Unit-5 Joint-stock Company
5.1 concept of Joint Stock Company
A joint-stock company refers to the independent or voluntary association of individuals which is established for generating revenue. It is an artificial person created by law having common seal perpetual succession. The required capital to operate the business is collected by promoters and the general public, who are known as shareholders. The capital of the company is divided into a large number of units which is known as shares. A company issues shares to the general public to raise the capital. The liability of the shareholders is limited. The company is managed and controlled by the board of directors. Boards of directors are elected by the shareholders in an annual general meeting through voting procedures. In Nepal, it is established under the company Act 2063 B.S.
The definition of a joint-stock company given by famous scholar is as follows:-
According to L.H Haney, “a joint-stock company is voluntary of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership again a company is an artificial person created by law having a separate entity with perpetual succession and a common seal.”
According to W.A wood,” it is a person created by law, separated and distinct from its stockholders and in certain sense. It is a citizen.”
According to company Act 2063 B.S, “company means any limited company incorporates under this act.”
From the above meaning and definition, we can conclude that a joint-stock company is an association of persons having a separate legal existence, perpetual succession, common seal, common capital, transferable shares limited liability, etc to earn profit through entrepreneurship.
5.2 Characteristics of Joint Stock Company.
a) An artificial person:
A joint-stock company is an artificial person created by law. It does not have a physical shape as a natural person but has almost all the facilities like a natural person for doing business. It can enter into a contract, can sell, hold and buy the properties in its own name. It can sue others and can be sued.
b) Separate legal entity:
A company has a separate legal entity from its shareholders. No shareholder is responsible for the acts of the company and the company is not responsible for the acts of the shareholders. A company can file a case against its shareholders and shareholders can also sue the company.
c) Perpetual succession:
A company has a perpetual existence. Its existence is not affected by the death, lunacy, disability or insolvency of the shareholders. Its shareholders may sell their shares and a new person may come in their place but the existence of their company is not affected.
d) Limited liability:
The liability of a shareholder is limited up to the face value of shares held by them. If the assets of the company are insufficient to pay the creditors in case of the bankrupt, the shareholder won’t pay anymore then what is to be paid to the company.
e) Common seal:
A company is an artificial person. So, it cannot sign on documents. The common seal is essential to the documents for getting legal validity. It is fixed on all important documents a contract. It signifies the signature of the company.
f) Capital divided into share:
The authorized capital of the company is divided into many units of equal value. Each unit is known as a share. Such shares are purchased by the general public as well as the promoters to be the shareholders of the company.
g) Publication of financial statement:
A joint-stock company should publish its yearly audited financial statement in a renowned national daily newspaper. These statements are published for the knowledge of the general public and other stakeholders.
h) Transferability of shares:
The shares of Joint Stocks Company are freely transferable from one person to another person. It is not necessary to take permission from the company’s management. The regular operation of the company is not affected due to the transfer of shares. It changes only the ownership of shareholders.
i. Democratic management:
A joint-stock company is a democratic organization. The important decisions are taken in the annual general meeting and the board meeting of the company by following the principles of democracy.
5.3 Merits of Joint Stock Company.
A huge amount of capital:
A joint-stock company can collect a huge amount of capital by selling shares and debentures to the general public. A large number of people invest money in order to purchase shares and debentures the company. Besides this, a company can easily raise necessary funds from banks and financial institutions.
The shareholders of a company have limited liability. Their liability is limited up to the face value of shares purchased by them. This encourages general people to invest in the company.
A company enjoys perpetual existence because of its distinct legal entity. The life of a company is not affected by the death, lunacy, insolvency or disability of the shareholders. The shareholders may change their ownership from time to time but the company remains as it is. Such stability of the company is important to society and the nation as well.
Transferability of share:
The shareholders can sell their shares to others whenever they required money. It can easily transfer from one person to another. Transfer of share does not affect the regular function of the company. This provision helps a company to attract a large number of investors to invest their savings amount.
The management of a company is entrusted to the board of directors. A shareholder does not involve directly in the management of the company. The members of the board are experts in management. Moreover, a company can hire professional managers for its management.
A joint-stock company should publish its audited financial statements annually or quarterly in the national daily newspaper. The general public can evaluate the financial position of the company through such statements which assure their confidence to invest in the company.
A company manages democratically. The shareholders elect their board of directors and decisions are taken in the shareholders meeting following democratic principles. The shareholders can dismiss the board of directors at any time bypassing the resolution in this respect.
Diffusion of risk:
A large number of shareholder bears the risk in the joint-stock company. Therefore, there is a Diffusion of risk. It means a shareholder has to bear minimum risk against the loss.
A joint-stock company mobilizes savings from high and low-income groups. It also creates employment opportunities for a large number of people living in society. Consumers get high quality goods at cheaper price. The government also receives income by imposing different kinds of taxes. Therefore, the joint-stock company has much social importance.
5.4 Demerits of the joint-stock company.
Difficulty in Formation:
In comparison to other business firms, it is difficult to establish a joint-stock company. It requires preparing a number of documents and following more legal formalities for its incorporation. Even after its establishment, it has to face many legal procedures such as the issue of shares, holding a meeting, a publication of statements and so on.
Delay in decision making:
In a joint-stock Company, important decisions cannot be taken easily. It is needed to call a meeting to make the decision in a certain matter. The meeting is also held at a certain interval of time. Sometimes, a meeting may be postponed due to the lack of quorum. Thus there is a lengthy process of making decisions in the Joint Stock Company.
Lack of secrecy:
The management and control of the Joint Stock Company remain in the hand of the board of directors. It cannot maintain the secrecy of any matter due to the frequent changing of directors after a certain duration. It also has to publish its annual report, financial statements and other matters due to which secrecy cannot be maintained.
Chances of frauds:
The management and control of the joint-stock company remain in a few hands. The directors remained in a board may take the unsound decision for their self welfare and benefits ignoring the benefit of other shareholders. They may commit fraud by exaggerating the financial figure and information, submitting the false documents and other possible causes. So, there is a greater chance of making frauds of directors.
Conflict and self-interest:
There is a number of parties associated with the Joint Stock Company. They have different interests and expect actions from a company. The different parties of a joint-stock company are shareholders, employees, debtors, creditors, government, etc. the shareholders expect a high rate of dividend and increment in the value of a share. The employees want an attractive salary and other benefits. The costumers expects qualitative products at lower price. The creditors want to collect their dues as soon as possible. Similarly, the government wants to collect large amount of tax from the company. However, it becomes almost impossible to manage and satisfy all the parties. Thus the conflict of the self-interest of different parties hampers for the progress of the company.
5.5 Types of the joint-stock company:
Joint Stock Company can be classified into various types on the basis of different angles. Some of them operating in different countries in the form of multinational companies. The bases on which the joint-stock companies are classified into different groups:-
A. On the basis of a number of members:
On the basis of a number of members, the company is classified into private and public companies. These are explained as follows:-
1. Private company:
A company that does not invite the general public to subscribe for its shares but sells its shares among the family members, friends and neighbors is called a private company. According to Nepal company Act, 2063 BS, a private company is one which restricts the right to transfer its share, limits the number of members up to 50 only and does not invite the general public to subscribe for its share.
The minimum number of members in a private may be one and the maximum number of shareholders shouldn’t exceed 50. The word ‘private limited’ is written after the name of a private company. Merryland college of management private limited, Kantipur publication private limited, etc is the examples of a private company.
2. Public company:
A public company is one that is incorporated with at least 7 members and the membership of which is open to the general public. The minimum number of members for its formation is seven but there is no upper limit. A public company invites the general public to purchase its shares. The share of a public company is freely transferable. This company should obtain the certificate of commencement of business before starting its business along with the certificate of incorporation.
According to the Nepal company Act, 2063 a public limited means any company incorporated according to this act. The word limited or Ltd is written after the name of a public company. Biratnagar jute mill Ltd, Nepal bank Ltd, Nepal Bangladesh bank ltd, etc are examples of a public company.
5.6 Difference between a private and public company.
Both private and public company are joint-stock companies registered under the provision of the company Act. The investors are called shareholders in both types of companies. However, they differ in the following ways:-
1. Share subscription:
A private company does not invite the general public to subscribe to the share and debentures but a public company invites the general public to subscribe to the shares and debentures.
2. Transferability of shares:
In private company, the right to transfer the ownership of share is restricted whereas in public company shares are freely transferable.
3. The number of shareholders :
The minimum number of shareholders is 1 and maximum shouldn’t exceed 50 in private company whereas in public company, a minimum number of shareholders is 7 and there is no. limit for the maximum number.
4. Commencement of business:
A private company can commence its business immediately after obtaining a “ certificate of incorporation” but the public company requires a certificate of commencement of business along with a certificate of incorporation to commence its business.
5. Issue of the prospectus:
The issue of a prospectus is not necessary in the case of a private company but a public company must issue prospectus before issuing shares to the general public.
6. Main documents for incorporation:
Two documents namely memorandum of association and article of the association are enough for incorporating a private company but three documents namely memorandum of association and prospectus are necessary for the incorporation of a public company.
A private company should use the word “private limited” or “Pvt. Ltd” after its name but a public company should use the word “ limited” or “ ltd” after its name.
8. The number of directors:
A number of directors should be managed according to an article of Association in private company whereas the minimum No. of a director is 3 and the maximum is 11.
9. Publication of financial statement:
It is not required to publish its annual financial statement in private company whereas it has to compulsory publish its annual financial statement in a national daily newspaper.
10. Annual general meeting :
The holding of annual general meetings is optional in a private company but the holding of an annual general meeting is compulsory in public company.
5.7 Main documents of joint-stock Company:
The establishment of a joint-stock company requires the preparation of some important documents. These documents are required at the time of incorporation of a company. A private company requires two documents namely memorandum of association (MOA) and article of association (AOA) whereas a public company requires one more document called a prospectus.
a. Memorandum of association (MOA):
MOA is a major document of ISC. It is also known as the constitution or charter of a company. It includes all important aspects of a company such as structure, name, place, capital, objectives, shares, etc. it also defines the scope and functions of a company. Similarly, it clarifies the company’s relationship with the outsiders such as shareholders creditors and all those who have dealings with the company. A company has to run it business according to the direction of its memorandum. So, this important document should be properly drafted. It is required for the incorporation of a company.
The MOA is an eventual document. It should be prepared clearly and carefully. The company cannot go beyond the contents described in it and it will be difficult to change any clause in change. Therefore, it should be drafted systematically by considering a various aspect of business as well as company act. The required no. of members must sign in it with the presence of at least witness.
The main clauses or contents of MOA are as follows:
i. Name clause:
In this clause, the name of the company is mentioned. After its incorporation, the company will be known by its name which helps to identify the organization. The name of the company should end with the words ‘Ltd’ or ‘Pvt. Ltd). The choice of the name depends upon the promoters of the company. However, they should not be identical to the names already registered. It should be remembered that the name of the company cannot be changed early and frequently. To change the name of the company. Special resolution should be passed in the special general meeting and approved by the concerned department.
ii. Situation clause:
The situation clause is also called a location or domicile clause. This clause includes the place where the company is to be located. The full address of the central or head office along with its branches and other offices should be mentioned here. Every company must have a registered office to which all official correspondence may be sent by the concerned department or other organizations. The central office can be changed only by passing special resolution in a special general meeting and taking permission from the concerned department.
iii. Objective clause:
Objective clause id the most important clause of MOA. Every company established for achieving some specific objectives. Therefore, the objectives for which the company is to be formed should be mentioned in the clause. The details regarding the activities to be undertaken in the future must also be mentioned here. This clause gives the scope and direction of the company. The company is not allowed to perform activities not specified in the objective clause.
iv. Capital clause:
In this clause of MOA, the amount of authorized capital with which the company is to be registered should be started here. Besides the authorized capital, the numbers of shares, the value of each share, types of share which the company is going to issue should be clearly mentioned. This clause enables the capital structure of the company.
v. Liability clause:
The liability clause mentions the liability of the shareholders. It must be mentioned that the shareholders’ liability will be limited up to the face value of shares held by them. The shareholders cannot be compelled to pay more than what is to be paid.
vi. Declaration clause:
Declaration clause gives a declaration to the effect that the shareholders are willing to establish the company. They are ready to purchase the stated number of shares. There must be at least 7 signatories in case of the public company and at least 1 signatory in case of a private company. It is also known as association or subscription clause.
b. Articles of association (AOA):
An article of association is another important document of a joint-stock company. This document should be attached with the application form for the incorporation of the company. It contains the detail rule and regulations for governing the internal affair of the company. The MOA clays down what is to be done and AOA states how the work is to be done.
The AOA defines the modes and methods for performing the activities which are to be carried out to achieve the goal. Thus the power mentioned in the MOA. The company and its members have to follow the rules and regulations mention in the articles. According to the company Act, 2063 BS the AOA should contain the following particulars and should be signed by the promoters who have a sign in the MOA.
- Name of the directors and their tenure in the office.
- The minimum amount of shares to be subscribed by the directors.
- The procedure for conducting company meetings and notice to be given for such a company.
- Rights and duties of managing directors.
- The provision relating to remuneration and allow the director.
- Special privileges and restrictions on preference shareholders.
- All the matters mentioned in the MOA in the summarized form other necessary particulars which the promoter feels necessary to includes.
- If any changes are made in the AOA, this has to pass by the general meeting notice has to send to the office of company register.
Differences between MOA and AOA:
|Nature||It is the constitution of the company.||It is the rules and regulations for the internal management of the company.|
|Subject matter||It defines the objectives and scope of business operations.||It defines the rights and duties of its members and directors.|
|The main purpose of this document is to define the objectives of the company.||The main purpose of this document is to lay down methods and procedures to achieve the objectives.|
|Relationship||It defines the relationship of the company with the outside company.||It defined the relationship between the company and its members or among the members.|
|A company cannot be engaged in any activities beyond the scope of MOA. If it does, it is considered as void or illegal.||Any activity beyond the scope of AOA will not be void. It can be approved by passing a special resolution.|
|The company can alter MOA and it contains under special circumstances and involve in many formalities.
MOA is the basis for preparing AOA. After preparing MOA, AOA will be prepared.
|The company can alter AOA by ordinary resolution which does not involve in different formalities.
AOA cannot be the basis for MOA. It is always prepared after preparing MOA.
The third important document of a joint-stock company the prospectus. But, it is only required for a public company, not for the private company. All the facts relating to the company are bought to public notice through prospectus. A public company has to collect a huge amount from the general public. so, it is essential to publish prospectus. It is compulsory to publish prospectus in case of public company which is also required at the time of incorporation.
A prospectus is an innovation to the general public to purchase the shares and debentures of a public company. It is such an important document that requests the general public for the subscription of the shares by providing necessary information about the company. It provides information in many aspects such as its establishment, founders, management, capital, the board of directors, plans and policies, etc. it also highlights special features of the company so that the general public subscribes share and debentures of the company. Furthermore, it is a kind of advertisement for a public company in front of the general public. So, these documents should be published attractively without any false statement. According to the Nepal company Act, a prospectus should contain the following information:-
- The main objective of the company and other important matters mentioned in MOA and AOA.
- Opening and closing the subscription date of shares and debentures.
- The minimum number of shares to subscribe to become the directors.
- Salaries and allowances of the directors.
- Description of cash receipt as remuneration or reward by the promoter or directors.
- A provision relating to bonus share.
- Provision, if any, regarding reservation of shares for any shareholders, employees and other people.
- Name and address of the directors and number of their subscribe share.
- The number of shares to be issued to the general public at par, discount or premium.
- The minimum number of shares to be subscribed and advance payment along with the application.
- Estimated expenditure of the company and the estimated income of the company for at least 3 coming years.
- The net worth of the company.
- Commission on shares and debentures.
- Name and address of the auditor and the audit report, if any.
- The balance sheet and profit and loss account of the company.
- Other necessary particulars.
5.8 Incorporation of joint-stock Company in Nepal:
Recognition of a company is called incorporation. A joint-stock company should be registered with the office of the company register under the provision of the company Act, 2063 B.S. for its legal recognition. The incorporation of a company is more difficult than that of sole trading concern and a partnership firm. A number of legal formalities should be fulfilled. The establishment of the company requires a series of steps that should be taken. The interested people who build up the concept and prepare the framework of a company are called promoters. First, they must be associated and perform the preliminary works. Incorporation is an important part of preliminary works. The following procedures should be taken for the incorporation of a joint-stock company in Nepal:
1. Filling the application:
The first step of incorporation of the joint-stock company is submitting an application to the company registers office. The application form can be obtained from the concerned office. It should be filled up carefully. The following subject matters are filled in the application form:
- Name and address of the proposed company.
- Name and address of the promoters of the proposed company, nature and objectives of the business of the proposed company.
- Description of the company’s share capital.
- Other necessary particulars.
The application must be signed by at least one promoter in the case of a private company. Inversely it is signed by at least 7 promoters in the case of a public company. The following document has been attached to the application form:
- Copies of the memorandum of association and articles of association.
- Attested copies of the citizenship of promoters.
- A copy of the agreement, if any, among the promoters.
- Deposit voucher of the registration fee.
- Recommendation letter from Nepal chamber of commerce (FNCC).
2. Depositing registration fee:
The promoters of a joint-stock company should attach the deposit voucher for the prescribed registration fee along with application form. They should deposit the registration fee in the account of Nepal Rastra bank. The amount of registration fee depends upon the amount of authorized capital.
3. Receive a certificate of incorporation:
The office of the register scrutinizes all the documents after receiving them. Then, the company registrar office registers the company. However, the company registrar has the right to reject the registration in some specified circumstances. A certificate of incorporation is issued to the company within 15 days. The company gets legal recognition upon receiving this certificate. A private company can commence this certificate. A private company can commence its business after receiving a certificate of incorporation.
4. Receiving certificate of commencement:
A private company can commence its business immediately after obtaining a certificate of incorporation. But, a public company has to obtain a certificate of commencement to initiate the business. A report of full payment about the subscription of promoters. Shares and an application of at least one director must be committed to the company registrar’s office to get the certificate of commencement. A copy of the prospectus is also to be submitted. A certificate of commencement is issued to the public limited company. The issue of the prospectus to the general public begins after receiving this certificate.
5.9 Company meeting:
A company is an artificial legal person. It cannot think and act as a natural person but if thinks decides through the meetings of the concerned person. Most of the important matters of the company are decided through a meeting.
The meeting is an assembly of two or more persons for the achievement of predetermined goals or purposes. Company meeting represents an assembly of shareholders and board of directors for discussing some business matters. Before conducting the meeting, an agenda is prepared and provided to the shareholders. Agenda is converted into resolution through a majority of votes. The future activity of the company will be conducted by the resolutions. The company meeting has the following features:-
- It involves shareholders and the board of directors.
- It has some predetermined purpose.
Types of a company meeting:
Section 54 to 68 of the company act, 2063 B.S. provides for different types of company meeting which is shown by the following diagram:
A. Shareholders meeting:
The assembly of shareholders for specific purposes in a company is called shareholders meeting. Shareholders are the real owners of a company. The business of a company is operated as per the decision made by its shareholders in the shareholder’s meeting. The shareholders meeting of a company can be classified into the following three types:-
1. Preliminary general meeting(PGM) :
PGM of a company is also known as the first general meeting or statuary meeting. The first meeting of shareholders of a company after its incorporation is known as a preliminary general meeting. According to the company Act, this meeting is to be held within one year from the date of obtaining a certificate of commencement of business. This meeting makes all the shareholders familiar to each other.
A notice signed by at least one director should be given to all shareholders. Prior to 21 days of the meeting. The notice provides details about the place, date, time and agenda of the meeting. This notice should be published at least twice in the national daily newspaper. The preliminary report should be certified by the auditor of the company and be sent to the company registrar’s office. The particulars discussed in the PGM are as follows:-
- A total number of shares allotted.
- The number of paid-up shares.
- Total amount received from shares.
- Reports of income and expenditure until 35 days prior to the meeting.
- Name and address of the directors, managers, secretary, accountant and auditor and terms and condition of service.
- Reports of the underwriting of share and commission there off.
- Share money due from directors.
- Other necessary particulars.
- Details of fund party agreement placed at the meeting for changes.
2. Annual general meeting (AGM):
AGM of a company is held once in a year. The first AGM should be held within 1 year. It should be held each year within 6 months from the date expiry of the concerned fiscal year. If the company is unable to hold its AGM within 6 months, it should inform the office of the company registrar. The main objective of holding this meeting is to provide detail information to the shareholders about the progress during the past year. It also informs them about the future plans and programs of the company.
The company should give notice to the shareholders about place, date, time and agenda of the meeting prior to 21 days and publish it at least twice in the national daily newspaper. Inviting all the shareholders to attend the AGM. Following particulars are discussed in AGM:-
- Audited financial statement and auditor’s report for the previous year.
- Declaration of the rate of dividend.
- Appointment of auditors and direction with their remuneration.
- Other particulars presented by the shareholders holding at least 5% of the total share capital.
- Other matters are to be discussed and passed by the shareholders.
3. Special general meeting (SGM):
SGM is also known as an extraordinary general meeting or emergency general meeting. If any matter requires urgent consideration and cannot wait till the next annual general meeting. In order to hold such a meeting, shareholders must be notified venue, date and time along with the agenda of the meeting prior to 15 days. The notice should also specify the reason for calling such a meeting. Generally, the following matters are discussed and decided in SGM:-
- Alternation in the contents of MOA and AOA.
- Change in the name and objectives of the company.
- Increase or decrease in the authorized share capital of the company.
- Issue of bonus share.
- Conversion of Pvt.Ltd. into a public Ltd. Company or vice versa.
- An amalgamation of a company into another company.
According to section 67 of the company Act, 2063 B.S the SGM of the company can be called by the following authorities:
i. By the board of directors:
If any urgent matters need to be solved and the board of directors feels necessary to call SGM then it can call the meeting, however, such a meeting cannot be called before the first AGM.
ii. By the auditors:
In connection with the auditing of the company’s accounts if auditor feels necessary to call SGM, then they can request the board of directors to call it. If the board of directors fails to convince it then the auditors can also request the company registrar office calls the SGM of shareholders.
iii. By shareholders:
If shareholders holding at least 10% of the paid of capital or at least 25% of the total shareholders demand to call SGM with reasonable cause then the board of directors should call this meeting. If they fail to call such a meeting within 30 days, the shareholders may file a complaint to the company registrar office. In this situation, the registrar office will call the SGM of a company.
iv. By the office of company registrar:
If the company registrar office finds any reasonable causes, it can call the SGM through inspecting the company or any of its documents.
B. Board of directors meeting:
The gathering of directors in connection with the business and management of the company is called the board of directors meeting. The matters discussed are as follows:-
- The activities and management of the company.
- Appointment of the employees.
- Formation of committees and sub-committees.
- The agenda and the date of AGM.
- Other necessary particulars.
According to the company Act, the board of meetings of a private company should be conducted as per AOA. Similarly, the board meeting of a public limited company should be called at least 6 times in a year and more than 50% of total directors should be present in the meeting.
5.10 Agenda and Resolution.
Agenda means things to be done. The list of subjects containing the things to be done in a meeting is called an agenda. In other words, a subject which is to be discussed in the meeting to come for final decisions is known as an agenda. It is necessary to send the agenda of discussion in advance to the shareholders to prepare themselves and get ready to present their views and ideas in the meeting. It should be clearly and systematically written so that the general shareholders can easily understand. The agenda of the company may be situational and it may vary as per situation like a statement of company accounts, reports of directors, declaration dividends, issuance right share, etc.
The dictionary meeting of a resolution is a formal statement of opinion agreed upon by committee or council especially by means of a vote. In some words, the decisions taken in the meeting is called resolution. Hence, it is the formal decision or opinion of a body that arrived after a detailed discussion through voting procedures. The resolution must be clearly written. It must not be ambiguous because the operation, management, and future of the company highly depend upon the successful implementation of the resolution. According to the company Act, all the matters to be discussed at the general meeting must be presented in the form of resolution. A copy of the resolution should be submitted to the office of the company registrar. The resolution of company meeting is of 2 types described as follows:-
a. General ordinary Resolution: (<50%)
The resolution which is taken by a simple majority of votes is called general/ ordinary resolution. It is passed by the shareholders holding more than 50% of the total shareholders. General activities of the company are passed through an ordinary resolution.
The following subject matters are passed and decided under general resolution.
- Audited financial accounts of the previous year.
- Declaration of dividend.
- Appointment and remuneration of auditors and directors.
b. Special resolution: (75% or 2/3)
Special resolution is passed by special general meeting special issues of the company. The decision is taken by the special majority i.e 75% of the votes of shareholders. It is passed in the AGM or SGM.
The following matters are discussed and passed under special resolution.
- Changes in MOA and AOA.
- Changes in name, objective and capital of the company.
- Issue of bonus share and creation of reserve capital.
- Conservation of private company to a public company or vice versa.
Winding up off the company:
5.11 Winding up of A joint-stock Company.
The process of collecting all the assets to pay the total liabilities in order to close the company permanently is called the winding up of a company. It is also called liquidation or termination. In other words, closure of the business forever is called winding up of a company. A company is an artificial legal person created by law and thus only law can end it. The company act provides the following two methods for liquidation of a company:-
1. Voluntary liquidation:
The agreement of all the shareholders at SGM to wind up of the company is called voluntary liquidation. A public company liquidates itself by a special resolution. It has the following conditions:-
- If the time frame prescribed in the AOA for the operation of the company expired.
- If the company passes a special resolution to wind up voluntary in the view of its liabilities or for any other causes.
A private company can be liquidated according to the provision of MOA and AOA and decisions made in the shareholders’ meeting. The company must publish the decision to liquidate in the newspaper twice a week from the date of the resolution to be wound up. It must also send the notice to the company registrar’s office. The office of the company registrar will also appoint liquidators and auditors to audit the company accounts and complete the liquidation process.
2. Compulsory liquidation:
The liquidation made by the office of the company registrar is called compulsory liquidation. Under this liquation, two-third of the creditors can apply to the office of the company registrar for liquidation of the company to recover the credit amount. After receiving the application the registrar can place the order for liquidation. The registrar appoints liquidators and auditors to complete the process of liquidation under the following conditions, the compulsory liquidation is made:
- If an application is submitted to the company registrar to liquidate the company as passed by the special resolution.
- If the creditors apply to the office of the company fails to pay its debt within one year even after its expiry of a stipulated time.
- If the meetings are not conducted within a prescribed period or report is not submitted to the office.
- If the banks or financial institution takes over the assets or sells all assets of the company.