KCAU PTTI

COMPANY LAW

COMPANY DIRECTORS

COMPANY DIRECTORS

1. INTRODUCTION

Both the Companies Act and case law recognize the General Meeting and the Board of Directors (the
BOD) as the principal managerial organs of the company. Whereas the General Meeting makes major
decisions, the Board of Directors is responsible for managing the day to day affairs of the company by
implementing the decisions of the General Meeting.

Section 3 Companies Act of the Act states that "director", in relation to a body corporate, includes:

a) any person occupying the position of a director of the body (by whatever name the person is called);
and

b) any person in accordance with whose directions or instructions (not being advice given in a professional
capacity) the directors of the body are accustomed to act;

Any person who occupies the position of director is treated as such. The test is what function they
perform in the company. The directors’ function is to take part in making decisions by attending the
meetings of board of directors. Anyone who does that is a director whatever they may be called.

2. THE BOARD OF DIRECTORS

It is the body responsible for the day to day affairs of the company. The board of directors is responsible
for the management of the company’s business. It is the group of persons elected by the shareholders to
govern and manage the affairs of the company. Under Section 128 of the Companies Act, whereas a
private company must have at least 1 director, a public company must have at least 2 directors. Section
129 of the Companies Act also provides that a company must have at least one director who is a natural
person. Section 130 of the Companies Act provides that a company in contravention of S. 128 and 129
must comply within a period of not more than 3 months from the date a compliance order is issued, by
appointing a natural person as Director and notifying the Registrar of such an appointment. Failure to
comply attracts a fine of KES 500,000 to the defaulting company and its officers.

Section 131 of the Companies Act provides that the minimum age of a director in Kenya is 18 years The
number and the names of the first directors is determined by the subscribers to the Memorandum of
Association in writing failing which all the subscribers become the first directors. A company may by its
Articles of Association require directors to take up a specified number of shares. Hey? Which shares are
these?

They must be taken up such shares within 2 months of appointment. In the absence of such an Article,
the Companies Act does not require directors to hold any number of shares.

3. APPOINTMENT OF DIRECTORS

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Directors are generally elected by members through ordinary resolutions in the General Meeting.
Directors are voted to office individually. However, 2 or more may be voted in by a single resolution
provided that a motion to that effect has previously been agreed to by the meeting any vote against it. All
proposed directors must deliver to the Registrar their written consent to act as Director.

The appointment of directors and their remaining in office is subject to various restrictions:

a) Minimum number of directors. Private company must have one director and public companies at least
two directors

b) Age restriction. at least 18 years

c) Sound mind. To qualify for appointment as director a person must be of sound mind. The office of
director shall be vacated if the director becomes of unsound mind.

d) Must be solvent. An insolvent person or a person declared bankrupt by a Court of law must not be
directly or indirectly involved in company management without leave of the Court.

e) Disqualification by the Court; The High Court has jurisdiction to disqualify a person from being directly
or indirectly involved in company management for a duration not exceeding 15 years if the person:

- Has been guilty of an offence relating to the formation, promotion and management of the company.
Has been guilty of fraudulent trading.

- Has been guilty of fraud or breach of duty to the company.

-Has been guilty of failing to lodge returns with the Registrar.

-Has been involved in the management of an insolvent company.

- Has been deemed unfit to manage a company in the interest of the public after investigations by the AG.
-Has acted as a director while an undischarged bankrupt.

N/B In other words, the above are the qualifications and disqualifications of Di? Directors.

4. THE REGISTER OF DIRECTORS

S.137 of the Companies Act provides that every company shall maintain a Register of director’s residential
address failing which a default fine of KES 500,000 applies. Any changes thereto must be notified to the
Registrar within 14 days thereof failing which a fine of KES 200,000 applies. S.134 of the Companies Act
requires every company to maintain a Register of Directors at its registered office and open for inspection
by; o Any member of the company without charge o A 3rd party on payment of an inspection fee (if any)
Particulars of a Register of Directors.

If the director is a natural person, the register should contain the following;

o Name and any former name

o Service address (which may be the company’s registered office)

o Residential address

o Country and place of residence

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o The person’s nationality

o The person's business or occupation

o The person's date of birth.

If director is a body corporate, the particulars are;

o The body's corporate name

o The registered or principal office of the body

o The legal form of the body and the law by which it is governed

o The corporate body’s registration number

4. DISQUALIFICATION OF DIRECTORS

The office of director shall be vacated (declared vacant) if the director:

 is disqualified from holding office by a Court of law.

 absents himself from director’s meetings held in over 6 months.

 becomes of unsound mind.

 is declared bankrupt or enters into an arrangement with his creditors to compromise his debts.

 resigns from office by written notice to the company.

 Is removed from office by an ordinary resolution of members in a General Meeting.

Removal of directors from office

Before his term coming to an end by the members through an ordinary resolution in a general meeting
Under Section 139 of the Companies Act, is effective provided that the following procedure is followed:

a. A special notice (28 days) of the intended resolution to remove a director from office must be given
to the company.
b. Upon receipt of the notice, the company must send a copy thereof to the director concerned who is
entitled to make written representations not exceeding a reasonable length as his defense.
c. The director may request the company to notify the members that he has made representations.
d. The directors must summon a General Meeting to discuss the matter.
e. Notice of the meeting must indicate that the director has made representations and copies thereof
must be sent to the members unless received late by the company.
f. If the copies are not enclosed by reason of lateness or default by the company, the director is entitled
to have them read out at the meeting however the directors representations need not be sent out to
members or read out at the meeting if an application by the company or any other aggrieved person,
the Court is satisfied that the director is abusing his right to be heard, to secure needles publicity for
a defamatory matter.
g. The Court may hold the director liable for the cost of the applications.

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h. The removal of a director from office takes effect when the meeting by ordinary resolution so
resolves.
5. THE LEGAL POSITION OF DIRECTORS

Section 3 of the Companies Act provides that a director includes any person occupying the position of
director by whatever name called.

This definition fails to identify the director and his relationship with the company. The legal position of
directors has been articulated by Courts. For certain purposes directors are regarded as agents, for others
they are considered as trustees but their true legal position is that of fiduciaries.

1. Directors as agents. Directors are deemed to be agents when they contract on behalf of the company.
On contracts of employment borrowing or in furtherance of the objects of the company, they contract as
agents and the company is generally liable as the principal. However, in those circumstances in which the
agent is personally liable, the directors are liable. It was so held in Ferguson V Wilson (1866) LR 2 Ch App
77.

2. Directors as trustees It is argued that directors are trustees for certain purposes though not ordinarily
trustees. Unlike ordinary trustees who have legal title in trust property, directors do not have it as it is
vested in the company. Unlike ordinary trustees whose obligation is to preserve trust property for the
beneficiary, directors are bound to invest for the benefit of the company. Money in a company’s bank
account which directors are authorized to operate is held in trust for the company assets that come into
the hands of directors or under their control are held in trust for the company. It was so held in Re: Forest
of Dean Coal Mining Co.

3. Directors as fiduciaries. There is a fiduciary relationship between the directors and the company, a
relationship based on trust, confidence and good faith which imposes upon the director’s various fiduciary
or equitable duties often referred to as duties of loyalty and good faith.

Regal (Hastings) Ltd V Gulliver [1942] UKHL

6. POWERS AND DUTIES OF DIRECTORS

Directors will only bind the company when acting collectively as a board. However, the board is
empowered to delegate powers to committees of one or more directors. S.140 of the Companies Act
provides that the general duties identified in the companies Act are owed by a director of a company to
the company (as opposed to third parties).

These general duties of directors are based on common law rules and equitable principles that apply in
relation to directors as provided in sections 142-147 are as follows:

The duties are as follows;

i. Duty to act within powers. A director of a company shall: a. act in accordance with the constitution
of the company; and b. only exercise powers for the purposes for which they are conferred

ii. Duty to promote the success of the Company In so doing the director shall have regard to: a. the long
term consequences of any decision of the directors; b. the interests of the employees of the company; c.
the need to foster the company's business relationships with suppliers, customers and others; d. the
impact of the operations of the company on the community and the environment; e. the desirability of

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the company to maintain a reputation for high standards of business conduct; and f. the need to act fairly
as between the directors and the members of the company

iii. Duty to exercise independent judgment This duty is not infringed by a director acting: a. in accordance
with an agreement duly entered into by the company that restricts the future exercise of discretion by its
directors; or b. in a way authorized by the constitution of the company.

iv. Duty to exercise reasonable care, skill and diligence. In performing the functions of a director, a
director of a company shall exercise the same care, skill and diligence that would be exercisable by a
reasonably diligent person with: a. the general knowledge, skill and experience that may reasonably be
expected of a person carrying out the functions performed by the director in relation to the company;
and b. the general knowledge, skill and experience that the director has.

v. Duty to avoid conflict of interest A director of a company shall avoid a situation in which the director
has, or can have, a direct or indirect interest that conflicts, or may conflict, with the interests of the
company. This is unless the action is sanctioned by the Board of Directors. Under S.151 of the Companies
Act, a director with a potential conflict of interest in a proposed or existing transaction must disclose the
same under to either:  A General Meeting; or  The Members via notice Disclosure need not be made: 
Where the director is not aware of the interest  The situation cannot reasonably be regarded as likely to
give rise to a conflict of interest. Lack of compliance attracts a fine of KES 1,000,000

vi. Duty not to accept benefits from 3rd parties A person who is a director of a company shall not accept
a benefit from a third party if the benefit is attributable: i. to the fact that the person is a director of the
company; or ii. to any act or omission of the person as a director.

vii. Duty of care, skill and diligence In Re: City Equitable Fire Insurance Co Ltd [1925] Ch 40, Romer J
observed that in discharging their mandate, directors are required to demonstrate some degree of care,
skill and diligence. The judge formulated the following principles, rules or standards expected of a
Director: 1. A director need not exhibit in the performance of his duties a greater degree of skill than may
be reasonably expected from a person of his knowledge and experience. In Re: Brazilian Rubber
Plantations and Estates Ltd where a company with five directors suffered huge losses by reasons of
purchasing certain rubber plantations in Brazil on the basis of a prospectus containing untrue statements
on their quality which directors ought to have discovered by exercising reasonable care, it was held that
they were not liable in negligence as directors of their knowledge and expertise could not have acted
otherwise. The Court was emphatic that a director was not bound to bring any special qualification to this
office. 2. A director is not bound to give continuous attention to the affairs of the company. His duties
are of an intermittent nature to be performed at periodical board meetings and at meetings of any
committee of the board upon which he happens to be placed. He is not however bound to attend all such
meetings though he ought to attend whenever in the circumstances he is reasonably able to do. 3. In the
absence of suspicion, a director is entitled to assume that officers of the company performed their duties
honestly. This means that the director is entitled to rely on information provided by trusted servants of
the company.

viii. Duty of loyalty and good faith This duty falls in the following 4 categories:

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1. Duty to act bonafide; Directors are bound to act in good faith in what they consider to be the best
interest of the company. The powers conferred upon them must be exercised in good faith. Regard must
be given to existing and future members of the company.

2. Duty to exercise unfettered discretion; Directors are required to approach company matters with an
open mind. Decisions must be made after deliberations and they cannot agree in advance on how to vote
at future board meetings.

3. Duty to exercise powers; for the proper purpose Directors are bound to exercise the powers conferred
upon them for the particular purposes for which they were conferred. Their powers must not be exercised
for extraneous or improper purposes even if the company benefits.

4. Duty to avoid conflict of interest as fiduciaries, directors are bound to avoid conflict of interest. A
director must not, without the company’s consent, place himself in circumstances in which his personal
interests and those of the company conflict. The potential situations of conflict of interest include: a.
Interest in contracts made by the company; If a director has a personal interest in a contract made by the
company, equity demands that he discloses the interest to the company, failing which, the contract is
voidable at the option of the company. Section 151 of the Companies Act prescribes the rules and
principles relating to disclosure by interested directors:

i. A director who is directly or indirectly interested in a contract or proposed contract must declare the
nature of his interest at the meeting of the board.

ii. If the contract is a proposal, disclosure must be made at the meeting of the board at which the question
of the contract is first considered.

iii. If the director’s interest develops after the first meeting, disclosure must be made at the next meeting
of the board.

iv. If the director’s interest develops after the contract is concluded, disclosure must be made at the next
meeting of the board.

v. The director must give a general notice of the nature of his interest e.g. he is a partner in the firm
dealing with the company.

vi. It is the duty of the director to disclose at the meeting or take reasonable steps to ensure that the
notice of disclosure is brought up and read at the meeting. vii. Upon disclosure, the director is not counted
in the constitution of quorum for the meeting deliberating the same, and does not vote on the issue.
Effects of non-disclosure; Non-disclosure of personal interest by a director is a criminal offence for
which he is liable to a fine not exceeding KES 1,000,000. The contract also becomes voidable at the
option of the company as the case

in Aberden Railway Company V Blaike Brothers where the appellant company contracted to buy certain
goods from the respondent partnership. The chairman of the board of the company was also the
managing partner of the firm, a fact he did not disclose when the contract was conducted. The company
repudiated the contract and was sued. It was held liable. However, on appeal, the company argued that
the contract was voidable at its option for the non-disclosure. It was held that the company was not liable
as it was entitled to avoid the contract. This phrase denotes any financial advantage enjoyed by a fiduciary
over and above his remuneration.

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In equity, a fiduciary must not benefit by virtue of his position. Any secret profit made by way of bribe,
secret commission, or from the use of information without disclosure must be accounted to the company,
failing which the company is entitled to the same under an action for money had and received. A director
who takes advantage of a maturing business opportunity which the company has an interest in is liable
to account for any profit made. It was so held in Canadian Aero Services Ltd V Omaliey where the Court
formulated the factors or circumstances to be considered in determining whether a director is liable to
account for the secret profit made. These factors are:

1. Office or position held.

2. Nature of the corporate opportunity
3. The extent to which it is specific.
4. The relationship between the office and the information.
5. The amount of information possessed.
6. The circumstances in which the information was obtained.
7. The use to which the information was put.
8. Reasons for leaving the company if he left.

However, a director is free to make a personal investment if the company has considered a particular
proposal and has rejected it in good faith. It was so held in Peso Silver Mining Co V Cropper. b) Conflicting
or interlocking directorships; Such conflict of interest arises if a director is actually involved in the affairs
of two or more competing companies.

NB: Under Section 207, a decision of a company to ratify the conduct of a director amounting to
negligence, default, breach of duty or breach of trust in relation to the company can be taken only by the
members. However, unless the company's constitution require unanimity or a higher majority, such a
decision can be approved by an ordinary resolution of the members.

9. LOANS TO DIRECTORS

Under section 164 of the Company’s Act, it is unlawful for a company to make a loan to any person who
is its director or director of its holding company or extend a guarantee or provide security in connection
with a loan unless it is approved by the members.

The loan must be approved by a resolution of the members All quasi-loans, credit transactions entered
into by the Company, loans or quasi loans given to persons related to directors or any related transaction
require the directors’ approval. a payment made without approval of the general meeting renders the
directors who authorized the same jointly and severally liable to indemnify the company from any loss
arising.

A resolution approving a transaction can be passed only if a memorandum is setting out the matters
referred to is made available to members;

1. in the case of a written resolution by being sent or submitted to every eligible member at or
before the time at which the proposed resolution is sent or submitted to the member; or
2. in the case of a resolution at a meeting by being made available for inspection by members of
the company both o at the company's registered office for not less than fourteen days ending
with the date of the meeting; and o at the meeting itself.

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The approval by the members is not required under the following circumstances;

a. private companies.

b. to provide a director of the company or of its holding company with funds to meet expenditure
incurred or to be incurred by the director in defending any criminal or civil proceedings in connection with
any alleged negligence, default, breach of duty or breach of trust by the director in relation to the
company or an associated company; and in connection with an application for relief; or to enable any such
director to avoid incurring such expenditure

c. to provide a director of the company or of its holding company with funds to meet expenditure
incurred or to be incurred by the director in defending himself in an investigation by a regulatory
authority; and against action proposed to be taken by a regulatory authority, in connection with any
alleged negligence, default, breach of duty or breach of trust by the director in relation to the company
or an associated company; and to enable any such director to avoid incurring such expenditure.

d. Exception for intra-group transactions; the lending company is the subsidiary and the holdings
company its director.

e. The lending money or giving guarantee is part of the ordinary business of the company and the same
is given in the ordinary course of that business.

f. The funds are necessary to meet expenditure incurred or to be incurred by the director for purposes
of the company or enabling him to properly perform his duties as an officer of the company.

g. The payment must be approved at the General Meeting during which particulars of the payments
including the amount are to be disclosed. A payment made without approval of the General Meeting
renders the directors who authorized the same jointly and severally liable to indemnify the company from
any loss arising.

10. COMPESATION OF DIRECTORS FOR LOSS OF OFFICE Under Section 182 of the Companies Act, it is
unlawful for the company to make any payment to a director by way of compensation for loss of office
or as consideration for this retirement unless:

x Particulars of the proposed payment including the amount are disclosed to members in the General
Meeting.

X The General Meeting has by resolution approved the payment. Similarly, a company may not make a
payment for loss of office to a director of its holding company unless the payment has been approved by
a resolution of the members of the company and each of the companies that are associated with it. A
resolution approving a payment to which this section applies can be passed only if a Memorandum setting
out particulars of the proposed payment (including the amount) is made available to the members of the
company whose approval is sought.

The above prohibition (S.182) does not apply for a payment made in good faith:

1. in discharge of an existing legal obligation;

2. as damages for breach of such an obligation;

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3. in settling or compromising any claim arising in connection with the termination of a person's office or
employment;

4. as a pension for past services; Under Section 187 of the Companies Act, a payment made to a director
without requisite approval is illegal and the director receives the same in trust for the company (entitled
to return the money after holding it). Any director who authorized the payment is jointly and severally
liable to indemnify the company that made the payment for any loss resulting from it. Further, it is
unlawful for a company to transfer the whole or any part of its undertaking in property to a director for
purposes of payment unless the payment has been approved by members in a General Meeting at which
the particulars of the payment including the amount were disclosed to members. It is unlawful for a
company to pay directors remuneration fee from tax.

11. PERSONAL LIABILITY OF DIRECTORS.

In Ferguson V Wilson (1866) LR 2 Ch App 77, it was observed that directors are agents when they contract
on behalf of the company thereby making the company liable as the principal.

However, under certain circumstances, the liability is that of the agent thereby making the directors
personally liable. These circumstances include:

a. Breach of warranty of authority: These are the circumstances in which a director has acted in excess of
his authority as a director. Such a director is personally liable.

b. Fraud: A director will be held personally liable if he has acted fraudulently in relation to a third party
dealing with the company.

c. Consent: An agent (the director) is personally liable if he had willfully bound himself to personal
responsibility. d. Negligence: If a director assumes direct duty of care to a third party, he renders himself
liable for any liability arising there from

e. Non-publication or mis-description of company name: A director who signs or authorizes the signing of
a negotiable instrument on behalf of the company where in the company’s name is not published or is
misdescribed, is personally liable for any loss arising there from unless it has been made good by the
company.

f. Illusory/deceptive company: A director who purports to act on behalf of an illusory company is

personally liable for any liability arising there from.

g. Unlawful purpose: A director who is party to the formation of a company whose object is to pursue an
unlawful purpose would be held personally liable on contracts made by the company.

12. THE INDOOR MANAGEMENT RULE

(The Rule in Turquand’s case) This rule is concerned with the liability of the company for the wrongs
committed by its organs (the General Meeting and the Board of Directors.) It answers the following
questions: - Can a company escape liability by pleading on internal irregularity of its own? - Are third
parties bound to satisfy themselves that the rules of internal management have been compiled with while
dealing with the company?

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These questions were answered in the negative in the case of Royal British Bank V Turquand (1856)
where the Constitution provided that the company could only borrow a bond such sums as had been
approved by ordinary resolution of the General Meeting. The company borrowed £2000 without any
resolution and subsequently went into liquidation. The liquidator denied liability on the ground that the
borrowing was irregular. The company was however held liable. The Court formulated the rule as follows.
“Persons who contract and deal with a company in good faith are entitled to assume that it is acting within
its constitutional powers and are not bound to satisfy themselves that rules of internal management have
been compiled with.” They are entitled to assume that what appears regular in so far as can be ascertained
from the company’s public documents is indeed regular.

The indoor management rule is intended to protect third parties in cases of internal irregularities and may
be justified on 2 grounds:

p. It is fair and just to third parties.

p. It facilitates commercial transactions and gives business efficacy. In certain circumstances the rule
cannot be relied upon by third parties and the company is thus not liable.

These are the exceptions to the rule in Turquand’s case.

m. Public documents; if the irregularity would have been apparent by an inspection of the company’s
public documents but the third party fails to do so, it cannot rely on the rule. For example, if the
transaction requires a special resolution and the same has not been passed, the third party is unprotected
as the resolution is registerable.

m. Knowledge of irregularity; if the third party is aware of the internal irregularity, it is not deemed to be
acting in good faith and cannot therefore rely on the rule.

m. Suspicion; if the circumstances are such that they put the third party under inquiry but he fails to
inquire so as to ascertain the facts, he cannot thereafter rely on the rule in the event of an irregularity.

m. Abuse of power; if the officer dealt with purports to exercise powers not exercised by that earlier of
officer and the third party does inquire, the company cannot be liable for any irregularities.  Forged
documents; the indoor management rule has not application where the document relied upon by the
third party is a forgery as such a document is a legal nullify.

m. Insiders; an insider is a person who by virtue of his position in the company is deemed to know whether
the rules of internal management have been complied with.

In Howard V Patent Ivory Manufacturing Co. Ltd, it was held that the director of the company could not
rely on the indoor management as they were aware of the irregularities. Directors are not always insiders
for purposes of indoor management rule. It all depends on the transaction. It if is so clearly intertwined
with the position of director as a director of the company, he is deemed aware of the circumstances
affecting it and is therefore an insider. If it is not so closely intertwined with his position he is not deemed
to be aware and may rely on the rule.

13. INSIDER TRADING

The provisions of Section 32B of the Companies Act provide that “insider” means a person in possession
of inside information. Insider trade is the sale or purchase of company securities by or on behalf of a

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person whose relationship with the company is such that he is likely to have access to material information
on the company not generally available to the public. It takes place when a person buys or sells securities
while knowingly in possession of price sensitive information not available to the public which if made
available will affect the price or value of those securities. It is the taking advantage of confidential
information on the company for personal gain. Insider trading occurs where an individual or organization
buys or sells securities while knowingly in possession of some piece of confidential information which is
not generally available and which is not likely, if made available to the general public, to materially affect
the price of the securities. Regulation of Insider Trading in Kenya In Kenya, Insider Trading is prohibited
and criminalised by Section 32B of the Capital Markets Act (Cap 485A). The offence of insider trading only
applies to listed companies. That is, companies whose shares are traded through the securities exchange.
Under Section 32B of the Capital Markets Act, a person who deals in listed securities or their derivatives
that are price-affected in relation to the information in his possession commits an offence of insider
trading if that person:  Encourages another person, whether or not that other person knows it, to deal
in securities or their derivatives which are price-affected securities in relation to the information in the
possession of the insider, knowing or having reasonable cause to believe that the trading would take
place; or  Discloses the information, otherwise than in the proper performance of the functions of his
employment, office or profession, to another person. An insider is prohibited from trading in the company
securities. Section 2 of the Capital Markets Act further explains “trading in securities” to mean making or
offering to make with any person, or inducing or attempting to induce any person to enter into or to offer
to enter into: 1. any agreement for or with a view to acquiring, disposing of, subscribing for or
underwriting securities; or 2. any agreement the purpose or intended purpose of which is to secure a
profit to any of the parties from the yield of securities or by reference to fluctuations in the price of
securities. Under Section 32C of the Capital Markets Act, "inside information" means information which:
1. relates to particular securities or to a particular issuer of securities; 2. has not been made public; and 3.
if it were made public is likely to have a material effect on the price of the securities; For the purposes of
section 32C, information is made public if: 1. it is published in accordance with the rules of a securities
exchange for the purpose of informing investors and their professional advisers; 2. it is contained in
records which by virtue of any law are open to inspection by the public; 3. it can readily be acquired by
those likely to deal in any securities to which the information relates; or of an issuer to which the
information relates; or 4. it is derived from information which has been made public. Information may be
treated as having been made public even though the information: a) Can be acquired by persons
exercising diligence or expertise; b) Is communicated to a section of the public; c) Can be acquired by
observation; d) Is communicated on the payment of a fee; or e) Is published outside Kenya Section 32E of
the Capital Markets Act imposes stiff penalties for persons convicted of insider trading On the first
conviction a convicted company may be fined up to KES 5,000,000 and payment of the amount of gain
made or loss avoided while a convicted individual may be fined up to KES 2,500,000 or be imprisoned for
a duration of not more than 2 years and payment of the amount of gain made or loss avoided. On a
subsequent conviction a company may be fined up to KES 10,000,000 and twice the amount of gain made
or loss avoided while an individual may be imprisoned for up to 7 years or fined up to KES 5,000,000 and
payment of twice the amount of gain made or loss avoided. Importance of Regulation It is generally
accepted that insider trading is wrong and unethical and ought to be regulated. It is argued that insider
trading should be regulated for the following reasons:  It gives companies a negative reputation which
may affect trading in their securities.  It interferes with the principle of equality of information in the
market as some investors rely on confidential information.  It amounts to a breach of trust in the case of

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fiduciaries such as directors.  It has a negative effect on market confidence and the entire securities
sector. This is on understanding the basis within which companies’ stock trade in the stock market and
how price-sensitive information affects the value of a listed company. In the realm of company law, it may
be necessary to regulate insider trading or trading since the insider with access to confidential information
is in potential conflict of interest situation, in particular where his position in the company enables him to
dictate or influence when the public disclosure of pricesensitive information is to be made. In such a case,
the officer’s decision and his own desire to trade advantageously in the company’s shares may conflict
and such conduct is likely to bring the company into disrepute. It is therefore recognised that it is wrong
for a director or any other insider to deal in a company’s securities knowing of some development which
is likely to affect the price of the securities which other members of the public are generally not yet privy
to. Liability for Insider Trading/Trading At common law, officers of the company are free to hold and deal
in the shares of the company. However, use of confidential information is actionable. This legal position
is traceable to the decision in Percival v Wright where joint holders of some shares of an unlisted colliery
company offered them for sale to the chairman of the company and two other directors at a price
determined by an independent value at £12.10 but after conclusion of the sale, it was discovered that
while negotiating the purchase, the chairman was involved in discussions of the possible sale of the whole
colliery at a price that would have made each share in the company worth more than £12.10. However,
the colliery was never sold. In an action by Percival and his shareholders to have the sale set aside on the
ground of non-disclosure by the chairman, it was held that since the directors owed their duties to the
company, there was no duty to disclose. In the words of Swinfen Eady J: “The contrary view would place
directors in a most invidious position, as they could not buy or sell shares without disclosing negotiations,
a premature disclosure of which might well be against the best interest of the company. I am of the
opinion that directors are not in that position.” In Multinational gas & Petrochemical Co. v Multinational
Gas and Petrochemical Services Ltd. (1983), Dillon L. J. observed: “The directors stand in a fiduciary
relationship to the company and they owe fiduciary duties to the company though not to individual
shareholders”. However, in Allen v Hyatt (1914) where shareholders had engaged directors to invest on
their behalf and the directors benefited, it was held that since the directors were agents of the
shareholders, they were liable to account to the shareholders. The challenge of using criminal law to
regulate insider trading is that detection of insider trading and procuring its conviction is difficult as
evidence is hard to come by. Both the Kenyan Companies Act and the Capital Markets Act adopt the
disclosure principle to regulate insider trading. It is argued that the best weapon to fight insider trading is
to ensure that price sensitive information reaches the market promptly. Although the Companies Act does
not recognize the offence of insider trading it provides for disclosure by directors. However, these
provisions do not go far enough neither do they cover relatives of directors. The Capital Markets
(Securities Public Offers Listing and Disclosure Regulations) of 2002 provide the framework for disclosure
by companies in relation to IPOs and continual obligations. They prescribe the contents of the company’s
prospects. Courts of law have enforced the disclosure philosophy embodied in the company’s act. In
Diamond V Oreamuno (1969) where directors of the company being aware that due to an increase in
expenses, the company’s profit and dropped, sold their share in the company at £28 each before the
company’s accounts were released and thereafter the prices fell to £11, it was held that the directors
were guilty of insider trading and had to account the profit to the company. The only justification for
insider trading is that it is not wrong to use private information for personal gain as this is the primal basis
for the capitalistic markets. Defences to a charge of Insider Trading 1. The trader did not honestly
anticipate to make a profit or avoid making a significant loss 2. The trade would have been undertaken at

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the same time with or without the inside information (scheduled trades) 3. The trader honestly believed
that the information had been made public or the trader utilized public information 4. The information
was already made public.

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