Key Concepts of Company Law
Company
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.
Partnership
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.
Sole Trading Business & Sole Trader
A sole trading business means a business which is wholly owned and run by a single personwho receives all profits and has unlimited liability for all losses and debts. The single personwho 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.
Limited Liability
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.
Unlimited Liability
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.
Limited Company
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.
Unlimited Company
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.
Government 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.
Foreign Company
It means any company incorporated outside Bangladesh but has an established place of business in Bangladesh.
Private Company
Sec. 2 (1) (q) of the Companies Act, 1994 provides,
“Private company means a company which by its articles
1. Restricts the right to transfer its shares, if any,
2. 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.
Public Company
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
1. the transfer of shares,
2. maximum number of members and
3. 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.
Ultra-Vires Transactions
Transactions performed by the company going beyond its powers granted by its memorandum are known as ultra-vires transactions.
Prospectus
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.
Promoters
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.
Pre-incorporation Contracts
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.”
Meeting
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.
Quorum
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
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..
Class 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]
Resolution
The proposal which is voted at the meeting and accepted by the members is termed as resolution. Ordinary 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
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).
Minutes
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.
Share
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
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
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.
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.
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.
Share Capital
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
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.
Paid-up Capital
The total amount of money paid by the shareholders as the part of called-up capital is called the ‘paid-up 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.
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.
Managing Director
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.
Secured Creditor
Secured creditor means the creditor who has a charge on the company’s assets for the repayment of his dues.
Directors Duties
The main duties of a director in general are-
1. Act within their powers
2. Promote the success of the company
3. Exercise independent judgement
4. Exercise reasonable care, skill and diligence
5. Avoid conflicts of interest
6. Not accept benefits from third parties
7. Declare interests in transactions or arrangements
