Company

1. Define a company.

The term company is used to describe an association of a number of persons, formed for some

common purpose and registered according to the laws relating to companies. According to sec.2 (1-

c), Companies Act, 1994 Company means a company formed and registered under this Act or any existing company.

2. Describe the characteristics of a company.

a. Law created concern: A company comes into existence only after registration under the

Companies Act, 1994. It is an artificial person recognized by the law.

b. Separate legal entity: A company is considered a separate legal entity, conducting business in its

own name. Therefore, corporations may own property, enter into binding contracts, borrow money,

sue and be sued and pay taxes.

c. Unlimited life: As a company is owned by stockholders and managed by employees, the sale of

stock, death of a stockholder, or inability of an employee to function does not impact the continuous

life of the corporation.

d. Number of shareholders: The number of shareholders of a company is set by the Companies

Act, 1994.For private limited company, the minimum and maximum number of shareholders is 2 and

50. For public limited company, the minimum number of shareholders is 7 and the maximum

number of shareholders is limited by the number of shares it offers.

e. Voluntary association: A company is an association of many persons on a voluntary basis.

Therefore a company is formed by the choice and consent of the members.

f. Separate management: Although a company is owned by the shareholders but it is managed by

the Board of Directors, Managing Director or Manager and/or Management Agent. These persons

are selected in the manner provided by the Act and the Articles of Association of a company.

g. Limited liability: The liability of stockholders is usually limited to the amount each has invested

in the company. Personal assets of stockholders are not available to creditors or lenders seeking

payment of amounts owed by the corporation.

h. Statutory obligations: A company is required to comply with various statutory obligations

regarding management such as filing balance sheets, creating and maintaining accounts and registers,

calling statutory meetings etc.

i. Common seal and residence: Due to separate legal entity, a company must have a common seal

which usage is mandatory to any written document. A company also has a registered office for

taxation and other purposes.

j. Transferability of stocks and shares: Particularly in a public company, the stock or share can be

easily transferred in part or total at the discretion of the shareholder. The shareholder wishing to

transfer (sell) stock does not require the approval of the other stockholders to sell the stock or share.

Privately held companies have some restrictions on the transfer of stock and shares.

k. Ease of capital acquisition: A company can obtain capital by selling stock or bonds. This gives a

company a larger pool of resources because it is not limited to the resources of a small number of

individuals.

l. Share capital: A company must have a share capital, otherwise it cannot work. Any person having

a sound mind can purchase the share of the company and become its shareholder.

3. Discuss the various forms of company.

There are mainly four types of company. They are-

a. Chartered Company: Chartered Company mainly evolved in the 16th

century in the Europe;

created by a charter granted by King or Queen. It is regulated by a charter and the charter usually

conferred a trading monopoly upon the company in a specific geographic area. Company Act does

not act upon it. Example- East India Company.

b. Statutory Company: When a company is formed by passing a special act at the Legislature or at

the National Parliament of the country, it is called a statutory company. For example-Dhaka Electric

Supply Company (DESCO). These companies are formed mainly with an intention to provide public

services like gas, water, electricity or national security of the country.

c. Registered Company: Companies which are formed under the Companies Act, 1994 or were

registered under the previous Companies Act therein consolidated and recognized are called

registered companies. There are two types of registered companies-

1. Private Company: A Private Company is one which, by its articles-restricts the rights of the

members to transfer their shares, if any; limits the number of its members (not containing its

employees) to 50; prohibits invitation to the public to subscribe for any shares in or debentures of the

company.- Sec. 3(1-iii)

2. Public Company: "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-

Sec. 3(1-iv). Public Companies might be classified into three types-

Company limited by shares: A company limited by shares is called a Public Limited Company. Here the persons financial liability is limited to a fixed sum, most commonly the value of his share in the company. A shareholder in this case, is not personally liable for any

of the debts of the company, other than for the value of his share in that company.

Company limited by guarantee: A company limited by guarantee is called a Guarantee Company, with its capital limited by guarantee so that each member undertakes to be liable to

pay the debts of the company up to a certain amount in case of winding up. Clubs, Trade

Associations and Societies, promoting social objectives are examples of this type.

Unlimited Company: In a company where the liability of its shareholders is unlimited, as in partnership a firm is called an Unlimited Company. Such companies are permitted under the

Company Act but are not known.

d. Other forms of company: There are some other types of company. They are-

1. Holding Company: A Holding Company is a parent company that owns enough voting stock in

another company to control its board of directors and therefore controls its policies and management.

2. Subsidiary Company: A Subsidiary Company is a company that is partly or completely owned

by another company (holding company) that holds a controlling interest in the subsidiary company.

Sec. 4 explains holding company and subsidiary company.

3. Government company: A Government Company is one in which not less than 51% of the paid

up share capital is held by the Central Government and/or any State Government or Governments or

by any two or more than together. The Subsidiary of such a company is also a Government

Company.

4. Foreign Company: A foreign company is a term used for an existing company that is registered

to do business in a state or other jurisdiction other than where it was originally incorporated.

4. Discuss the formation of a company.

According to Company Act, 1994- to form a company whether it is Public or Private, a systematic

criteria must be followed:

1. Promotional Stage: In this stage, at least 2 promoters for Private Company and 7 promoters for

the Public Company need to complete these primary tasks:

a. Decision making: Firstly, promoters need to identify their business sector, study its feasibility, prepare an efficient project according to their sector and prepare financial plan for

the project. Secondly, they need to make decision about the amount of share capital, price of

each share, amount of minimum capital, directors, qualification shares of directors etc.

b. Name clearance: Promoters then set up an appropriate name for their company. No existing name can be used. They submit their desired name or names to the Office of the Registrar of

Joint Stock Companies and Firms with registration fee. Registrar then approves the name and

provides them name clearance certificate and asks them to provide more documents for the next process.

2. Document Preparation Stage: In this stage, the promoters submit the most two important

documents of the company. They are:

a. Memorandum of Association: Main document of the company. In this document- Company

name, address, objectives, consents, share capital, liabilities etc. are described in details.

b. Articles of Association: Rules and regulations for the internal management of the company

are described in details in this document. Promoters can use schedule-1 according to the Company Act, 1994 instead of Articles of Association. If they do so, no separate document

needs to be formed and submitted.

3. Certificate of Incorporation Collection Stage: In this stage, promoters fill up important forms

and submit them to the Registrar office with necessary documents and stamp duty and fee. Promoters

must submit-

a. 3 copies of the Memorandum of Association. b. 3 copies of the Articles of Association. A statutory declaration of statement if schedule-1

is used instead of Articles of Association

c. A list of persons who have consented to be directors of the company, their address and professions

d. A written consent duly signed to act as directors e. An undertaking in writing signed by each director to take and pay for their qualification

shares, if any.

f. A statutory declaration by an attorney or a chartered accountant or by a director or by any senior officer engaged in formation of company that all requirements of the Act and Rules

there under in respect of the registration have been compiled with.

The Registrar verifies all the submitted documents and when he is satisfied, he provides Certificate of Incorporation to the promoters. A Private Company can start its business after getting Certificate of Incorporation but a Public Company must collect Certificate of Commencement.

4. Commencement Stage: This step is only for the Public companies. Here the promoters start to

arrange the share capital. They usually do this-

a. By creating prospectus and share them to the public to sell shares of the company. b. By selling shares to the known people (friends or relatives) without sharing prospectus to the

public and thus collect share capital.

c. Collecting money from the qualification shares which the directors hold.

Then according to section 150(1), Company Act 1994, a director is required to submit the following

documents:

a. A statutory declaration that the minimum capital has been collected. b. A statutory declaration that the directors have bought their qualification shares. c. A copy of prospectus.

After successful submission, the promoters of Public Company get Certificate of Commencement and start their business.

5. Describe the distinction between Private and Public companies.

Subject Private Company Public Company

1. Minimum

capital

Must have a minimum paid up capital

of R.S. 100000

Must have a minimum paid up capital

of R.S. 500000

2. number of

members

Number of members cannot be less

than two and more than 50

Number of members cannot be less

than seven and no maximum has been

fixed

3.Transferability

of shares

Its articles must restrict its members

the right of transfer their shares.

There is no restriction for the transfer

of shares.

4.Invitation to

public

Cannot invite public to purchase its

shares or debentures.

Can invite public to purchase its

shares and debentures

5.Number of

directors

Must have at least 2 directors Must have at least 3 directors

6. Statutory

meeting

Need not to hold the statutory meeting

or file the statutory report

Need to hold the statutory meeting or

file with the Register a statutory report

7. Name Must use words Private Limited at the end of its name

Only need to mention Limited at the end of its name

8.Commencement Can commence its business as soon as

it is incorporated.

Cannot commence its business

immediately unless it has been

granted Certificate of Commencement of business.

9. Prospectus Does not need a Prospectus Must need a prospectus or a statement

in lieu of prospectus to sell its shares

to the public

10.Share

warrants

Cannot issue share warrants against its

fully paid shares

Can issue share warrants against its

fully paid shares

11. Consent of the

directors

There is no need to give the consent

by the directors of a Private Company.

The directors of the Public Company

must have file with Registrar consent

to act as the Director of the company.

12. Qualification

shares

The Directors need not sign an

undertaking to acquire qualification

shares

The Directors are required to sign an

undertaking to acquire qualification

shares

13. Quorum The quorum for a Private Company is

two members present personally.

For a Public Company, five members

must be present personally to

constitute quorum.

14. Managerial

remuneration

No restriction on managerial

remuneration.

Total managerial remuneration for A

Public Company cannot exceed 11%

of the net profits.

6. Discuss the Legal positions of Directors.

There are different views about the legal positions of the directors. But the directors might work in

these positions-

a. Director as Trustee: A director is not a trustee in the correct legal sense of term. A trustee is a

person who is the owner of the property and deals with it as principal. A director is not the owner of

the company and he does not enter into contracts with third parties as owner of the companys property. But the directors position is similar to that of a trustee because he is bound to exercise his power in the interest of the company and is liable for the misuse of his powers.

b. Director as Employee: Being a director does not make that person an employee of the company.

If the company enters into a service contract with the director, then the director becomes an

employee. For example, a director may be the legal advisor of a company. In this circumstance,

relevant aspects of employment law apply in addition to the law relating to directors.

c. Director as Agent: It is more accurate to describe directors as agents of the company. The

directors are agents of the company because the company acts through the directors. Contracts with

third parties are entered into by the directors, not as principals but as agents of the company. An

agent is bound to take instructions from his principal. But by the articles and under the Companies

Act, 1994, the directors have independent power in certain matter. Even the directors are not bound

to consult the shareholders in all matters.

d. Director as Officer: Directors are treated as officers of the company. An officer, who is in default may be punished if he is guilty of default, no compliance, failure or refusal of the rules regarding the Companies Act,1994.

7. Discuss the appointment methods of the Directors.

A Director of a company may be appointed by various ways. These ways are described in brief-

a. By promoters: According to sec-91(a), the subscriber of the memorandum shall be deemed to be

the directors of the company until the first directs are appointed in the Annual General

Meeting(AGM) of the company. They are primarily elected by the promoters of the company and

may work as directors until the AGM.

b. By shareholders: According to sec-91(b), the directors of the company are elected by the direct

votes of the shareholders of the company in the AGM. This the general rule for appointing directors.

c. By board of directors: According to sec-91(c), the Board of Directors can appoint directors of the

company under following conditions-

The Board of Directors can appoint directors for any temporary vacancy in the post of directors.

By the articles mentioned in the Memorandum of the company or by the decisions made in the AGM by the shareholders, the Board of Directors may appoint a person for the absence of

other director.

By the articles mentioned in the Memorandum of the company. The Board of Directors might appoint additional directors for the company if necessary.

d. by managing agent: Sec-125 of the Companies Act,1994 provides power to the managing agent

of the company to appoint directors. But it shall not exceed in number one-third of the total number

of directors.

e. by third parties: The article under certain circumstances may give power to the debenture holders

of the creditors or the investors of the company to appoint their nominee to the Board of Directors.

f. by government: By the articles mentioned in the Memorandum of the company or by the

application of the shareholders, the government may appoint directors of the company anytime.

8. Discuss the Dissolution process of the company.

Dissolution is the last stage of liquidation, the process by which a company or part-of-a company is

brought to an end, its legal entity is terminated, and the assets and property of the company

redistributed.

According the Sec. 234, Companies Act, 1994, there are three fundamental ways of dissolution of

the company. They are described in brief-

a. Compulsory winding up by the court: A company may be wound up by the Court by the

application of shareholders and/or creditors, investors and/or the Chief Registrar in following cases:

1. If company has by special resolution resolved that the company be wound up by the Court. 2. If Default is made in filing the statutory report or in holding the statutory meeting. 3. If the company does not commence its business or fails to commence its business or suspends

its business within a year from its incorporation.

4. If the minimum number of members is reduced. 5. If the company is unable to pay the debts. 6. If the Court is of opinion that it is just and equitable that the company should be wound up.

b. Voluntary Dissolution: If the shareholders or the directors of the company, voluntarily want an

end to company, it is called voluntary dissolution. It may occur in following two ways:

1. Voluntary Dissolution of members: A company which has the ability to pay its debts can come to an end after the official declaration of the Board of Directors if-

The companys business life is fixed in the Memorandum of the company and it expires.

There is article mentioned in the Memorandum of the company that the company will come to an end after fulfilling its objective and that objective is fulfilled.

There is article mentioned in the Memorandum of the company that the company will come to an end after experiencing a special event and that event is faced.

2. Voluntary Dissolution of creditors. A company unable to pay its debts can come to an end

after the official declaration of the Board of Directors under the supervision of creditors.

c. Under supervision of court: A company may come to an end under the supervision of Court in

following cases:

1. If Court comes to an opinion that the company is being terminated to defraud its shareholders.

2. If Court finds out defects in the dissolution process. 3. If Court finds out disorder and bias in assets and property redistribution process. 4. If the Court is of opinion that it is just and equitable that the company should be wound up

under the supervision of Court.

9. Discuss the power of the directors.

A company's directors act on behalf of the company. They only have powers to do what the company

itself is legally entitled to do. The powers that directors have are those which have been conferred

upon them by the company, usually via the company's Articles of Association. Normally, the powers

of the Directors are formally exercised by a resolution at a board meeting, usually decided by a

majority of votes.

Typical duties of boards of directors include:

1. Taking decisions of companys management 2. Share issues and allotment of shares 3. Calling for money from the shareholders 4. Debentures issue and taking decisions for borrowing money from external sources. 5. Forfeiture of shares 6. Maintenance of companys accounts 7. Appointment of managing agents or directors 8. Selecting, appointing, supporting and reviewing the performance of the chief executive 9. Calling for AGM and other meetings 10. Monitoring the financial reporting of the company 11. Approval of dividends for shareholders 12. Transferring retained earnings to reserve funds 13. Making contracts on behalf of the company 14. Making decisions about investment in other company or projects 15. Corporate governance 16. Setting the salaries and compensation of company management 17. Approving annual budget 18. Dissolution of the company

10. Discuss the disqualification of directors.

By virtue of Sec.-92: A person shall not be capable of being appointed as director of a company by

the articles unless he/she-

1. Signed and filed with the Registrar a consent in writing to act as such director; and

2. In the case of companies having a share capital -

a. Signed the memorandum for a number of shares not less than his qualification shares; or b. Taken from the company and paid or agreed to pay for his qualification shares; or c. Signed and filed with the registrar a contract in writing to take from the company and pay for

his qualification shares; or

d. Made and filed with the Registrar any affidavit to the effect that a number of shares not less than his qualification shares are registered in his name.

2. By virtue of Sec. 94- A person shall not be capable of being appointed director of a company, if

a. He has been found to be of unsound mind by a competent court and the finding is in force; or b. He is an undercharged insolvent; or c. He has applied to be adjudicated as an insolvent and his application is pending; or d. He has not paid any call in respect of shares of the company held by him, whether alone or

jointly with others, and six months have elapsed from the last day fixed for the payment of

the call; or

e. He is a minor.

11. Discuss the removal of Directors.

a. Removal by decision: according to Sec. 106(1), The company may be extraordinary resolution

remove any share-holder director before the expiration of his period of office and may by ordinary

resolution appoint another person in his stead and the person so appointed shall be subject to

retirement at the same time as if he had become a director on the day on which the director in whose

place he is appointed was last elected director.

b. removal by law: According to Sec. 108(1), The office of a director shall be vacant, if-

1. He fails to obtain within the time specified in section 97 (1) or at any time thereafter ceases to hold, the qualification shares, if any, necessary for his appointment; or

2. He is found to be of unsound mind by a competent court; or 3. He is adjudged an insolvent; or 4. He fails to pay calls made on him in respect of shares held by him within six months from the

date of such calls being made; or

5. He or any firm of which he is a partner or any private company of which he is a director, without the sanction of the company in general meeting accepts or holds any office of profit

under the company other than that of a managing director or manager or a legal or technical

adviser or a banker; or

6. He absents himself from three consecutive meeting of the directors or from all meetings of the directors for a continuous period of three months, whichever is the longer, without leave

of absent from the Board of Directors; or

7. He or any firm of which he is a partner or any private company of which he is a director accepts a loan or guarantee from the company in contravention of section 103; or

8. He acts in contravention of section 105.

12. What is Memorandum of Association? Discuss its contents.

The Memorandum of Association, often simply called the Memorandum is a document which contains the fundamental rules regarding the constitution and activities of a company.

The Memorandum defines the power or extent of the actions of the company. It lays down the object

of the company and the company cannot surpass the objects even if each associate concurs. Thus, a

company cannot lawfully do any take action which is not sanctioned by its memorandum of

association. It is the heart and soul of a company.

Clause/Contents: According to Sec. 6, Companies Act, 1994, the Memorandum contains the

following clauses:

1. Name clause: the name of the company, with "limited" as the last word in its name in case of Public Limited Company.

2. Address Clause: the address of the registered office of the company. The work area of the company is also described here.

3. Objective clause: the most important clause- the objects of the company, and, except in the case of trading companies, the territories to which they extend.

4. Liability clause: the liability of the members of the company- liability of the members is limited in case of Public Limited and liability is unlimited in case of Unlimited Company.

5. Capital Clause: the amount of share capital with which the company proposes to be registered; types of shares and total number of shares; price of each share in respect of its

type.

6. Consent Clause: The promoters of the company shall sign the following things in front of at least one witness-

a. that they shall form the company according to the articles of the Memorandum b. that they shall buy the number of shares written opposite to their names

13. What is Articles of Association? Discuss its contents.

The Articles of Association is a document which contains rules, regulations and bye-laws regarding

the internal management of the company.

Articles of association often identify the manner in which a company will issue stock shares, pay

dividends and audit financial records and power of voting rights. This set of rules can be considered

a user's manual for the company because they outline the methodology for accomplishing the day-to-

day tasks that must be completed.

The contents of the Articles of Association are:

1. rules regarding daily operations of the company 2. rules regarding directors-

Appointments, powers, responsibilities, removal, qualification, disqualification

3. rules regarding executives and employees- Appointments, wages, remuneration, removal

4. rules regarding shareholders-

Powers, rights and responsibilities, relations

5. rules regarding share capital- Total amount, classification, alteration

6. rules regarding shares- Total number, total amount, types, price, transferability, calling, forfeiture

7. rules regarding meeting- AGM, calling of meeting, voting methods, quorum

8. rules regarding book keeping, accounts and audits 9. rules regarding stakeholders-

Appointment process of managing agent, name and address of bankers, auditors, brokers etc.

10. rules regarding dividends and reserves 11. rules regarding borrowing and investment methods 12. rules regarding usage of Common Seal 13. rules regarding secrecy and indemnity 14. rules regarding winding up-

Methods, property and assets redistribution process