From the up-coming book “The Basics of Company Law” by FS Mahdi, University of Dhaka
According to Sec. 2 (1) (c) the Companies Act, 1994-“Company means a company formed and registered under this Act or an existing company”.
Thus, a company is an association of persons formed under the Companies Act, 1994 with a view to achieving some common objectives. Though a company is regarded a legal person, it possesses similar rights and owes similar obligations like a natural person.
Section 4 of the Partnership Act, 1932 defines the tern ‘partnership’ in the following words:
“Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”
In short, a partnership is the relation between two or more persons who carry on a business enterprise in which the profits and losses are shared proportionately.
The maximum number of members that can exist in partnership is 10 in case of a firm carrying on banking business and 20 in case of any other business. This restriction is placed by the Companies Act, 1994 (Sec. 4) and not the Partnership Act, 1932.
Joint Venture Company
It refers to an association of two or more individuals or companies engaged in a solitary business enterprise for profit without actual partnership or incorporation. It is a contractual business undertaking between two or more parties. It is similar to a partnership business, with one key difference: a partnership generally involves an ongoing, long-term business relationship, whereas a joint venture is based on a single business transaction. Individuals or companies choose to enter joint ventures in order to share strengths, minimize risks, and increase competitive advantages in the marketplace.
For example, a high-technology firm may contract with a manufacturer to bring its idea for a product to market; the former provides the know-how, the latter the means.
A co-operative society is a means for forming a legal entity to conduct business. It means a voluntary association of persons who conduct business together to promote their common economic interest. It works on the principle of self-help as well as mutual help.
The main objective is to provide support to the members. Nobody joins a cooperative society to earn profit. People come forward as a group, pool their individual resources, utilise them in the best possible manner, and derive some common benefit out of it.
Sole Trading Business & Sole Trader
A sole trading business means a business which is wholly owned and run by a single person who receives all profits and has unlimited liability for all losses and debts. The single person who owns and runs such a business is called a ‘sole proprietor’ or ‘sole trader’. It is to be noted that to set up a sole trading business, no legal filing requirements or fees and no professional advice is needed. One just literally goes into business on one’s own and the law will recognise it as having legal form.
It means the fact that the liabilities of the shareholders are limited to the extent of the value of shares held by them or the amount guaranteed by them. Thus, their personal or private property cannot be attached for debts of the company. This advantage attracts many people to invest their savings in the company.
It means the fact that the liability of the shareholders is unlimited and their personal or private property can be utilized to meet the debts of the company. However, in this case, the shareholders’ liability extends beyond the value of shares held by them.
A limited liability company refers to the company in which the members bear limited liabilities. Here members’ liability is confined to a limited amount and they are not personally liable for the payment of all liabilities of company.
For example, in the event of winding up of the company, if the assets of the company cannot meet its liabilities, then personal property of the members cannot be utilized to meet company’s liabilities.
An unlimited company is one in which the members’ liability is unlimited. Thus, in such companies, the members remain personally liable for the payment of all liabilities of company.
For example, in the event of winding up of the company, if the assets of the company become insufficient to pay its liabilities, the personal property of the members will be utilized to meet company’s liabilities.
Company limited by Shares
It refers to the company which has a share capital and in which the liability of each member is limited by the Memorandum to the extent of face value of share subscribed by him.
In other words, during the existence of the company or in the event of winding up, a member can be called upon to pay the amount remaining unpaid on the shares subscribed by him. Such a company is called company limited by shares. A company limited by shares may be a public company or a private company.
Company Limited by Guarantee
It means the company which may or may not have a share capital and the members thereof promise to pay the company’s debts up to a fixed sum in the event of liquidation of the company. Such a company may be a public company or a private company.
A Company of which not less than 51% of the paid up capital is held by the Central Government of by State Government or Government singly or jointly is known as a Government Company. It includes a company subsidiary to a government company. The share capital of a government company may be wholly or partly owned by the government, but it would not make it the agent of the Government.
It means any company incorporated outside Bangladesh but has an established place of business in Bangladesh.
Sec. 2 (1) (q) of the Companies Act, 1994 provides,
“Private company means a company which by its articles-
- Restricts the right to transfer its shares, if any,
- Prohibits any invitation to public to subscribe for its shares or debenture, if any,
- Limits the number of its members to fifty not including persons who are in its employment.”
Thus, in a private company, the members cannot transfer their shares and the number of members cannot exceed 50 (minimum 2).
Invitation to public to subscribe for its shares is not allowed.
Sec. 2 (1) (r) of the Companies Act, 1994 speaks,
“Public company means a company incorporated under this Act or under any law at any time in force before the commencement of this Act and which is not a private company.”
In short, a public company is one the AOA (articles of association) of which don’t provide any restrictions on-
- the transfer of shares,
- maximum number of members and
- the invitation to public seeking their subscription for its shares.
The minimum limit of its member is 7.
Holding & Subsidiary Company
When a company holds ‘majority of shares’ i.e. more than 50% of the equity shares of the another company, the former is called holding company or parent company and the latter is called subsidiary company.
EXAMPLE: B is a company incorporated under the Companies Act, 1994 having share capital of TK 6 lacs divided into 6000 shares of TK 100 each. Out of the total shares, 3100 shares are held by A, another company. In this case, A is a holding company and B is the subsidiary company. The concept is illustrated with chart-
Memorandum of Association (MOA)
The memorandum of association (MOA) is the first and most important document of a company which informs the general public of the company name, its share capital, the address of its registered office, the objects of the company etc.
Articles of Association (AOA)
The articles of association are the second most important document of a company which contains rules and regulations for internal management or affairs of the company.
Transactions performed by the company going beyond its powers granted by its memorandum are known as ultra-vires transactions.
Indoor Management Role
A person dealing with a corporation – assuming that he or she is acting in good faith and without knowledge of any irregularity – need not inquire about the formality of the internal proceedings of the corporation, but is entitled to assume that there has been compliance with the articles and bylaws. This principle, known as the ‘indoor management rule’, was authoritatively laid down in the 19th century case of Royal British Bank v Turquand (1856).
The rights which attach to the outsiders of the company i.e., the third persons who are not the members of the company are called ‘outsider rights’. Interestingly, a member will be considered an outsider, if he does not purely remain in a capacity of a member.
EXAMPLE: A member as a solicitor, promoter or a director is considered an outsider in the company laws as he possesses a capacity other than that of a member. Thus, such a member has no right to enforce the articles of association against the company as the articles of association do not create a contract between the outsiders and the company.
A prospectus means any invitation made to the general public inviting it to deposit money with the company or to take shares or debentures of the company. Such invitation may be in the form of a document or a notice, circular, advertisement etc. The sole requirement is that the invitation must be issued to the public.
According to Sec. 145 (6) (a) of the Companies Act of 1994,
“Promoter means a promoter who was a party to the preparation of the prospectus or of the portion thereof.”
In short, the term ‘promoters’ can be defined as those persons who think of forming a company, take necessary steps to accomplish that purpose and thus actually bring the company into existence.
The ‘pre-incorporation contracts’ are those contracts entered by the promoters on behalf of the company before its incorporation.
EXAMPLE: A contract for the purchase of assets for the proposed company is a pre-incorporation contract.
Separate Legal Entity
It means that a company is separate and distinct from its members. As a result, the members cannot be held liable for the acts or debts of the company. However, a company can sue or be sued in its own name and hold the property in its own name as well. This principle was successfully adopted in the famous case Salomon v. Salomon and Co. Ltd. (1897).
Lifting the Corporate Veil
By the decision of Salomon v. Salomon and Co. Ltd. (1897), we knew that there is a fictional veil between the company and its members and the company is a separate legal entity distinct from its members. Thus, lifting the corporate veil means disregarding or ignoring the separate legal entity of the company and examining the character of the persons who are in real control of the company.
In other words, where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality. In this regards the court will break through the corporate shell and apply the principle of what is known as “lifting or piercing through the corporate veil.”
Generally, a meeting is defined as a gathering of a number of persons for transacting any lawful business. A company meeting must be convened and held according to the provisions of the Companies Act, 1994 and rules framed thereunder.
The term ‘quorum’ means the minimum number of members that must be present at the meetings of the company. Sec 85 of the Companies Act, 1994 provides for the quorum of a meeting of the company and that is 5 members for public company and 2 members for private company.
Statutory meeting means the first meeting of the members of the company after its incorporation which is held within 6 months from the date at which the company is entitled to commence its business. According to Sec. 83 of the Companies Act, 1994, this type of meetings must be held within 6 months from the date of incorporation.
Annual General Meeting (AGM)
It is the regular meeting of the members of the company which must be held once in each year in addition to any other meetings. Sec. 81 of the Companies Act, 1994 deals with AGM.
Extra-ordinary General Meeting
The meeting which is called for dealing with some urgent special business is called the ‘extra-ordinary general meeting’. The statutory and annual general meetings cannot be regarded as the extra-ordinary general meetings. As per Sec. 84 of the Companies Act, 1994, the requisition of the holders of not less than 1/10th on the issued share capital of the company is a must for calling an ‘extra-ordinary general meeting’.
Generally, there two classes of shareholders, namely equity shareholders and preference shareholders. When any class of these two types of shareholders calls a general meeting, it is called a class meeting.
Meetings of Directors
Meetings of Directors mean the meetings of the Board of Directors which need to be held at least once in every three calendar months. However, there must be at least four meetings of the Board of Directors in every year. [Sec. 96 of the Companies Act, 1994]
The proposal which is voted at the meeting and accepted by the members is termed as resolution.
Ordinary resolution means the resolution which is passed by ‘simple majority’ of members (entitled to vote either in person or by proxy) is called the ordinary resolution. The term ‘simple majority’ denotes to the situation where the votes cast in favour of the resolution are more than the votes cast against the resolution.
EXAMPLE: At a general meeting of the company, 1000 members were present. Out of these 1000 members, 501 members casted their votes in favour of the resolution, and the remaining 499 members casted their votes against the resolution. In this case, the resolution is said to be passed by simple majority (501 members).
Special resolution means the resolution which is passed by ‘special majority’ of the members i.e., by the support of 3/4th majority of the members present and entitled to vote at a meeting. For the purpose of such a resolution, at least a twenty one day’s notice is required to be given to the members specifying the intention to propose the resolution as a special resolution. [Sec. 87 of the Companies Act, 1994]
EXAMPLE: At a general meeting of the company, 1000 members were present. Out of these 1000 members, 750 members casted their votes in favour of the resolution, and the remaining 250 members casted their votes against the resolution. In this case, the resolution is said to be passed by special majority (750 members which is 3/4th majority of 1000 members).
The term ‘minutes’ means the written record of the proceedings of every general meeting and of every meeting of its Board of Directors. Sec. 89 of the Companies Act, 1994 deals with minutes.
The term ‘share’ is defined in Sec. 2 (1) (v) of the Companies Act of 1994, which reads as below:
“Share means a share in the share capital of a company, and includes stock except where a distinction between stock and share is expressed or implied.”
Justice Farewell gave an exhaustive definition in the case Borland’s Trustees vs. Steel Bros. (1901):
“A share is the interest of a shareholder in the company, measured by a sum of money for the purpose of liability and dividends in the first place, and of interest in the second; and also consisting of a series of contracts as contained in the articles of association.”
In short, the capital of a company is usually divided into different units of a fixed amount and each unit is called a share. Thus, the persons who hold the shares of a company are called the shareholders of the company.
Stock means the aggregate of fully paid up shares legally consolidated. In other words, it is a set of shares put together in a bundle.
Share certificate is a document issued by the company to its every shareholder certifying that he is the holder of the specified number of shares in the company.
A share warrant is a document specifying certain shares, and stating that its bearer is entitled to the shares specified therein. It may be noted that a share warrant, as the substitute for a share certificate, is issued by the company under its common seal.
Equity or Ordinary Shares
The equity or ordinary shares are those which don’t enjoy any preferential rights. Thus, for the purpose of dividends (during the continuance of the company) and repayment of the capital (in the event of winding up) these shares rank after the preference shares.
The preference shares are those which enjoy some preferential rights over the equity or ordinary shares. Thus, for the purpose of dividends (during the continuance of the company) and repayment of the capital (in the event of winding up) these shares get preference over the equity shares.
Cumulative Preference Shares
The Cumulative Preference Shares are those which are assured of the dividends every year even if there are no profits in a particular year. If in a particular year, there are no profits to pay the dividends, the unpaid dividends of such preference shares is treated as arrear. Thus, the unpaid dividends accumulate and are paid if there are sufficient profits in the subsequent year.
Non-Cumulative Preference Shares
Non-cumulative preference shares are those which do not get any dividend if in the particular year there are no profits to pay their preferential dividends. Their dividends do not accumulate and are not carried forward to the subsequent year. Thus, the unpaid dividends cannot be claimed when there are sufficient profits in the subsequent year.
Participating Preference Shares
The participating preference shares are those which, in addition to their preferential dividends, are also entitled to participate in the ‘surplus profits’ or ‘surplus assets’.
Here the term ‘surplus profits’ means the balance of profits which is left after paying the fixed amount of dividends to the preference shareholders and some dividend to the equity shareholders. The term ‘surplus assets’ means the balance of assets which is left after paying back both the preference and equity shareholders.
Non-participating Preference Shares
The non-participating preference shares are those which are not entitled to participate in the ‘surplus profits’ or ‘surplus assets’. They are only entitled to a fixed rate of dividend. Usually, the preference shares are deemed to be ‘non-participating’.
The deferred shares are those which are issued to the promoters or the founders of the company in return of their contribution in forming the company. These shares are also called ‘promoters’ shares’. The deferred shareholders rank after the ordinary shareholders in terms of satisfying the claims.
A company usually raises an amount of money by issue of shares and the amount so raised is called share capital or capital.
Authorised capital means the maximum amount of share capital which is mentioned in the company’s memorandum of association (MOA) with which the company plans to be registered. By issuing the shares, a company is authorised to raise only the amount of share capital which is fixed in the memorandum. This type of share capital is also termed as ‘nominal’ or ‘registered’ capital.
Issued capital means the part of the authorised capital which is offered to the public for subscription. The company has no obligation to issue whole of its authorised capital. It may be noted that the company cannot issue the capital to the public exceeding the authorised capital.
Subscribed capital means the part of the issued capital which is subscribed by the public.
Called-up capital means the part of subscribed capital which is called (demanded) by the company to be paid. The rest part of subscribed capital which is not called by the company is called ‘uncalled capital’.
The total amount of money paid by the shareholders as the part of called-up capital is called the ‘paid-up capital’.
Reserve capital refers to the part of the uncalled capital which cannot be called by the company except in the event of its winding up. According to Sec. 74 of the Companies Act, 1994, the company may, be special resolution, declare that a portion or whole of the uncalled capital shall not be called except in the event of its winding up.
Sec. 2 (1) (e) of the Companies Act, 1994 says,
“Debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of company or not.”
According to Topham:
“Debenture the holder usually arising out of a loan and most commonly secured by charge.”
In short, debenture is a certificate of loan issued by the company which creates or acknowledges a debt due from the company.
A charge is said to be fixed when it attaches to any specific property. Thus, the company is not allowed to dispose of that specific property without the assent of the holders of the charge.
A charge is said to be floating when it is floating, i.e. which does not attach to any definite or specific property. Thus, the company can dispose of its property without the consent of the holders of the charge as if no charge were created on that property.
The profits of the company which are distributed among its members are called dividends. It is noteworthy that dividends must be paid only out of company’s profits. The payment of dividends cannot be made out of company’s capital.
Winding Up/ Liquidation of the Company
The term ‘winding up’ of a company is defined as the process or the proceedings by which a company is dissolved.
According to Prof. Gower,
“Winding up of a company is the process whereby its life is ended and its property is administered for the benefit of its creditors and members. And an administrator, called a liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights”.
In short, the winding up is the process of putting an end to the life of the company. During this process, the debts of the company are paid off out of the assets of the company and the surplus or remaining assets are distributed among the members in proportion to their rights in the company.
Winding Up by Court
Sec. 241 of the Companies Act, 1994 speaks about ‘winding up by court’. As per Sec. 241, a company may be wound up by the court;
- if the company has, by a special resolution, resolved that the company may be wound up by the court; or
- if default is made in filing the statutory report or in holding the statutory meeting; or
- if the company does not commence its business within a year from its incorporation or suspends its business for a whole year; or
- if the number of members is reduced, in case of a private company below 2, or, in case of a public company below 7; or
- if the company is unable to pay its debts; or
- if the court is of the opinion that it is just and equitable that the company should be wound up.
Voluntary Winding Up
Voluntary winding up means the winding up by the members or creditors themselves without any intervention of the court. Sec 286 of the Companies Act, 1994 deals with the cases in which the company may be voluntarily wound up.
Members’ Voluntary Winding Up
The term ‘members’ voluntary winding up’ refers to the winding up in which a ‘declaration of solvency’ is made and delivered to the Registrar (for registration) as per the provisions of the Companies Act. [Sec. 290 of the Companies Act, 1994]. The ‘declaration of solvency’ means the declaration in which the directors of the company states that the company has no debts, or that it will be in a position to pay its debts in full. [Sec 290 (1)]
Creditors’ Voluntary Winding Up
The term ‘creditors’ voluntary winding up’ refers to the winding up in which no ‘declaration of solvency’ is made and the company is in a position that it is unable to pay its debts in full. As in such a situation, the interest of the creditors is involved, they are given the powers to control and supervise the winding up of the company.
Winding Up Subject to the Supervision of the Court
Sec. 316 of the Companies Act, 1994 provides that when a company has, by special or extraordinary resolution, resolved to wind up voluntarily, the court may make an order that the voluntary winding up shall continue subject to supervision of the court, and on such terms and conditions as the court thinks just.
An official liquidator is an officer who helps the court in conducting the winding up proceedings. Generally, such an officer takes all the properties of the company into his custody and acts in the name of the company with the sanction of the court. [SS. 260 & 262 of the Companies Act, 1994]
The term ‘contributory’ means every person who is liable to contribute to the assets of the company in the event of its being winding up. [Sec. 237 of the Companies Act, 1994]
Thus, on the commencement of the winding up of a company, its shareholders are called contributories. Interestingly, the holders of fully paid up shares are also considered contributories though their liability is nix.
According to Sec. 2 (1) (l) of the Companies Act of 1994, a managing agent is a person, firm or company who or which is entitled to manage the whole affairs of a company by virtue of an agreement with the company, and under the control or direction of the directors so far as provided in the agreement.
According to Sec. 2 (1) (m) of the Companies Act of 1994, a managing director is the director who is entrusted with the ‘substantial powers of management’ which would not otherwise be exercisable by him.
The substantial powers of management means the powers to take decision concerning some policy matters e.g., pricing of products, buying and selling, appointment of employees etc.
Generally, there two classes of shareholders, namely equity shareholders and preference shareholders. The rights which attach to any of these classes of shareholders are known as the ‘class rights’.
A company is governed and managed by the will of the majority of its shareholders and the minority is not allowed to bring an action about a thing which has fairly been substantiated by the majority of shareholders. It is known as the ‘majority rule’ or the’ rule of supremacy of the majority’. The rule is well established in the famous case of Foss v. Harbottle (1843).
Secured creditor means the creditor who has a charge on the company’s assets for the repayment of his dues.
The term ‘reconstruction’ may be defined as the transfer of the business and the undertaking of one company to another new company formed for carrying on the same business.
The term ‘amalgamation’ may be defined as the combination of two or more existing companies to form a new company. In this process, one existing company is absorbed into and blended with another existing company and thus, the business of those companies is carried on by a new company (which is the result of the combination of the companies).
Misfeasance means willful misconduct or willful negligence which results in loss to the company.