);
• etc.
D. CESSATION OF FOREIGN COMPANY ACTIVITIES
In the terms of the article 340, where a foreign company ceases to have a place of business or
to carry on business in Rwanda, it shall, within seven (7) days of the date of the cessation, file
with the Registrar General a notice to that effect, and as from the day on which the notice is
filed, its obligation to file any document other than a document that ought to have been filed
shall cease to operate, and the Registrar General shall within three (3) months after the filing of
the notice remove the name of the company from the register.
Article 341 adds by saying that Where a foreign company goes into liquidation or is dissolved
in its place of incorporation or origin:
1. an authorized agent in Rwanda shall, upon commencement of the liquidation, file with
the Registrar General a notice to that effect;
2. the liquidator of a dissolved company shall have the powers of a liquidator for Rwanda.
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The article 342 gives the procedure to follow by the liquidator in these terms, A liquidator of a
foreign company appointed by the Court or a person exercising the powers and functions of
such a liquidator shall:
1. before any distribution of the foreign company's assets is made, by advertisement in a
newspaper circulating generally in each country where the foreign company had been
carrying on business and where no liquidator has been appointed , invite all creditors to
make their claims against the foreign company within a reasonable time before the
distribution;
2. not, without leave of the Court, pay out any creditor to the exclusion of any other
creditor.
Where a foreign company has been wound up so far as its assets in Rwanda are concerned and
there is no liquidator for the place of its incorporation or origin, the liquidator may apply to the
Court for directions as to the disposal of the net amount recovered (article 343).
Finally to the terms of the article 344 of the law says, On receipt of a notice from an authorized
agent in charge of liquidation or dissolution of the company, the Registrar General shall
remove the name of the company from the register.
Where the Registrar General has reasonable cause to believe that a foreign company has ceased
to carry on business in Rwanda, shall remove it from the register of companies in accordance
with the Law.
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Study Unit 15
Dormant Company
Contents
A. Dormant Company
Page 126
A. DORMANT COMPANY
Article 346 and 347 give this definition, a company shall be a dormant company for any period
during which no significant accounting transaction occurs in relation to the company. Where a
company has:
1. been dormant from the time of its formation;
2. has been dormant since the end of its previous accounting period; and is not required to
prepare accounts for that period, by a special resolution passed at a meeting of
shareholders, such company declare itself a dormant company.
A company shall not declare itself to be a dormant company where it is a company formed for
the business of banking or insurance.
The company shall, within fifteen (15) days of the passing of the special resolution declaring
itself to be a dormant company gives notice to the Registrar General of that resolution (art.
349).
Where a company which has declared itself to be a dormant company ceases to be dormant, a
notice thereto shall be given to the Registrar General by that company (art.350).
It is worth mentioning exemption for dormant companies as envisaged by article 351 saying
that any company, which is registered as being a dormant company, shall be exempted from the
requirement of having its accounts audited and from the payment of any prescribed fee as is
relevant to its situation.
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Study Unit 16
Removal from Register of Companies and Penalties
Contents
A. Removal from Register of Companies
B. Solvency and company’s inability to pay
C. Pertinent provisions in relation to the removal from the register of
companies
D. Penal Provisions
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The present chapter approaches the removal of a company from register of companies as well
as the penalties.
A. REMOVAL FROM REGISTRAR COMPANIES
Before speaking of actual removal from register, the law distinguishes a companies based on
whether or not they have passed the solvency test. It is however difficult to establish.
B. SOLVENCY AND COMPANY’S INABILITY TO PAY
According to the wording of article 352, a company shall satisfy the solvency test where:
1. the company is able to pay its debts as they become due in the normal course of
business;
2. the value of the company's income is greater than the sum of the value of its liabilities
and the company’s share capital.
A company shall be considered to be unable to pay its debts where:
1. a creditor to whom the company is indebted in a sum exceeding twenty thousand
Rwanda francs (20,000 Rwf), has served at the registered office a demand under his/her
hand or under the hand of his/her Lawfully authorized agent requiring the company to
pay the sum due, and the company has for three weeks thereafter neglected to pay the
sum or to secure it to the reasonable satisfaction of the creditor;
2. execution or other process issued on a judgment or order of any Court in favor of a
creditor of the company is returned unsatisfied;
3. it is proved to the satisfaction of the Court that the company is unable to pay its debts,
having regard to its existing, contingent and prospective liabilities.
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C. PERTINENT PROVISIONS IN RELATION TO THE
REMOVAL FROM THE REGISTER OF COMPANIES
A company shall be removed from the register of companies when a notice, signed by the
Registrar General states that the company is removed from the register (art. 354).
Concerning reasons for removal from the register of companies article 355 specifies that The
Registrar General shall remove a company from the register of companies where :
1. the company is an amalgamating company, other than an amalgamated company, on the
day on which the Registrar General issues a certificate of amalgamation;
2. the Registrar General is satisfied that the company has ceased to carry on business.
However article 357 provides for possible objections in the following manner:
Where a notice is given of an intention to remove a company from the register, any person may
deliver to the Registrar General, not later than the date specified in the notice, an objection to
the removal on grounds that :
1. the company is still carrying on business or there is other reason for it to continue in
existence;
2. the company is a party to legal proceedings;
3. the company is in receivership or liquidation, or both;
4. a person is a creditor or a shareholder, or a person who has an undischarged claim
against the company;
5. the person believes that there exists, and intends to pursue, a right of action against the
company;
6. for any other reason, it would not be just and equitable to remove the company from the
register.
The proceeding of removal of a company from the register by the Registrar General are subject
to prior assessment of objections as put by article 358, the Registrar General shall not proceed
with the removal unless he/ she is satisfied that :
1. the objection has been withdrawn;
2. any facts on which the objection is based are not, or are no longer, correct;
3. the objection is frivolous or vexatious. The Registrar General shall give notice to the
person objecting that his/her objection is receivable or not and provide grounds
therefor.
The property of a company which is removed from the register includes leasehold rights and all
other rights vested in or held on behalf of or on trust for the company prior to its removal but
does not include property held by the former company on trust for any other person (art. 359).
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Finally article 360 states that the removal of a company from the register of companies shall
not affect the liability of any former director or shareholder of the company or any other person
in respect of any act or omission that took place before the company was removed from the
register and that liability continues and may be enforced as if the company had not been
removed from the register.
D. PENAL PROVISIONS
Articles 361 to 376 give a whole range of the penal provisions mainly consisting in fine up to
10 millions Rwandan Francs, notwithstanding the existing penal Code provisions.
Those penalties are applied notably in the following cases:
• where a company fails to comply with the Law as to getting registered in the relevant
• register of companies is concerned (art. 361);
• where a company fails to keep the books required (art. 362);
• where a company fails or delays to provide the Registrar General with the documents
that are required (art. 363);
• recidivism (art. 364);
• false or misleading notice (art. 365);
• deliberate submission of false document (art. 366);
• fraudulent us and destruction of company’s property (art. 367);
• falsification of the records (art. 368);
• use of a fraudulent document (art.369);
• fraudulent exercise of the commercial activities (art. 370);
• fraudulent acts (art. 371);
• Etc.
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Study Unit 17
Accounting Records and Audit
Contents
A. Definition
B. Financial Statement and Annual Report
C. Mandatory Investigation
D. Amalgamation of Companies
E. Alteration of the nature of companies
Page 132
A. DEFINITION
By audit, one should understand a mission of investigating entrusted to a professional (named
auditor sometimes) by a person in quest of information on a concerned operation or on a
situation of an enterprise that consists depending on the agreement in verifying the conformity
of the operation or the situation under study to the rules of the law in general or those of a
determined sector, it can also aim at assessing the risks of the initiative or the activity
considered or even its degree of efficiency and eventually draw a report to the assignor.
Some provisions related to the auditors
These provisions hinge on the appointment, fees and expenses, resignation of an auditor, etc.
Concerning an auditor's nomination article 238 specifies that a company shall, at each annual
meeting, appoints an auditor. Where at that annual meeting, the company fails to appoint an
auditor during that annual meeting or the post continues to fall vacant for a one month period,
the Registrar General shall have the powers to have the company appoint its auditor within
thirty (30) days.
When during a yearly assembly of the company, no auditor is named or takes back to his/her/its
station and that the station remains vacant since one month, the Registrar General is authorized
to order to the company to name a auditor within (30) days at most.
An auditor of a company shall be automatically reappointed at an annual meeting of the
company unless:
1. the company passes a resolution at the annual meeting appointing another person to
replace the auditor;
2. a small private company passes a resolution that no auditor shall be appointed;
3. the auditor has given notice to the company that he/she does not wish to be reappointed.
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Where an auditor gives the Board of Directors of a company written notice that he/she does not
wish to be reappointed, the Board shall, if requested to do so by that auditor :
1. distribute to all shareholders and to the Registrar General, at the expense of the
company, a written statement of the auditor’s reasons for his/her wish not to be
reappointed;
2. permit the auditor or his/her representative to explain at a shareholders’ meeting the
reasons for his/her wish not to be reappointed.
Regarding an auditor's qualification, article 242 says that no person shall be appointed or act as
auditor of a company, other than a small private company, unless he/she possesses
qualifications of, or equivalent to those of any institution or association of chartered
accountants.
It is worth highlighting that Small private companies need not to appoint an auditor according
to article 251 of the law. Where a small private company decides to appoint an auditor, the
provisions of this Law shall apply.
Where at, or before the time required for the holding of the annual meeting of a small private
company, notice is given to the Board of Directors of the company, signed by a shareholder
who holds at least five per cent (5%) of the shares of the company, the company shall appoint
an auditor. Such resolution shall cease to have effect at the next annual meeting, and the
auditor shall thereupon be re-appointed unless the shareholders by unanimous resolution agree
not to appoint the auditor.
With regard to fees and auditor's expenses, they are determined by the meeting of the
shareholders or by the Board of directors when it is specified by the articles of association of
the company.
Where from a report of an inspector it appears that any qualified auditor:
1. has been guilty of misconduct;
2. has conducted an audit in a manner that is not appropriate;
the Registrar General shall refer that matter to competent authorities for necessary action.
Concerning an auditor's resignation, an auditor may resign prior to the annual meeting of the
company. This shall, after receiving the notification thereof, call on the Board of Directors to a
special meeting to receive the auditor’s notice of resignation. The auditor shall provide a
written report which gives to him/her representative the opportunity to give an explanation why
he/she does not wish to be re appointed as auditor. Also during that meeting, the Board of
Directors or the meeting of shareholders shall appoint of a new auditor (article 245).
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Where from a report of an inspector it appears to the Registrar General that in the management
and administration of a company, there is a shareholder who, by virtue of his/her company,
shares and voting rights deriving from the classes of such shares and other benefits, alters the
decisions that were taken through the vote, causes mismanagement for him/her to maintain
control and where the latter helps him/her to unfairly discriminate other shareholders, the
Registrar General may lodge a case before the Court following this Law.
Auditing report
According to the article 241 of the law, an auditing report required to be signed on behalf of a
firm appointed as auditor of a company, by a member of the firm who is a qualified auditor.
Article 247 says that the auditor of a company shall prepare an auditing report and submit it to
the company’s shareholders. The auditor’s report shall state the following:
1. the work done by the auditor;
2. the scope and limitations of the audit;
3. the proof that there is no relationship, no interests and debt which the auditor has in the
company;
4. whether the auditor has obtained all information and explanations he/she needed;
5. whether, proper accounting records have been well kept by the company;
6. whether, in the auditor’s opinion, the financial statements give a true and fair view of
the matters to which they relate, and where they do not, shortcomings are identified;
7. whether, the financial statements comply with the international accounting standards;
8. the auditor’s opinion and problems that are linked with the company’s management;
9. the auditor makes recommendations with regard to the identified problems.
Article 250 lays down modalities for submitting auditor’s report in these words, where the
auditor of a company completes his/her report, he/she submits it to the company in a period not
exceeding seven (7) days and reserve a copy of the same for the debenture holders or their
representatives.
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B. FINANCIAL STATEMENT AND ANNUAL REPORT
Financial Statement
The Board of Directors of every company shall ensure that, within three (3) months following
the end of a financial statement the audit is made and signed by at least one representative of
the company. Such an audit shall be submitted to the Registrar General (article 253).
The financial statements of a company shall comply with international standards. Members of
the Board of directors shall provide such information and explanations as are necessary for
auditing process to be conducted (art. 254).
Concerning registration of the financial statement, all company, with the exception of the small
private companies, must insure that in the thirty (30) days that follow the date required for the
signature of the financial states of the company and the financial states of the whole group, the
copies of these financial states accompanied by a copy of the audit report on these financial
states are deposited to the office of the Registrar General for registration.
With regard to the content of the financial statement, article 266 states that the consolidated
financial statements shall, in the case of companies which are required to comply with the
International Accounting Standards, contain:
1. a consolidated balance sheet for the group as at that balance sheet date;
2. a consolidated income statement;
Annual report
The Board of Directors of every company shall, within six (6) months after the company’s
financial statement date, prepare an annual report on the affairs of the company during the
accounting period (article 267 of the law) ending on that date.
The Board of Directors of a company shall cause a copy of the annual report to be sent to every
shareholder of the company not less than fifteen (15) days before the date fixed for holding the
annual meeting of the shareholders.
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Concerning the format, every annual report for a company shall be in writing and be dated and
shall:
1. describe, so far as the Board believes is material for the shareholders to have an
appreciation of the state of the company’s affairs and is not harmful to the business of
the company or of any of its subsidiaries, especially any change during the accounting
period in:
a) the nature of the business of the company or any of its subsidiaries;
b) the classes of business in which the company has an interest, whether as a
shareholder of another company or otherwise;
2. include financial statements for the accounting period and any group financial
statements for the accounting period completed and signed in accordance with this
Law;
3. where an auditor’s report is required in relation to the financial statements or group
financial statements, included in the report, include that auditor’s report;
4. state particulars of entries in the interests register made during the accounting period;
5. state the amount which represents the total of the remuneration and benefits received by
or due and receivable from the company and any related corporation by:
a) executive directors of a company engaged in the full time employment of the
company and its related corporations, including all bonuses and commissions
received by them as employees;
b) separate statement, the non-executive directors of the company;
6. state the total amount of donations made by the company and other subsidiaries during
the accounting period;
7. state the names of the persons holding office as directors of the company as at the end
of the accounting period and the names of any persons who ceased to hold office as
directors of the company during the accounting period;
8. state the amounts payable by the company to the person or firm holding office as
auditor of the company as audit fees and, as a separate item, fees payable by the
company for other services provided by that person or firm;
9. be signed on behalf of the Board of Directors by two (2) directors of the company or,
where the company has only one director, by that director;
10. disclose related party transactions and full information about the nature and extent of
the conflict of interest;
11. any other details that are necessary for the report to be well understood.
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A Company whose subsidiary companies is located outside Rwanda shall also comply with the
provisions of this article within eight (8) weeks after the dates contained therein.
C. MANDATORY INVESTIGATION
Besides the inspection of the documents of a company made by the Shareholder(s), the law set
out a series of provisions related to the inspection of the activities of a company and that is
made by the inspector.
Mandatory investigation and appointment of an inspector
Where the Minister in charge of companies is satisfied that:
1. for the protection of the public, the shareholders or creditors of a company, it is
desirable that the affairs of a company should be investigated;
2. it is in the public interest that the affairs of a company should be investigated;
3. in the case of a foreign company, the appropriate authority of another country had
requested that an investigation be made under this article in respect of the company;
he/she shall issue the instructions to the Registrar General as to investigating into the
business of a local company or of a foreign company having its branch in Rwanda
(article 274).
An inspector of the business of a company shall be appointed by the Registrar General and
have the power to investigate the business of a company.
The appointed inspector should be a qualified, skilled and experienced professional manager.
This expert shall prepare a report according to the format required by the Registrar General
(art. 175).
However, the article 283 allows a company, with the exception of a declared company can, to
appoint an inspector by ordinary resolution, to investigate its business.
In the same vein, article 294 provides that a foreign company with subsidiary companies in
Rwanda may appoint inspectors for such subsidiary companies and the Registrar General shall
be notified thereof.
Expenses and operating cost of the inspection of a declared company are paid by the office of
the Registrar General.
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An inspection cannot be ordered by the Minister, in this case the article 277 The Registrar
General may :
1. in the case of a company having a share capital, on the application of:
a) one shareholder or a group of shareholders holding at least one-tenth (1/10) of the
issued shares;
b) debenture holders holding not less than one-fifth (1/5) in nominal value of the
issued debentures;
2. in the case of a company limited by guarantee, on the application of not less than one-
fifth (1/5) in number of the persons on the share register;
3. where he/she considers that the appointment of an inspector is necessary to safeguard
the interests of shareholders or debenture shareholders or is necessary in the public
interest, require an inspector to investigate the affairs of a company or such aspects of
the affairs of a company as are specified in the instrument of appointment and in the
case of a debenture agency deed, the conduct of the debenture holders' representative,
and to make a report on his/her investigation in such form and manner as the Registrar
General may direct.
Publication or submission of copies of the reports
The Registrar General may, where he/she is of the opinion that it is necessary in the public
interest to do so, ask the organ that requested for the investigation to cause the report to be
published (art. 280).
A copy of the inspector's report shall be forwarded to the Registrar General, at the registered
office of the company and to those who requested for it. (art. 279).
On the conclusion of the investigation, the inspector shall report his/her opinion in such manner
and to such persons as the company’s general assembly indicated (art. 284).
Procedure and powers of the inspector
Every person concerned shall, if required to do so by the inspector, produce to the latter every
book in his/her custody, control or possession and give to the inspector all assistance in
connection with the investigation which he/she is reasonably able to give for the investigation
to be smoothly carried out (art. 287).
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An inspector may by written notice require any person concerned to appear for examination on
oath in relation to the business of a subsidiary and the notice may require the production of
every book in the custody, control or possession of the person concerned (art.288).
Where an inspector requires the production of a book in the custody, control or possession of a
person concerned, he/she:
1. may take possession of those books;
2. may retain those books for such time as he/she considers necessary for the purpose of
the accomplishment of his/her mission;
3. shall, where those books are in his/her possession, permit the company to have access,
at all reasonable times to the book.
D. AMALGAMATION OF COMPANIES
It first fit to give the definition and types of amalgamation before speaking of the procedure of
the amalgamation.
Definition and types of amalgamation
The term amalgamation has not been defined in the Companies Act, though this voluminous
piece of legislation contains 44 definitions in Article 2. The terms amalgamation and merger
are synonyms and the term ‘amalgamation’, as per Concise Oxford Dictionary, Tenth Edition,
means, ‘to combine or unite to form one organization or structure’.
There is amalgamation when a company is absorbed by another one that subsists alone or when
two companies disappear to constitute a new company. It is therefore a legal operation that
consists in bringing together several companies in one company.
According to article 295 of the law, two (2) or more companies may amalgamate and continue
as one company, which may be one of the amalgamating companies or may be a new company.
Article 49 para.1 of the law of 1988 provided: "The amalgamation of two or several companies
may be either by the absorption of one or several companies by another, either by the
constitution of a new company ".
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The amalgamation is characterized at a time by:
• a dissolution of the company absorbed that disappears as moral person.
• a transfer of the universality of properties of the absorbed company to the absorbing
company or the new company emerging from the amalgamation.
PRELIMINARY PROCEDURE OF THE AMALGAMATION
Amalgamation proposal
As put by article 296, an amalgamation proposal shall set out the terms of the amalgamation,
and in particular:
1. the name of the amalgamated company where it is the same as the name of one of the
amalgamating companies;
2. the registered office of the amalgamated company;
3. the full name or names and address or addresses of directors of the amalgamated
company;
4. the address for registered office of the amalgamated company;
5. the share structure of the amalgamated company, specifying :
a) the number of shares of the company;
b) the rights, privileges, limitations and conditions attached to each share of the
company;
6. the manner in which the shares of each amalgamating company are to be converted into
shares of the amalgamated company;
7. the consideration that the holders of those shares are to receive instead of shares of the
amalgamated company;
8. any payment to be made to a shareholder or a director of the new amalgamated
company;
9. details of any arrangement necessary to complete the amalgamation and to provide for
the subsequent management and operation of the amalgamated company;
Page 141
10. a copy of the proposed constitution of the amalgamated company;
11. the date on which the amalgamation proposal will be effective.
Concerning the resolution for amalgamation, article 297 disposes that the Board of Directors of
each amalgamated company shall resolve that in its opinion, the amalgamation is in the best
interest of the company and it is satisfied on reasonable grounds that the amalgamated
company shall, immediately after the amalgamation becomes effective, satisfy the solvency
test.
The directors who vote in favor of a resolution of amalgamation under this article shall sign a
certificate stating that the amalgamation will benefit the company and the latter will satisfy the
solvency test.
The Board of Directors of each amalgamating company shall send to each shareholder of the
company, not less than thirty (30) days before the amalgamation is proposed to take effect :
1. a copy of the amalgamation proposal;
2. copies of the certificates given by the directors of each Board;
3. a summary of the principal provisions of the articles of association of the amalgamating
company, if it has one;
4. a statement that a copy of the constitution of the amalgamated company shall be
supplied to any shareholder who requests it;
5. a statement setting out the rights of shareholders of each company;
6. a statement of any material interests of the directors, whether in that capacity or
otherwise;
7. such further information and explanation as
The amalgamation proposal shall be approved by the shareholders of each amalgamating
company and any other interested parties by special resolution (art. 300)
The company’s creditors must not be caught by surprise as article 301 provides that the Board
of Directors of each amalgamating company shall, not less than thirty (30) days before the
amalgamation is proposed to take effect, give written notice of the proposed amalgamation to
every creditor of the company.
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Article 302 determines types of documents needed for the registration of amalgamation in these
words, For the purpose of effecting an amalgamation, the following documents shall be
delivered to the Registrar General for registration:
1. the approved amalgamation proposal;
2. a certificate that is signed by the Board of Directors of each amalgamating company;
3. a certificate signed by the Board of Directors of the new company resulting from the
amalgamation;
4. the proof that the amalgamation will not jeopardize the interest of those creditors of
amalgamating companies;
5. a document in the prescribed form, signed by each of the persons whose name is
indicated in the amalgamation proposal as a director or employee of the amalgamated
company consenting to act as a director or employee of the company.
Regarding the issue of certificate of amalgamation, articles 303 and 304 give the following
precisions: On receipt of the application for amalgamation, the Registrar General shall
forthwith :
1. where the amalgamated company has the same name as one of the amalgamating
companies, issue a certificate of amalgamation;
2. enter the particulars of the company on the register;
3. issue a certificate of amalgamation;
4. issue a certificate of incorporation.
An amalgamation shall be effective on the date shown in the certificate of amalgamation.
Effects of the amalgamation
The absorbing company (or the new company) is going to acquire the assets of the absorbed
company that will disappear (art. 305). It thus inherits the rights and liabilities of the absorbed
companies (art. 307). The absorbed companies stop existing; they are however supposed to
exist for the purpose of the possible nullity actions, for the period of proceeding until the
court’s decision becomes definitive. The shareholders of the absorbed companies become
shareholders of the absorbing company according to the modes specified in the project of
amalgamation. The third parties keep all rights that they possessed before the amalgamation.
Page 143
E. ALTERATION OF THE NATURE OF COMPANIES
This section undertakes to explain the notion of the transformation of a company and the types
of transformation.
Notion of the transformation of a company
If the law of 1988 on commercial companies laid down in its article 48, the principle of the
transformation of a commercial company in its terms: "every company can adopt another form
without losing its legal personality"; the new law is content with giving some situations of
alteration or transformation of a company.
In a general manner, it essentially sounds like a modification of the articles of association that
allows the company to adapt its structure to new needs. It allows the enterprise that grows to
choose a form that facilitates a more complex management or to appeal more comfortably on
new shareholders. It also occurs in order to benefit from fiscal advantages recognized to such
type of company.
The transformation can be imposed to the shareholders like a necessary condition to the
survival of the company. It intervenes every time a company complies no more with the
requirements of current form. To avoid the dissolution, the company must upgrade its status,
or otherwise transform.
Thus, in the terms of the new law related to companies a company limited by shares may be
converted to a company limited by guarantee. In the same way a limited company turn into to
unlimited one and vice-versa.
Types of transformation
1. Transformation of a company limited by shares to a company limited by guarantee
According to article 318 of the law company limited by shares may be converted to a company
limited by guarantee when:
1. there is no unpaid shares;
2. all its members agree in writing to the conversion and to the voluntary surrender to the
company for cancellation of all the shares held by them immediately before the
conversion;
3. a new articles of association appropriate to a company limited by guarantee is filed; The
new articles of association of the company limited by guarantee shall be filed to the
Registrar General for registration.
Page 144
The conversion of a company shall –
1. take effect on the issue of the certificate;
2. operate so that all shares are deemed to have been validly surrendered and cancelled;
3. have effect so that every member who has not agreed to contribute to the share capital
of the company shall cease to be a member;
4. not affect any right or obligation of the company except as otherwise provided in this
section or render defective any proceedings by or against the company.
2. Transformation of a limited company to unlimited company
Article 320 disposes that a limited company may convert to an unlimited company by passing a
special resolution to that effect and by making any necessary amendments to its constitution
and filing with the Registrar General a copy of the resolution.
3. Transformation of an unlimited company to limited company
In the terms of the article 321 of the law, an unlimited company may convert to an limited
company by passing a unanimous resolution to that effect and filing with the Registrar General
a copy of the resolution.
Page 145
Appendix I
I Forms to be completed when a company is registered with the Office of the Registrar
General
-A-
FORM OF MEMORANDUM OF ASSOCIATION OF A COMPANY LIMITED BY
SHARES (ART. 14)
1) The name of the company is “…………………………………………………………
limited (insert name of company).”
2) The category of the company is Private / Public.
3) The company has the articles of association/ doesn’t have articles of association.
4) The registered office of the company will be
……………………………………………...
5) The shareholders resolved that Mr./Mrs./Miss: …………………………………………
will be the first Managing Director of the Company.
6) The objects for which the company is established are
……………………………………
……………………………………..……………………………………………………
….........................................................................................................................................
.........
7) The liability of the members is limited.
8) The share capital of the company is ……………………………….. (Insert the amount
of share capital) divided into ……………………… shares of ……………………
Rwandan francs
WE, the several persons whose names and addresses are subscribed, desire to be formed into a
company, under this memorandum of association, and we respectively agree to take the number
of shares in the capital of the company set opposite our respective names
N
o
Names, postal addresses and
occupations of subscribers
Number of shares
subscribed
Signature of
subscribers
1.
Page 146
N
o
Names, postal addresses and
occupations of subscribers
Number of shares
subscribed
Signature of
subscribers
2.
3.
4.
5.
Total shares taken
*(if more than 5, please attach a list of shareholders on separate paper)
Date:
………………………………………………………………………………………………..
Witness:
............................................................................... Signature:
..........................................
-B-
FORM OF MEMORANDUM OF ASSOCIATION OF A COMPANY LIMITED BY
GUARANTEE (ART. 14)
1) The proposed name of the company is
“…………………………………………………… limited (insert name of company).”
2) The category of the company is Private.
3) The company has the articles of association/ doesn’t have articles of association.
4) The registered office of the company will be situated
…..…………………………………
5) The shareholders resolved that Mr./Mrs./Miss: …………………………………………
will be the first Managing Director of the Company.
6) The objects for which the company is established are
……………………………………
……………………………………..……………………………………………………
….........................................................................................................................................
.........
Page 147
7) The liability of the members is limited.
8) Every member of the company undertakes to contribute to the assets of the company in
the event of its being wound up.
WE, the several persons whose names and addresses are subscribed, are desire to be formed
into a company, under this memorandum of association.
No
Names, postal addresses and
occupations of subscribers
Amount of guarantee
Signature of
subscribers
1.
2.
3.
4.
5.
*(if more than 5, please attach a list of shareholders on separate paper)
Date: …………………………………………
Witness: ............................................................................... Signature:
..........................................
Page 148
- C-
MEMORANDUM OF ASSOCIATION OF A COMPANY LIMITED BOTH BY
SHARES AND BY GUARANTEE (ART. 14)
1) The proposed name of the company is
“…………………………………………………… limited (insert name of company).”
2) The category of the company is Private / Public.
3) The company has the articles of association/ doesn’t have articles of association.
4) The registered office of the company will be situated
…..…………………………………
5) The shareholders resolved that Mr./Mrs./Miss: …………………………………………
will be the first Managing Director of the Company.
6) The objects for which the company is established are
……………………………………
……………………………………..……………………………………………………
….........................................................................................................................................
.........
7) The liability of the members is limited.
8) The share capital of the company is ……………………………….. (Insert the amount
of share capital) divided into ……………………… shares of ……………………
Rwandan francs
Page 149
9) Every member of the company undertakes to contribute to the assets of the company in
the event of its being wound up.
WE, the several persons whose names and addresses are subscribed, are desire to be formed
into a company, under this memorandum of association.
*(if more than 5, please attach a list of shareholders on separate paper)
Date: …………………………………………
Witness: ............................................................................... Signature:
..........................................
N
o
Names, postal addresses and
occupations of subscribers
Number of
shares
subscribed
Amount of
guarantee
Signature of
subscribers
1.
2.
3.
4.
5.
Total shares taken
Page 150
-D-
MEMORANDUM OF ASSOCIATION OF AN UNLIMITED COMPANY (ART. 14)
1) The proposed name of the company is
“…………………………………………………… limited (insert name of company).”
2) The category of the company is Private.
3) The company has the articles of association/ doesn’t have articles of association.
4) The registered office of the company will be situated
…..…………………………………
5) The shareholders resolved that Mr./Mrs./Miss: …………………………………………
will be the first Managing Director of the Company.
6) The objects for which the company is established are
……………………………………
……………………………………..……………………………………………………
….........................................................................................................................................
.........
7) The liability of the members is unlimited.
8) The share capital of the company is ……………………………….. (Insert the amount
of share capital) divided into ……………………… shares of ……………………
Rwandan francs
WE, the several persons whose names are subscribed, desire to be formed into a company,
under this memorandum of association, and we respectively agree to take the number of shares
in the capital of the company set opposite our respective names.
N
o
Names, postal addresses and
occupations of subscribers
Number of shares
subscribed
Signature of
subscribers
1.
2.
3.
4.
Page 151
5.
Total shares taken
*(if more than 5, please attach a list of shareholders on separate paper)
Date:
………………………………………………………………………………………………..
Witness: .................................................
.............................. Signature: ....................................

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