Author: Loice Erambo

Why need an advocate for land transfer?

February 18, 2016Loice EramboLeave a comment

You generally do not need an advocate to undertake land transfers especially for simple
conveyances. Most aspects in conveyancing can be undertaken by any ordinary Kenyan.
However, the risks involved in doing so are insurmountable. Below is a breakdown of the steps
involved in conducting a conveyancing matter. With each step, the risks involved are carefully
highlighted.

STEPS UNDERTAKEN IN TRANSFER OF PROPERTY

STEP 1- Official Search

In legal terms, we call this due diligence. This involves making an application to the relevant
land registry requesting for basic information on the title intended to be transferred. From this
process, the buyer confirms that:
 1. the title exists- Carefully check the title number, acreage, and the type of ownership
(freehold or leasehold);
2. the owner of the property- If the seller is not identified in the title as the owner, he is
probably a con.
3. The interests registered against the owner’s (seller’s) interest e.g. a charge. If the land is
charged it cannot be transferred.

To conduct a search, the buyer requires a copy of the title deed from the seller. Generally, one
does not need an advocate to conduct a search. However, it is advisable to obtain the counsel of
an advocate who can interpret the results of a search. For example, if a search identifies a parcel
to be a leasehold title, an advocate will advise the buyer that such a title will require the consent
of the Commissioner of Lands before the same is transferred. This is not the case for freehold
titles.

STEP 2: Sale Agreement

A Sale Agreement is essentially a contract between a buyer and a seller. The agreement is
prepared by the seller who need not retain an advocate to do so. Because the agreement is
prepared by the seller or seller’s advocate, it typically favours the seller. Accordingly, it is
advisable for the buyer to retain an advocate to advise them on the terms of the agreement and to
negotiate on his behalf before he signs the agreement. Otherwise, the buyer will bind himself in a
bad deal for example, where he is required to pay a large sum of money as deposit (risky) or
where he is required to pay the purchase price directly to the seller (highly risky).

The executed sale agreement is then stamped and duty is paid.

STEP 3: Payment of Deposit

Typically, the buyer is required to pay the deposit of the purchase price when he signs the Sale
Agreement. This is where most buyers who do not have advocates make the biggest mistake
which is, paying the deposit directly to the seller. When an advocate is involved, the buyer pays
the deposit to the seller’s advocate who issues a professional undertaking promising not to
release the funds to the seller until the transfer is completed. The promise is binding on the
seller’s advocate and is enforceable in court. Serious professional penalties accrue if an advocate
breaks this promise. Accordingly, the advocate is by law and practice inclined to keep the
promise. This arrangement prevents fraudulent sellers from fleeing with the buyer’s money
before the transfer is complete.

STEP 4: Completion

1. Once the sale agreement is executed by both parties, the seller is required to get all the
necessary consents and clearances identified in the sale agreement. These typically
includes the following:
2. Land Rent Clearance Certificate (where the title is leasehold);
3. Land Rates Clearance Certificate (where the property is within a municipality);
4. Consent to transfer (where the title is leasehold);
 5. Land Board Control Consent (where the land is agricultural)
6. Any other consents prescribed under any other Act of Parliament.

Depending on the circumstances, an advocate will be best placed to advice on the consents
needed.

1. Once the consents, clearances and other completion documents have been obtained, the
buyer typically pays the balance of the purchase price in full. Once again, it is advisable
for payment to be made to the seller’s advocate for the same reasons highlighted above.
Once the seller’s advocate has confirmed that the buyer has paid the balance, the
advocate releases to the buyer the completion documents highlighted above including the
original transfer document and an undated transfer document signed by the seller.
2. The rates clearance certificate, rent clearance certificate and consent to transfer typically
expire after 2 months of issue. Therefore, a prudent buyer must pay the full purchase
price and complete the registration of the transfer within the said period. Otherwise, the
buyer will incur additional expenses in paying for the subsequent accruing rent and rates
for the property and obtaining the consents and clearances all over again.

STEP 5: Valuation and Stamp Duty

The property to be transferred is required to be valued by the government valuer. The buyer or
his advocate makes an application for valuation. The valuation report will indicate the market
value of the property. This value will be used to compute the amount to be paid as stamp duty.

Where the property is situate in urban areas, the stamp duty payable will be 4% of the market
value indicated in the valuation report. Where the property is situated within a rural area, the
stamp duty payable will be 2% of the market value.

From the above, it is evident that stamp duty is generally quite hefty and a buyer must be
informed at the earliest possible time of his liability to pay stamp duty. In most instances, a buyer
is not informed forthwith and ends up being too financially constrained to complete the transfer.

STEP 6: Registration of Transfer

After payment of stamp duty, the transfer forms and the completion documents together with the
original title deed are lodged at the land registry for registration. Depending on the law regime
governing the land, a new title in the buyer’s name will be issued.

STEP 7: Search after registration

After registration, the buyer is advised to do a search on the title to confirm the transfer. Where
the search results indicate the names of the buyer as the owner, the transfer has been successfully
completed. If not, the transfer is yet to be completed.

STEP 8: Release of funds to the seller

Once the search confirms that the transfer has been successfully completed and the title is in the
buyer’s name, the buyer or his advocate releases the seller’s advocate from the promise
(professional undertaking) which will allow the seller to release the deposit and balance of the
purchase price to the seller.

CONCLUSION

From the above, it is evident that land transfers are high risk ventures. The risks can be easily
averted by retaining the services of an experienced advocate. There is a common misconception
that advocate fees drive up the costs of land transfers. However, from the above we have seen
that the cost is largely driven up by stamp duty which is paid directly to the Commissioner of
domestic tax-KRA not to the advocates. Further, many of the processes identified above attract
costs payable to various government agencies. Fees for the official search is paid to the land
registry; rent is paid to the Commissioner of Lands at the Ministry of Lands; rates and the rates
clearance fees are paid to the county government/council; valuation fees is paid to the land
registry e.t.c Accordingly, government entities are squarely to blame for the hefty incidental
costs.

Besides the above, due to lack of information or awareness, buyers who are not represented by
advocates are highly likely to make errors, some of which I have highlighted herein, and as a
result incur unnecessary bloated financial liabilities that could have been easily avoided.
Accordingly, it is advisable to retain an advocate when involved in a land transfer. Legal fees are
charged at a fair rate by the Advocates Remuneration Order 2014.

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LAND LAWAdvocate, Completion, Kenya, Land, Stamp Duty, Transfer
Implied borrowing powers of a company
February 11, 2016Loice EramboLeave a comment

INTRODUCTION

One of the powers and primary benefits enjoyed by body corporates is the ability to borrow.
Corporate personality allows corporate entities to borrow and to issue their properties as security
for loans in the form of debentures and/or charges. Whilst the power to borrow is expressed and
granted by law, obscurity arises where the power has not been expressly prescribed by the
constitutive documents of a company i.e. the Memorandum and Articles of Association. This
evokes the question, can the borrowing powers of a company be implied?

THE LAW

Under section 4 and 5 of the Companies Act 1948 (repealed), a company is constituted vide the
Memorandum of Association. The Memorandum of Association must by law state the objects for
which the company is formed. It is an established principle of law that a company cannot do
anything beyond the objects and powers conferred upon it by its Memorandum of Association.
Accordingly, a company can only exercise borrowing powers if the same has been prescribed
under the Memorandum. It is accordingly customary for the memorandum to expressly
prescribe a company’s power to borrow.

Note however that a company is not limited solely to the objects expressly stated in the
Memorandum of Association. The memorandum may also impliedly confer upon a company the
powers and objects to perform activities incidental to the declared objects. Accordingly, in
Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246, the Judge
stated that:-

“a company has the implied powers to do anything reasonably incidental to its declared objects
unless such act is expressly prohibited by the Memorandum. Thus a trading company must
always have implied power to borrow money for purposes for its trading business.”

“Trading company” is a business term and not a legal term. A trading company as opposed to a
non-trading company is an operating company involved in the exchange of goods and services.
From the foregoing court case, the mere fact of a company being conferred with the power to
engage in trade activities infers an incidental power to borrow money for purposes of
undertaking such trade activities.

However, this power can only be implied where there is no express restriction in the
Memorandum of Association against borrowing. Lastly, the implied borrowing power merely
allows a company to borrow money to fund its declared objects and none other.

CONCLUSION
From the foregoing, we have established that the law by implication vests upon a trading
company the power to borrow money to fund its objects unless the company’s Memorandum of
Association prohibits the same. Accordingly, a company need not amend its Memorandum of
Association and/or Articles of Association to adopt a borrowing clause. This is especially
because the newly adopted Companies Act, 2015 allows companies to pursue any and all objects
save as restricted by their respective memorandums of association. The Act therefore dispenses
the need for the object clause hence liberalizing the activities that a company may pursue.
Accordingly, under the new Act, there is no need to expressly provide for borrowing powers as
the same is conferred by law.

CORPORATE & COMMERCIAL LAW, Uncategorized

Constitutionality of a Mixed Bench

January 6, 2016Loice EramboLeave a comment

PARTIES: Karisa Chengo, Jefferson Kalama Kengha & Kitsao Charo Ngati Vs. Republic

CITATION: Criminal Appeal no. 44, 45 and 76 of 2014

COURT: The Court of Appeal at Malindi

(Being an appeal against the judgment and orders of the High Court of Kenya at Malindi
(Moeli & Angote, JJ) dated 7th March, 2014)

CORAM: Okwengu, Makhandia & Sichale, JJ. A

DATE OF DECISION: 8th May, 2015

1.0. STATEMENT OF FACTS

Karisa Chengo, Jefferson Kalama Kengha and Kitsao Charo Ngati hereinafter referred to as “the
Appellants”, were separately charged and convicted for the offence of robbery with violence
contrary to section 296(2) of the Penal Code in various magistrates courts.

The appellants subsequently appealed the judgment before the High Court. The High Court
dismissed their appeal thus prompting a subsequent appeal to the Court of Appeal at Malindi.

1.1. PROCEDURAL HISTORY

 The Appellants were separately charged, convicted and sentenced for the offence of
Robbery with Violence contrary to section 296 (2) of the Penal Code in various
magistrate courts.

 Subsequently, the appellants separately appealed against their conviction and sentence to
the High Court of Kenya at Mombasa.

 Vide Gazette Notice No.13601 dated 4th October 2013, titled ‘Designation of High Court
Judges to participate in service week’, the Chief Justice appointed Meoli J, a High Court
Judge as well as Angote J, a judges of the ELC to hear and determine criminal appeals
during the judiciary service week.

 The panel heard the Appellants’ appeals separately and at the conclusion of the
proceedings, it upheld the convictions and sentences meted out by the respective learned
Magistrates.

 Subsequently, the Appellants separately appealed against the respective High Court
rulings to the Court of Appeal at Malindi.

 The three appeals were on 4th March, 2015 consolidated in Criminal Appeal No. 44, 45
and 76 of 2014 for ease of hearing, since they raised common issues.

1.4. ISSUES

 Whether a judge appointed to the Environment & Land Court (ELC) had jurisdiction to
deal with criminal appeals specifically reserved for the High Court; and
 Whether the Chief Justice acted within his constitutional mandate by empaneling a bench
consisting of judges from the High Court and the Environment & Land Court.

1.5. JUDGMENT/HOLDING
  A judge appointed to any of the two specialized courts namely ELC and the Employment
and Labour Relations Court (ELRC) does not have the jurisdiction to sit in courts other
than the one he/she was specifically appointed to and vice versa.

 Angote, J. having been appointed as a judge of the ELC can only perform the functions
and duties of the ELC and cannot purport to discharge the functions and duties of the
High Court because that is not the office or the court to which he was appointed.

 The proceedings before the High Court were a nullity to the extent that Angote, J. sat in
them without jurisdiction.

 The Chief Justice cannot confer on a Judge or judicial officer jurisdiction which in law he
does not have and accordingly, deploying and empanelling judges to sit and preside over
matters reserved for the courts they were not appointed to was unconstitutional.

 The Appeal was allowed and the matter is to be heard afresh by a High Court manned by
judges of competent jurisdiction.

1.6. RATIONALE

 359 (1) of the Criminal Procedure Code requires that appeals from subordinate courts be
heard by two judges of the High Court.

 The Constitution expressly prohibits the High Court, (which can only be constituted by a
judge appointed to that court), from hearing matters to do with the environment, land and
employment and vice versa. Accordingly, the purported appointment of judges to do that
which the Constitution prohibits is inconsistent with the Constitution.

 A court as an institution is an inanimate body that must be activated, run, managed and
controlled by animate organs authorized by law;

 The courts established under the Constitution and the judges appointed to sit in them are
synonymous.

 A judge is appointed to a particular court; he takes the oath of office to the specific court
he has been appointed to; and is issued with an appointment letter specifying that he has
been appointed as a judge of a specific court.

 It is the court that a judge was appointed to that determines the kind of jurisdiction that
judge is seized of.

 One cannot be appointed as a judge at large nor can a Judge be appointed without
portfolio.

 Section 5(2) (c) of the Judicial Service Act grants the Chief Justice the power to exercise
general control over the judiciary.
  Accordingly, the Chief Justice has the power to transfer judges within the courts they are
appointed, create divisions for administrative purposes, and issue practice directions to
control the running of courts but he does not have the powers to deploy and empanel
judges to sit and preside over matters reserved for the courts they were not appointed to.

 Once a judge has been appointed by the President to a specialized court, the Chief Justice
or indeed any other entity cannot lawfully move him to hear matters reserved for the
High Court and vice versa

1.7. CONCLUSION

The judgment reached by the learned judges above was primarily pegged on the issue of the
mode of appointment of judges. The court was of the opinion that judges are appointed to
specific courts sanctioned by the Constitution. Accordingly, a judge appointed to a specific court
cannot perform the duties reserved for another court. Consequently, the court opined that the
mandate vested in the Chief Justice to control judiciary merely gives the Honorable Justice
administrative as opposed to substantive powers. Therefore, in the court’s opinion, empanelling
judges to sit and preside over matters reserved for the courts they were not appointed to went
beyond the administrative powers of the Chief Justice and was thus unconstitutional.

A contrasting school of thought opines that one is firstly appointed as judge without a specific
mandate. Subsequently, a judge is administratively assigned to specific courts whereupon his
duties become defined by the jurisdiction vested in that court. This school of thought argues that
in a similar fashion, the assigned judge can lawfully be re-assigned to another court whereupon
his duties become re-defined to conform to the jurisdiction of the subsequent court. The
protagonists argue that a court and the presiding judicial officer are separate and distinct. They
are emphatic that prescription of jurisdiction by the law is directed at the court and not the person
of the judge. Jurisdiction of a court refers to the competence of a court to entertain the matter
before it which is different from the competence of a judge which refers to a judicial officer’s
personal capability to realize the mandate of the court in which the officer is presiding at the very
time at hand. In the absence of express provision, there is nothing in law to suggest that the
jurisdiction of a court and any limitations thereof are appended to the person of the judicial
officer as to permanently restrict his exercise of the mandate of another court in which he is
subsequently appointed to preside. This is in contrast with, for example, the International
Criminal Court where the Rome Statute of the ICC expressly prohibits a judge of the Appeal
Chamber from presiding over matters before the Pre-Trial and Trial Chambers. No such
provision exists in Kenyan law so that it could legitimately be argued that a judge of one court is
capable of lawfully acquiring a fresh mandate when he sits before another court upon re-
assignment.

Regardless of your inclination, the case above invokes the following pertinent questions:

 Is a judge appointed to a specific court or is he/she appointed generally as a judge subject

to subsequent assignment to specific courts?
  Assuming that a judge is appointed to a specific court, in the absence of express
provision, is there anything in law that permanently bars the judicial officer to the
appointed court?
 Assuming, there is no such bar, does the president on recommendation of the Judicial
Service Commission, have the exclusive power to re-assign a judge to another court via
re-appointment or can the Chief Justice do so in the exercise of his mandate as the head
of the judiciary?
 Are the powers of the Chief Justice as the head of Judiciary merely administrative?
 Does empaneling a mixed bench go beyond the supposed “administrative” powers of the
Chief Justice?
 Considering Article 165 (4) of the Constitution, is the Chief Justice’s power to
empanelling a three- judge bench merely administrative? If not, what is the difference
between such a case and the circumstances in this case?

Case Briefs, GENERALCivil Litigation, Constitution, ELC, ELRC, Judges, Specialized Courts

Demystifying the Companies Act, 2015

January 6, 2016Loice EramboLeave a comment

Kenya’s recently repealed Companies Act was adopted in 1948 during the colonial era. It is a
replica of the United Kingdom’s Companies Act that was operational at the time. The Act was
criticized for its archaic provisions which were faulted for being unsuitable in the modern
business environment. Further, it was argued that the Act was modeled to cater for the needs of
the colonial masters with little consideration and attention to our unique domestic business
needs.

Considering the foregoing, there have been several attempts over the last decades but especially
since 2008 to overhaul company law in Kenya in order to facilitate contemporary business
practices, and to simplify, rationalize and consolidate the law. In 2008, the Attorney General
proposed the Companies Bill (2008). This Bill was eventually amended in 2010. The companies
Bill (2010) was published and tabled before Parliament for debate. Unfortunately, the Bill was
not passed into law. A similar attempt was made via the Companies Bill, 2012 which similarly,
was not adopted as law. Thereafter came the Companies Bill 2014 which was withdrawn from
debate in Parliament on 18th February 2015 for amendment in order to capture the suggested
amendments thereto following intense parliamentary scrutiny and debate. These amendments
bore the Companies Bill 2015 which was passed by Parliament and forwarded to the President
for assenting. On 11th September 2015, the Companies Bill 2015 was assented to law by
President Uhuru Muigai Kenyatta. This article explicates this voluminous Act specifically noting
its departure from company law as depicted in the repealed Companies Act.

1.1 One Member Company

Under the repealed Companies Act, a private company was required to comprise of a minimum
of two members while a public company was required to comprise of a minimum of seven
members. In contrast, section 11 of the newly enacted Companies Act, 2015 allows for the
formation of one member companies. However, note that under section 128 (2) thereof, a public
company is required to have at least two directors.

1.2. Objects Clause & the doctrine of ultra vires

Under the repealed Companies Act, a company could not pursue any object unless it was
specifically prescribed in the memorandum of association. This requirement laid foundation for
the doctrine of ultra vires which made it unlawful for a company to pursue objects beyond those
which are either expressly or by implication prescribed in its Memorandum. Accordingly, any
activity pursued in excess of those powers was ineffective and void to the same extent. The
arbitrary consequences of pursuing an object beyond those which had been prescribed
necessitated an expansive drafting of the objects clause to cover every conceivable form of
business that could possibly be pursued by a Company.

The Companies Act 2015 adopts a different approach. Section 28 (1) thereof provides that unless
the articles of a company specifically restrict the objects of the company, its objects are
unrestricted. Accordingly, under this Act a company has the power to pursue any object save for
that which is expressly disallowed under its Memorandum of Association. This provision
immensely expands the scope of business that may be pursued by companies in Kenya. Further,
the provision will ease the rigorousness involved in drafting the Memorandum as it negates the
need for expansive draftsmanship of the objects clause. Moreover, because a company can
generally pursue any and all objects, there is little leeway for applicability of the ultra vires
doctrine.

Notably, section 33 of the Act further provides that the validity of an act or omission of a
company may not be called into question on the ground of lack of capacity because of a
provision in the constitution of the company. This deals a severe blow to the ultra vires doctrine
which is thereby rendered nought. Pursuant to that provision, the pursuit by a company of an
object expressly prohibited under the Memorandum of Association would be lawful.
Accordingly, in such instances, the absolute elimination of the ultra vires doctrine could result in
an absurdity.

1.3. Company limited by guarantee

Under section 9 (1) (b) of the Companies Act 2015, a company limited by guarantee cannot be a
private company. Further, under section 7 (1) (a) of the Act such a company cannot have a share
capital. This contrasts with the position under the repealed Companies Act which allowed a
private company to be limited by guarantee and further to have a share capital. Note however,
under the new Companies Act, a company registered before commencement thereof as a
company limited by guarantee but having a share capital is not prohibited.

1.4. Common law duties of Directors

Under the former dispensation, the fiduciary duties of directors were solely prescribed under the
common law of England as adopted in Kenya under section 3 (1) of the Judicature Act.
However, with increasing corporate governance awareness, the Companies Act 2015 has adopted
these duties into its statutory provisions under sections 140 to 150. The Act therefore prescribes
Directors’ duties:

1. to promote the success of the company;

2. to exercise independent judgment;
3. to exercise reasonable care, skill and diligence;
4. to avoid conflicts of interest; and
5. not to accept benefits from third parties

These duties are enforceable in the same way as any other fiduciary duty owed to a company by
its directors.

1.5. Written Resolutions

Under the former Companies Act, it was a mandatory requirement for the resolutions of the
Company to be passed at the general meeting of members. However, section 255 (1) of the
Companies Act 2015 permits a private company to pass a resolution as a written resolution
instead of passing it at a meeting of the members as is ordinarily the case. Instead, copies of the
written resolution will be delivered to the members together with a statement informing the
member how to signify agreement to the resolution and indicating the date by which the
resolution is required to be passed.
Accordingly, written resolutions are substantially efficient and cost effective because they do
away with the requirement for private companies to issue notices for meetings. Further, they
negate the need for physical presence at the meetings. Members are able to pass resolutions
without the inconvenience of attending the company’s general meetings. Lastly, there will be
lesser need for absentee members to appoint proxies to attend the general meetings and vote in
their place because the voting can be undertaken anywhere.

1.6. Conversion of Shares to Stock

Under the repealed Companies Act, a company could by ordinary resolution convert any of its
paid-up shares into stock and reconvert any stock into paid-up shares of any denomination.
However, section 322 of the Companies Act, 2015 prohibits the conversion of the shares of a
company into stock.

1.7. Prohibition of issuance of Share Warrants

Under the repealed Companies Act, companies limited by shares whether public or private could
issue share warrants. Share warrants are instruments that give a right and option to the holder to
acquire shares within a specified time and at a specified price. They entitle the bearer to the
shares specified therein. Share warrants are transferable by delivery and are thus negotiable
instruments. Unfortunately, share warrants are highly susceptible to abuse. Further, the fact of
transferability by mere delivery flouts the provision that restricts the transfer of shares in private
companies.

Considering the foregoing, section 504 (1) of the Companies Act 2015 prohibits the issuance of
share warrants. A share warrant issued in contravention with the Act shall be void.

1.8. Restrictions on non-cash payment for shares

Under section 361 (1) of the Companies Act 2015, a public company is prohibited from
accepting an undertaking given by a person to work or perform services for the company as
consideration for its shares or any premium on them. Further, a public company is prohibited
from allotting shares as fully or partly paid up otherwise than in cash unless the consideration for
the allotment has been independently valued.

1.9. Company acquisition of its own shares

Under section 56 of the repealed Companies Act, a company was prohibited from purchasing or
subscribing for its own shares or those of its holding company. The Companies Act 2015 adopts
a different approach. Under section 424 (1) thereof, a limited company is generally prohibited
from acquiring its own shares, whether by purchase, subscription or otherwise. However, under
sub-section 2 a limited company having a share capital is allowed to purchase its own shares in
accordance with the provisions of the Act. Further, section 449 allows a private limited company
to purchase its own shares out of its capital. Shares that have been purchased or acquired by the
company out of distributable profits and thus are part of its assets are known as treasury shares.
1.10. Trading Certificates

Section 516 of the Companies Act 2015 introduces the concept of a trading certificate. A public
company whose nominal value of the allotted share capital of the company is more than the
authorized minimum is prohibited from conducting business or exercising borrowing powers
unless the Registrar of Companies has issued it with a trading certificate. Under section 518, the
authorized minimum is Kshs. 6, 750,000/=.

1.11. Company Secretary

Under section 178 of the repealed Companies Act, every company was required to appoint a
company secretary. In contrast, the Companies Act 2015 only makes it mandatory for public
companies to have a company secretary. Under section 243 (1) thereof, a private company is not
required to have a company secretary unless it has a paid up capital of five million shillings or
more. This provision has been met with protests by the Institute of Certified Public Secretaries of
Kenya (ICPSK) which argues that exempting some companies from having a Secretary would
have a significant negative effect in the push to instill good corporate governance practice in our
corporate entities. ICPSK recommends that all companies be required to have a Company
Secretary. Whilst ICPSK’s arguments carry some legitimacy, the body has failed to consider the
costs inefficiencies arising from the requirement which hinders growth of small businesses. The
efficiency consideration is paramount to the ICPSK’s quest to sustain a market for its members.
Further, small entities are unlikely to face any complex corporate governance challenges that
cannot be resolved internally without the involvement of a professional secretary.

1.12. Exemption from Audit Requirements

Section 711 (1) of the Companies Act 2015 exempts small companies from the audit
requirements prescribed thereunder. Under section 624 (3), a small company is one whose
turnover is not more than Kshs. 50 million; and the value of its assets is not more than Kshs. 20
million; and has less than 50 employees. Accordingly, under the provision, small companies will
benefit from decreased operational costs incurred in appointing auditors, in the preparation of
annual financial statements and in the lodging of the same at the Companies Registry. Note
however that despite this provision, other incidental laws will compel these small companies to
prepare annual financial statements. For example, the Income Tax Act requires all companies to
file annual tax returns which must be accompanied by approved financial accounts. Accordingly,
small companies must still incur expenditure in appointing auditors to prepare the necessary
annual financial statements.

The exemption provision has been met with disgruntlement by the Institute of Certified Public
Accountants of Kenya (ICPAK). ICPAK argues that the exemption will put small businesses at
risk because these institutions will not access prudent financial advisory on the fiscal probity of
their businesses. Accordingly, ICPAK recommends that in order to reduce this risk, the turnover
threshold for a small company be reduced to Kshs. 5million as per the Value Added Tax Act
instead of the prescribed Kshs. 50 million.

1.13. Partnership restriction

Section 389 of the repealed Companies Act prohibited the formation of any association or
partnership of more than 20 persons. The Companies Act 2015 does not contain a similar
provision. Accordingly, there is no legal restriction in Kenya as to the number of partners
comprising a partnership. This expands the scope of membership in partnership arrangements.

1.14. Age requirement for directorship

Under section 186 (1) of the repealed Companies Act, the minimum age for qualification for
appointment as a director was 21 years of age. The Companies Act 2015 reduces the minimum
age qualification for directorship to 18 years.

1.15. Electronic lodging of documents

The Companies Act 2015 grants the Registrar of Companies the power to make regulations that
allow documents or documents of a specified class to be lodged with the Registrar for
registration by electronic means. These regulations will finally sanction the adoption of an
electronic registry where registry business and payments can be efficiently conducted
electronically.

CORPORATE & COMMERCIAL LAWCompanies Act, Kenya, Law, MEMARTS, Uhuru

Kenyatta

Microfinance Institutions in Kenya

May 5, 2015Loice Erambo1 Comment

Kenyan Currency

A Microfinance Institution (MFI) is a form of financial development that primarily provides

financial services to the low income groups and micro and small enterprises (MSEs) which
usually lacking access to formal financial institutions in the country.

In Kenya, MFIs are regulated under the Microfinance Act (2006). Under section 3 of the Act,
there are two types of MFIs namely:

1. Deposit-taking MFIs; and

 2. Non-deposit-taking MFIs otherwise known as Credit-only MFIs.

Under the Microfinance (Categorization of Deposit-Taking Microfinance Institutions)

Regulations (2008), deposit-taking MFIs are further categorized into:

1. Community microfinance institutions licensed to carry out deposit-taking microfinance

business within the relevant district, city or other specified region approved by the
Central Bank of Kenya; and
2. Nationwide microfinance institutions licensed to carry out deposit-taking microfinance
business countrywide.

A community MFI may be converted into a nationwide MFI with the written approval of the
CBK. However, a nationwide MFI cannot be converted into a community MFI.

Note that under section 13 of the Act, a deposit-taking MFI cannot operate outside Kenya.

Microfinance Institution

2.0. DEPOSIT-TAKING MFIs

Deposit-Taking MFIs are regulated under the Microfinance Act and the Microfinance (Deposit-
Taking Microfinance Institutions) Regulations, 2008 prescribed thereunder.

2.1. Eligibility Requirements

Under section 4 of the Microfinance Act, in order to be eligible for registration as a deposit
taking MFI, the applicant must be:

1. A company registered under the Companies Act (Cap. 486) whose main objective is to
carry out deposit-taking business; or
2. A wholly-owned subsidiary of a bank or a financial institution whose main objective is to
carry out deposit-taking business.

However, these requirements do not apply to a duly approved agency conducting deposit-taking
business on behalf of a licensed microfinance bank. Where an agency conducts a deposit-taking
business on behalf of a microfinance bank, the bank is liable for the acts of the agency in so far
as such acts relate to that business.
Deposit-taking business is defined by the Act to mean-

1. accepting money from members of the public on current account and payment on and
acceptance of cheques; and
2. accepting money from members of the public on deposit repayable on demand or at the
expiry of a fixed period or after notice;
3. employing the money held on deposit or on current account, or any part of the money, by
lending, investing for the account and at the risk of the institution including the provision
of short-term loans to SMEs or low income households and characterized by the use of
collateral substitutes.

2.2. Licensing Requirements and Procedure

Under section 5 of the Act, a deposit-taking MFI must be licensed by the Central Bank of Kenya.
The application is made in a prescribed form. This application must be accompanied by:

1. A copy of the Memorandum and Articles of Association or other instrument under which
the company is incorporated;
2. A verified official notification of the company’s registered place of business;
3. The prospective place of operation, indicating that of the head office and branches, if any;
4. Evidence that the company meets the prescribed minimum capital requirements;
5. Prescribed forms encapsulating information for conduct of the “Fit and Proper” test of the
professional and reputational suitability of persons proposed to manage or control the
institution;
6. The prescribed fee; and
7. A report of a feasibility study and three-year business plan of the proposed deposit-taking
business in Kenya, detailing the mission, vision, scope and nature of business operations,
profitability analysis and internal controls and monitoring procedures, including but not
limited to—

 the proposed shareholding structure;

 the proposed organizational structure;
 the domestic economic situation and its relevance for the operation of the proposed
institution and an analysis of the financial sector environment and the market to be served
by the proposed business company; and
 a schedule of all the preliminary expenses including the institutions costs, all expenses
relating to the establishment or transformation of the institution.

Where granted, the license is valid up to the 31st day of December of the year of issue and may,
on expiry, be renewed on application. Where an application for renewal is made, the license is
deemed to continue in force until the application is determined.

2.3. Ownership in deposit-taking MFI

Under section 19 of the Act, no person can hold, directly or indirectly a beneficial interest in
more than 25% of the shares of a deposit-taking MFI except where the person is a wholly-owned
subsidiary of a bank or a financial institution; or is a company exempted by the Minister.

Further, the Act forbids the transfer of more than 10% of the shares of an institution except with
the prior approval of the CBK.

2.4. Duties of a deposit-taking MFI

A deposit-taking MFI is required to maintain a minimum capital of at least 60 Million for a

nationwide MFI and 20 Million for a community MFI. Further, deposit-taking MFIs must
maintain such minimum holding of liquid assets of twenty per cent of all its deposit liabilities,
matured and short term liabilities.

Under section 17 of the Act, a deposit-taking MFI cannot grant a loan or credit facility to an end-
user single borrower or his associates where the loan or credit facility, in the aggregate, exceeds
the limit of its core capital as prescribed by the Central Bank. Further, it cannot grant a loan or
credit facility against the security of the shares of its deposit-taking business. Lastly, insider
lending cannot exceed 2% of core capital and aggregate of 20% of core capital.

Three months after the end of each financial year, a deposit-taking MFI must submit to the
Central Bank—

1. an audited balance sheet, showing its assets and liabilities;

2. an audited profit and loss account; and
3. A copy of the auditor’s report.

2.5. Prohibited Activities

Section 14 prohibits deposit taking MFIs from engaging in;

1. Trust operations;
2. Investing in enterprise capital;
3. Wholesale or retail trade;
4. Underwriting or placement of securities; and
5. Purchasing or otherwise acquiring any land except as may be reasonably necessary for
the purpose of expanding the deposit-taking business.

Money changing Hands

3.0. NON DEPOSIT-TAKING MFIs

The Microfinance Act (2006) applies to non-deposit taking MFIs. However, these institutions are
registered under eight different Acts of Parliament namely:

 The Non-Governmental Organizations Co-ordination Act (Repealed) e.g. SISDO;

 The Building Societies Act e.g. Equity Building Society (formerly);
 The Trustee Act e.g. Yehu Microfinance Trust ;
 The Societies Act;
 The Co-operative Societies Act
 The Companies Act e.g. Platinum Credit
 The Banking Act; and
 The Kenya Post Office Savings Bank (KPOSB) Act

Credit facilities offered by non-deposit taking MFIs remain substantially unregulated. However,
several non-deposit taking MFIs are regulated under sectoral laws albeit minimally. Accordingly,
these institutions do not fall under the jurisdiction of the CBK’s microfinance regulation and are
thus not subject to the prudential regulations. They are self-regulated by the Association of
Microfinance Institutions (AMFI) which is a member-based institution formed in 1999 by
leading microfinance institutions.

However, the incorporation of Non Deposit-Taking MFIs into the regulatory framework is
currently under discussion by the CBK and a variety of industry stakeholders. It is expected that
non-deposit taking MFIs will be regulated under the Microfinance Act (2006). Section 2 (b) of
the Act mandates the Minister for Finance to make regulations to control the conduct of the
specified non deposit-taking MFIs. These regulations are yet to be put in place. The Ministry
of finance is in the process of discussing the best way forward for regulating the non-deposit
taking microfinance businesses.

Note however that the Microfinance Act does not apply to financial institutions licensed under
the Banking Act; the Building Societies Act; and the Kenya Post Office Savings Bank Act.

4.0. CONCLUSION

From the above, it is noted that deposit taking MFIs are heavily regulated compared to non-
deposit taking MFIs which only offer credit services to their members. The rationale for the
stringent regulation of deposit-taking MFIs is to protect investor funds and ensure the stability of
financial institutions in Kenya. Due to lack of regulation, non-deposit taking MFIs fail to offer
guarantee of financial probity to its members and have thus remained unattractive to investors.
Further, the limited regulation exposes these institutions to potentially huge losses.

Due to the identified disabilities faced by non deposit taking MFIs, there are discussions to bring
these institutions under a comprehensive legal and regulatory framework. In the meantime, with
the introduction of the Microfinance Act, several non deposit taking MFIs e.g. Kenya Women
Finance Trust (KWFT) have converted to deposit taking MFIs.

~Loice Erambo
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BANKING LAWBusiness, CBK, Kenya, MFI, Microfinance Act, Microfinance Institutions,
Money

Compensating Tax: The Hidden Burden

May 5, 2015Loice EramboLeave a comment

Compensating tax is a tax charged upon the distribution of untaxed income. Distribution of
income is commonly achieved through payment of dividends to shareholders. Accordingly, in
order to understand the concept of compensation tax, one must first understand the taxation of
dividends.

1.1. Taxation of Dividends

Under section 3 (2) of the Income Tax Act, income tax is chargeable for income received in the
form of dividends. Dividends are ordinarily taxed on a withholding tax basis which is final tax.
Withholding tax is charged at the rate of 5% for dividends paid to residents of Kenya and 10%
for dividends paid to non-residents. However, dividends received by a resident company owning
more than 12.5% of the paying company are exempt from the tax. Further, no withholding tax is
imposed if the recipient is a Kenyan financial institution qualified under Fourth Schedule of the
Act. Where dividends are paid out of untaxed income, a penalty is charged in the form of
compensating tax

2.0. COMPENSATING TAX

Section 7 A (5) of the Act provides for compensating tax. Compensating tax is a penalty tax
charged upon the distribution of untaxed income. It largely arises when dividends are paid out of
untaxed profits or reserves that have not borne income tax at the corporate rate. For example,
where a resident company receives income from its business, such income is charged to 30% tax.
Upon payment of dividends, a further 5% is charged as withholding tax. However, should the
company pay dividends on untaxed income, a penalty is charged in the form of compensating
tax. Similarly, compensating tax will be incurred upon payment of dividends out of untaxed
capital gains. If a company makes some capital gains, the revenue would ordinarily be charged to
capital gains tax at the rate of 5%. Upon payment of dividends, a further 5% is charged as
withholding tax bringing the total taxed amount to 10%. However, should the company decide to
distribute dividends from the capital gains made before paying the required Capital Gains Tax, it
will be liable to pay compensating tax at the hefty rate presented below. Accordingly,
compensating tax is a secondary tax arising following failure to pay the requisite primary income
tax chargeable to the various sources of income identified under section 3 (2) of the Act.

2.1. COMPENSATING TAX RATE

Compensating tax is charged at the rate of 42.8%. This is a higher rate than the corporate tax rate
charged at 30% for residents and 37.5% for non-residents. Compensating tax aims to ensure
corporate distributions are made out of after-tax income hence the hefty rate.

TABLE OF COMPARISON

DIVIDENDS FROM DIVIDENDS FROM

DIVIDENDS FROM DIVIDENDS FROM
TAXED CAPITAL UNTAXED
TAXED INCOME UNTAXED INCOME
GAINS CAPITAL GAINS
Compensating tax- Compensating tax-
Corporate tax- 30% + Capital Gains tax- 5% +
42.8% Withholding 42.8% Withholding
Withholding tax- 5% Withholding tax- 5%
tax- 5% tax- 5%
TOTAL- 35% TOTAL- 10% TOTAL- 47.8% TOTAL- 47.8%

2.2. MODE OF CALCULATION

Compensating tax operates under a memorandum account called a dividend tax account (DTA)
required under the Act to be established and maintained by all companies resident in Kenya. The
account traces the movement of dividends received or paid and taxes paid. The DTA balance is
the determinant of the level of compensating tax payable, if any. Under section 7 A (5) of the
Act, if the amount in the DTA is decreased below zero as a result of payment of dividend, the
company pays compensating tax sufficient to bring such a resulting negative balance up to zero.
That is, when there is a credit balance in the DTA, compensating tax is payable to the extent
sufficient to bring the account to a zero balance.

3.0. CONCLUSION Compensating tax is a very hefty penalty. Fortunately, it is a tax that is
completely avoidable by ensuring the timely payment of taxes due on the income of a business
before payment of any dividends. Accordingly, companies must endeavor to make only after-tax
distribution of income and capital gains.

~Loice Erambo

CORPORATE & COMMERCIAL LAW, TAX LAWCapital Gains, Companies, Dividends,

Law, Tax Law; Kenya; Compensating Tax

The Law of Adoption in Kenya

April 17, 2015Loice Erambo2 Comments

Mixed family

The law of adoption in Kenya is encapsulated under the Children’s Act (2001) and the
appertaining rules and regulations prescribed thereunder. Before setting out the procedures
involved in adoption, some preliminary substantive issues must be considered.

1.1. PRELIMINARIES

1.1.1. ELIGIBILITY OF A CHILD FOR ADOPTION

In Kenya, a child cannot be adopted unless the child is at least six (6) weeks old and has been
declared free for adoption by a registered adoption society. Accordingly, in Kenya, no individual
or other body of persons can legally make any arrangement for the adoption of a child.
Consequently, informal adoptions are illegal and constitute an offence under the Act.
Any child who is resident within Kenya may be adopted whether or not the child is a Kenyan
citizen, or was or was not born in Kenya. Further, under section 157 (1) of the Act, an
application for an adoption order can only be made if the child concerned has been in the
continuous care and control of the applicant (adopter) within Kenya for three (3) consecutive
months preceding the filing of the application.

Note that in all adoption applications, the best interest of the child is the primary consideration of
the court.

1.1.2. ELIGIBILITY OF THE ADOPTER

An adoption order may be made upon the application of a sole applicant or jointly by two
spouses. The applicant or at least one of the joint applicants must have attained the age of 25
years and be at least 21 years older than the child but should not have attained the age of 65
years. Note however, that the age requirements are not mandatory where the applicant is the
mother or father of the child or is otherwise a relative of the child.

Generally, section 158 (2) of the Act disallows the making of an adoption order in favour of a
sole male applicant in respect of a female child; and a sole female applicant in respect of a male
child. Presumably, the prohibition is aimed to protect adopted children from potential sexual
abuse. Further, an adoption order will generally be denied where the applicant has or both joint
applicants have attained the age of 65 years. Lastly, where the applicant is a sole foreign female,
an adoption order will generally be denied. It is not clear why the same is not the case for sole
foreign males. Note however that an adoption order will in all the above circumstances be made
to the applicants if the court is satisfied that there are special circumstances that justify the
making of the order.

Section 158 (3) of the Children’s Act, prohibits the making of an adoption order in favour of an
applicant who:

1. is not of sound mind within the meaning of the Mental Health Act (Cap. 248); or
2. has been charged and convicted by a court of competent jurisdiction for any of the
offences set out in the Third Schedule to the Act or similar offences. The prescribed
offences generally include defilement, sexual offences, immoral behavior, attempt to
procure abortion, unnatural offences; and assault; or
3. is a homosexual; or
4. in the case of joint applicants, if they are not married to each other; or
5. is a sole foreign male applicant.

Firstly, the prohibition of homosexuals from adoption constitutes discrimination against gay
persons and thus raises human rights concerns. Notably, Article 27 of Kenya’s Constitution
which prohibits discrimination does not forbid the discrimination of a person based on sexual
orientation. Further, under section 162 of the Penal Code, having carnal knowledge of any
person against the order of nature is a felony punishable on conviction by a fourteen-year prison
term. Accordingly, homosexuality is illegal in Kenya hence the prohibition of gay persons from
adopting children. It is not clear whether the prohibition extends to Lesbians, Bisexuals,
Transsexuals and Intersexuals. In any case, it is doubtful whether any particular safeguard
measures have been placed for scanning applicants to detect LGBTIs.

Additionally, the absolute prohibition of foreign male applicants goes against the cooperative
spirit encouraged under the Hague Convention on Protection of Children and Co-operation in
Respect of Inter-country Adoption (1993) to which Kenya is a signatory. Further, it is difficult to
justify the adverse treatment of sole male foreign applicants as compared to sole female foreign
applicants who are allowed to adopt though under special circumstances.

2.o. PROCEDURE FOR ADOPTION IN KENYA

The procedure for undertaking adoption in Kenya is regulated under the Children (Adoption)
Regulations, 2005. In Kenya, there are two types of adoption;

 Local adoption; and

 International adoption.

2.1. LOCAL ADOPTION

The procedure for undertaking a local adoption is as set out below:

1. SURRENDER OF CHILD TO ADOPTION SOCIETY

a. Where appropriate as the case may be, the parent or guardian places the child who is to be
potentially adopted, at the disposal of a registered adoption society.

b. The parent or guardian is issued with an explanatory memorandum in the prescribed form
whereon a certificate of acknowledgement is attached.

c. The parent or guardian must sign and deliver to the society a certificate of acknowledgement
in prescribed form indicating that he has read and understood the memorandum.

d. The adoption society thereafter accepts the child.

2. APPLICATION

a. A prospective adopter forwards an application for adoption to the registered adoption society.

b. The society obtains a social worker who makes an appointment to visit the applicant’s home
for purposes of knowing the prospective adopter better and to assess his accommodation to
determine its suitability for the child.

c. After the visit, the social worker makes a report of his assessment in the form prescribed under
the Schedule to the Adoption Regulations.
d. The adoption society also makes arrangements to obtain a medical report on the health of both
the child and the adopter in the prescribed forms.

3. APPLICATION ASSESSMENT

a. The Case Committee of the adoption society vets the application together with the social
worker’s report and the health report of the child and the adopter.

b. The Committee then makes a decision to approve the application or to defer or reject the same
with stated reasons.

c. The approval intimates that the child is free for adoption and approves the adopter.

d. Once the adopter has been approved by the case committee, the adopter is required to read and
understand the explanatory memorandum for adopters prescribed in the Regulations, and sign the
certificate of acknowledgement attached to the memorandum.

4. PLACEMENT

a. Upon approval of the application, the child is delivered into the care and possession of an
adopter by or on behalf of an adoption society.

b. The child is visited in the first month and at least once in every three months thereafter by a
representative of the society, who reports on the case to the case committee.

c. The Committee may recommend appropriate action to be taken in the event that the child is
not being taken care of properly.

5. LEGAL PROCESS

a. The adopter makes an application for an adoption order to the High Court of Kenya;

b. The court may on its own motion or upon the application of the adopter, appoint a guardian ad
litem for the child pending the hearing and determination of the adoption application.

c. The court may reject the application. The adopter may appeal the decision to the Court of
Appeal.

d. The court may grant the adoption order which is then registered by the Registrar-General
through making an entry in the Adopted Children Register.

e. Under section 171 (1) of the Act, upon an adoption order being made, all rights, duties,
obligations and liabilities of the parents or guardians of the child in relation to the future custody,
maintenance and education of the child, including all rights to appoint a guardian and to consent
or give notice of dissent to marriage, are extinguished and become vested in and are exercisable
by and enforceable against the adopter as if the child were a child born to the adopter inside
marriage.

2.2. INTERNATIONAL ADOPTIONS

The procedure for undertaking an international adoption in Kenya is set out hereunder.

a. An International adoption can only be arranged by a foreign adoption society which has been
approved by the Adoption Committee established under section 177 of the Children’s Act.

b. An international adoption is initiated by a foreign adoption society making an application to a

local adoption society. The application must be accompanied by the documents set out in the
Tenth Schedule which include the passport, marriage certificate, and the adopter’s medical
certificate. All the documents submitted by the foreign adoption society must be notarized or
authenticated by the Ministry responsible for foreign affairs in the country where the adopted
child will ordinarily reside and gain citizenship i.e. the receiving state. Note that the receiving
state must be a signatory to the Hague Convention on Protection of Children and Co-operation in
Respect of Inter-country Adoption (1993).

c. The local adoption society must forward the application to the Adoption Committee within
thirty (30) days from the date of receipt.

d. The Adoption Committee vets the application and either approves or rejects the same.

e. The decision of the Committee is communicated to the local adoption committee within thirty
days from the date of the decision being made.

f. Where an application is rejected, the local adoption society communicates the rejection to the
foreign adoption society within 60 days from the date of receipt thereof detailing the reasons for
the rejection.

g. Where the application is approved, the local adoption society communicates the approval to
the foreign adoption society within 60 days from the date of receipt thereof. The communication
is accompanied by—

 a brief report on the children, if any, available for adoption at the time, who match the
adopter’s preferences;
 information about the approximate length of time the adoption process may take, court
filing fees, advocate’s fees, administrative and accommodation charges, and other
relevant information; and
 a copy of an undertaking prescribed in the Adoption Regulations which is to be signed by
the foreign adoption society before conclusion of the adoption process.

h. Thereafter, the foreign adoption society makes arrangements for the prospective adopter to
travel to Kenya within 3 months from the date of receipt of the notification of approval.
i. When the prospective adopter arrives in Kenya, the local adoption society introduces the
adopter to the children available for adoption who match the adopter’s preference, and if the
adopter is willing to proceed, he must sign the undertaking set out in the Eleventh Schedule
before commencement of adoption arrangements.

j. Subsequently, the child intended for adoption is placed in the care of the adopter in Kenya for
three continuous months subject to the supervision of the local adoption society.

k. Where an adopter completes the placement period to the satisfaction of the local adoption
society, the local adoption society may assist the adopter in making an application to the High
Court for an adoption order. Note however that the application must be made in the name of the
adopter or his advocate.

l. Where the local adoption society is not satisfied with the conduct of the adopter during the
placement period, it must inform the Adoption Committee, which carries out investigations as to
the suitability of the adopter. At the close of the investigation, the Committee communicates its
findings to both the local and foreign adoption societies.

m. If, upon conclusion of investigations the Adoption Committee decides to stop the adoption
arrangements, it must inform both the local and foreign adoption societies of the decision within
a reasonable period.

n. Where the High Court grants an adoption order following an application by the adopter, the
local adoption society notifies the foreign adoption society within 7 days from the date of the
making of the order, and may assist the adopter to obtain the necessary travel documents for the
child to facilitate departure from Kenya.

o. Thereafter, the foreign adoption society must send to the local adoption society reports on the
progress being made by the adopted child in the receiving country (progress report) once every
three months during the first two years from the date of making of an adoption order, and
annually thereafter for the next 3 years unless the child attains the age of majority before lapse of
the 3 years.

3.0. CONCLUSION

The procedures for undertaking adoption in Kenya are very stringent as laid out above. The law
aims to ensure that the interests of the child are promoted and protected. Unfortunately, despite
the rigorous laws, inhumane vices such as child trafficking remain prevalent as illegal
transactions involving children are masqueraded as adoption processes.

Away from procedural matters, as noted hereinabove, the law of adoption in Kenya is very
stringent. Certain segments of the population have been denied the possibility of adoption in
Kenya on several bases including sexual orientation due the need to safeguard the interests of the
children and to protect them from harmful vices. While the best interests of the child remains the
primary consideration in all matters relating to children, to what extent does the principle justify
the violation of other individual rights?
~Loice Erambo

FAMILY LAW & SUCCESSIONAdoption, Best interest, Children, International, Kenya, Local

Duration of Copyright Protection

March 10, 2015Loice EramboLeave a comment

Copyrighted

Copyright refers to a set of exclusive rights granted to an author or creator of an original work
expressed in fixed tangible form. Copyright subsists automatically. There are no prescribed
formalities for bringing copyright into existence. For a work to be eligible for copyright
protection it must be original, that is, the author’s own work and not a copy of an existing work.
The subject-matter of the copyright must also be fixed in a tangible form. Copyright does not
protect mere ideas but ones expressed in a fixed form.

THE DURATION OF COPYRIGHT PROTECTION

The duration of copyright protection in Kenya is prescribed under the Copyright Act, 2001. The
duration depends on the subject matter of copyright as follows:

A. Literary works

Books
Under section 2 of the Copyright Act, literary work means, any of the following, and related
works namely—

1. novels, stories and poetic works;

2. plays, stage directions, film sceneries and broadcasting scripts;
3. textbooks, treatises, histories, biographies, essays and articles;
4. encyclopedias and dictionaries;
5. letters, reports and memoranda;
6. lectures, addresses and sermons;
7. charts and tables;
8. computer programs; and
9. tables and compilations of data including tables and compilations of data stored and
embodied in a computer or a medium used in conjunction with a computer irrespective of
literary quality.

These works are eligible to copyright protection irrespective of their literary quality. Note
however that written laws and judicial decisions do not constitute literary works and are thus not
eligible for copyright protection in Kenya.

Section 23 (2) of the Copyright Act provides that literary works are granted copyright protection
for the Life of the author + 50 years. Accordingly, authorship determines the duration of
copyright. Under section 2 of the Act, an author is the person who first makes or creates the
work. In the case of joint authorship, copyright duration is calculated in reference to the life of
the author who dies last. In the case of anonymous or pseudonymous literary works, the
copyright subsists until the expiration of 50 years from the end of the year in which it was first
published. However, the where the identity of the author subsequently becomes known, the term
of copyright protection will be Life of the author + 50 years.

Note however that under section 25 (2) of the Act, literary works which has been created
pursuant to a commission from the Government or such international body or non-governmental
body subsists until the end of the expiration of 50 years from the end of the year in which it was
first published.

In the United States of America, literary works are granted copyright protection for the life of the
author + 70 years. Anonymous and pseudonymous literary works are protected for 95 years from
first publication or 120 years from creation, whichever is shorter.

The foregoing illustrates that the length of copyright protection is measured by reference to the
human author’s lifespan. This begs to question, how long does the copyright last where the
author is a juristic person? The Copyright Act does not expressly provide for copyright
ownership by corporate entities. However, corporate entities are not prohibited from copyright
ownership under the Act and can therefore be granted copyright protection. As noted above,
literary works authored by individuals are granted copyright protection for the life of the author
+ 50 years. If we apply this formula to corporate entities, we will result in perpetual copyright. A
corporate entity exists in perpetuity. To calculate a juristic person’s duration of copyright
protection would be perpetuity + 50 years. It is doubtful as to whether such a long period of
copyright protection is desirable. The Copyright Act ought to address this lacuna in law. In the
USA, literary works authored by a corporate are protected for 95 years from publication or 120
years from creation, whichever expires first.

B. Musical works

Musical works

Under section 2 of the Copyright Act, musical work means any musical work, irrespective of
musical quality, and includes works composed for musical accompaniment. Section 23 (2) of the
Act provides that musical works are granted copyright protection for Life of the author + 50
years. In relation to musical works, the author is the person who first makes or creates the work.

Note however that under section 25 (2) of the Act, musical works which has been created
pursuant to a commission from the Government or such international body or non-governmental
body subsists until the end of the expiration of 50 years from the end of the year in which it was
first published.

In the United States of America, musical works are granted copyright protection for the life of
the author + 70 years thus comprising of a significantly longer duration.

In Kenya, musical works authored by corporates face similar problems with juristic-owned
copyright for literary works. There is uncertainty as to the period of their protection. In the USA,
musical works authored by a corporate are protected for 95 years from publication or 120 years
from creation, whichever expires first.

C. Artistic works

Monalisa

Under section 2 of the Copyright Act, artistic work means, irrespective of artistic quality, any of
the following, and related works:
 1. paintings, drawings, etchings, lithographs, woodcuts, engravings and prints;
2. maps, plans and diagrams;
3. works of sculpture;
4. photographs not comprised in audio-visual works;
5. works of architecture in the form of buildings or models; and
6. works of artistic craftsmanship, pictorial woven tissues and articles of applied handicraft
and industrial art.

Section 23 (2) of the Copyright Act provides that artistic works are granted copyright protection
for the Life of the author + 50 years. Under section 2, the author in this case means the person
who first makes or creates the work. In the United States of America, artistic works are granted
copyright protection for the life of the author + 70 years.

In Kenya, there is uncertainty as to the duration of copyright granted to artistic works authored
by corporate entities. In the USA, artistic works authored by a corporate are protected for 95
years from publication or 120 years from creation, whichever expires first.

However, under section 25 (2) literary, musical or artistic work t which has been created
pursuant to a commission from the Government or such international body or non-governmental
body as may be prescribed, subsists until the end of the expiration of 50 years from the end of the
year in which it was first published.

D. Audio-visual works

Audio-visual works

Under section 2 of the Copyright Act, audio-visual work means a fixation in any physical
medium of images, either synchronized with or without sound, from which a moving picture may
by any means be reproduced and includes videotapes and videogames but does not include a
broadcast. Under section 23 (2) of the Act, audio-visual works and photographs are protected for
50 years from the year the work was either made available to the public or the date of its
publication, whichever is latest. A work is taken to have been published only if copies have been
issued in sufficient quantities to satisfy the reasonable requirements of the public. In the USA,
broadcasts are granted copyright protection for life of the author + 70 years. Anonymous and
pseudonymous works are protected for 95 years from publication or 120 years from fixation,
whichever is shorter. Corporate broadcasts are protected for 95 years from publication or 120
years from fixation, whichever is shorter.

E. Sound Recordings

Compact Disk

Under section 2 of the Copyright Act, a sound recording means any exclusively aural fixation of
the sounds of a performance or of other sounds, or of a representation of sounds, regardless of
the method by which the sounds are fixed or the medium in which the sounds are embodied but
does not include a fixation of sounds and images, such as the sound track of an audio-visual
work. Under section 23 (2), sound recordings are granted copyright protection for 50 years after
the end of the year in which the recording was made. In USA, sound recordings made after 1978
are granted copyright protection for life of the author + 70 years. Anonymous and pseudonymous
works are protected for 95 years from publication or 120 years from fixation, whichever is
shorter. Corporate works are also protected for 95 years from publication or 120 years from
fixation, whichever is shorter.

F. Broadcasts

A live Broadcast

A broadcast is defined under section 2 of the Copyright Act as the transmission, by wire or
wireless means, of sounds or images or both or the representations thereof, in such a manner as
to cause such images or sounds to be received by the public and includes transmission by
satellite. Broadcasts are protected for 50 years after the end of the year in which the broadcast
took place. In the USA, broadcasts are granted copyright protection for life of the author + 70
years. Anonymous and pseudonymous works are protected for 95 years from publication or 120
years from fixation, whichever is shorter. Corporate broadcasts are protected for 95 years from
publication or 120 years from fixation, whichever is shorter.

CONCLUSION

Copyright protection in the USA is granted for a considerably longer period as compared to
Kenya. Whether Kenya ought to amend the Copyright Act to adopt longer copyright protection
terms is debatable. On one hand, it is argued that lengthy copyright protection stifles creativity.
On the other hand, proponents argue that long copyright protection promotes creativity.

INTELLECTUAL PROPERTY LAWBroadcast, COPYRIGHT, Kenya, Music, VideoTapes

Understanding Capital Gains Tax in Kenya

February 24, 2015Loice Erambo1 Comment
 Capital Gains Tax

Capital Gains Tax was first introduced in Kenya in 1975 under the Eighth Schedule to the
Income Tax Act. At the time, it was payable at the rate of 10%. On 13th June 1985, the said
provisions were suspended thus discontinuing the charge of Capital Gains Tax in Kenya. In
2006, there was an attempt to re-introduce Capital Gains Tax through the Finance Bill (2006)
but the motion to pass the Bill was defeated in Parliament. The Bill sought to charge Capital
Gains Tax at the rate of 10%. Parliament was largely of the view that the tax would increase the
cost of land and make housing less affordable to Kenyans. Ultimately, in the wake of Kenya’s
growing budgetary constraints, Parliament finally approved the Finance Bill 2014 which re-
introduced Capital Gains Tax in Kenya. Capital Gains Tax became operational on 1st January
2015 upon the commencement of relevant sections of the Finance Act 2014.

SCOPE OF CAPITAL GAINS TAX

Under the Finance Act 2014, Capital Gains Tax is charged on the profit acquired by a company
or an individual upon the transfer of property effected from 1st January 2015, whether or not
the property was acquired before this date. It is generally charged at the rate of 5% which is a
final tax. Capital Gains Tax is computed on the amount by which the transfer value of the
property exceeds the adjusted cost of the property, that is, the profit. Transfer value is the buying
price for the transfer of the property. Adjusted cost is the costs incurred by the seller in acquiring
the property. DUTY TO PAY The responsibility to pay Capital Gains Tax is generally on the
transferor, that is the seller. However, under the Income Tax Act, the responsibility to collect and
account for the Capital Gains tax accruing upon the transfer of investment shares is on the
stockbrokers . In the case of transfer of discountable securities like Commercial Paper and
Treasury Bills, the tax will be collected and accounted for by the Central Bank of Kenya. Capital
Gains Tax will be paid through Commercial Banks into a given account held at the Central Bank
of Kenya for all transactions chargeable to the tax.

PROCEDURE FOR PAYMENT OF CAPITAL GAINS TAX

The KRA Capital Gains Tax Guidelines outline the procedure as follows;-

1. The transferor or stock broker , as the case may be, completes a declaration form (CGT
form) prescribed by KRA. The forms comprise of a self-assessment to determine the gain
upon which Capital Gains Tax will computed.
2. The computations are verified by the Commissioner of KRA.
 3. The declaration form is accompanied by:

 A Copy of Sale/Transfer Agreement of the property;

 Proof of the incidental costs related to the acquisition and transfer of the property;
 A copy of the title deed or ownership document for the property; and
 A report from a registered valuer for property transactions between related parties.

COURT CASE

In January 2015, the Kenya Association of Stock Brokers (Kasib) filed a suit against KRA
seeking to suspend the laws providing for Capital Gains Tax citing challenges in implementation.
Firstly, Kasib claims that there is uncertainty as to the rate payable as capital gains tax upon the
transfer of investment shares. Part II of the Eighth Schedule of the Income Tax Act states that
the rate of 7.5% is to be charged. On the other hand, the Finance Act 2014 states that the rate of
5% is to be charged. The Finance Act does not amend or repeal the rate stated in the Income Tax
Act hence causing uncertainty as to the applicable rate. Secondly, Kasib is dissatisfied with the
clause under the Income Tax Act that places the obligation to pay Capital Gains Tax accruing on
the transfer of investment shares upon stock brokers . In its petition, Kasib states that only 19
firms are licensed to act on behalf of investors in the securities exchange. Expecting these firms
to calculate taxes due for over 3000 transactions daily is overly burdensome. Accordingly, Kasib
proposes that Capital Gains Tax should be paid by investors directly as part of income tax.
Thirdly, Kasib alleges that KRA is exceeding the requirements set out in the Income Tax Act in
further placing the responsibility to calculate the amount of Capital Gains Tax payable upon the
stock brokers . Fourthly, Kasib argues that the Income Tax Act is archaic in inferring that stock
brokers were involved in the transfer of shares. It states that this responsibility has since been
passed on to the Central Depository and Settlement Corporation. Lastly, the Kasib argues that
stock brokers should not be responsible for facilitating the payment of Capital Gains Tax by
foreign investors who do not have KRA PIN numbers thus causing practical difficulties. In
response, KRA argues that Capital Gains Tax should be implemented to remedy the loophole
that allowed people to use securities exchange to evade taxes. KRA also argues that the concerns
expressed over calculation of Capital Gains Tax by stock brokers on behalf of their clients were
merely administrative and can be resolved as the new laws continue to be in effect. KRA and
Kasib were involved in out-of-court negotiations for settlement. Unfortunately, the talks
collapsed. Accordingly, Kasib’s petition is being heard in court before Mumbi J CONCLUSION
There are prevailing uncertainties concerning the practical modalities for the collection of capital
gains tax in Kenya. Legitimate concerns as to their implementation have been raised as briefly
noted in this article. KRA is making efforts to resolve these problems. In the coming months,
KRA’s efforts will continue to be subject to public scrutiny. Concerns have also been raised on
the potential impact of capital gains tax on Kenya’s economy with factions expressing concern
that the tax will substantially inflate property prices. Market analysts predict distress in the
economy because of the re-introduction of the tax. Considering that Kenya charges capital gains
tax at possibly the lowest rate in Africa, the legitimacy of these concerns can only be verified
with certainty in the future.

~Loice Erambo
TAX LAWCapital Gains Tax, Kenya, KRA, Stockbrokers

Change Your Name?

February 24, 2015Loice Erambo22 Comments

Name Change

Often times, adults feel the need to change their names for one reason or the other. Fortunately,
the law allows one to do so. Under the Registration of Documents Act, the following procedure
must be undertaken to effect a name change.

1. Complete a deed poll prescribed as Form 1 of the Regulations to the Act;

2. Make an application for registration which is prescribed as Form A in the Registration of
Documents (Forms) Regulations;
3. The Deed Poll is accompanied by a birth certificate of the applicant.
4. The application is also accompanied by a statutory declaration prescribed under the Act
(Form 6). This declaration is sworn by a person resident in Kenya and who personally
knows the applicant by the name they want to change.
5. The documents are presented to the Registrar of Documents for registration. There are
only two of these registries. There is one in Nairobi which serves the whole of Kenya
except the Coast Province, and another one is in Mombasa which serves Coast Province
only.
6. Upon registration, the registrar causes the deed poll to be advertised in the Kenya
Gazette. Name change is effected at this point.

Identity Card

Sometimes, after name change has been effected under the procedure above, the person feels the
need to reflect the change in their identity card. Under the Registration of Persons Act, the
process of changing the name in your identity card is as follows:

1. Fill the form prescribed in the fifth schedule of the rules to the Act and present it to the
Registration Officer. This form gives the particulars of the change.
2. Be in possession of a combination of any of the following documents depending on the
type of name change;
 o Marriage Certificate
o Deed Poll
o School leaving Certificates
o Sworn affidavits
o Confirmation letters from administrative office
o Birth Certificate
o Copy of parents ID card.
3. Surrender the current identity card and pay a fee of Kshs. 1000/=.
4. The registration officer signs a certificate in a form prescribed in the Fourth schedule to
be issued to the applicant;
5. The applicant’s photo is taken for the purpose of enabling a new identity card to be issued
to him.
6. The Registration officer forwards the application form, the photograph and the
surrendered identity card to the Principal Registrar who records the changes in the
register of persons; and cancels the surrendered I.D. card.
7. After the expiration of sixty days from the issue of the certificate by the registration
officer, the applicant appears before the registration officer at the registration office
specified in the third column of the certificate, and surrenders the certificate in exchange
for a new identity card.

HOPE YOU LIKE YOUR NAME BETTER NOW!

~Loice Erambo