A director who arranges for the company to buy an asset from them, lend them money, or pay them a large exit package is not automatically doing anything wrong. What makes the difference between a properly governed transaction and a personal liability problem is whether the company’s shareholders approved it the way the Companies Act, 2015 requires. Division 5 of the Act sets out precisely which director transactions need that approval, and getting the sequence wrong, approving after the fact instead of before, or skipping it altogether, is one of the more common governance failures in Kenyan private companies.

The transactions Division 5 catches

The Companies Act, 2015 requires members’ approval, ordinarily by ordinary resolution, before a company enters into any of the following with a director or a person connected to a director: a long-term service contract guaranteeing a director’s employment for more than a specified period (section 157); a substantial property transaction, where the company acquires a non-cash asset from, or disposes of one to, a director or connected person above the value threshold the Act sets (section 158); a loan to a director (section 164); a quasi-loan to a director, meaning an arrangement where the company meets a director’s expenses on terms that the director is to reimburse (section 165); a loan or quasi-loan to a person connected with a director, such as a spouse, child, or a company the director controls (section 166); and certain credit transactions entered into for a director’s benefit (section 167).

The Act carves out sensible exceptions. Transactions with other companies in the same group, or with a person who is both a director and a member acting purely in their capacity as a member, do not require the same approval, and a company in liquidation or under administration is exempted from some of these requirements given that an insolvency practitioner is already overseeing the company’s affairs by that point. Transactions on a recognised investment exchange are similarly excluded, since the market itself provides the pricing discipline the approval requirement is meant to substitute for.

What happens if the approval is missed

Where a substantial property transaction under section 158 proceeds without the required approval, the transaction is voidable at the company’s instance unless restitution is no longer possible, the company has been indemnified for any loss, or a bona fide third party’s rights would be affected by rescission. Separately, and regardless of whether the transaction itself is set aside, the director who entered into it, and any other director who authorised it, is liable to account to the company for any gain made and to indemnify the company for any resulting loss. The Act allows an affirming resolution to cure the defect within a reasonable period, but affirmation after the fact is a repair job, not a substitute for getting the approval right the first time; it depends on the very shareholders whose approval was skipped being willing, after the fact, to bless what already happened.

How this interacts with the general duty to declare an interest

Division 5’s approval requirements sit alongside, and are separate from, the director’s duty under sections 151 to 154 to declare any interest, direct or indirect, in a proposed or existing transaction with the company. A director can properly declare an interest and still need Division 5 approval if the transaction falls into one of the specific categories above; declaring the interest does not substitute for obtaining the members’ approval where the Act requires it. Conversely, a transaction too small to trigger Division 5’s thresholds may still need to be declared under section 151 if the director has any interest in it at all. Treating these as the same requirement, or assuming that disclosing a conflict in board minutes is enough where member approval was actually required, is a common and avoidable error.

Building a related-party approval process that actually works

In practice, a workable process starts with a standing register of who counts as a connected person for each director, spouses, children, and companies they control, so that the question of whether a proposed deal is caught does not have to be worked out from scratch each time. Before any transaction proceeds, the company should identify whether it falls within sections 157 to 167, obtain the member approval in advance rather than after signing, and keep a paper trail, board minutes, the resolution itself, and the valuation or terms disclosed to members, that would let the company demonstrate compliance if the transaction is ever challenged. For recurring categories, such as a family business that regularly transacts with companies its directors also control, it is often more efficient to seek a standing members’ resolution covering a defined category of transactions within agreed parameters, rather than seeking fresh approval every time a similar deal arises, provided the resolution is specific enough to satisfy the Act’s requirements.

How We Can Help

Clay & Associates Advocates advises boards and shareholders on structuring related party and connected person transactions correctly under Division 5 of the Companies Act, drafting the resolutions and disclosures needed to obtain valid approval, and advising on the consequences and remedies where a transaction proceeded without it. Contact our corporate and commercial practice to review a proposed transaction before it is signed, or to assess exposure on one that has already gone ahead without approval.

Sources: Companies Act, 2015, sections 151 to 154 and 157 to 167.

Frequently asked questions

Does declaring a conflict of interest at a board meeting satisfy the Companies Act’s approval requirements?
Not on its own. The duty to declare an interest under sections 151 to 154 is separate from the members’ approval Division 5 requires for specific transaction types such as substantial property transactions and loans to directors.

Can a related party transaction be approved after it has already been signed?
The Act allows a subsequent affirming resolution to cure a substantial property transaction entered into without prior approval, but this depends on the members being willing to ratify it after the fact and does not guarantee the transaction survives challenge.

What happens to a director personally if a required approval was skipped?
The director, and any other director who authorised the transaction, can be required to account to the company for any gain made and to indemnify the company for any loss, independently of whether the transaction itself is set aside.

Are transactions between group companies caught by Division 5?
Generally not. The Act exempts transactions with other companies in the same group from several of these approval requirements.