Company Law (notes)

Concept and nature of Company

What is the meaning of a Company?

The word company means an association formed by a number of persons for some common object. When
such an association of persons is registered under the companies act, it becomes an artificial person with
perpetual succession and common seal.

According to the Companies Act, 1994 ‘A company is defined as, ‘a company formed and registered
under this act or an existing company.’

Chief Justice Marshall of U.S.A. has defined the term company, as ‘a company is a person, artificial,
invisible, intangible and existing only in the contemplation of the law. Being a mere creature of law, it
posses only those properties which the charter of its creation confers upon it either expressly or as
incidental to its very existence.’

What are the characteristics of the company?

The following are the characteristics of the company:

Incorporated Association: Under the Companies Act 1994, a company must be registered or
incorporated. The minimum numbers of persons required for incorporation are seven in case of public co.
and two in case of private company.

Artificial person: It is an artificial legal person enjoying same rights and owing same obligation as a
nature person.

Separate Legal Entity: A company is separate and distinct from the persons who constitute it. The
principal of separate of legal entity was explained and emphasized in the famous case of Salomon v
Salomon & Co. Ltd.

The facts of the case are as follows: Mr. Saloman, the owner of a very prosperous shoe business, sold his
business for the sum of $ 39,000 to Saloman and Co. Ltd. which consisted of Saloman himself, his wife,
his daughter and his four sons. The purchase consideration was paid by the company by allotment of &
20,000 shares and $ 10,000 debentures and the balance in cash to Mr. Saloman. The debentures carried a
floating charge on the assets of the company. One share of $ 1 each was subscribed by the remaining six
members of his family. Saloman and his two sons became the directors of this company. Saloman was the
managing Director. After a short duration, the company went into liquidation. At that time the statement
of affairs’ was like this: Assets: $ 6000, liabilities; Saloman as debenture holder $ 10,000 and unsecured
creditors $ 7,000. Thus its assets were running short of its liabilities b $11,000. The unsecured creditors
claimed a priority over the debenture holder on the ground that company and Saloman were one and the
same person. But the House of Lords held that the existence of a company is quite independent and
distinct from its members and that the assets of the company must be utilized in payment of the
debentures first in priority to unsecured creditors.

Saloman’s case established beyond doubt that in law a registered company is an entity distinct from its
members, even if the person hold all the shares in the company. There is no difference in principle
between a company consisting of only two shareholders and a company consisting of two hundred
members. In each case the company is a separate legal entity.

Limited Liability: the liability of its members is limited to the unpaid value of the shares held by them or
guarantee given by them.

Separate Property: Company is entitled to own and hold property as distinct from its members.
Transferability of Shares: Shares of the company are freely transferable which makes the life of the
company independent of the lives of its members.

Perpetual Existence: A company being an artificial judicial person, it is not affected by the death,
insolvency or retirement of the members. Members may come and members may go out but the company
can go on forever.

Common seal: Common seal is the official signature of the company because a company cannot sign like
a natural person.

Company may sue and be sued in its own name: One of the consequences of separate legal entity is
that a company may sue and be sued in its own name.

Different types of Companies:

Classification on the basic of incorporation:

Chartered Companies: The companies which are incorporated by a charter and granted by the “Crown”
in exercise of royal prerogative, such companies or corporations are known as chartered companies; Eg.
East India Company. The powers and the nature of business of a chartered company are defined by the
charter which incorporates it.

Statutory Companies: The companies incorporated by means of Statute of special Act of the parliament
or any State Legislative Eg. Bangladesh Bank, Jiban Bima Corporation etc.

Registered Companies: The companies registered under the companies Act, 1994 or the earlier
Companies Act. Such companies come into existence when they are registered under the Companies Act
and a certificate of incorporation is granted to them by the Registrar.

Classification on the basic of number of members:

Public company: A public company is a company which is owned and traded publicly. The minimum
number of persons required to form a public company is seven.

Private company: A private company is a company which is owned and traded privately. The minimum
number of persons required to form a private company is two.

Classification on the basic of liability:

Companies limited by Share: The companies in which the liability of the members are limited by the
memorandum to the amount, if any, unpaid on the share respectively held by them. Suppose, ‘A’ takes a
share of taka 100, he remains liable to the extent of that amount. As soon as that amount in paid, he is no
more liable.

Companies limited by Guarantee: The companies in which the liability of the members are limited to
such amounts as they may respectively undertake by the memorandum to contribute to the assets of the
company in the event of being its wound up. In the case of such companies the liability of its members is
limited to the amount of guarantee undertaken by them. Clubs, trade associations, research associations
and societies for promoting various objects are various examples of guarantee companies.

Unlimited Companies: The companies in which the liability of the members is not limited at all. In case
of such a company every member is liable for the debts of the company as in an ordinary partnership in
proportion to his interest in the company.

Difference between a Public Company and a Private Company:

Minimum number of members: The minimum number of persons required to form a ‘ public company
is seven whereas in a private company it is only two.

Maximum number of members: There is no maximum limit on the members of a public company but a
private company cannot have more than 50 members excluding employees and ex-employees of the
company.

Number of its directors: A public company must have at least three directors whereas a private
company must have at least two directors.

Restrictions on the appointment of directors: A director of a public company shall file with the
Registrar consent to act as a director or sign the memorandum of association or enter into a contract for
their qualification shares. The directors of a private company need not do so.

Commencement of business: A public company can commence its business only after getting the
certificate of commencement of business. But a private company can commence its business as soon as it
is incorporated.

Transferability of shares: There is no restriction on the transfer of shares in the case of a public
company whereas the articles of a private company must restrict its right to transfer its shares.

Invitation to the public: A public company must issue a prospectus or statement in lieu of prospectus for
inviting public to subscribe to its shares or debentures. A private company on the other hand cannot issue
such invitation to the public.

Statutory meeting: A public company must hold a statutory meeting and file with the Registrar a
statutory report. But a private company has no such obligations.

How is a Public Company converted into a Private Company?

The Company Act does not allow a Public Company to turn itself into a private company, but it neither
prohibits such conversion. The conversion can take place in following ways:-
A Public company can be converted into a private company by altering the articles, incorporating the
three restrictions, mentioned in section 3(i)(iii). Approval of the central government is necessary for
converting a Public company into a private company. Special resolution is to be passed within 30 days,
after obtaining the approval of the Central Government for conversion. The word private Ltd. is used. The
conversion of a public company into a private company does not affect the identity of the company.
Difference between a Company and a Partnership

Definition: Any voluntary association of persons registered as a company and formed for the purpose of
any common object is called a company. But a partnership is the relation between two or more individuals
who have agreed to share the profits of a business carried on by all or any of them acting for all. The
partners are collectively called as a firm.

Law: A company is regulated and controlled by the Companies Act 1994. But a partnership firm is
regulated by the Partnership Act, 1932.

Registration: A company should be compulsorily registered under the Companies Act. Its formation is
very difficult. But registration of a partnership firm is not compulsory under the Partnership Act. The firm
is based on the partnership deed. Its formation is very easy.

Legal Position: A company is a body corporate and a legal person having a corporate personality distinct
from its members. The members are not liable for the acts of the company. But a partnership has no legal
existence distinct from its members. Partners are liable for the acts of the firm.

Life Time: A company is a mere abstraction of law. So its existence is not affected by the change of
membership or death or insolvency of its members. But a partnership is a mere aggregation of
individuals. So the life of a partnership ends on the death or insolvency or insanity of any one partner.

Transferability of Shares: Shares of a company are freely transferable unless restricted by the Articles.
But a partner cannot transfer his share without the consent of all other partners.

Liability: The maximum liability of the shareholders, in case of a limited company, is limited to the face
value of the shares purchased by them. In case of companies limited by guarantee, the liability of the
shareholders will be up to the amount guaranteed by them. But in case of a partnership the liability of the
partners is unlimited. The partners are jointly and severally liable for all the debts of the partnership firm.

Number of Members: A private company should have a minimum of 2 members and can have a
maximum of 50 members. A public company should have a minimum of 7 members and there is no
maximum limit. But a partnership should have a minimum of 2 and can have a maximum of 20 persons.

RELATIONSHIP OF PARTNERS WITH THIRD PARTIES (CONTRACTS OF PARTNERSHIP)

Partners’ Liability:

• Personal Liability if the partnership is contractually bound, each partner has joint and several unlimited
personal liability.
• Joint and Several Liability a creditor may sue the partners jointly as a group or separately as individuals.
Authority to Bind Partnership: a partner who has actual authority (express or implied) or apparent
authority may bind the partnership.
• Actual Express Authority: authority set forth in the partnership agreement, in additional agreements
among the partners, or in decisions made by a majority of the partners regarding the ordinary business of
the partnership.
• Actual Implied Authority: authority that is reasonably deduced from the nature of the partnership, the
terms of the partnership agreement, or the relations of the partners.
• Apparent Authority: an act of a partner for apparently carrying on in the ordinary course the partnership
business or business of the kind carried on by the partnership binds the partnership, so long as that third
person has no knowledge or notice of the lack of actual authority.
Partnership by Estoppel imposes partnership duties and liabilities on a non-partner who has either
represented himself or consented to be represented as a partner.

What is meant by Lifting of the Corporate Veil?

In the eyes of law, a company is a legal person with a separate entity distinct from its members of
shareholders. In essence it means that there is a veil or curtain separating the legal entity of the company
from its members or shareholders. When any fraudulent and dishonest use is made of the legal entity, the
individuals concerned will not be allowed to take shelter behind the corporate personality. The Courts will
break through the corporate shell and apply the principle of ‘lifting or piercing the corporate veil’. The
Court will make the members or the controlling persons liable for debts and obligations of the company.

What is meant by Lifting of the Corporate Veil?

As per the judicial point of view, a company is a separate legal entity different from its members (saloman
Vs. Saloman & co. Ltd.). When there are cases of dishonesty and fraudulence in incorporation, the law
lifts the veil. This veil is a fictional veil and not a wall between the company and its members. Lifting the
corporate veil may be defined as looking behind the company as a legal person and identifying the
persons who are behind the scene and are responsible for the preparation of fraud.

The circumstances under which the court may lift the corporate veil may be broadly divided into
following two heads:-
 Judicial Interpretation
 Statutory Provision

1. Judicial Interpretation: following are the cases under which the court has lifted the corporate veil:-
Avoidance of welfare legislation: Where the device of incorporation is used for reducing the amount to
be paid by way of bonus to the workmen, the Supreme Court can upheld the lifting of the veil to look at
the real transactions: [workmen of Associated Rubber Industry Vs. Associated Rubber Co.]

Protection of Revenue: Where the medium of the company has been used for tax evasion or to
circumvent tax obligation, courts have lifted the veil and looked at the realities of situation [In Sir
Dinashaw Mancekjee Petit]

Where company is a sham: When the court finds that company is a mere cloak or sham and is used for
some illegal or improper purpose, it may lift veil. The leading case on this was P.N.B. Finance V. Shital
Prasad, where a person borrowed money from a company and invested it into three different companies,
the lending company was advised to bring together the assets of all the three companies, as they were
created to do fraud with the lending company.

Where the company is acting as the agent of the shareholders: Where a company is devised to act as
an agent of its shareholders or of another company it will be responsible for its acts. However, it will be a
question of fact every case whether the company is acting as agent for its shareholders.

Determination of character: Test of control is adopted in the cases when the trade is conducted with
enemy country. In such cases the court will lift the veil at the times of war to see whether a company is
controlled by enemy aliens. Consequently a company registered in England may be alien enemy if its
agents or the persons in default controls of its affair are alien.
Provision of fraud or improper conduct: The court will disregard the separate existence of the company,
where it is shown the company is formed for evading contractual and statutory obligations [Gilford Motor
Co. Ltd. V. Horne]
2. Statutory Provision: cases are as follows:-

Number of member below statutory minimum [sec. 45]: When at any time the number of member of a
company is reduced below two in case of a private company or below seven in case of a public company
and then too it continues it s business for more than six months, the every member who knows the fact
will become liable to an unlimited extend for the payment of the whole debt of the company done during
that time. The reason behind this is to withdraw the advantage of incorporation when the conditions are
not fulfilled.
Company not mentioned on the bills of exchange [sec. 147]: When the bills of exchange, promissory
note, cheque or order for money or goods are signed by officer of the company or any other person on
behalf of the company, and the name of company is not fully or properly mentioned. Then the person who
signed the instrument will be personally liable. Unless the amount is paid by the company.

Failure to refund application money [sec. 69]: In case of issue of shares by a company to the public, if
the company is unable to receive minimum subscription within 120 days from the first issue of the
prospectus than all money received from application shall have to be returned. If the amount is not
refunded within 10 days, the directors shall be liable to repay the money with interest at the rate of 6% per
annum.

Fraudulent trading [sec. 542]; On the winding up procedure of the company, if it is found that any
business of the company has been carried on to defraud creditors, the court shall declare those persons
personally liable for the debts and other liabilities of the company.

Group accounts [sec. 212]: Where the company has subsidiaries and group accounts, than the principle
of separate legal entity may be disregarded. Along with the own profit and loss account and balance sheet,
subsidiaries and group accounts have also to be laid down. Thus, these are the circumstances were the veil
can be lifted.

Formation of a company

How to form a Company?

The process of formation of a company can be discussed and divided in following four stages:
1) Promotion,
2) Incorporation or Registration,
3) Capital Subscription,
4) Commencement of Business

1. Promotion: Before a company can be formed, there must be some persons who intend to form a
company and who take the necessary steps to carry that intention into operation. Such persons are called
promoters. The promoter is a person “who the promotion is the first stage in the formation of the
company. Promotion may be defined as “the discovery of business opportunities and the subsequent
organization of funds, property and managerial ability into a business concern for the purpose of making
profits there from.”

2. Incorporation of a Company: Any seven or more persons or where the company to be formed will be
a private company, any two or more persons, associated for any lawful purpose may, by subscribing their
name to a memorandum of associations and otherwise complying with the requirement of this Act in
respect of registration, form an incorporated company, with or without limited liability. The application
shall be accompanied by the following documents:
1. Memorandum of association
2. Articles of association
3. A statement of nominal capital
4. A notice of address of the registered office of the company.
5. A list of directors and their consent to a act signed by them
6. A declaration that all the requirements of the act have been complied with. Such declaration shall be
signed by an advocate of high court or supreme court or a chartered accountant who is engaged in the
formation of company.

3. Capital Subscription: After incorporation a company can raise capital by issuing shares. A private
company cannot issue shares to public. In case of public company a copy of prospectus is filed with the
registrar and it will be issued to the public. Those who are intended in purchasing share are required to
send their application money to company's banker. On the last date fixed for the receipt of application if
the company has received application equal to minimum subscription the directors will start with
allotment of shares.

4. Commencement of Business: A private company may commence its business immediately after
incorporation. But a public company cannot commence business immediately after incorporation but it
has to obtain a certificate of commencement from the registrar.

Who is a promoter in a company?

A promoter conceives an idea for setting-up a particular business at a given place and performs various
formalities required for starting a company. A promoter may be an individual, firm, association of persons
or a company. The persons who assist the promoter in completing various legal formalities are
professional people like Counsels, Solicitors, Accountants etc. are not promoters.

Functions of promoters:
 Conceive an idea of forming a company.
 Analyze profitability and feasibility of the idea.
 Investigate the workability of the idea by consulting experts.
 Decide the name and location of the company and also the amount and form of its share capital.
 Prepare the Memorandum of Association, Prospectus and other necessary documents and file
them for incorporation.

Legal Position of Promoter:

The company law has not given any legal status to promoters. A promoter is neither an agent nor a trustee
of the company because it is a non entity before incorporation. He stands in a fiduciary position. The
promoter moulds and creates the company and under his supervision it comes into existence. It is the
duty of the promoter to get maximum benefits for the company. He should not get secret profits from the
company. If he sells his property to company, then he should explain his interest in such property.

Liabilities of a Promoter: Following are the liabilities of a promoter:

(i) A promoter should not make secret profits out of the dealings of the company.
(ii) He must deposit with the company all money received on its behalf.
(iii) He must exercise due diligence and care while performing the work of a promoter.
(iv) He will be personally responsible for all the preliminary contracts till all these are approved by the
company.
(v) He will compensate any person who made investments in the company on the basis of untrue
statements made by the promoter.