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Company Law

Company Law initiates with Act 43 of 1850, which was based on the English Companies Act of 1844, making it possible, for the first time, to incorporate and register a company without obtaining a royal charter. Under the Indian Act, the supreme courts in the presidency towns of Calcutta, Bombay and Madras were authorised to order the registration of unincorporated companies of partners associated under a deed containing a provision that the shares were transferable. The privilege of limited liability was not conferred upon by this Act, although a company was permitted to sue and be sued in its registered name.

In 1857, an act for the incorporation and regulation of joint stock companies and other associations either with or without limited liability of the members thereof was passed. But under this Act the privilege of limited liability was not extended to a company formed for the purpose of banking or insurance. This disability was removed by the Act of 1860, based on the English Companies Act of 1857. Then, following the English Companies Act of 1862, a comprehensive act was passed in India in 1866 for consolidating and amending the laws relating to the incorporation, regulation and winding up of trading companies and other associations. Between 1866 and 1913, various amendments in the Indian law were made following similar changes in England. The law relating to companies was re-enacted in a comprehensive form in the Companies Act of 1913. This Act was principally based on the English Companies (Consolidation) Act of 1908. Between 1908 and 1936, small amendments were made in the Act of 1913. The Indian Companies (Amendment) Act, 1936 introduced important provisions in the Act of 1913 in the light of the English Companies Act, 1929. This Amendment Act of 1936 also recognised for the first time the system of managing agencies in the subcontinent.

After the partition of India (1947), India passed a new comprehensive Act in 1956, based primarily on the English Companies Act, 1948 and the suggestions made in the Bhava Company Law Committee Report. During the Pakistan period a Company Law Commission was set up and it suggested amendments in 1962 in the light of the English and Indian amendments, and subsequently some amendments were made. The Securities and Exchange Ordinance, 1969 was the most important piece of legislation incorporating corporate activities during this period. It supplemented the Capital Issues (Continuance of Control) Act of 1947, giving extensive powers to the controller of capital issues.

After the emergence of Bangladesh a Company Law Reforms Committee was set up in 1979, comprising leading government servants, chartered accountants and lawyers. The committee made many recommendations for changes in company law but not until 1994 was a new comprehensive act passed by Jatiya Sangsad. The Securities and Exchange Commission Act of 1993 created the securities and exchange commission which oversees the issue of capital. Its primary purpose is to protect the investing public in corporate investments. It has been given extensive powers to make rules and regulations. Its responsibilities include those of the Controller of Capital Issues under the Acts of 1947 and 1969.

The essential elements of company law are the concepts of the company as a separate legal entity, irrespective of the closeness of the shareholders, investor protection, management of a company and the modes of winding up, and accounts and securities trading.

Artificial personality An incorporated company has an artificial personality distinct from its members. Corporate personality became an attribute of the normal joint stock company at a comparatively late stage, and it was not until the celebrated case of Salmon vs Salmon (1897) that the English House of Lords held that a company which was composed of seven members, all of them belonging to a family of husband, wife and children, was in the eyes of the law a different personality from its members so that a debenture created and issued in favour of the master of the house by the company would be a valid transaction. The courts, however, made exceptions to this rule of a separate personality of a company, especially in the fields of tax and fraud. But this principle still holds good and the Appellate Division of the Supreme Court in the case of Rujab Ali vs Mokarram Hossain (1977) held, while reconfirming that a company is a separate personality, that a shareholder has no direct interest in the property of a company.

The permanence of the general constitution of the company is secured by the memorandum of articles which cannot, save as provided by the act, be modified or altered. Neither can the articles authorise the company to do anything which is expressedly or implicitly forbidden by the act, e.g to pay dividends out of the capital, nor take away from the company or its members any rights conferred by the Act, i.e the right of a member to petition to wind up the company. Subject to these limitations the articles may contain such regulations for the management of the company as the original incorporators think fit. The articles constitute a network of rules regulating the affairs of the company. Each article is a rule for the regulation of the relations between the company and its shareholders and relations between the shareholders and the management. The articles may explain the memorandum in case of ambiguity.

The memorandum of association is the basic constitution of the company. The shares may be of the smallest nominal amount, and one share is enough to constitute membership. There is nothing in the act requiring that the subscribers shall be independent or unconnected, or have a substantial interest, or have a mind and will of their own, or that there shall be anything like a balance of power in the constitution of the company. If there are seven or, in the case of a private company, two members the law is complied with. The word 'person' includes a body corporate and a company may be a member in another company. Foreigners may be the shareholders subject to conditions laid down by the Bangladesh Bank and the Board of Investment. There is at present almost no restriction on foreigners becoming shareholders although the Securities and Exchange Commission may lay down conditions about the sale of their shares in case they buy quoted shares of primary issue.

The memorandum and articles of association form the constitution of the company and Section 26 prescribes that every member of the company is entitled to a copy of these documents on payment of a fee. To ensure that a member is not misled, the law further requires that any alteration of the memorandum and articles of association should be incorporated in those documents. The High Court Division had a verdict to this end that there is no provision in the companies act to correct clerical errors in the memorandum or articles of association, and these may be amended with the court's approval where needed.

Investor protection and accounts The concept of investor protection encompasses the notion that a company must have its accounts audited and place them at least once before the annual general meeting of shareholders (Section 183 of the Companies Act 1994). The Act further provides that the company shall furnish the informations that the balance sheet and the audited accounts of the company contain.

The law requires that a public company must publish a prospectus at the time of inviting subscriptions for shares or debentures in the company, and this document contains particulars of those in management, the project for which the money is required, and the general financial background of the company (Section 135 of the Act of 1994). If the company is listed in the stock exchange, the prospectus must be approved by the Securities and Exchange Commission. The act provides for investigation by the registrar of joint stock companies on its own or on complaint by shareholders holding one-tenth of the issued shares; but in practice this is a rare phenomenon in this country. However, Section 233 of the Act of 1994 specifically provides for protection of minority shareholders where the affairs of the company are being run in a manner prejudicial to the interests of a shareholder or the petitioners who must hold one-tenth of the issued share capital. The concept of minority protection is new, and judges are yet to lay down decisions which would really entrench the minority shareholders' position in the company. A shareholder may also petition the Court if he can show that it is just and equitable to wind up a company.

Management of a company A company is managed by its board of directors. The powers of the board are generally contained in the articles of association of the company, and where the powers are given to the board the general meeting has no authority to interfere in the management. The general body of shareholders has ultimate control in a sense that they may remove the board and replace them by a body of persons after their liking, but until then the board is the supreme managing body. The functions of the general meeting are generally confined to amending the memorandum and articles of association of the company, passing the annual balance sheets and the audited accounts of the company, electing directors in place of those who retire at the general meeting etc. The articles sometimes vest the managing director with plenary powers of management where the founding entrepreneur desires to keep control of the management, but the Act now provides that a managing director cannot be appointed for more than five years at a time, and his appointment must be ratified by the general meeting. In law, however, he remains a servant of the company and the board may dispense with his services, if necessary, on payment of compensation if there is a service contract.

Managing agents The country is witnessing the gradual elimination of an important feature of the management of the companies i.e. the managing agency system which was peculiar to the subcontinent and had been a direct legacy of the British economic colonisation. The origin of the system lies in early British contacts with India. The servants of the east india company used to do business on their own, sometimes by appointing their own agents. The board of directors of the East India Company turned a blind eye to this, and very soon it became an accepted practice to have a business started by a managing agent. The function of these mercantile houses primarily consisted in importing British goods and exporting Indian goods and raw materials as agents of British agents or firms. In addition to their commercial or trading functions, the Calcutta mercantile houses also carried on financial activities and were responsible for introducing modern banking in India as an extension of trade in the European community there. These houses later frequently acted as investment bankers, and provided funds for the establishment and operation of indigo plantations, tea gardens and jute mills. Such was the importantee of some of those mercantile houses that their managers were sometimes called 'merchant princes'.

The managing agency houses took advantage of the expanding English commerce and there was a mushrooming of business in India. The managing agency houses supplied directors to look after the British company's interests in India, and soon it became an invariable practice for newly formed companies to entrust their business in India to these managing agencies, who looked after the company's interests, while the investors and the board of directors in England quitely enjoyed the fruits of their enterprise without having to bother about management. In return, the managing agency houses were remunerated handsomely on the basis of fixed pay and commission. Thus the managing agency system is purely a product of British colonisation of India. Able Indian merchants followed in the footsteps of English mercantile houses; Parsis, Gujaratis and Marwaris promoted companies of which they became the managing agents.

The swadeshi movement of 1905 gave added impetus to indigenous business and many new companies were founded, and these were controlled by existing managing agencies. The managing agents rendered valuable services by providing money and technical know-how in an emerging market, and it was a common feature for an enterpreneur to call upon a managing agency for assistance. Strangely enough, not until 1936 did the legislature think it fit to insert provisions in the then Companies Act of 1913, which restricted the amount a managing agent may charge by way of commission. With the emergence of Bangladesh the entrepreneurs were able to start their own business, and this system is getting a natural death in this country. India still has a few managing agents.

Winding up A company may be wound up either voluntarily or compulsorily by the court. Usually the Company Bench of the High Court Division is crowded with petitioners who seek to wind up a company either on the ground that it is unable to pay back debts (Taka five thousand remaining unpaid for three weeks inspite of a notice to pay) or that it is just and equitable that the company should be wound up became of a deadlock in the management, fraud and oppression etc of shareholders. Generally if a company is wound up a liquidator is appointed to take over the assets of the company. The liquidator winds up the business of the company, pays the creditors, and distributes the surplus, if any, to the members. In practice the assets are sold at a pittance, and the creditor who petitioned the court for winding up the company ends up with nothing or very little.

Jurisdiction The High Court Division exercises special statutory jurisdiction to try matters under the Companies Act. Under Section 3 of the Companies Act, an application relating to the company should be made to the original side of the High Court Division. The case of Murshed C.J and Abu Sayeed Chowdhury of Dacca Jute Mills Ltd vs Satish Chandra Banik and others (1967) are decided by way of special statutory jurisdiction conferred upon the Court by the Act itself. However, in the case of Md. Shamsuzzaman Khan vs MS Islam (1976) it was held that Section 3 of the Companies Act only gives certain jurisdiction to the High Court for resolution of the disputes under the Companies Act. If the nature of the dispute which is being litigated upon is entirely a civil dispute, it can only be decided by a competent civil court.

Securities laws The laws relate to shares and debentures traded in the stock exchanges. There are two stock exchanges in the country, in Dhaka and Chittagong. The Securities and Exchange Commission created under the Securities and Exchange Commission Act of 1993 is entrusted with the task of ensuring proper issuance of shares and debentures to protect the interests of investors in securities and to promote the development of, and to regulate, the capital and securities market. The history of securities laws in Bangladesh, as in other countries, follows the development of this branch of law in the United States of America.

After the great Wall Street crash of 1929 the Democrats promised sweeping changes in the laws relating to sharemarkets and dealings, and two laws were passed in the USA in 1933 and 1934 creating the U.S Securities and exchange Commission which has earned since then a good reputation as a protector of the American economy. In Pakistan the Securities and Exchange Ordinance provided for banning of fraudulent activities in share trading, but the law was not applied seriously until 1996. [M Zahir]