Forms of Business

Company
The Companies Act 1994
 Companies
• Companies are creations of statute
• Are legal persons
• Company’s authority to act and liability for its
actions are separate and apart from its
owners, who are called shareholders
• Limited liability of shareholders
 Corporate personality
• With incorporations company become a legal
person distinct from its shareholders;
• Cases:
• Salomon v. Salomon & Co Ltd
• Lee and Lees Air Farming Co
• Macaura v. Northern Assurance Company
 Salomon v. Salomon & Co Ltd
• In this case, Mr. Salomon, a trader sold his
solvent business to a limited company with a
nominal capital of 40,000 shares of £1 each.
This company consisted only of Mr. Salomon,
his wife, a daughter and four sons, who
subscribed for one share each, all the terms of
sale was known to and approved by the
shareholders
• In part payment of the purchase-money, debentures
were issued to Mr. Salomon. Twenty thousand
shares were also issued to him and were wholly paid
for out of the purchase-money. Thus, Salomon
virtually retained the power of outvoting the
remaining shareholders. No shares other than these
20,007 were ever issued. All the requirements of the
relevant Companies Act were complied with.
Salomon was appointed as the managing director.
• When the business was facing hardship, the
company was wound up, and after satisfying
the due on the debentures, there was not
enough fund to pay the ordinary creditors.

• What could be the likely claim of the

unsecured creditors?
• It was held that the proceedings were not
contrary to the true intent and meaning of
the Companies Act. The company was duly
formed and registered and was not the mere
“alias” or agent of or trustee for Mr.
Salomon. Hence, it must be treated as a
distinct legal entity and that there was no
fraud upon creditors or shareholders.
• Lee and Lees Air Farming Co
• Macaura v. Northern Assurance Company
Corporate Personality, ethics & Lifting
the veil of incorporations
• Lipman v. Jones (sale of land case)
• Gilford Motor Company Ltd v Horne (solicitor
case)
• Holding and subsidiary company
Adams v Cape Industries Plc
 Lifting the veil of incorporation
• Holding and subsidiary company
- Where the company is a mere façade
- Where the subsidiary is an agent of the
company
Statutory Provisions
- Reduction in number of members
- fraudulently inducing persons to invest money
- Non publication/ unauthorized use of name
• In Union Carbide Corp. v Union of India , Union Carbide Corp,
the US parent company was held to be liable for gas leak
disaster in a plant operated by its Indian subsidiary, Union
Carbide India (UCI).
• The court reasoned that majority share ownership meant that
Union Carbide had controlled the composition of the board of
directors of UCI and also had complete control over its
management. The court noted that it was immaterial whether
Union Carbide actively managed the affairs of UCI or not as
majority stake would suffice for having control of a subsidiary.
• On the contrary, in Adams v. Cape Industries Plc,
the claimants with default judgments obtained in
Texas against a British company sought to enforce
those judgments against its ultimate holding
company in the UK. The Court of Appeal held that
although the parent company exercised supervision
and control over its subsidiary in South Africa, the
parent company was not present in that country, and
did not submit to that jurisdiction, by a subsidiary
which did business in its own right.
 Types of companies

• Company Limited by Shares

- Public Limited company
- Private Limited company
- One Person Company
• Company Limited by Guaranty
• Company with unlimited liability
 Foreign companies:

• Means companies that are incorporated

outside Bangladesh but has a place of
business in Bangladesh.
• The Companies Act, 1994 requires that foreign
companies which establish a place of business
within Bangladesh shall, within one month of
the establishment of the place of business
must deliver to the Registrar for registration
• (a) a certified copy of the charter or statute or
memorandum and articles of the company or
other similar instrument
• (b) the full address of the registered or
principal office of the company;
• (c) a list of the directors and secretary, if any,
of the company;
• (d) the name and address or the names and
addresses of one or more persons resident in
Bangladesh who are authorised to accept on
behalf of the company service of process and
any notice etc;
• (e) the full address of the office of the
company in Bangladesh.
Formation of company, promoters and
ethical issues
• Memorandum and articles of association
• Memorandum contains object clause of the
company. Any act done outside the scope of
the memorandum is considered ultra vires of
the company
• The object clause can be changed with
consent of the shareholders at a general
meeting
• Memorandum is a constructive notice to the
public of the business of the company based
on which public subscribe shares of the
company
• Therefore it is very important that
memorandum remains as it is
 Articles and ethics
• Articles of association contains internal
management rules of the company within which
company runs its business
• Articles of association provides the general guide
line of business management but how far those
rules have been complied with or not is a
question of fact and part of indoor management
of which creditors are not aware
• Therefore, indoor management rule protect the
third parties dealing with the company from
defective dealing by the board of directors.
 Promoters, pre – incorporation
contracts and ethics
• Promoters: persons who takes necessary steps to
form a company
• The subscriber to the Memorandum of the
company
• They are the first shareholders and directors of
the company
• Any unfair dealing of the promoters with the
company before incorporation make them liable
even after their retirement from the company
 Pre incorporation contracts
• Contracts entered into by the promoters
before incorporation of the company during
the formation period
• Presumption is that the company will ratify all
these pre incorporations contract on its
incorporation
 Pre incorporation contract and
personal benefit of the promoters
• Kelner v Baxter
The promoters of a hotel company entered into a
contract on its behalf for the purchase of wine.
When the company came into existence it
ratified the contract. The wine was consumed but
before payment was made the company went
into liquidation. The promoters, as agents, were
sued on the contract. They contented that
liability has passed to the company on
ratification. Court held ratification not enough.
New contract is necessary.
 Directors
• Every corporation is governed by a board of
directors (elected by the shareholders)
• Directors can be shareholders
• Number of directors is set forth in the
companies act and company’s bylaws
 British Murac Syndicate Limited v Alperton
Rubber Company Limited
• In British Murac Syndicate Limited v Alperton
Rubber Company Limited by an agreement
with the defendant company, it was settled
that so long as the plaintiff syndicate should
hold 5000 shares in the defendant company,
the plaintiff syndicate would have the right of
nominating two directors on the board of the
defendant company.
 British Murac Syndicate Limited v Alperton
Rubber Company Limited

• A clause to the same effect was contained in

the articles of association of the defendant
company. The plaintiff syndicate had the
required number of shares and nominated
two persons as directors.
 British Murac Syndicate Limited v Alperton
Rubber Company Limited
• The defendant company objected to these
persons being appointed as directors and
refused to accept the nomination, and a
meeting of the shareholders was called for the
purpose of passing a special resolution
cancelling the relevant provision in the articles
that gave effect to the contract with the
plaintiff company.
 British Murac Syndicate Limited v Alperton
Rubber Company Limited
• The court held that the defendant company
could not alter its articles of association for
the purpose of committing a breach of
contract and hence, decided that an
injunction ought to be granted to restrain the
holding of the meeting for that purpose.
• Alpha Ltd („the company‟) is a private tutorial college. Alec, Christine and Barry are the only directors
and shareholders of the company, each owning 100 shares. In addition, Alec has been appointed the
managing director. The Articles of Association of the company contain the following clauses:
• (a) In the event of a resolution being proposed at any general meeting of the company for the removal
from office of any director, any shares held by that director shall carry the right to three votes per
share.
• (b) Jake shall be the company secretary.
• (c) The managing director, Alec, shall have the power to veto any board decision relating to the
teaching of any new course at the college.
• In addition, there is a shareholders‟ agreement signed by the company and all of the shareholders that
the company will not increase its share capital unless all of the parties to the agreement give their
consent.
• At a recent board meeting, Alec tried to exercise his veto after the board decided that the college
should offer a new course but Christine and Barry ignored Alec‟s veto. They then called a general
meeting which passed a resolution ratifying the decision of the board. The company will need to raise
additional capital to run the course but Alec has stated that he will not consent to any increase in the
company‟s share capital. Christine and Barry are now considering calling another general meeting to
remove Alec as a director. Jake acted as the company secretary but has since been removed.
• Advise Alec and Jake whether they can rely on any of the above Articles of Association.
 Duties of Directors
• Directors are fiduciaries of the corporation.
They owe ethical and legal duties to the
corporation
• Directors are expected to act in good faith,
using prudent business judgment, and in the
best interest of the corporation
• Failure to exercise due care may subject
individual directors to personal liability for
negligence
 Majority rule and fraud on minority

• As a general rule, courts would not normally

interfere in the internal management of a
company when the decision has been taken
by a majority decision. In any case, the
majority of the members may even alter the
articles of association.
 Foss v Harbottle
• Two members of a company brought a suit on
behalf of themselves and all other members
except those who were defendants and directors
of the company for compelling them to
compensate for the losses suffered by the
company for the directors purchasing their own
land for company’s use at a price greater than its
normal market value. The court declined to allow
the plaintiff’s suit as it found nothing that
prevented such an action to be brought by the
company itself.
 Statutory Protection of the Minority:

• the rule of majority is not absolute. The examples

where an individual member may successfully sue in
her/his own name would include the followings:
• For preventing a company from acting illegally or
inconsistent with its memorandum of association;
• For preventing actions that demands special majority
when such majority approval has not been obtained;
• For preventing a company to act inconsistently with its
articles of association;
• For vindicating a statutory right such as the right to
seek any rectification in the share register under
Section 43 of the Companies Act, 1994.