1. Companies Act 1994 Lecture 8

2. Company means an association of a number of individual formed for some common purpose, which includes numerous members and a member may transfer his interest without the consent of others. When such association is incorporated according to law, it becomes a legal person, an entity distinct and separate from its members.

3. Distinction between a Company and a Partnership Firm 1.Legal Entity: A Company has a separate legal entity from its members but a firm is not distinct from the persons who compose it. 2.Property: In a company, the property of the company not to the individual composing it. In partnership, however the property of the firm is the property of the individuals partners. The partners are liable to the creditors jointly as well as severally.

4. 3. Liability to Creditors: In the case of a company, the creditors can proceed against the company alone and the members of the company are not liable to them. 4. Agency: A member of a company is never deemed to be an agent of the company, whilst a partner can dispose of the property and incur liability in the course of the firm’s business because each partner is the agent of every other partner.

5. 5. Availability of restrictions on powers against outsiders: The restrictions on power imposed on the company in the articles of association are effective against the public because they are a public document and one can dispose of the property and incur liability in the course of the firms business because each partner is the agent of every other partner.

6. 6. Contract with firm or company: A partner cannot contract with his firm, whereas a member of a company can. 7. Transfer of shares: A shareholder can transfer his shares without the consent of other shareholders because the company’s shares are freely transferable. A partner cannot transfer his shares and make the transferee a member of the firm without the consent of the other partner.

7. 8. Limit of Liabiliy: The liability of a shareholder of a company may be limited either by shares or by guarantee. A partners liability is always unlimited.

8. Types of Company under the Companies Act 1994 Unlimited Company: The liability of members is not limited at all. Companies limited by shares: The liability of the members is limited to the extent of their unpaid shares.

9. Subsidiary Company: Where the assets of a company consists wholly or partly shares in another company of whatever kind, and the amount of shares so held is at the time of making up the accounts of the holding company more than fifty percent of the voting power in that company, than that other company is a subsidiary company.

10. These four companies are further divided into two varieties; 1)Public Companies; and 2) Private Companies.

11. Categories of company Company law is mainly concerned with the company limited by shares (that is a company where the liability of the shareholders for the debts of the company is limited to the amount unpaid on their shares). There are also companies limited by guarantee. These companies were designed for charitable or public interest ventures where no profit is envisaged. As a result the people behind the venture guarantee to pay a certain amount towards the debts of the company should it fail. Companies limited by shares are also subdivided into public and private companies limited by shares.

12. Differences between public and private companies limited by shares In private companies investment comes either from the founding members in the form of personal savings or from a bank loan. As such, private companies are prohibited from raising capital from the general public. Public companies, on the other hand, are formed specifically to raise large amounts of money from the general public. Private companies can restrict their membership to those the directors approve of or insist that those who wish to leave the company first offer their shares to the other members. Public companies could also do this but, as their aim is to raise money from the general public, a restriction on the sale of shares would not encourage the general public to invest.

13. Public companies have a minimum capital requirement. That capital requirement does not have to be fully paid – it just needs one quarter of the £50,000 to be paid and an ability to call on the members for the remaining amount. Private companies have no real minimum capital requirements. For example a private company can have an authorised share capital of £1 subdivided into shares of 1p each. Because public companies raise capital from the general public there is a raft of extra regulations that affects their activities. This is Private companies can also adopt a more streamlined procedure for meetings by introducing written agreements instead of formal meetings. Part 13 CA 2006is designed to recognize that often in private companies the directors and the members of the company are one and the same and so requirements for meetings, timing of meetings and laying of accounts can be suspended to streamline the operation of the private company.

14. Limited Liability One of the most obvious differences between the company and other forms of business organization is that the members of both private and public companies have limited liability. This means that the members of the company are only liable for the amount unpaid on their shares and not for the debts of the company. We will explore how this operates in some detail in the next chapter. In order to warn those who might deal with a company that the members have limited liability the word ‘limited ’or ‘Ltd’ must appear after a private company’s name or ‘plc’ after a public company.

15. The Incorporation of the Company Five steps in the formation of the company; Memorandum of Association; Articles of Association; Pre-incorporation Contract, if any Registration of the company; and Issue of a prospectus or a statement in lieu of prospectus.

16. Registration of the Company Persons wishing to register the company must file with the Registrar, of the Joint Stock Companies, the following documents: The Memorandum of Association, The Articles of Association, A list of persons who have consented to become directors, A statutory declaration of a advocate A written consent of the directors to act.

17. Cancellation of Registration If all of the objects of the company are illegal they cannot be rendered legal by the issuance of the certificate. If the objects of the company are illegal, the illegality cannot be legalized by the certificate because the certificate is only conclusive proof of the fact that the objects are legal.

18. The Memorandum The memorandum is addressed to the general public and contains: the company name the company’s share capital the address of the company’s registered office the objects of the company (stating what the company is empowered by the state to do)a statement that the liability of its members is limited.

19. The objects of the company was once a very complex area of study for company lawyers because of the tendency of companies to change the nature of their business without changing – or because they were unable to change – their objects clause. Companies can choose to have a restrictive objects clause if they wish but in general the objects clause issue should recede further.

20. Share capital in public and private companies The share capital in the memorandum is known as the nominal or authorized share capital. It represents the amount of share capital that could be issued to investors. Once an amount has been issued to investors, that amount is called the issued share capital. The memorandum will also state the amounts that the authorized share capital is subdivided into. So, for example, Tk. 100 might be subdivided into shares of Tk.1 each. The value given to each share is known as its par or nominal value. Shares can be fully paid, partly paid or even unpaid. With partly and unpaid shares, the shareholder can be called upon to pay for them at a later date. Shares may be also be paid for in goods and services and not necessarily in cash.

21. The Articles of Association The articles of association are a set of rules for running the company. They set out the heart of any company’s organizational structure by allocating power between the board of directors (the main management organ) and the general meeting (the main shareholder organ). Those forming a company can provide their own articles. Therefore, while the board is the primary management organ, under the constitution it is subject to the continuing approval of the shareholders in general meeting.

22. Advantages subdivide their capital into small amounts, allowing them to draw in huge numbers of investors who also benefit from the sub-division by being able to sell on small parts of their investment. Limited liability also minimizes the risk for investors and is said to encourage investment. It is also said to allow managers to take greater risk in the knowledge that the shareholders will not lose everything. The constitution of the company provides a clear organizational structure which is essential in a business venture where you have large numbers of participants.

23. Disadvantage Forming a company and complying with company law is expensive and time- consuming. It also appears to be an inappropriately complex organisational form for small businesses, where the board of directors and the shareholders are often the same people.

24. A large company The general meeting meets once a year (this is the annual general meeting or AGM) primarily to elect the directors to the board. The directors will be a mix of professional managers (executive directors) and independent outsiders (non-executive directors). The executive directors will normally have a small shareholding but not usually a significant one. The shareholders are also provided with an annual report from the directors outlining the performance of the company over the past year and the prospects for the future (like a sort of report card on their performance). At the heart of the report are the accounts certified by the auditor (an independent accountant who checks over the accounts prepared by the directors).

25. In between AGMs the directors run the company without any involvement by the shareholders. In a large company the board of directors will be more like a policy body which sets the direction the company goes in, but the actual implementation of that direction will be carried out by the company’s employees. The directors in carrying out their function stand in a fiduciary† relationship with the company. They therefore owe a duty to act bona fides (in good faith) in the interests of the company (this generally means the shareholders’ interests) and not for any other purpose. The employees who are authorized to carry out the company’s business are the company’s agents and therefore the company will be bound by their actions.

26. A Small Company The same company law model applies to a small company but with significant differences in effect. The shareholders and directors will often be the same people. The same people will also be the only employees of the company. There is no separation of ownership from control, the shareholders are the managers and therefore most of the statutory assumptions about the company’s organisational structure will not hold.

27. T he doctrine of ultra vires Registered companies were also required to have specific purposes (objects) in their memorandum but were much more likely to change the nature of their business over time. This was both problem for companies who legitimately wished to change the nature of their business and for outsiders who were dealing with the company and were in danger of having unenforceable contracts because the company was acting outside its powers.

28. The objects clause Two key issues combined in this area to cause problems: This was modified somewhat in the twentieth century, but until 1989 the objects clause could only be changed in very limited circumstances. Second, the doctrine of constructive notice could combine with the ultra vires rule to leave outsiders with unenforceable contracts. The doctrine of constructive notice applies to public documents

29. Company’s memorandum and articles of association are public documents which are provided as part of the registration process and constructive notice deems anyone dealing with registered companies to have notice of the contents of its public documents. As a result an outsider dealing with a company is deemed to have knowledge of its objects clause and has therefore entered into the unenforceable contract with that knowledge.

30. Alteration of the objects A company can alter its objects provided that the alteration is required to enable the company. To carry on the business more economically or more effectively, or To attain its main purpose by new or improved means, or To enlarge or change the local area of its operation, or

31. to carry on some other business which may be conveniently combined with its own, or To restrict or abondon any of its objects, or To sell its undertaking; or To amalgamate with another company

32. Procedure The object clause may be altered as per the following procedure: A sufficient notice must be given to all persons whose interests are likely to be affected by the purposed alteration. The court must hear the objections, if any, of the creditors of the company and be satisfied that their consent is obtained.

33. The court would, then confirm the alteration if it deems fit. A certified copy of the order or the court confirming the alteration together with the printed copy of the memorandum should be filed with registrar within 3 months from the date of the order of the court. The registrar will then issue a certificate of registration, which will be a conclusive proof of alteration and its validity.