Company Act

1. Definition:

The term company is used to describe an association of a number of persons, formed for
some common purpose and registered according to the law relating to companies.

Section 3 (1) (i) of the Companies Act, 1956 states that a company means, “A company
formed and registered under this Act or an existing company.”
2. Types of companies (Part: A):
a. One-man company or family company

Even when a single person holds most of the shares of a company, the company has a
legal personality separate and distinct from the owner of the majority of the shares. A
person can form a company by getting a few nominees or dummies, get registration and
commence business. Such a company can be called a one-man company or individual
ownership of a company.
b. Statutory company
A company or corporation, formed by an Act of the legislature, is called statutory
corporation. The constitution and functions of such companies are laid down by the Act
of parliament or any state legislature of India. Statutory companies are created and
organized for specific public undertakings. For Example, Reserve Bank of India, Life
Insurance corporation etc.
c. Chartered company
Formerly in Great Britain, companies were formed by Royal charter for specific purpose,
e.g. East India Company. A chartered company is regulated by the terms of its charter.
d. Registered company
A company must be registered under the companies Act. After registration, the registrar
of the companies issues a Certificate of Incorporation. After that the company becomes a
registered company.
e. Unregistered company
If an association or company is not registered it should be called unregistered company.
The companies act provides, under section 582, for the winding up of unregistered
company.
f. 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. The subsidiary of such a
company is also a government company.
g. Foreign companies
Companies falling under the following two classes are called foreign companies:-
i. Companies incorporated outside Bangladesh which after the commencement of the
Company Act, established a place of business within Bangladesh.
ii. Companies incorporated outside Bangladesh which have, before the commencement
of the company Act, established a place of business within Bangladesh and Continue to
have the same at the commencement of the act.

3. Essential features of a company

The principle characteristics of an incorporated company can be summarized as follows:
1. Registration
A company comes into existence only after registration under the companies act. But a
statutory corporation is formed and commences business as notified or stated in the act
and as passed in the legislature. In case of partnership, registration is not compulsory.
2. 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.
3. Legal personality
A company is regarded by law as single person. It has a legal personality. This rule
applies even in the case of one Man Company.
4. Contractual capacity
A shareholder of a company, in its individual capacity, cannot bind the company in any
way. The shareholder of a company can enter into contract with the company and can be
an employee of the company.
5. Management
A company is managed by the board of directors, whole time directors, managing
director or manager. These persons are selected in the manner provided by the act and
the articles of association of the company. A shareholder, as such, cannot participate in
the management.
6. Capital
A company must have a capital, otherwise it cannot work.
7. Permanent existence
The company has perpetual succession. The death or insolvency of shareholder does not
affect its existence. A company comes into end only when it is liquidated according to
provisions of the companies act.
8. Registered office
A company must have a registered office.
9. Common seal
A company must have a common seal.
10. Limited liability
The liabilities of the shareholder of the company are usually limited. The creditors of a
company are not creditors of individual shareholders and a decree obtained against a
company cannot be executed against any shareholders. It can only be executed against
the assets of the company.
11. Transferability
The shareholder of a company can transfer its share and ordinarily the transferee
becomes a member of the company.
12. Statutory obligations
A company is required to comply with various statutory obligations regarding
management, e.g., filing balance sheets, maintaining proper account books and registers
etc.
13. Not a citizen
A company is an artificial person, not a natural person. Therefore a company is not a
citizen.
14. Residence
A company has a residence for taxation and other purpose.
15. No fundamental rights
A company does not possess any fundamental rights. However, it can challenge a law as
void if the law happens to violate fundamental rights of citizens.
16. Social objective
The company is a social institution having duties and responsibilities toward the
community, its workers, and the national economy and progress.
17. Centrally administered
The administration of company law is entrusted to the central government.

4. Types of companies (Part: B)

There are two types of companies-Public and private.
1. Private company
A private company is one which, by its articles, (a) restricts the right of the members to
transfer their shares, if any; (b) limits the number of its members to 50 and (c) prohibits
any invitation to the public to subscribe for any shares in, or debentures of, the
company.
2. Public Company
All companies other than private companies are called public companies.
Public companies may be classified into three types: (i) Companies limited by shares (ii)
companies limited by guarantee and (iii) unlimited companies
i. Companies limited by shares
In these companies there is a share-capital and each share has a fixed nominal value
which the shareholder pays at a time or by installments. The member is not liable to pay
anything more than the fixed value of the share, whatever may be liabilities of the
company. Most of the companies in India belong to this class.
ii. Company limited by Guarantee
In these companies, each member promises to pay a fixed sum of money in the event of
liquidation of the company. This amount is called the Guarantee. Sometimes the
members are required to buy a share of fixed value and also give a guarantee for a
further sum in the event of liquidation. There is no liability to pay anything more than
the value of the share and the guarantee.
iii. Unlimited Company
In these companies the liability of the shareholder is unlimited, as in partnership firms.
Such companies are permitted under the companies Act but are not known.
4.1 Difference between a private company and a public company
The main points of difference between the two types of companies are enumerated
below:
1. Paid up capital
A private company must have a minimum paid up capital of Rs 1,00,000, where a public
limited company must have a minimum paid up capital Rs. 5,00,000 as per amendment
act.
2. Number of members
The number of members in a private company cannot be less than two and cannot be
more than fifty. In a public company, the number of members cannot be less than seven
but no maximum has been fixed. There may be any number members.
3. Restrictions on transfer of shares
In a private company there must be regulations restricting the transfer of shares. In a
public company there need not be any. By restricting transfer, a private company can
prevent the membership of persons or classes of persons who are considered to be
undesirable.
4. Restrictions on invitation on public
A private company cannot invite the public to purchase its shares or debentures. A
public company may do so.
5. Restriction on name
A private company must add the words, “Private Limited” at the end of its name.
6. Prospectus
A private company need not file a prospectus or statement in lieu of prospectus.
7. Issue of rights shares
When a public company proposes to increase its subscribed capital by the issue of new
shares, it must be offered first to the existing equity shareholders, unless the members
in a general meeting decide otherwise. This provision does not apply to private
companies.
8. Commencement of business
A private company can commence business immediately on incorporation, whereas a
public company has to wait until it obtains a certificate for the commencement of
business.
9. Statutory meeting and statutory report
A private company need not hold the statutory meeting or file the statutory report.
10. Managerial remuneration
In the case of public companies there are certain limits to managerial remuneration
such as, 11 percent of the net profit. This rule does not apply to a private company which
is not a subsidiary of a public company.
11. Number of directors
The Act provides that a private company must have at least 2 directors and public
company at least 3 directors.
12. Rules regarding directors
The rules regarding directors are less stringent in the case of private companies which
are not subsidiaries of public companies.
13. Company’s own share
In a private company any person can get financial assistance for purchasing the
company’s own share.
14. Procedure of meeting
The law relating to the procedure of meeting is relaxed in a private company.
5. Articles of Association:
The articles of association contain rules, regulations and bye-laws regarding the internal
management of companies.
Articles of association form a document a specifies the regulations for a company’s
operations and defines the company’s purpose. The document lays out how tasks are to
be accomplished within the organization, including the process for appointing directors
and the handling of financial records.
6. Memorandum of association
Memorandum of association is the most important document of a company. It
states the objects for which the company is formed. It contains the rights, privileges and
powers of the company. It is treated as the constitution of the company. It
determines the relationship between the company and the outsiders.
7. Formation of a company:
7.1 Essential steps of formation a company

Before a company can be formed the following steps must be taken:

1. The memorandum and articles must be prepared. These two documents must be filed
when application is made for the registration and incorporation of the company. The
companies Act lays down rules regarding the preparation of the memorandum. Schedule
I to the Act of 1956 contains four models for use in different cases.
2. If it is proposed to have a paid up capital or more than Rs 3 crores, sanction of the
central Government must be obtained under the capital issues Act 1956. Formerly,
sanction was required up to Rs 1 crore or more. The exemption limit was raised to Rs 3
crores by an order of the central government on 31st March 1978. The exemption is not
available to monopoly companies subject to the monopolies and restrictive trade
practice Act Of 1969 and companies with foreign shareholding of more than 40%.
3. If the company to be formed intends to participate in an industry which is included in
the schedule annexed to the industries Act 1951, a license must be obtained under that
act.
4. The company must be registered in accordance with the provisions of the companies
Act 1956 and certificate of incorporation must be obtained.

In the case of a public company, the following further steps are required to be taken
before it can commence business.

5. The prospectus or the statement in lieu of prospectus must be issued and registered
with the registrar.
6. The minimum subscription must be raised and thereafter the allotment of shares
must be made.
7. The certificate for the commencement of business must be obtained from the
registrar.
7.2 Procedure of registration and incorporation
For the registration of a company, the following documents, together with the necessary
fees, must be submitted to the registrar of companies of the state in which registered
office of the company will be situated.
1. The memorandum of Association, prepared in accordance with the provisions of the
companies Act, and signed by at least 7 persons in the case of public companies and 2
persons in the case private companies.

2. The articles of association, in case of unlimited companies, companies limited by

guarantee and private companies limited by shares.

3. A declaration by any of the following persons, stating that all the requirements of the
Act have been compiled with-an advocate, an attorney, a pleader, a chartered
accountant, or a person named in the articles as director, manager or secretary of the
company.

4. A duly signed list of persons have consented to be directors of the company, their
consent in writing and the signed agreement with every such director to take the
number of shares required to qualify as director. These are not required in the case of
private companies and companies not having a share capital.

5. The registration fees of a company is fixed on a graduated scale on the amount of

nominal capital or the number of members. There is also a filing fee per document.

If the registrar is satisfied that all the requirements of the Act have been compiled with,
he will register company and issue a certificate called the certificate of incorporation.
8. Company Management
8.1 Models of management of a company

The usual and normal practice is to entrust the management of a company to the board
of directors. The companies’ act of 1956 formerly recognized and provided for four
alternative forms of management:
1. By managing directors or whole-time directors
2. By managing agents
3. By sectaries and treasures and
4. By managers.

But no company can have at the same time more than one of the above categories of
managerial personnel.
The amended act of 1969 abolished 2nd and 3rd of the modes.

8.2 Manager

Manager is an individual who subject to the superintendence, control and direction of

the board of directors, has the management of the whole or substantially the whole
affairs of the company.

Provisions of the act regarding managers:

1. No company can employ a firm, a body corporate or an association as its manager.
2. No company can appoint or employ any person as its manager who-
a. is an undischarged insolvent
b. Suspends payment or makes a composition with its creditors
c. is or has any time within the preceding five years been convicted by a court
3. Ordinarily a person can be manager of one company only. He can be manager of two
or more companies under the same conditions under which a person may be managing
director of two or more companies.
4. Subject to the overall limits laid down for managerial remuneration, a manager may
be given remuneration either by way of monthly payments or by way of a specified
percentage of net profits. Except with the approval of the central government such
remuneration shall not exceed in the aggregate 5% of the net profits.
5. Any change in the regulation of the company or any agreement, by which the
remuneration of a manager is increased, requires the previous approval of the central
government.
6. A manager cannot be appointed for a term exceeding five a years at a time.
7. The above rules do not apply to a private company unless it is a subsidiary of a public
company.
9. Winding up of company
The winding up of or liquidation of a company means the termination of the legal
existence of a company by stopping its business, collecting its assets and distributing the
assets among creditors and shareholders, in the manner laid down in the act.
9.1 Modes of winding up

There are three methods of winding up of a company:

A. Compulsory winding up by the tribunal

B. Voluntary winding up by the members themselves or by the creditors
C. Voluntary winding up under the supervision of the tribunal
9.2 Compulsory winding up:

Compulsory winding up takes place when a company is directed to be wound up by an

order of tribunal.

Grounds of compulsory winding up:

A company may be wound up by the court under the following circumstances:

1. Special resolution of the company

If the company has, by special resolution resolved that the company be wound up by
tribunal.

2. Default

If default is made in developing the statutory report to the registrar or in holding the
statutory meeting.

3. Not commencing or suspending the company

If the company does not commence its business within a year from its incorporation, or
suspends its business for a whole year.

4. Reduction of members
If the number of members is reduced, in the case of a public company to below seven
and in the case of a private company to below two.

5. Inability to pay debts

If the company is unable to pay debts

9.3 Voluntary winding up

Voluntary winding up means winding up by the members themselves without the

intervention of the tribunal.

Section 484 of the Act provides that a company can be winding up voluntarily under the
following circumstances:

1. By an ordinary resolution of the members passed in a general meeting of the following

cases-
(a). where the duration of the company was fixed by the articles and the period has
expired; and
(b). where the articles provided for winding up on the occurrence of any event and the
specified event has occurred.

2. By a special resolution passed by the members in all other cases.

When a resolution is passed for voluntary winding up, it must be notified to the public
by an advertisement in the official gazette and in a local newspaper.
A voluntary winding up is deemed to commence at the time when the resolution for the
winding up is passed.

Types of Voluntary winding up:

1. If the company is, at the time of winding up, a solvent company; able to pay its debts
and directors make a declaration to that effect is called members voluntary winding up.
2. If the company is not in a position to pay its debts and the directors make no
declaration of solvency it is called a creditors winding up.

9.4 Voluntary winding up under the supervision of tribunal

Where a company is being wound up voluntarily or subject to the supervision of tribunal

a petition for its compulsory winding up may be presented by any person entitled to
apply for winding up or the official liquidator. Upon the making of such a petition, the
tribunal may pass an order for compulsory winding up, if it is of opinion that such a
course of action is necessary in the interest of the creditors or contributories.