1.a) Explain 'pre-incorporation contract' with an example. Why is a company generally not liable under a pre-incorporation contract? Can a pre-incorporation contract be included in the incorporation documents or ratified post-incorporation?
1(a) Pre-incorporation Contract
A pre-incorporation contract is a contract entered into by promoters on behalf of a proposed company before the company is incorporated. Since the company has not yet come into existence, it has no legal personality at the time of making the contract.
Example: Suppose Mr. Rahim and Mr. Karim plan to form “ABC Ltd.” Before incorporation, they sign an agreement with a landlord to rent office premises for the proposed company. This agreement is a pre-incorporation contract because ABC Ltd. was not yet incorporated when the contract was made.
Why the Company is Generally Not Liable
A company is generally not liable under a pre-incorporation contract because
Non-existence of the company: Before incorporation, the company has no legal existence. Under company law, a contract requires competent parties. A non-existent company cannot be a party to a contract.
No capacity to contract: Since the company is not yet incorporated, it has no legal capacity or contractual power.
Law of agency does not apply: A promoter cannot act as an agent of a non-existent principal. Therefore, the company cannot automatically become bound by the promoter’s contract.
Doctrine established in case law: In the famous English case Kelner v. Baxter (1866), it was held that the company could not be liable because it was not in existence when the contract was made.
Position under the Companies Act, 1994 (Bangladesh)
The Companies Act, 1994 does not expressly validate pre-incorporation contracts. Therefore, the common law principles generally apply in Bangladesh.
Can a pre-incorporation contract be included in incorporation documents?
Yes. The terms of a pre-incorporation contract may be referred to or reflected in the company’s:
Memorandum of Association, or
Articles of Association.
However, merely mentioning the contract in incorporation documents does not automatically bind the company unless a fresh contract is made after incorporation.
Can it be ratified after incorporation?
Generally, a company cannot ratify a pre-incorporation contract in the strict legal sense because ratification is possible only where the principal existed at the time the contract was made.
Since the company did not exist when the promoter entered into the contract:
there was no principal in existence, and
the contract cannot technically be ratified.
Practical Solution
After incorporation, the company may:
enter into a new contract adopting the same terms; or
novate the earlier agreement.
Only then does the company become legally bound.
Closing Remark: A pre-incorporation contract is made by promoters before the company comes into existence. Because the company is not yet a legal person, it is generally not liable for such contracts and cannot technically ratify them after incorporation. Nevertheless, after incorporation the company may adopt the contract by entering into a fresh agreement on similar terms.
1.b) Death, insolvency, insanity, or separation of members has no effect on the company's continued existence. Explain this statement. (6 Marks)
The statement refers to the principle of perpetual succession, which is one of the fundamental characteristics of a company under the Companies Act, 1994. A company is an artificial legal person separate from its shareholders or members. Once incorporated, it acquires an independent legal existence distinct from the persons who compose it.
Meaning of Perpetual Succession
Perpetual succession means the company continues to exist continuously until it is legally wound up according to law. Changes in membership do not affect its existence.
Therefore:
death of a member,
insolvency of a member,
insanity of a member, or
transfer/separation of membership
do not dissolve or terminate the company.
Explanation of the Statement
1. Death of Members: If any shareholder dies, the company does not come to an end. The deceased member’s shares may pass to his legal heirs or nominees, but the company continues its business uninterrupted.
2. Insolvency of Members: When a member becomes insolvent or bankrupt, his membership may cease or his shares may vest in the receiver/assignee, but the company remains unaffected as a separate legal entity.
3. Insanity of Members: If a shareholder becomes mentally incapable, the company’s existence is not affected. The member’s rights may be exercised through a legal guardian or representative.
4. Separation or Transfer of Membership: Members may resign, transfer shares, or cease to be members. New members may also join. Such changes only affect ownership structure, not the legal existence of the company.
Legal Importance: Because of perpetual succession:
business continuity is ensured;
contracts and assets remain with the company;
creditors’ rights are protected, and
the company can continue irrespective of changes in shareholders.
This principle gives stability and permanence to corporate organizations.
Closing Remark: Thus, a company enjoys perpetual succession, meaning it has continuous existence independent of its members. Death, insolvency, insanity, retirement, or transfer of shares by members do not affect the company’s legal existence, and the company continues until it is legally dissolved by winding up.
(c) Why Register a Company Limited by Shares Instead of a Partnership or Sole Proprietorship? (6 Marks)
A company limited by shares is generally preferred over a partnership or sole proprietorship because it provides greater legal protection, business continuity, and opportunities for expansion under the Companies Act, 1994.
The main advantages are discussed below:
1. Limited Liability: The liability of shareholders is limited to the unpaid amount on their shares. Therefore, the personal assets of members are protected from business debts and liabilities. In a sole proprietorship or partnership, owners may have unlimited personal liability.
2. Separate Legal Entity: A company has a separate legal existence distinct from its members.
It can:
own property,
enter into contracts,
sue and be sued in its own name.
This gives the business legal identity and stability.
3. Perpetual Succession: The company continues to exist irrespective of:
death,
insolvency,
retirement, or
transfer of shares by members.
Unlike partnership firms, the company is not dissolved due to a change of ownership.
4. Easy Transferability of Shares: Shares of a company can generally be transferred easily, especially in public companies. This provides liquidity and flexibility to investors, which is not easily possible in partnerships.
5. Better Scope for Raising Capital: A company limited by shares can raise large amounts of capital by:
issuing shares,
issuing debentures, or
obtaining institutional finance.
Partnerships and sole proprietorships usually have limited financial capacity.
6. Professional Management: Companies may appoint qualified directors, managers, and professionals for efficient management. This improves operational efficiency and corporate governance.
7. Greater Public Confidence: Registered companies are subject to statutory regulation, audit, and disclosure requirements.
As a result:
banks,
investors,
suppliers, and
customers
generally place more trust in companies than in unregistered business forms.
8. Tax and Business Advantages: Companies may enjoy:
easier access to credit facilities,
business expansion opportunities,
better succession planning, and
stronger corporate image.
Closing Remark: Therefore, registering a company limited by shares provides limited liability, separate legal identity, perpetual succession, better capital-raising ability, and greater business credibility. For these reasons, many entrepreneurs prefer forming a company rather than operating as a sole proprietor or partnership firm.
2.a) A person wishes to incorporate a company; describe the importance and process of name selection under the provisions of the Companies Act, 1994.
Importance and Process of Name Selection under the Companies Act, 1994
The selection of a company name is an important step in the incorporation process under the Companies Act, 1994, because the name becomes the legal identity of the company.
Importance of Name Selection
1. Legal Identity: The Company carries on all business activities in its registered name. It is the name under which the company can sue and be sued.
2. Protection from Deception: The name must not be identical or deceptively similar to an existing company name so as to avoid confusion and fraud.
3. Corporate Reputation and Goodwill: A suitable name helps create business reputation, brand value, and public confidence.
4. Statutory Compliance: The company must use the word
“Limited” in case of a public company, and
“Private Limited” in case of a private company.
This informs the public about the nature of liability of members.
Process of Name Selection
1. Availability Check: The proposed name is searched in the records of the Registrar of Joint Stock Companies and Firms (RJSC) to ensure that no identical or similar name already exists.
2. Application for Name Clearance: The promoters apply online to RJSC for name clearance by submitting the proposed name and prescribed fee.
3. Examination by RJSC: The RJSC examines whether
the name is undesirable.
misleading,
offensive, or
too similar to an existing company or trademark.
4. Issuance of Name Clearance Certificate: If approved, RJSC issues name clearance, usually valid for a specified period within which incorporation documents must be filed.
Closing Remark: Therefore, proper name selection is essential for legal recognition, corporate identity, and protection against confusion. The Companies Act, 1994, requires prior approval of the proposed name from RJSC before incorporation of a company.
2.b) What is the implications of 'OPC,' 'Limited,' and 'PLC' while selecting the name of a company?
2.b) Implications of "OPC," "Limited," and “PLC”
OPC: “OPC” means One Person Company. It indicates a single-member company, limited liability structure, incorporated under amended provisions of company law.
Limited: “Limited” signifies the liability of shareholders is limited; the company is generally a private limited company. Example: ABC Limited.
PLC: “PLC” means Public Limited Company. It signifies a public company, the ability to invite public subscription subject to law, and compliance with stricter regulatory requirements.
2.c) Areas of Change Required for Changing Company Name
If ABC Limited changes its name to include "PLC," the following changes are necessary:
1. Special Resolution: The company must pass a special resolution under applicable provisions of the Companies Act, 1994.
2. Approval from RJSC: An application for a name change must be submitted.
3. Fresh Certificate of Incorporation: RJSC issues a fresh certificate reflecting the changed name.
4. Amendment of Constitutional Documents: The Memorandum of Association and Articles of Association must be altered.
5. Change in Common Seal: If any seal exists, it must be changed. [The Common Seal has been discontinued through an amendment in 2020 in the Companies Act, 1994].
6. Update in Official Records—Name must be updated in: bank accounts,
trade license, TIN/VAT, share certificates, contracts, letterheads, websites,
stock exchange records, and BSEC filings.
7. Notification to Stakeholders: Creditors, regulators, and shareholders should be informed.
2.d) Whether “Limited” Must Be Used by Charitable Company
Legal Position
Under Section 28 of the Companies Act, 1994, the government may grant a license to an association formed for charity, commerce, religion, science, or social welfare, allowing it to omit the word "Limited."
Advice
Therefore, Mr. X is legally correct. If the proposed company intends to promote charitable objects only, applies its profits for such objects, and prohibits dividend distribution, then the government may permit registration without using "Limited."
Hence, the name may simply be "XY Charitable Company."
Mrs. Y’s statement is not fully correct because charitable licensed companies may legally omit "Limited."
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