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Company Act, 1994


Company Act, 1994 On a broader context, the evolutionary development of the concept and practice of regulatory framework of companies is associated with the United Kingdom or Great Britain as it once was During the period from eleventh to thirteenth century, trading organisations under the name and style Merchant Guild consisting of traders as members, sprang up in England. These Guilds were in the nature of association of merchants. In order to carry on monopoly business in specified areas, these associations used to obtain the right of monopoly trade through special royal charters granted by the King or the Queen. They were, however, bound to abide by the terms and conditions of the royal charter. Viewed in this perspective, Merchant Guilds were an extended connotation of the term company as it is understood today. These companies were basically trading companies.

The seventeenth century witnessed the development of such companies which carried out trading overseas. Important among these were (i) The East India Company, (ii) The Levant Company and (iii) The Russian Company. All such companies were incorporated under the Royal Charter granted by the then Queen of England. Some of these companies such as The East India Company acquired authority under the charter to rule in part or whole of their area (geographical) of business. In that sense, the East India Company over time became a political authority and exercised the monopoly of powers of the state.

A parallel development of the time witnessed the growth of the concept and practice of joint capital in business. This was done by individual merchants jointly. It was thus the concept and practice of joint stock companies was born, and the words 'joint stock' became an integral part of the later day joint stock companies categorised into public and private limited companies.

The period after the seventeenth century was marked by the development of regulatory control by the British Parliament over trading companies. This development was the direct result of numerous growth of companies outside the ambit of parliamentary control. The rather time-consuming and expensive process of obtaining royal charter and parliamentary approval explain the rapid rise of unregulated companies.

In order to cheek this undesirable trend, the British Parliament enacted The Bubble Act in 1720. However, due largely to the deficiencies of the Act, it failed to achieve the purpose for which it was created. Consequently, to overcome the difficulties faced, the earlier act was repealed. Instead, authority was vested in the Queen or King to grant charter with the proviso that each member of the company would be liable for the respective sums contributed as joint capital for trading. It was from such step that the concept of limited company took roots in trading. The Act of 1834 further provided for registration of joint stock companies.

Further refinement of the law relating to the trading companies occurred when in 1844, Gladstone as president of Board of Trade took initiative to enact The Joint Stock Companies Act, 1844. This act is considered to have laid the foundation for modern company law. Such law was later, in 1850, enacted in undivided India, then under colonial rule. In 1857, the concept and practice of 'limited liability' of members was first introduced in India. Thereafter, the British model of company law went through successive developments in 1862, 1866 and 1882. From 1882 to 1913, the law went through further amendments resulting in the enactment of the Company Law, 1913.

The law continued to operate in post 1971 era. In 1977, a Law Reform Committee was constituted by the government to update the existing law. In 1994, a new Company Law, more or less based on the recommendations of the Committee, was framed under the name and style 'The Company Law, 1994'. It repealed the earlier law of 1913. The preamble to this law, mentions that it is desirable and expedient to consolidate different laws and further amend the existing law. The new act consists of eleven parts and 12 schedules.

Under the law, a company is defined as a company constituted and registered under the Act. Companies are broadly categorised into public and private with limited or unlimited liabilities. Public companies are those companies which are not private in nature but incorporated under the act. To be a private company, it has to fulfill the conditions such as (a) restrictions imposed by its charter to transfer its share if any, (b) restrictions on inviting public subscriptions to its shares or debentures if any, and (c) the total number of members excluding the appointed officials must not exceed fifty.

The law imposes five main conditions on the constitution and incorporation of companies. First, unless a company is registered under the Act, it is prohibited from establishing partnership firms, company or association to carry on banking business if such organisation is not constituted under the Act or any other law. Second, no profit-making organisation not constituted under the Act or any other law can be established with more than twenty members either in the nature of a partnership business or business association. Third, the above restriction is not applicable to joint-family business. However, other conditions of the Act will apply in cases where two or more families establish partnership firm, association or company. In such cases, in calculating the number of family members, the members of minor age must be excluded. Fourth, full liability will have to be paid by any company, association or partnership firm which carries on business in violation of any of the above-cited conditions. Fifth, each member of a company, association or partnership firm which violates the above conditions of the Act shall be liable to pay a fine not exceeding taka five thousand.

The Act also provides for constitution of a company, public or private. In case of public companies, the number of members has to be seven or more. In case of private, it is two or more members. The business to be carried out has to be lawful business. Whether or not it is a company with limited liabilities or otherwise has to be clearly mentioned in the articles and memorandum of association of the said company.

Such companies proposed to be established can have three different forms such as (a) a company limited by shares implying that the memorandum and articles of association shall specify the respective liability of the members based on the number and value of shares that each member holds including the value of unpaid shares if any, or (b) guarantee to pay limited liability as may be specified in the articles and memorandum of association, and such liability based on guarantee has to be paid out of sale of assets upto a specified value, or (c) company with unlimited liability meaning that no limit is imposed. Other conditions are imposed by the Act for all the above three categories which must be specified in the respective articles and memorandum of association. Further restrictions also apply on the procedure for changes to be subsequently made in the articles and memorandum of association. The Act also provides for certain discretionary authority for the courts of law in respect of changes to be made in the articles and memorandum of association.

Under the Act, companies established for charitable purposes or other non-profit making companies need not use the words 'limited' and only the government retains the right to provide for such waiver. Some non-government organisations specifically categorized as not-for-profit companies are registered under the Act.

The Act provides for procedural details relating to apportionment of share-capital, index of members, transfer of shares and its certification and all other related details including reduction in the level of share-capital. Permission to reduce share-capital has to be obtained from a court of law. Specific procedural details are also set forth in the law in respect of management and administration of a company, holding of meetings, appointment of directors, and their eligibility and ineligibility. Provision is also there for appointment of alternate director.

The administration of the Act is vested in the Ministry of Commerce by the allocation of functions attached to the rules of business of the government. The ministry exercises this authority through the office of Registrar of Joint Stock Companies. This office is vested with authority for registration of various companies envisaged under the Act. In the Act, it is specifically laid down that Registrar of Joint Stock Company shall have the same meaning as in Societies Registration Act, 1860 (Act XXI of 1860).

In the end, it will be pertinent to mention that there are at least four other laws relating to companies. These are: The Undesirable Companies Act, 1958, The Companies (Foreign Interest) Act, 1918, The Companies Profit (Worker's Participation) Act, 1968 and Partnership Act, 1932. However the scope of the Companies Act, 1994 is broader than any of the above Acts, and where relevant the Act contains cross-references to some of the above Acts. [AMM Shawkat Ali]

Bibliography The Company Act, 1994 (Act 8 of 1994); MM Rahman, Company Act, 1994, Shams Publications (Fourth edition), 2008.