Lecture 8 Law Company Act

The Company Act,1994
Background
The first sub-continental act, regarding
companies was the Joint Stock Companies act of

1850.
The act of 1850 was replaced by a new Act of
1857
Before liberation the Act of 1913 was popularly
used
After liberation, Govt. of Bangladesh reformed

the Company Act of 1913 which is now known as
The Company Act 1994.
Definition of Company
The term company is used to describe an
association of a number of persons, formed for

the common purpose and registered according to
the law relating to companies. Therefore, a
company is different from its members and the
individuals composing it.
Section 2(c)of the company Act , 1994 states
that a company means, A Company formed and
registered under this Act or any existing
company.
Definition of Company
Lord Justice Lindley defines a company as
follows: By a company is meant an

association of many persons who contribute
money or moneys worth to a common stock
and employ it for a common purpose.
Characteristics of a
Company
1. Registration: A company comes
into
existence only after registration under the
Company Act.
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.
Company
3. Legal Personality: A company is regarded
by law as a single person. It has a legal
personality. This rule applies even in the case
of One-man Company.
Salomon vs. Salomon

case
This is a milestone case in establishing
legal
personality of a company.
Aron Salomon was a successful leather
merchant who was specialized in manufacturing
leather boots. For many years he ran his
business as a sole proprietor. By 1892, his sons
had become interested in taking part in the
business. Salomon decided to incorporate his
business as a Limited company, Salomon & Co.
Ltd.
Salomon vs. Salomon

case
At the time the legal requirement for incorporation
was that at least seven persons subscribe as
members of a company i.e. as shareholders. Mr.
Salomon himself was managing director. Mr.
Salomon owned 20,001 of the company's 20,007
shares - the remaining six were shared individually
between the other six shareholders (wife, daughter
and four sons). Mr. Salomon sold his business to the
new corporation for almost 39,000, of which
10,000 was a debt to him. He was thus
simultaneously the company's principal shareholder
and its principal creditor.
Salomon vs. Salomon

case
He asked the company to issue a debenture of
10,000 to him. However, a sudden slow down
in business occurred and the company could no
longer pay interests to Salomon. Even the wife
puts money, but the company still could not
pay. Finally, Salomon transferred the debenture
to one B, but still the company could not pay. B
was here a secured creditor, in relation to the
company, as he holds a security over property
of the company in term of the debenture.
Salomon vs. Salomon

case
B called for a receiver and therefore, sold the
easiest part of the company, i.e., the factory
to cover his debts. That led to the end of the
business. This left the debts of the general
creditors, for instance, the general suppliers
to be covered. The company had to be hence
liquidated and the assets were to be sold to
pay
them.
Salomon vs. Salomon

case
When the winding up order was made,
the
official receiver became liquidator unless and
until an insolvency practitioner was appointed
in his place. As a liquidator of a company, the
official receiver's general functions were to
investigate any wrongdoing in the company, to
secure the assets, realize them and distribute
the proceeds to the company's creditors, and,
if there is a surplus, to the persons entitled to
it (normally the contributories).
Salomon vs. Salomon

case
When the company went into liquidation, the liquidator argued
that the debentures used by Mr. Salomon as security for the

debt were invalid, on the grounds of fraud; Solomon was not a
genuine
businessman.
High Court:
The Judge, Vaughan Williams J. accepted this argument, ruling
that since Mr. Salomon had created the company solely to
transfer his business to it, prima facie, the company and
Salomon were one unit; the company was in reality his agent
and he as principal was liable for debts to unsecured creditors.
Salomon vs. Salomon

case
The appeal:
The Court of Appeal also ruled against Mr. Solomon, on the
grounds that Mr. Salomon had abused the privileges of

incorporation and limited liability, which the Legislature
had intended only to confer on "independent bona fide
shareholders, who had a mind and will of their own and
were not mere puppets". The Lord justices of appeal
variously described the company as a myth and a fiction
and said that the incorporation of the business by Mr.
Salomon had been a mere scheme to enable him to carry
on as before but with limited liability.
Salomon vs. Salomon

case
The House of Lords unanimously overturned this
decision, rejecting the arguments from agency
and fraud.
Salomon followed the required procedures to set
the company; shares and debentures were issued.
The House of Lords held that the company has
been validly formed since the Act merely required
7 members holding at least one share each.
Salomon vs. Salomon

case
The Company is at law a separate person. The 1862
Act created limited liability companies as legal
persons separate and distinct from the shareholders.
They held that there was nothing in the Act about
whether the subscribers (i.e. the shareholders)
should be independent of the majority shareholder.
It was held that: "Either the limited company was a
legal entity or it was not. If it were, the business
belonged to it and not to Mr Salomon.
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.
Company
5. Management: A company is managed
by
the Board of Directors, whole time Directors,
Managing Directors or Manager. These
persons are selected in the manner provided
by the Act and the Articles of Association of
the company.
6. Capital: A company must have a capital,
otherwise it cannot work.
Company
7. Permanent Existence: The company
has
perpetual succession. The death or insolvency
of a shareholder does not affect its existence.
A company comes into end only when it is
liquidated according to provision of the
Companies Act.
8. Registered Office: A company must have a
registered office.
Company
9. Common Seal: A company must have a Common
Seal. The company being an artificial person cannot
sign its name on a contract. The common seal is
used as a substitute for its signature. The common
seal bears the name and place of the company, and
date of its incorporation engraved on it.
10. Limited Liability: The liabilities of shareholder 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 shareholder. It can only be
executed against the assets of the company.
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.
Company
13. Not a Citizen: A company is an
artificial
person, not a natural person. Therefore a company
is not a citizen, although it may have a Domicile.
14. Residence: A company has a residence (for
taxation and other purpose). A company does not

possess any fundamental rights.
15. Social Objective: The present view as regard
the legal nature of Company Law is that the

Company is a social institution having duties and
responsibilities towards the community, its
workers, the national economy and progress.
Types of Company
There are two types of company

1. Private Limited Company
2. Public Limited Company
Private Limited Company

According to Section 2 (q)"private company"
means a company which by its articles-(i) restricts the right to transfer its shares, if any;
(ii) prohibits any invitation to the public to
subscribe for its shares or debenture, if any;
(iii) limits the number of its members to fifty not
including persons who are in its employment;
Provided that where two or more persons hold
one or more shares in a company jointly, they
shall, for the purposes of this definition be
treated as a single member;
Public Limited Company

According to Section 2(r) "public company"
means a company incorporated under this Act

or under any law at any time in force before
the commencement of this Act and which is
not a private company;

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Lecture 8 Law Company Act

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The Company Act,1994

companies was the Joint Stock Companies act of

After liberation, Govt. of Bangladesh reformed

association of a number of persons, formed for

follows: By a company is meant an

2. Voluntary Association: A company is an

association of many persons on a voluntary

Salomon vs. Salomon

Salomon vs. Salomon

Salomon vs. Salomon

Salomon vs. Salomon

Salomon vs. Salomon

Salomon vs. Salomon

When the company went into liquidation, the liquidator argued

that the debentures used by Mr. Salomon as security for the

Salomon vs. Salomon

The Court of Appeal also ruled against Mr. Solomon, on the

grounds that Mr. Salomon had abused the privileges of

Salomon vs. Salomon

Salomon vs. Salomon

8. Registered Office: A company must have a

10. Limited Liability: The liabilities of shareholder of

a company are usually limited. The creditors of a

12. Statutory Obligations: A company is

required to comply with various statutory

14. Residence: A company has a residence (for

taxation and other purpose). A company does not

15. Social Objective: The present view as regard

the legal nature of Company Law is that the

There are two types of company

Private Limited Company

Public Limited Company

means a company incorporated under this Act

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