The Companies Act, 1994 Mubashira Khan

Sources: Lecturer
ICAB Study Manual Department of AIS, FBS, BUP
ICMAB Study Manual

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Lesson Contents
• Background
• Introduction
• Characteristics of a Company
• Lifting the Corporate Veil
• Types of Companies
• Sole Proprietorship and Partnership Firm: Business Structures vs. Companies
• Conversion of Private Company into Public Company
• Conversion of Public Company into Private Company
• Company Registration Process in Bangladesh
• Post-registration Compliances for a Company
• Memorandum of Association
• Alteration of Memorandum
• Indication of Limited Company
• Clauses of the Memorandum of Association
• Certificate of Incorporation
• Doctrine of Ultra Vires
• Key Principles of the Doctrine
• Prospectus
• Statement in Lieu of Prospectus
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Background The Companies
Act, 1994 Click here to view the act

Sections: 404
Chapters: 11
• The Companies Act 1994 replaced the Indian Companies Act 1913.
• It was Enacted by the Parliament on 11 September 1994 and gazetted on 12
September 1994.
• Since its enactment, the law has been amended twice to address evolving
business and regulatory needs.
• The most recent amendments were introduced in 2020 through the
Companies Act (1st Amendment) 2020 on 25 February and the Companies
Act (2nd Amendment) 2020 on 26 November. 3
Introduction
The Companies Act 1994 provides a comprehensive legal framework for
company regulation in Bangladesh.

"Company means a company formed and registered under this Act or an

existing company." – Sec 2(1),

A company is a legal entity representing an association of people, whether

natural, legal, or a mixture of both, with a specific objective.

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Characteristics of a Company

• Incorporated Association • Limited Liability

• Artificial Legal Person • Transferable Shares
• Separate Legal Entity • Common Seal
• Perpetual Succession • Separate Property
• Capacity To Sue And Being Sued

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Macaura v. Northern Assurance Co. Ltd. (1925)

Macaura was the holder of nearly all the shares—except one—of a timber
company. He was also a substantial creditor of the company. He insured the
company's timber in his own name instead of the company's name. When the
timber was destroyed by fire, he filed a claim with the insurance company for
compensation.
1. Was the insurance company held liable to compensate Macaura for the loss?
2. Can a shareholder insure a company's property in their own name?

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Judgment:

1. Insuring in one's own name means taking out an insurance policy under a
personal name rather than the name of the actual owner of the insured
property. Since a company is a separate legal entity, its property belongs to
the company itself—not to its shareholders. This means that only the
company could legally insure its assets. Because Macaura had no insurable
interest in the timber, the insurance company was not liable to pay his claim.
2. No, a shareholder cannot insure the company's property in their own name,
even if they own all or most of the company's shares.
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Lifting the Corporate Veil

When a company is formed, it becomes a separate legal entity, distinct from its
owners/members. This separation creates a veil between the company and its
members, shielding them from personal liability. The privilege of corporate
personality must be used for legitimate purposes only.

If a company is used for fraudulent or dishonest activities, individuals cannot

hide behind the corporate veil. Courts can pierce the corporate veil to hold
individuals accountable in certain situations.

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Situations Where the Corporate Veil May Be Lifted

• When the company is used to commit fraud or illegal activities.

• When the company's activities violate public policy.
• When the company is created solely to evade taxes.
• When the company has enemy character, meaning it is controlled by
residents of an enemy country.
• When the company abuses its corporate identity for unjust or inequitable
purposes.

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Situations Where the Corporate Veil May Be Lifted

• When the company is formed to evade legal obligations.

• When the number of members falls below the legal requirement but the
company continues operations.
• When the company is formed to defraud creditors.
• When the company is merely a sham or a façade to disguise the true nature
of its operations.

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Gol Ford Motor Co. v. Home (1933)

Facts:
Home was appointed as the managing director of the plaintiff company under
the condition that "he shall not, at any time while holding the office of managing
director or afterwards, solicit or entice away the customers of the company." His
employment was governed by an agreement. Shortly after his appointment,
Home opened a business under the name of another company, which solicited
the plaintiff's customers.

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Judgment:
It was held that the company established by Home was merely a cloak or sham
created for the purpose of allowing him to breach his covenant against soliciting
the plaintiff's customers. The court ruled that it would refuse to uphold the
separate existence of a company if it was formed with fraudulent intent or to
avoid legal obligations.

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Types of Companies

Primarily, there are three types of companies: Private Company, Public Company,
and One Person Company.
1. Private Company
According to Section 2(q), a private company is defined as a company that:
• Restricts the right to transfer its shares.
• Prohibits any public invitation to subscribe to its shares or debentures.
• Limits the number of its members to fifty (excluding employees).
• If two or more persons jointly hold shares, they are counted as one member.

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• Private companies may be limited by shares or limited by guarantee.
• A private company cannot have unlimited liability.
2. Public Company
According to Section 2(r), a public company is:
• A company incorporated under this Act or any prior law.
• A company that is not classified as a private company.

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Types of Companies

i. Company Limited by Shares

• Has a share capital with a fixed nominal value per share.
• Shareholders are liable only up to the amount they invest.
ii. Company Limited by Guarantee
• Members agree to contribute a fixed sum in case of liquidation (called a
Guarantee).
• Sometimes, members must buy shares and also provide a guarantee amount.
• Liability is limited to the share value (if any) and the guaranteed amount.

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iii. Unlimited Company
• Shareholders have unlimited liability, similar to a partnership firm.
• Past members who left within the last year may still be liable for debts
incurred before leaving.
• Liability arises only when the company is wound up.
• May operate with or without share capital but must register Articles of
Association.

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3. One Person Company (OPC)
According to Section 2(1)(BB), an One Person Company (OPC) is a company that:
• Has only one shareholder, who must be a natural person.
• Operates as a separate legal entity, distinct from the owner.
• Provides limited liability protection to the single shareholder.

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Sole Proprietorship and Partnership Firm: Business Structures vs. Companies

1. Sole Proprietorship: A sole proprietorship is a business owned and managed

by a single individual. It is not a separate legal entity, meaning the owner
and the business are legally the same. The owner has unlimited liability,
meaning personal assets can be used to pay business debts.
2. Partnership Firm: A partnership firm is a business owned and managed by
two or more individuals who share profits and losses. It is governed by a
partnership agreement, and partners have unlimited liability, unless
registered as a Limited Liability Partnership (LLP).

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Kinds of Companies

1. Based on Number of Members:

Public Ltd. Private Ltd. OPC
• Private Company Minimum 7 2 1
Shareholders
• Public Company Minimum Directors 3 2 1
Maximum Members - 50 1
2. Based on Control:
• Holding Company – Controls one or more subsidiary companies.
• Subsidiary Company – Controlled by a holding company.
• Government-Owned Company – Majority shares owned by the
government.

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3. Based on Liability:
• Limited by Shares – Shareholders' liability is limited to their unpaid share
value.
• Limited by Guarantee – Members contribute a pre-agreed amount in
case of winding up.
• Unlimited Liability Company – No limit on shareholders' liability.

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4. Based on Manner of Access to Capital:
• Listed Company – Shares traded on a stock exchange.
• Unlisted Company – Shares not traded on a stock exchange.
5. Miscellaneous:
• Foreign Company – Incorporated outside the country but operates within.
• Special Purpose Vehicle (SPV) – Formed for a specific business purpose (e.g.,
asset securitization).

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Conversion of Private Company into Public Company

Requirements for Conversion (Section 231)

A private company with at least seven members can be converted into a public
company. The company must alter its Articles of Association (AoA) to remove
private company restrictions. From the date of alteration, the company ceases
to be a private company. Within 30 days, the company must file either:
i. A prospectus, or
ii. A statement in lieu of prospectus with the Registrar.

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Conversion of Public Company into Private Company (Section 232)

Conditions for Conversion

A public company with not more than 50 members can be converted into a
private company. The company must pass a special resolution to amend its
Articles of Association (AoA):
i. Remove public company provisions.
ii. Include private company provisions.

Consent from secured creditors is mandatory before passing the resolution. If

the company’s shares are listed on a Stock Exchange, they must be de-listed. 23
Company Registration Process in Bangladesh

Step 1: Obtaining a Name Clearance Letter

An application for name clearance must be submitted to RJSC along with the
following information:
a) Application Form
b) Proposed Name

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Step 2: Document Preparation
a) Drafting the Memorandum of Association and Articles of Association, along
with other required documents.
b) Passing a directors' resolution to establish a new company in Bangladesh.
c) Obtaining and completing the following forms for company registration with
RJSC:
i. Form I: Declaration for company registration
ii. Form VI: Notice of the registered office’s address
iii. Form IX: Consent of a director to act
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Form X: List of persons consenting to be directors
Form XII: Details of the directors, manager, and managing agents
Step 3: Bank Account Formalities
a) The directors must open a temporary bank account in the name of the
proposed company with a scheduled bank, with the condition that the
account will be regularized once the company is officially registered with the
Company House.
b) Depositing the capital contribution into the bank account.

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c) Obtaining an encashment certificate from the bank, confirming that the
required capital contribution has been deposited in the temporary bank account
of the proposed company.
Step 4: Submission of Documents To RJSC
Submitting the application to RJSC along with all executed documents listed
above.

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Certificate of Incorporation (Section 25)

A certificate issued by the Registrar after a company is successfully registered.

Conclusive Evidence of:
• Compliance with all legal requirements for registration.
• Authorization and proper registration under the Act.
The company's legal existence begins from the date of issuance.
Finality of Incorporation: Once issued, the certificate cannot be challenged,
even if there were irregularities before registration.

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Post-registration Compliances for a Company

a) Trade License: Companies must obtain a trade license from the relevant City
Corporation by submitting an application along with the necessary
documents and fees.
b) Tax Identification Number (TIN): A company must obtain an E-TIN from the
official website of the National Board of Revenue (NBR).
c) VAT Registration Certificate: The newly incorporated company must obtain a
VAT Registration Certificate.

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Memorandum of Association

Formation (Section 5)
• A legal document that outlines a company's constitution and its relationship
with shareholders.
• Public Company: Requires at least seven persons.
• Private Company: Requires at least two persons.
• Must be formed for any lawful business activity.

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Clauses of the Memorandum of Association (MOA)

The Memorandum of Association (MOA) contains fundamental clauses that

define the scope, structure, and legal identity of a company. These clauses act
as conditions of incorporation and determine the company's rights and
responsibilities.
1. Name Clause
2. Registered Office Clause
3. Object Clause
4. Liability Clause
5. Capital Clause 31
Alteration of Memorandum (Section 12)

A company may alter its memorandum by passing a special resolution to:

• Improve efficiency or reduce costs.
• Modify business operations.
• Expand or relocate.
• Merge or diversify.
• Restrict or remove certain objectives.
• Sell or dispose of assets.
• Amalgamate with another company.

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Approval Process:
• Court confirmation is required before alterations take effect.
• The Court must ensure creditors' interests are protected.
• Notice must be given to debenture holders and affected parties.
The Court verifies that:
• Proper notice has been issued to affected parties.
• Creditors' objections are resolved or compensated.
The Court may:
• Approve changes fully or partially.
• Impose conditions for approval.
• Decide on cost-related matters. 33
Indication of Limited Company (Section 11A)
• Public Limited Company (PLC): Must include "Public Limited Company" or
"PLC" at the end of its name. The designation must be written explicitly.
• Private Limited Company (Ltd.): Must add "Limited" or "LTD." at the end of
its name.
• One Person Company (OPC): Must include "One Person Company" or "OPC"
at the end of its name.

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Exceptions:
This requirement does not apply to:
• Societies with non-profit purposes (Section 28).
• Companies limited by guarantee (Section 29).

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Doctrine of Ultra Vires

"Ultra Vires" is a Latin term where “Ultra” means beyond and “Vires” means
power or authority. In corporate law, any act beyond the powers given in the
Memorandum of Association (MOA) is called Ultra Vires. A company can
engage in activities only if they are within its object clause in the MOA or
incidental to its main objectives.

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Key Principles of the Doctrine:

• Even if all shareholders agree, they cannot approve an ultra vires

transaction.
• If one party has fully performed a contract, the other party cannot use
ultra vires as a defense (Doctrine of Estoppel Limits Defense of Ultra
Vires).
• If both parties have completely performed their obligations, the
contract cannot be declared Ultra Vires.
• Any party in the contract can claim the act is Ultra Vires and refuse to
perform. 37
Key Principles of the Doctrine:

• If a contract is partially performed, but not enough to apply estoppel,

the performing party can sue for reimbursement.
• If a company’s employee or agent commits a default or wrongful act
within their job responsibilities, the company remains liable.

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Ultra-Vires Act vs. Illegal Act

Ultra-Vires Act Illegal Act

Acts beyond the object clause of the Any act that is prohibited by law or
Memorandum of Association (MOA). results in criminal or civil liabilities.
Not necessarily prohibited by law Violates statutory provisions or
but beyond the company's authority. legal restrictions.
Example: A manufacturing company Example: A company engaging in
investing in real estate (if not fraud, or money laundering.
mentioned in its MOA).

Ultra-vires acts may or may not be illegal, but illegal acts are always ultra-vires. Ultra-vires acts can be declared
void but do not necessarily lead to legal punishment, whereas illegal acts can result in fines or criminal charges.

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The case of Ashbury Railway Carriage & Iron Co. Ltd. v. Riche is a landmark
decision in company law, particularly concerning the ultra vires doctrine.
Overview
Ashbury Railway Carriage & Iron Co. Ltd. was formed under the Companies Act of
1862. The memorandum of association stated that the company's objectives were
to manufacture, sell, or engage in hire-purchase of railway carriages and wagons, as
well as all sorts of railway plants, fittings, machinery, and rolling stock. Additionally,
it authorized the company to engage in mechanical engineering, act as general
contractors, trade as merchants in timber, coal, and metals, and buy or sell such
materials on commission or as agents.
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Despite this, the company entered into a contract with Riche, a contractor, for
constructing and financing a railway in Belgium. Later, the company refused to
honor the contract, arguing that railway construction exceeded its statutory
authority since it was not one of the objectives listed in the memorandum. Riche
sued for breach of contract, claiming that the shareholders had ratified the
transaction, making it binding.
The key question before the House of Lords was: Is a contract enforceable by
law if it falls outside a company’s stated objectives?

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Prospectus

A formal invitation to the public to purchase shares or debentures of a

company. It includes notices, circulars, advertisements, or other documents
inviting public investments. It serves as an invitation to the public to subscribe
to shares or debentures.

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Statement in Lieu of Prospectus

It is required when a public company with share capital does not issue a
prospectus. Must be filed with the Registrar of Companies at least 3 days before
the first allotment of shares or debentures.

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The Articles of Association (AoA)

This is a legal document containing rules, regulations, and by-laws governing

the internal management of a company. It defines the rights, duties, and
powers of shareholders, directors, and company officers.
Articles must not violate:
• The Memorandum of Association
• The provisions of the Companies Act

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Contents of Articles of Association
1. Name and Registered Office of the Company 3. Alteration of Capital
2. Share Capital and Shares 4. Buyback of Shares
i. Classes of shares 5. Management of the Company
ii. Variation of rights • Board of directors
iii. Allotment of shares and share • Board meetings
certificates • Independent directors
iv. Transfer and transmission of shares • Additional directors
v. Call on shares • Other key officials
vi. Lien on shares
vii. Forfeiture of shares 45
6. General Meetings 10. Book of Accounts and Audits
• Procedure of general meetings 11. Secrecy and Confidentiality
• Voting rights 12. Indemnity
• Proxy
13. Winding Up
• Quorum
14. Dispute Resolution
• Adjournment of meetings
15. Amendment to AoA
7. Borrowing Powers
8. Profit and Dividends
9. Capitalisation of Profits

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Doctrine of Constructive Notice

The Doctrine of Constructive Notice assumes that outsiders (like a supplier,

contractor, or client) dealing with a company have knowledge of its
Memorandum of Association (MoA) and Articles of Association (AoA).
1. Public Documents
• MoA and AoA are public documents once registered.
• These documents are open for public inspection at the company registry.
2. Presumption of Knowledge
• Any person engaging with the company is presumed to have read and
understood these documents. 47
 • They are expected to know the company’s powers and restrictions on
directors.
3. Legal Consequence
• Outsiders cannot claim ignorance of the company’s rules and limitations.
• If a transaction violates the MoA or AoA, it may be deemed invalid or
unenforceable.

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Doctrine of Indoor Management

The Doctrine of Indoor Management protects outsiders (like a supplier,

contractor, or client) from being affected by the company’s internal
irregularities.
It is an exception to the Doctrine of Constructive Notice.
Protection for Outsiders
• Outsiders cannot be expected to know the company’s internal
procedures.
• If they enter into a contract in good faith, they should not suffer due to
internal mismanagement. 49
No Obligation to Investigate
• If a company’s documents allow a transaction, an outsider does not need
to check whether internal approvals were correctly followed.
• If the company fails to follow its own internal rules, it cannot blame the
outsider.
Legal Consequences
• Contracts with third parties remain valid even if the company’s internal
processes were defective.
• The company cannot escape liability by citing internal irregularities.

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Contrast with Constructive Notice
• Constructive Notice: Outsiders are expected to know the company’s
public documents.
• Indoor Management: Outsiders are not responsible for verifying internal
company actions.

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Kotla Venkataswamy vs. Chinta Rammurthy and Others case:
In the company’s Articles of Association, it clearly said that three people had to
sign any agreement to mortgage the company’s property: The Managing
Director, The Working Director, The Company Secretary. Without all three
signatures, the contract would not be valid. But in this case, the mortgage
document given to the plaintiff (the person who gave the loan, Kotla
Venkataswamy) was missing the Managing Director’s signature.
Later, when the company was being closed down (winding up), the plaintiff tried
to claim the mortgaged property. But the company argued that the document
was not valid. The plaintiff said he didn’t know that all three signatures were
needed. 52
What the Court Said:
• The mortgage deed is not valid because it did not follow the company’s own
rules.
• Anyone dealing with a company is expected to know and check its Articles of
Association and Memorandum of Association. So, the person cannot say “I
didn’t know.” That excuse is not acceptable.
This case supports the Doctrine of Constructive Notice, which means outsiders
are assumed to know the company’s rules.

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Royal British Bank v. Turquand (1856) 6 E&B 327
In this case, the Royal British Bank (the plaintiff) lent money to a company called
the Cameron’s Coal Company, where Mr. Turquand was the official liquidator
(defendant). According to the Articles of Association of the company, the
company had the power to borrow money only if a resolution was passed in a
General Meeting. However, in this case, the directors of the company borrowed
money without passing such a resolution.
When the company failed to repay the loan, the Royal British Bank sued to
recover the money. The shareholders of the company argued that the bank
should not get the money back because the internal requirement (the
resolution) had not been met. 54
Court’s Decision:
The court ruled in favor of the Royal British Bank. It held that outsiders dealing
with a company are entitled to assume that internal company procedures have
been properly followed, this is known as the Doctrine of Indoor Management.
So, even though the required resolution was not actually passed, the bank had
no way of knowing that, and it was reasonable for the bank to believe that the
directors had the authority to borrow the money.

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Exceptions to the Doctrine of Indoor Management

While the Doctrine protects outsiders dealing in good faith, it doesn’t apply in
the following situations:
1. Knowledge of Irregularity: If the outsider knows something is wrong with
how the company is acting, they can't claim protection. Example: If you
know directors don’t have permission but you go ahead anyway — you’re
responsible.
2. Forgery: If the documents or signatures are forged, the doctrine doesn’t
apply. There’s no consent at all, so the transaction is invalid from the start.

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3. Negligence: The doctrine doesn’t reward people who act carelessly. If an
officer does something that is not normally in their power, the outsider must
make proper enquiries and confirm their authority. You can’t turn a blind eye
and still expect legal protection.
4. No Knowledge of MoA & AoA: If the outsider did not read or rely on the
Memorandum or Articles, they can not use this doctrine.

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