Operating on trust alone is not adequate for chama

Sheila

Dear Sheila, as your chama grows, you will need the right legal structure. Operating on trust alone is not adequate because there are other laws that could make your venture risky.

Operating the chama assets in the names of the founders is very risky in as much as you trust them. Firstly, the chama asserts will be construed under law as belonging to the two founders and not the chama. This means if any of the founders have personal liabilities and debts, the assets of the chama could be seized to settle external liabilities.

Secondly, when it comes to succession laws, if any of the founders die then the chama assets would be claimed by the deceased’s estate.

The chama has unique needs that call for proper structures. One is the need to have the chama as a separate entity from the members. 

Two, the chama needs a structure that is not affected by membership changes such as exits of members. In law, such a structure is defined as having perpetual succession. This means the entity remains in existence unless it is wound up under law.

Three the chama needs a structure that can own property in its own name and lastly, it needs to set up proper governance structures where the role of leaders is clearly defined. The rights of members should also be clearly defined and the accountability of leadership to members also clearly set out.

This is why I advise the chama to incorporate as a company under the Companies Act. A company offers several attractions as it is a separate entity from the members, the members' liability is limited, it has perpetual succession and can own property in its name.

A company protects the chama investments from external claims arising out of members' personal liability. A company will continue to own property in its name despite membership changes.

Other than just incorporating a company, I would advice your chama to set up a strong governance structure by having in place a shareholder’s agreement.

The Articles of Association, which is a document needed when incorporating the chama, should be specially drafted to cater for the needs of the chama. For example, if a member wishes to exit, then she should offer her share to the other members first and she will be paid back a pro-rated based on the value of the company against her shareholding.

Members also need to draft wills nominating successors who will take over the shareholding should the member die. This will protect the chama from succession court battles.

A mediation clause should be included in the shareholders' agreement to protect the chama from court litigation which is expensive and time-consuming. 

Ms Mputhia is the founder of C Mputhia Advocates | [email protected]