INDUSTRIAL LAW & ACCOUNTING (HUM-2231)

Chapter 3 - Company Act

 Company: The word ‘company’ comes from the Latin word ‘Com’ and ‘Panis’. ‘Com’ means ‘with
or together’ and ‘Panis’ means ‘Bread’, and it was originally referred to as an association of persons
who took their meals together. In popular parlance, a company denotes an association of like-minded
persons formed for the purpose of carrying on some business or undertaking. In the legal sense, a
company is an association of both natural and artificial persons and is incorporated under the existing
law of a country.

Definition: A company is an incorporated and voluntary association of individuals for the purpose of
carrying on some lawful activity in common. It is an artificial person created by law having a separate
entity with perpetual succession and a common seal. It has usually a capital divided into transferable
shares of a fixed denomination and the liability of members is generally limited.

 According to Lord Justice Lindley, A company is an association of many persons who contribute
money or monies worth to a common stock and are employed for some common purpose. The common
stock so contributed is denoted in money and is the capital of the company. The persons who contribute
to it or to whom it pertains are members. The proportion of capital to which each member is entitled
is his share. The shares are always transferable although the right to transfer is often more or less
restricted.
 According to Sec. 2 (1) (c) of the Companies Act, 1994- “Company means a company formed and
registered under this Act or an existing company”.

Thus, a company is an association of persons formed under the Companies Act, of 1994 with a view
to achieving some common objectives. Though a company is regarded as a legal person, it possesses
similar rights and owes similar obligations like a natural person.

A company, formed and registered under the Companies Act, is regarded by law as a single person,
having specified rights and obligations. The law confers on a company a distinct legal personality,
with perpetual succession and a common seal. Therefore a company is different from its members and
the individuals composing it. Suppose that, A, B, C, and 50 other persons form a company called XY
& Co. The Company, XY & Co. is a legal person quite separate from A, B, C and others.
Therefore, A, B, C, etc. can enter into contracts with XY & Co.

 Characteristics of Company: The principal characteristics of an incorporated company can be

summarized as follows:
1. Registration: A company comes into existence only after registration under the Companies Act. In
other words, a company cannot come into being unless it is incorporated and recognized by law. This
feature distinguishes a company from the partnership which is also a voluntary association of persons
but in whose case registration is optional.
2. Voluntary association: A company is a voluntary association of two or more persons. A single person
cannot constitute a company. At least two persons must join hands to form a private company. While
a minimum of seven persons are required to form a public company. The maximum membership of a
private company is restricted to fifty, whereas, no upper limit has been laid down for public companies.
3. Separate legal entity: The law recognizes the independent status of the company. A company has got
an identity of its own which is quite different from its members. This implies that a company cannot
be held liable for the actions of its members and vice versa.
4. Artificial personality: In the eyes of the law there are two types of person:
 Natural person and
 Artificial persons such as companies, firms, institutions, etc.

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Legally, a company has got a personality of its own. Like human beings, it can buy, own, or sell its
property. It can sue others for the enforcement of its rights and likewise be sued by others.
5. 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 a contract with the company and
can be an employee of the company.
6. Management: A company is managed by the Board of Directors, full-time Directors, Managing
Directors, or Managers. 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.
7. Share capital: A company must have capital, otherwise it cannot work. Share capital is the money a
company raises by issuing common or preferred stock. The amount of share capital or equity
financing a company has can change over time with additional public offerings.
8. Permanent existence: The Company has Perpetual Succession. The death or insolvency of a
shareholder does not affect its existence. A company comes to an end only when it is liquidated
according to provisions of the Companies Act.
9. Registered Office: A company must have a registered office.
10. Common seal: A common seal is an official seal used by a company. A company being an artificial
person cannot sign for itself. Therefore, the law provides for the use of a common seal as a substitute
for its signatures. The common seal with the name of the name of the company engraved on it serves
as a token of the company’s approval of documents. Any document bearing the common seal of the
company and duly witnessed (signed) by at least two directors is legally binding on the company.
11. Limited liability: The liabilities of shareholders of a 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.
12. Transferability of shares: The shareholder of a company can transfer its share and ordinarily the
transferee becomes a member of the company. The members of a public company are free to transfer
their shares to anyone else without any restriction. The private companies, however, do impose some
restrictions on the transfer of shares by their members.
13. Statutory obligations: Statutory obligations are those obligations that do not arise out of a contract,
but are imposed by law. A company is required to comply with various statutory obligations regarding
management, filing balance sheets" maintaining proper account books and registers, etc.
14. Social objective: The present view as regards the legal nature of Company Law is that the Company
is a social institution having duties and responsibilities toward the community, its workers, the national
economy, and progress.
15. Centrally administrated: The administration of Company Law is entrusted to the Central
Government.

 Classification of Company: The Classifications of the company are described below:

1. Chartered Company: Companies that are established by the Royal Charter or under a special order
granted by a king or queen are known as chartered companies. Such a company enjoys exclusive
powers and privileges. Such companies can be set up only in countries having a system of monarchy
or kingship. The East India Company, the Bank of England, the Chartered Bank of Australia, and the
Hudson Bay Company are examples of chartered companies.
2. Statutory Company: A statutory company is a company that is created by a Special Act of the
Parliament and it provides services of value to the public. A statutory company can be approved by
either the Central or State Legislature Statutory Company. A statutory company is usually created with
the intention of serving people rather than the traditional business goal of creating profits. Biman
Bangladesh Airlines, BRTA, BRTC, Bangladesh Bank, BCIC, and WASA are examples of statutory
companies.
3. Registered Company: A registered company is an organization that is formed and registered with the
appropriate statutory authority of the country as a ‘company or corporation’ in accordance with the

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company law of the country. In the case of liability, a registered company can be classified in two
ways which are:
a) Unlimited Company: An unlimited company is a company whose shareholders' liabilities are
unlimited and shareholders will lose all their money if the company goes bankrupt, and also risk losing
their own property in order to pay the company’s debt.
b) Limited Company: A limited company is a company in which shareholders' liabilities are limited by
the number of their shares. In a limited company, the liability of members of the company is limited
to what they have invested or guaranteed to the company. Limited companies may be two types which
are:
 Company limited by guarantee: In a company limited by guarantee, the liability of owners is limited
to such amount as the owners may undertake to contribute to the assets of the company, in the event
of being wound up.
 Company limited by share: In a company limited by shares, the liability of members is limited to
the unpaid value of shares. The company which is limited by shares can be classified into two types
which are:
i) Private limited company: According to Companies Act 1994, section 2(q), A Private Limited
Company is a Company that by its Articles of Association restricts the right of transfer of the share,
limits the number of members to fifty, and prohibits invitation to the public to subscribe to the
shares or debentures of the Company.
ii) Public limited company: According to the Company Act 1994, a Public Limited Company, is a
Company that can be formed by at least 7 (seven) persons as members and the membership is open
to the public. A Public Limited Company must register its name as a member of the stock exchange
otherwise it cannot issue shares. To start a business a company has to issue a certain amount of
share in public. In the case of ownership and control public limited companies are classified into
the following types:
 Government Company: A government company is a company in which the Government or State
Government holds 51% or more of the paid-up capital. Government companies are also called Public
enterprises or state enterprises. It works as other companies registered under the Companies Act.
 Non-Government Company: Non-Government Company is a company that is not owned by the
government of that country. The ownership of this company is owned by the shareholder of the
company.
 Holding company: A holding company is a parent company, limited liability company, or
limited partnership that holds ample voting shares (more than 50%) in another company. The
shareholding is arranged in a way that the holding company can control the policies of
its subsidiary company and oversee its management decisions. Although a holding company
controls the properties of other businesses, it merely retains management capacities and is thus not
directly involved in managing the day-to-day activities of a corporation. A holding company usually
does not produce goods or services itself. Its purpose is to own shares of other companies to form
a corporate group.
 Subsidiary company: A subsidiary company is a company that belongs to another company, which
is usually referred to as the parent company or the holding company. The parent holds a controlling
interest in the subsidiary company, meaning it has or controls more than half of its stock. In cases
where a subsidiary is 100% owned by another firm, the subsidiary is referred to as a wholly owned
subsidiary.

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 Difference between Private and Public Limited Company:

Subject Private Company Public Company

A Private Limited Company refers A Public Limited Company is a company
1. Meaning to a company that is not listed on a that is listed on a recognized stock exchange
stock exchange and the shares are and whose shares are traded openly by the
held privately by the members public.
concerned.
The number of members in a In a public company, the number of
2. Number of private company cannot be less members cannot be less than seven but no
members than two and cannot be more than maximum has been fixed. There may be any
fifty. number of members.
3. Restriction on A private company must add the A public company must add the words,
name words, "Private Limited" at the "Limited" at the end of its name.
end of its name.
4. Restrictions on In a private company, there must In a public company, there need not be any.
transfer of share be regulations restricting the
transfer of shares.
5. Restriction on A private company cannot invite A public company may do so.
invitations to the the public to purchase its shares or
public debentures.
6. Commencement A private company can commence A public company has to wait until it
of business business immediately on obtains a certificate for the Commencement
incorporation. of Business
7. Statutory A private company need not hold Statutory meeting is compulsory for a
meeting the Statutory Meeting or file the public company.
Statutory Report.
8. Number of A private company must have at A public company must have at least 3
directors least 2 directors. directors.
09. Prospectus Need not issue and file prospectus Must issue and file a prospectus or a
statement in lieu of a prospectus.
10. Allotment of No restrictions on the allotment of Cannot allot shares without raising
Share shares. No binding on further minimum subscription and without
issues of shares. complying with other legal formalities.

 Methods or Steps of a Company Formation: The formation of a company goes through a number
of steps, starting from idea generation to commencing of the business. Before forming a company
following steps must be taken:

1. Promotional stage: Promotion is the first step in the formation of a company. In this phase, the idea
of starting a business is converted into reality with the help of promoters of the business idea. In this
stage, the ideas are executed. The promotion stage consists of the following steps:
a) Identifying sector
b) Feasibility study
c) Approval of the project
d) Preparing a financial plan
e) Selecting a name
f) Collecting name clearance
2. Registration Stage: Registration stage is the second part of the formation process. In this stage, the
company gets registered, which brings the company into existence. In order to get a company
registered, some documents need to be provided to the Registrar of Companies. Two basic documents
of a company are described below:

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a) Memorandum of Association: A Memorandum of Association represents the charter of the company.

It is a legal document prepared during the formation and registration process of a company to define
its relationship with shareholders and it specifies the objectives for which the company has been
formed. The company can undertake only those activities that are mentioned in the Memorandum of
Association. As such, the Memorandum of Association lays down the boundary beyond which the
actions of the company cannot go. A Memorandum of Association helps the shareholders, creditors,
and any other person dealing with the company to know the basic rights and powers of the company.
Also, the contents of the Memorandum of Association help the prospective shareholders in taking the
right decision while thinking of investing in the company. Memorandum of Association must be
signed by at least 2 subscribers in case of a private limited company, and 7 members in case of a public
limited company.
b) Articles of Association: Articles of the association form a document that 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. Articles of association often identify the manner in which a company
will issue shares, pay dividends, audit financial records, and provide voting rights.
3. Certificate of incorporation collection stage: A certificate of incorporation is a legal
document/license relating to the formation of a company or corporation. It is a license to form a
corporation issued by the state government or, in some jurisdictions, by a non-governmental
entity/corporation. A certificate of incorporation is issued when the registrar is satisfied with the
documents provided. This certificate validates the establishment of the company in the records.
4. Certificate of commencement stage: A certificate of commencement of business is required for a
public company to start doing business, while a private company can start business once it has received
the certificate of incorporation. Public companies receiving the certificate of incorporation can issue
a prospectus in order to make the public subscribe to the share for raising capital. Once the minimum
number of required shares has been subscribed, a letter should be sent to the registrar along with a
bank document stating the receipt of the money. The registrar will issue a certificate upon finding the
provided documents satisfactory. This certificate is known as a certificate of commencement of
business. The company can start business activities from the date of issue of the certificate and the
business shall be done as per rules laid down in the MoA (Memorandum of Association).

 Share: A share represents a unit of equity ownership in a company. Shareholders are entitled to any
profits that the company may earn in the form of dividends. They are also the bearers of any losses
that the company may face. In simple words, if you are a shareholder of a company, you hold a
percentage of ownership of the issuing company in proportion to the shares you have bought.
Definition: Share may be defined as an interest in the company entitling the owner to receive a
proportionate part of the profits, and a proportionate part of the assets of the company upon liquidation.

 Classification of Shares: Any company can create different classes of shares by setting out those
classes and the rights attached to them in the company's articles. Different classes of shares often have
different voting, dividends, and/or capital rights. The following are descriptions of some typical
classes of shares:
1. Equity share/Ordinary share: Equity shares are also known as ordinary shares. The majority of
shares issued by the company are equity shares. This type of share is traded actively in the secondary
or stock market. These shareholders have voting rights in the company meetings. They are also entitled
to dividends declared by the board of directors. However, the dividend on these shares is not fixed and
it may vary from year to year depending on the company’s profit. Equity shareholders receive
dividends after preference shareholders. These shares also give the right to the distribution of the
company’s assets in the event of winding-up or sale. The rights attached to ordinary shares are
generally defined in the articles of association of the company and/or in the shareholders'.
2. Preference share: Preference shares are those shares which are given, by the articles of the company,
two privileges, (i) priority in the payment of dividends over other shares, and (ii) priority as regards

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return of the capital in the event of liquidation. Preference shares give their holder a preferential right
to a fixed amount of dividend, meaning that they will receive dividends ahead of ordinary
shareholders. Preferred shareholders also have a higher priority claim to the company’s assets in case
of insolvency. In the event of winding up, if surplus assets are available, the preference shareholders
must first be given back the amount that they paid on the share. The balance is available for distribution
to the other shareholders. The voting power of a preferred shareholder is limited. Preference share can
be classified as stated below:
a) Cumulative preference share: Cumulative shareholders have the right to receive arrears on dividends
before any dividend is paid to equity shareholders. In the case of cumulative preference shares, if the
profit made by the company in a particular year is not sufficient to pay dividends at the prescribed
rate, the shortage must be made up out of the profits of succeeding years. For example, if the dividends
on preference shares for the years 2017 and 2018 have not been paid due to market downturns,
preferential shareholders are entitled to receive dividends for all preceding years in addition to the
current one.
b) Non-cumulative preference share: Non-cumulative shareholders cannot claim any outstanding
dividend. These shareholders only earn a dividend when the company earns profits. No dividends are
paid for the prior years.
c) Participating preference share: Participating preferred stock gives the holder the right to a specific
dividend which is separate from the dividends common stockholders receive and is also received
before common stockholders. It is a clause that also gives preferred stockholders priority of
accumulated dividends over common stockholders in the event that the underlying asset is faced with
a liquidity event.
d) Non-participating preference share: Non-participating shares do not provide their holders with
a share of the earnings of the issuing entity. Instead, these shares typically provide a fixed rate of
return in the form of a dividend, and so are designated as preferred shares. The shareholder cannot
participate in the surplus profits or in the assets in liquidation.
e) Redeemable preference share: Redeemable shares are shares that can be bought back by the
company at some point in the future. Redeemable preference shares provide the company with the
option to buy back the share at a later date. After redemption, the share is canceled. The redemption
date can either be fixed in advance (3 years from the date the share is issued) or decided at the
company's discretion. The redemption price is usually the same as the issue price, but not necessarily.
f) Irredeemable preference share: Irredeemable preference shares are those preference shares that
would not be redeemed by a company. All irredeemable preference shares are ones that cannot be
purchased back. The holder cannot be redeemed unless the entity is liquidated.
g) Convertible preference share: Convertible preferred stocks are preferred shares that include an
option for the holder to convert the shares into a fixed number of common shares after a
predetermined date. Convertible shareholders can convert their preference shares into equity shares at
a specific period of time. However, the conversion of shares will need to be authorized by the Articles
of Association (AoA) of the company.
h) Non-convertible preference share: Non-convertible preference shares are those shares that cannot
be converted into equity rather they shall be redeemed at the expiry of their tenure.
3. Deferred/Promoters share: A deferred share is a share that does not have any rights to the assets of
a company undergoing bankruptcy until all common and preferred shareholders are paid. It may also
be a share issued to company founders that restricts their receipt of dividends until dividends have
been distributed to all other classes of shareholders. Deferred shares are a form of stock that is
sometimes issued to key people within the issuing company. Usually, executives or directors of the
company are eligible to receive these shares of stock.
4. Other shares: Except the above shares some other share can be implemented which are as follow:
a) Bonus share: Bonus shares are additional shares given to the current shareholders without any
additional cost, based upon the number of shares that a shareholder owns. These are the company's
accumulated earnings which are not given out in the form of dividends but are converted into free
shares.
b) Right share: The Right Shares refer to those issues of shares that a company offers to their existing
shareholders at a discounted price. The company’s shareholders have the right to accept or reject the
proposal and there are minimum criteria for subscriptions of the share if the shareholder accepts the
proposal. Such issuance of shares is called Right issues and such share is known as Right Shares.

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c) No-per-value share: No-par stock is stock issued with no par or face value. No-par value
stock doesn't have a redeemable price; rather prices are determined by the amount that investors are
willing to pay for the stocks on the open market. No-par value stock, sometimes called no-par stock,
is a class of stock that was never assigned a par value or stated value. The share does not have any
face value from the beginning but at the year after calculating total assets and total liabilities the face
value is settled.

 Winding Up/Liquidation of Company: The winding up 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.

According to Professor Gower winding up of a company represents the process whereby its life is
ended and its property administrated for the benefit of its creditors and members.

 Modes/Methods of Winding Up of Company: Under the Company Act 1994, there are three modes
of winding up a company in Bangladesh. The winding-up of a company may be either:
1. Compulsory winding up by the Court: Compulsory winding up takes place when a company is
directed to be wound up by an order of the Court. A Company may be wound up by the court under
the following circumstances:
a) Special resolution of the Company: If the Company has, by special resolution resolved that the
Company be wound up by Court.
b) Default: If default is made in delivering the statutory report to the Registrar or in holding the statutory
meeting. In this case, the Court may instead of ordering winding up, direct the holding of the meeting
and filling of the report and order the party responsible for the default to pay the cost of the proceedings
before the court.
c) 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. The Court will not
direct winding up under this clause if satisfactory reasons are given for the delay or suspension.
d) 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.
e) Inability to pay debts: If the Company is unable to pay its debts.
f) The just and equitable clause: If the Court is of the opinion that it is just and equitable the Company
should be wound up. The interpretation of the 'just and equitable' clause depends on the facts of each
case. The court may order the winding up of a company:
 when the object for which it was incorporated has substantially failed or it is impossible to carry on
the business of the company except at a loss, or the existing and probable assets are inadequate to meet
the liabilities,
 when the majority of the shareholders are using their powers unfairly or
 where there is a deadlock in the management of the company or
 where the public interest is likely to be prejudiced,
 when the company was formed to carry out fraudulent or illegal business,
 when the company is a mere bubble and does not carry on any business.
2. Voluntary winding up: Voluntary winding up means winding up by the members themselves without
the intervention of the court. A company can be wound up voluntarily under the following
circumstances:
a) Members’ voluntary winding up: By the declaration of directors although the company is solvent.
b) Creditors’ voluntary winding up: If the company is not in a position to pay its debts and the directors
make no declaration of solvency.
3. Winding up under the supervision of the court: Winding up with the intervention of the court is
ordered where the voluntary winding up has already commenced. As a matter of fact, it is the voluntary
winding up but under the supervision of the court. A court may approve a resolution passed by the
Company for voluntary winding up but the winding up should continue under the supervision of the
court. The court will issue such an order only under the following circumstances:
 If the resolution for winding up was obtained by fraud by the company; or
 If the rules pertaining to winding up are not being properly adhered to; or
 If the liquidator is found to be prejudicial or negligent in releasing the assets of the company.
SHOAIB ISLAM, LECTURER, DEPARTMENT OF HUMANITIES, RUET 7