CPA Company law – August 2026 Past Paper & Answers

Membership of a company Nature and classification of companies

Zedora Health Systems (ZHS) Limited is a private company that develops digital patient-record systems for county hospitals. The company has three registered members. One member is a nominee company holding shares on behalf of the Velari Family Trust. A second member holds shares under a private voting agreement with a foreign investor who gives instructions on how the shares should be voted. The third member is a local venture capital company that has advanced a convertible loan to ZHS Limited. If the loan is converted into shares, the venture capital company would acquire effective control of the company. The company secretary of ZHS Limited is preparing the company’s statutory filings for submission to the Registrar of Companies. During the review, the board discovered that the persons who ultimately own and significantly influence the company have not been fully identified, verified or entered in the beneficial ownership register.

Required:

(a) With reference to the Companies Act, 2015, advise the board on FIVE steps it should take to identify, verify, record and disclose the company’s beneficial owners.

(b) Explain THREE consequences that may arise from the failure to disclose beneficial ownership information.

(c) Analyse TWO constitutional principles that support transparency and accountability when regulating companies in Kenya.

Company Directors Membership of a company Shares

Lantrex Appliances PLC manufactures household equipment in Kisumu. The company intends to purchase a new automated assembly line to improve its production capacity. Mavora Machines Limited has submitted a proposal to supply and install the equipment. The proposal was introduced to the board by two directors of Lantrex Appliances PLC. One of the directors is married to a shareholder of Mavora Machines Limited, while the other director expects to receive a commission from Mavora Machines Limited if the contract is approved.

During the internal review of the proposal, the finance manager of Lantrex Appliances PLC reported that the quoted price was above the prevailing market value. He also reported that the company had not obtained an independent valuation or comparable quotations from other suppliers.

Despite these concerns, the chairperson of Lantrex Appliances PLC called an urgent board meeting to approve the transaction, arguing that Mavora Machines Limited had given the company a short acceptance deadline. Some non-executive directors were concerned that approving the transaction in its current form may expose the company and the directors to legal liability.

Required:

(a) With reference to the Companies Act, 2015, advise the board of Lantrex Appliances PLC on FOUR statutory duties that the directors should observe before approving the proposed purchase of the automated assembly line from Mavora Machines Limited.

(b) The board approved the purchase without requiring the interested directors to disclose their personal interests, without obtaining an independent valuation and without considering alternative suppliers. Six months later, the automated assembly line broke down and the company suffered substantial loss. A group of shareholders now wants the company to recover the loss from the directors who approved the transaction.

With reference to the above facts, advise the shareholders on FOUR legal remedies that may be pursued to enable the company recover the loss from the responsible directors.

Share capital Debt capital

Kinara Packaging Limited manufactures recyclable packaging materials in Athi River. The company expanded its operations two years ago and several members are now expecting a return on their investment. The latest management accounts show a profit for the year. However, the finance manager has explained that most of the reported profit resulted from a revaluation of the company’s land, rather than from its ordinary trading activities. The board nevertheless intends to declare a dividend in order to satisfy members who invested during the expansion phase.

The board also proposes to advance money to one member to enable that member to purchase additional shares from another member who wishes to exit the company. The finance manager has warned that the company still has pending tax liabilities, supplier debts and loan covenants that may be breached if cash is paid out. The directors are therefore unsure whether the proposed dividend and the proposed advance to the member would comply with the capital maintenance rules.

Required:

(a) With reference to the Companies Act, 2015, evaluate THREE statutory conditions that the directors should observe before authorising the proposed dividend.

(b) The dividend was paid despite the finance manager’s warning. Shortly afterwards, the company was unable to meet its financial obligations as they fell due. It also emerged that some board members knew that the payment was not supported by distributable profits. Explain FOUR legal consequences that may arise from the unlawful distribution.

Membership of a company Company Directors The Company Secretary Company meetings Foreign Companies Auditors Audit of Company Accounts

Veridian Cloud Services PLC provides cloud-based services to banks and microfinance institutions. The company has recently moved its registered office from Nairobi to Kiambu, appointed two new directors, changed its company secretary and opened a branch office in Mombasa. During an internal compliance review, the company discovered that several statutory registers had not been updated, some records were missing and certain members' inspection requests had not been acted upon.

The Registrar has also written to the company requiring it to lodge overdue documents and correct inaccurate particulars previously filed. The directors are concerned about possible penalties, compliance notices and the risk of the company being struck off the register if the failures are not corrected.

Required:

(a) With reference to the changes and compliance failures identified in Veridian Cloud Services, analyse FOUR statutory records the company should maintain, update and keep available for inspection.

(b) In relation to the Registrar's letter requiring Veridian Cloud Services PLC to lodge overdue documents and correct inaccurate particulars, explain TWO enforcement measures available to the Registrar.

Corporate restructuring Receivership, Administration, Liquidation and Dissolution of companies Formation of companies

Ardova Textiles Limited (ATL) manufactures and supplies uniforms, medical linen and protective workwear to schools, county hospitals and selected institutional clients. The company has invested in additional production capacity to meet the growing demand from county hospitals and to pursue export contracts with regional buyers. Although the export contracts remain commercially viable, the company is facing serious cash-flow difficulties after losing a major local institutional customer and it is experiencing delays in payments from some public sector clients.

Several credit suppliers have threatened to take legal action for amounts outstanding, while the company’s bank has demanded repayment of an overdue facility. The board believes that immediate liquidation would destroy the company’s value, disrupt existing supply contracts and prejudice creditors. It therefore wishes to propose a compromise with creditors through a scheme of arrangement. A further review of ATL financial position reveals that the company continued operating despite being unable to pay its debts as they became due. During this period of financial distress, the directors accepted customer deposits for new orders, paid a related company ahead of ordinary creditors and failed to keep credit suppliers properly informed about the company’s true financial position. The company also intends to communicate with members electronically during the restructuring process

Required:

(a) With reference to the threats made by ATLs credit suppliers, and the board’s desire to avoid immediate liquidation, advise the board on THREE steps it should take to implement a compromise with the suppliers.

(b) Advise the credit suppliers on FIVE forms of civil liability that ATLs directors may incur for continuing to trade while the company was insolvent, accepting customers deposits, preferring a related company over ordinary creditors and failing to disclose the company’s true financial position.