Commerce

The term “finance” is associated with revenue and expenditure. Public finance is a branch of economics that deals with the government’s revenue and expenditures of an economy. If it is related to the private sector, it is called private finance.

Finance includes those means by which we make various types of payment. It may be defined as the provision of money at the time of need. In other words, it is the arrangement of money sources and the acquisition of funds for the satisfactory conduct of business activities.

Finance consists of providing and utilizing the money, capital rights, credit and funds of any kind which are employed in the operation of an enterprise.

George Terry

It may thus refer to investing in borrowing and spending of money with proper manners for the operation of the business.

Finance is important and essential for the success of any enterprise. Without proper finance, no business can be run smoothly. So a sufficient amount of capital must be provided in order to achieve desired results from the activities.

Sources of Business Funds

The balance sheet represents the amount that is supplied by the contributors. Assets are shown on the right-hand side of the balance sheet which refers to the use of funds. Liabilities are on the left side of the balance sheet which shows the sources of funds. These funds are employed temporarily by the creditors and are expected ultimately to be paid back with the sum they have advanced to the business. But owners make a permanent investment of funds to the business.

Creditors

This source of loan is obtained for short term intermediate and long periods. The repayment of this loan is made on an installment basis if it is more than one year. Creditor’s fund is generally grouped into the following main titles on the liabilities side of the Balance sheet.

Accounts Payable

This is the result of the supply of goods services to the customers. No credit document is used in this kind of credit dealings.

Notes Payable

It arises from the sale of goods, the supply of services, or a loan of funds from the financial institution. It is represented by a written document i.e. promissory note etc.

Securities

Large-size firms may issue secured or unsecured bonds or promissory notes when various term funds are required. It is divided up among a number of creditors. Each creditor holds written evidence or promises to pay for his share of the loan on a future date.

Mortgage

It represents that the firm has accepted a loan from the commercial bank or investment bank for a long period of time against the security of building, land, and machinery.

Outstanding

It refers to the accumulation of indebtedness amount up to the date of the closing books. These generally include the items which have accrued but have not been actually paid. They represent accumulating wages, rent, salaries, interest, and taxes which are found on the liabilities side of the Balance sheet.

Owners

The owner’s investment appears in the Balance sheet by various heads in various forms of Business Organization.

Sole Tradership

The invested amount by the owner may be increased by profit and decreased by losses and withdrawal. The owner’s interest in a sole tradership generally finds a single title in the Balance sheet.

Partnership

Owner’s interests are generally considered similar to the sole traders in the Partnership. But in the partnership, the profit is distributed among the number of partners and if there is any loss, the same partners are to bear it. Therefore the owner’s interest in the partnership is not constant but it may increase or decrease at a rate varying with the profit or loss of the firm.

Differences Between Public & Private Finance

Private: It deals with the revenue and expenditure of the private sector.

Public: It deals with revenue and expenditure of the government sector (public sector)

Time Period

Public finance is related to one year time period whereas private finance is concerned with daily, weekly, and monthly budgets, etc.

Income vs Expenditure

In public, revenue follows expenditure. On the other hand, in private finance expenditure follows revenue.

Deficit Financing

In the case of the deficit budget, Govt. can issue new notes. On the other hand, the private sector has no authority to issue new notes.

Nature of Budget

In the public sector, the deficit budget is appreciable. In the private sector, the surplus budget is appreciable.

Compulsory Loans

The government can take compulsory loans from different financial institutions to meet its expenditure whereas the private sector cannot do it.

Secrecy

A government budget is no more secret, rather Govt. publicizes its budget through T.V, Radio, etc. On the other hand, the private budget is tried to be kept secret.

Nature of Projects

In public finance, Government has to complete long term projects. On the other hand, the private sector has a short terms project to complete.

Nature of changes

Public finance is concerned with remarkable changes whereas the private sector is concerned with minor changes.

Written Document

A public budget is a written document whereas a private budget is not a written document.

Audit System

Govt. revenue and expenditure are regularly checked by an audit system. On the other hand, there is no audit system in private finance.

Foreign Assistance

The Government can depend upon foreign assistance but in private finance, there is no chance of any foreign aid.

Direct or Indirect Source of Income

In public finance, the source of income is indirect i.e., various taxes whereas in private finance source of income is direct.

Prior Sanction

Govt. takes prior sanction from its cabinet, national assembly, senate, etc whereas, no prior sanction is required from any authority.

Future Planning

There is long term planning while in private finance short term planning is the motive.

Use of Financial Resources

In public, the main objective is the social welfare of the people whereas, in private resources are used just for maximum personal satisfaction.

Record of Finance

The private may or may not keep the record of its finance whereas Govt. keeps the permanent record of its finance.

Finally

We can conclude that the finance of both the private and public sectors is concerned with revenue and expenditures. Anyhow, we can differentiate private and public finance on the basis of certain grounds.

Resolutions are communications embodying the views or intentions concerning some important matter. They are not addressed to anyone in particular and are drafted in the third person. A company resolution may be defined by Pitfield, “a formal declaration of the will or wishes of the company”.

Kind of Resolutions

Ordinary Resolution

An ordinary resolution is one which is passed by a simple majority of members entitled to vote such resolution is used for ordinary routine business at a general meeting of the company.

The notice is served in writing to each member for 21 days.

Ordinary Resolution Objective

This resolution is passed for the following purposes:

• To pass the accounts
• To appoint the directors
• To recommend the dividend
• To appoint or remove the managing agents
• To appoint the auditors and to fix their remuneration
• To adopt the statutory Report
• To authorize the issue of shares at discount etc
• To permit a director or his firm to hold an office of profit
• To permit a director or his firm to hold an office of profit

Special Resolution

This resolution is passed by a majority of not less than three-fourths of such members who are entitled to vote and who do votes, A copy of the resolution must be filed with the registrar’s office within fifteen days from the date of its adoption.

Under section 2 (36) the notice is given to each member for 21 days with the copy of resolution.

Objective of Special Resolution

The following types of business are conducted by special resolution.

• To reorganize the’ share capital of the company
• To change the name with the permission of the central Government
• To alter the articles of Association
• To reduce the share capital of the company
• To sanction additional remuneration to managing agents
• To appoint the inspectors to investigate the affairs
• To transfer the registered office from one state to another
• To initiate winding up by the court
• To sanction payment of interest out of capital during construction
• To create reserve liability
• To turn a private company into a public company

Extra Ordinary Resolution

An extraordinary resolution is one which is passed by a majority of not less than three-fourths of such members entitled to vote as are present in person. Proxy is also considered if it is allowed by the Articles of Association. A copy of this resolution must be submitted to the registrar within 15 days from passing thereof.

Fourteen days notice must be sent to each member for such resolution. The notice specifies the intention to propose the resolution as an extra ordinary resolution.

Objective of Such Resolution

• To remove the director from the office
• To wind up a company voluntarily on the ground that it cannot continue its business due to heavy liabilities
• To appoint’ another director in the place of the removed director

Important Note

For all kinds of meeting and resolution proxy and quorum will be considered as follows:

Proxy

The proxy may also be accounted if it is allowed by the Articles of Association Proxy form will be sent by the secretary along with notice of resolution of the meeting.

Quorum

The articles of Association will describe rules about quorum. If it is silent then under section 160, in case of a private company two-members present personally who represent not less than twenty-five per cent of the total voting power, either of their own account or as proxies. In the case of a public company not less than three members present personally who represent not less than twenty-five per cent of the total voting power, either of their own account or as proxies.

It is a popular type of business running across the globe under different territory based rules and regulations. The driving factors of this business type are different characteristics, including its legal entity in the state, people trust, and many others. It is also a form of business like other businesses, including public limited companies, partnerships, and sole proprietorships.

A Joint Stock Company is a type of business that gives business ownership rights to shareholders by giving them a certificate of their shares. These shares can be bought or sold anytime from the people who already purchased them. There is the unlimited liability of shareholders in the United States and Limited in Asian countries.

There are different types of joint-stock companies depending upon their goal, their design, their business model, their mission, vision, roles, and stakeholders. Each has its own advantages and disadvantage because of many factors involved in different phases of the business cycle.

In Simpler words, a voluntary association made by different persons under state law for a specific reason is known as a Joint Stock Company. It is started by the collection of initial investment by each member. This capital amount is divided into transferable shares with the liability of shares to their face value.

“A company is an artificial person created by law with a perpetual succession and a common seal.”

LORD JUSTICE LINDLEY

Companies are formed with legal ordinances under country law. There can be a minimum of 2 and maximum 50 numbers of shareholders in a Private limited company and a minimum of 7 to no maximum number of shareholders in a Public Limited Company.

Board of directors are managers to operate its function under law of the country – Different Nature of Company is the most popular business form for production and business on large scale. It has its own advantages & disadvantages.

Types of Joint Stock Company

1. Chartered Company

The company which is incorporated by the royal order is called a chartered company. Its power, rights, and functions are governed by the charter, issued at the time of formation. But this kind is not killed and formed in present days. Now all companies are registered under the company ordinance.

Examples

Chartered Mercantile Bank of India, Amsterdam Stock exchange, Chartered Bank of England, Muscovy Company.

2. Statutory Company

This company is formed by the order of the Governor-General President or Prime Minister or by the special act of the legislature. It is organized to carry on some business of national importance. The word “Limited” may not be used after the name of such a company. Each can exercise its particular power which is governed by the terms of its special Act.

3. Registered Company

It is incorporated under the company act. In our country, there is ordinance 1984 to form and supervise the registered company. It possesses a separate legal entity apart from its members.

Example

The registered company may be divide into the following groups

• Unlimited company.
• Company limited by guarantee
• Company limited by Shares

3.1 Unlimited Company

The shareholders of the unlimited company are liable to pay the debts and other obligations of the business as in an ordinary partnership.

Features of Unlimited Joint Stock Company

1. It is managed by the board of directions.
2. It has a separate legal entity.
3. There may be a large number of shareholders and
4. Its shares may be transferred to another person.

But despite the foregoing characteristics, the public does not like to form this type of company.

3.2 Company Limited by Guarantee

Where each member gives a guarantee to contribute a specified amount to the company on its winding up, such a company is said to be limited by guarantee. It may or may not also have share capital. If such a company has a share capital, the amount must be mentioned in the charter of the company.

It is not formed to earn profit but the object of the company is to promote social, cultural, and scientific activities such as clubs, chambers of commerce, welfare, and educational association.

3.4 Company Limited by Shares

Where the liability of each member is limited to the nominal amount of the shares which he holds is called company limited by shares. If he pays the value of the shares, his liability will be nil. It is popular among different types of joint stock companies. It may be classified into two groups

What is difference between Public & Private Company?

PUBLIC	PRIVATE
There is no restriction for the maximum number of members but the minimum number must be seven.	There must be at least two members, but not more than fifty.
It can invite the public for the subscription of its shares and debentures.	It cannot invite the public for a subscription of any type of securities.
Its shares can be transferred and disposed of to other persons without any restriction.	Its members cannot transfer their shares to other persons.
Under section 174 a minimum number of directors is seven and the maximum number of directors can be appointed according to the provisions of its Articles of Association.	Its shareholders may elect at least two directors and the maximum number of directors will be described by the Articles of Association.
There is compulsion by law to file the prospectus or statement in lieu of the prospectus with the local registrar’s office.	As it cannot issue the prospectus there is no restriction to submit the prospectus to the registrar’s office.
It cannot obtain the certificate of commencement of business without fulfillment of the condition of minimum subscription.	There are no restrictive provisions made in the company ordinance to fulfill the requirements of minimum subscription before its incorporation.
It has to hold a statutory meeting and it has to submit the statutory report to the registrar within the prescribed time.	As it does not need to hold a statutory meeting there is no compulsion to submit the statutory report to the registrar’s office.
Every Public Company has to use the world Limited or “LTD” after its name.	A private company has to mention the “Private” Limited as the last word under section [16 (a) (i)]
A public company cannot start its business after obtaining a certificate of incorporation.	It can commence its business soon after receiving this certificate.
There is a compulsion to submit the various reports, profit and loss account, Balance Sheet, and minutes to the registrar’s office.	There are no restrictions for the submission of some reports to the registrar’s office.
Some reports and statements must be published for public inspection.	There is no restriction for the publication of various statements for public inspection.
It must have to obtain this certificate for the commencement of business.	There is no provision by law to receive this certificate for the commencement of business.
Its working field is vast. It can attract a huge amount of capital. So it is possible to conduct heavy and large scale business.	Its capital and financial resources remain limited due to certain restrictions and hindrances so the large-scale business cannot be arranged under this organization.

Public Company

To a company that is formed by at least seven members and there is no restriction i.e.

• for transferring of shares
• for maximum numbers
• for subscription of shares and debentures is called the public company.

Under section 2 (30), “Public Company” means a company that is not a private company,

Private Company

The company is formed by at least two members and there are restrictions i.e. {Section 2 (28)}

• for a maximum number of members (not more than fifty)
• for transferring of shares

for the subscription of shares and debentures is known as a private company.

How to Convert Private Limited Company into Public Limited Company?

There are several restrictions on Private companies which may result in limited financial resources, limited production activities, limited technical and administrative abilities. Due to these factors, a business may not be expanded and the private company faces high cost per unit, limited sales, and low profit. These hindrances constrain to decide in the conversion of a private company into a public company.

To convert into a public company, it is necessary to alter the articles of association by a special resolution. The following alteration has to be brought in the provision of Articles of Association.

• Shareholders may transfer their shares.
• They may invite the public for subscription of shares and debentures.
• A maximum number of shares i.e. fifty will be struck off from the Articles.

New Articles of Association will be submitted to the registrar’s office within two weeks of such alteration. The following necessary documents must be filed with the registrar’s office along with altered Articles of Association.

• A list of persons containing their names addresses and other particulars who have agreed to act as directors.
• The written consent of the directors.
• Declaration of the directors to take up their qualification shares
• Declaration ‘of the directors that they have paid for their qualification shares, or statement of the fact that they have already taken up and paid for their qualification shares.
• A prospectus or statement in lieu of prospectus.
• A declaration from the directors or secretary or advocate that all the provisions of the Company ordinance have been fulfilled.

After submission of the foregoing documents to the registrar’s office Private Company may be converted into a Public Company.

Formation of the Company

The first stage in the formation of a company is that a few persons known as PROMOTERS get together to bring it into existence, to carry on a joint-stock business. They prepare certain necessary legal documents and take all steps necessary for the registration of the company. They convince responsible persons to act as first directors of the company.

There must be a minimum of seven promoters in public companies and two promoters in the private companies under the said ordinance. They have to prepare the following few documents which are to be filed with the Registrar of joint-stock companies of the province where the registered office of the company is to be situated; (Section 30)

• Memorandum of Association
• Articles of Association: When a company adopts Table ‘A’ in its entirety, it need not file any special articles, but this fact must be endorsed on the Memorandum of Association. These documents require a prescribed stamp and signed by at least seven persons in case of a public company and at least by two in case of a private company
• A statement showing the authorized or registered capital of the company
• A list of persons who have agreed to act as first directors of the company
• Their written consent to act as a director.
• Notice of the situation of the registered office of the company (Section 142)
• A written declaration by the directors to take up and pay for their qualification shares.
• A statutory declaration that the requirements of the law for registration have been duly complied with

Difference Between Memorandum of Association and Articles of Association

Payment of the Requisite amount

The following payment would have also to be made to the Registrar:

• Requisite amount of duty on share capital.
• Prescribed amount of filing fees. These amount can be deposited into a government treasury.

Certificate of Incorporation

It the Registrar is satisfied that all legal formalities under the companies ordinance have been complied with, he will issue a certificate of incorporation (Section 33). It means that (a) company has been registered and the .liability of its member is limited (b) It has come into existence as a legal entity apart from its members.

A private company may start its business at once after obtaining this certificate. But the public company cannot commence its business without taking the following further steps.

Issue of Prospectus

The promoters have to issue a prospectus to invite the public to subscribe to its shares and debentures. A Private Company is not entitled to advertise this document. No prospectus may be issued unless a copy has been filed with the registrar. It must be signed by every person named in it as a director or his agent authorized in writing.

Allotment of Shares

When applications have been received from different persons, the directors will allot the shares to applicants. As the allotment is the acceptance of the offer of the applicant, and as such, constitutes a binding contract with the applicants.

Certificate of Commencement of Business

A public company may not commence its business unless the following documents are submitted to the registrar:-

Minimum Subscription

A statutory declaration on the prescribed form that the shares have been allotted to an amount not less in the whole than the minimum subscription.

Payment of Shares

Every director of the company has paid for the Company’s qualification shares.

Submission of Prospectus

The company has filed a prospectus or statement in lieu of a prospectus with the registrar.

Declaration Regarding condition

A statutory declaration by the secretary or one of the directors on the prescribed form that all. the conditions have complied with companies ordinance 1984.

After verifying these foregoing documents, the Registrar issues a certificate of commencement of business to the Public Company. Now this company is entitled to commence its business from the date of obtaining this certificate.

Why Joint Stock Company is Good? The most Amazing Advantages

Features & Advantages

Limited Liability

The liability of each shareholder is limited to the unpaid value of the share holds. If he has already paid the total value of the shares, his liability will be nil. Private assets of the members are not liable to settle the business obligations. But in sole tradership and partnership, the private property of owners is also to pay the debts of the business.

Larger Capital

As there is no restriction for the maximum numbers in the public company, it can attract huge capital from thousand of persons of varying incomes. Thus the problems of deficiency of capital may not arise in this organizational structure.

Expert Management

Joint stock companies hire professional directors in many ways as well as the service of qualified technical and administrative abilities due to its sound financial sources. The management is generally conducted by expert and professional directors.

So, its sources can be utilized to the maximum for productive purposes. They overcome the depression phase of the business cycle with their experience to retain in the market.

Long Life (Perpetual Succession)

It normally possesses a perpetual life. The death of a director or member cannot affect the life of the joint stock company. it has a separate life apart from its members. On the other side, the biggest disadvantage of a partnership is that the death of any partner may dissolve the partnership.

Objective of Formation

The basic object of the formation of the joint-stock company is to earn profit. While profit is not distributed among the shareholders but some portion of the profit is transferred to the reserve fund. So that it may be used at the time of emergency.

Opportunity for Investment

As the company can divide its ownership into shares of a small denomination, it is possible. All groups of society to invest their amount in joint stock company.

Public Confidence

Joint stock company is created by law and is supervised by legal authority. So this form of business can easily win the public confidence and faith. This is no added advantage of a company that the public feels no chances of fraud or misrepresentation.

The major difference in partnership and company is Public has less confidence in one-man ownership and partnership.

Growth of Heavy and Risky Industry

The heavy and risky industry may be started only under this organization due to the following factors.

• Limited liability.
• Larger capital.
• Better management and technical abilities.

Separate Legal Existence

It is created by law or by the particular Act of the company. it possesses separate legal existence apart from its members. So it can accept loans, hold property, make contracts,s and open bank accounts in its own name.

Transferability of Shares

The share of a public company may easily be transferred to another person and may be disposed of in the stock exchange market. So its members are ways in a position to withdraw their capital under its Acts.

Promotion of Thrift

Joint stock company provides the opportunities to the general public for the investment of their savings. So this tendency promotes the habits of savings and thrift among the public.

Expansion of Business

As it can attract a huge amount of capital from the issue of shares, debentures, and bonds, it is possible to increase its business activities for productive purposes. There is no limit to the maximum number of shareholders in the case of a public company, capital may be increased and large business may be commenced. But it is not possible in another form of the organization due to lack of capital.

Minimum Risk of Loss

There is a minimum chance of loss under this organization. If there is a loss it will be sustained by a large number of investors. So the hardship cannot be confined into few hands as in the case of partnership.

Chances of Increasing Funds

A joint-stock company has wide power by law to raise its effective funds and capital by (a) sales of its debentures. (b) sale of its shares. (c) issue of secured and unsecured bonds ( In advanced counters) (d) Contracting loans on a mortgage of its assets.

Job Opportunity

Joint stock company provides job opportunities to millions of people working there in various industrial units.

Flexibility

As management of the company is conducted by few persons known as the board of directors, they are in a position to bring new changes in the business. Capital sources and human abilities can be adjusted to the new situation. If the director is found indifferent in this respect he may be removed from his office.

Economies

It can enjoy the benefits and economy of large-scale production, management, and distribution. By introducing better methods of production they try to save or reduce unnecessary expenditures.

Growth of Economic activities

Joint stock companies increase the economic activities in the country. These provide the major source of revenue for the government. Industrial units produce the goods at a large scale and thus provide the necessitates of life at a low price. so the healthy growth of joint stock companies may bring positive results in the economic structure of the country.

Loans at Company Name

The company can receive loans in its own name which are payable by the company itself. But in the partnership, the loans are obtained by the partners by their own names which creates various problems for them.

Roles

Its activities are controlled by many central or provincial departments. They are numerous rules which must have to be carried into effect by the company. It has to audit its account and submit the various reports to Registrar’s office. It thus cannot operate freely without any interference.

Numbers of Members

There are large numbers of members in the joint stock company. In the case of a public company, a minimum number of members is seven and there is no restriction for the maximum number of members. In the case of a private company, the minimum number of members is two, and the maximum is fifty.

Agreements or Contracts

As a joint-stock company enjoys a separates existence it may enter into trade agreements in its own name.

Change the Nature of Business

In the partnership, the nature of the business may easily be changed with mutual consent from partners. But object clause of the Memorandum of Association which also describes the nature of the business may not be Changed except the sanction of the court.

Why Joint Stock Company is Bad? 15+ Disadvantages

The Demerits

Complicated Formation

The process of the formation of all types is very complicated. It requires a long time and formalities. Like, Director’s appointment, There are many legal documents that must be prepared and submitted to the registrar’s office before its formation.

Operational Expenses

A joint stock company is a costly organization. Certain fees and other charges during the operation are paid to the government. Many persons are engaged in various departments and heavy salaries are paid to them. So its financial source is utilized in unproductive sectors.

Concentration of Control

The management of the joint-stock company is concentrated into a few hands known as the board of directors. The shareholders who are the actual owners are not entitled to participate in the affairs of the company. So, they cannot know the internal activities of the directors who take undue benefits from their ignorance.

Limited Personal Interest

Its ownership belongs to thousands of persons who do not know each other. Secondly, the business activities are conducted by paid persons who do not take an interest to create a direct relationship with the public. SO, a business may suffer a loss due to the absence of personal relationships.

Promotion of Speculation

The price of the shares fluctuates at the stock exchange due to various factors. This promotes careless speculation in the country which results in trouble for the public.

Lack of Responsibility

Directors generally employ their friends and relatives on key jobs. But these persons are incompetent and inexperienced to conduct and follow the affairs of the business. So they cannot perform their professional duties with great responsibility.

Growth of Monopoly

The growth of joint-stock companies leads to a monopoly which is always against the public interest. It trees to have monopolistic control over the market. So this becomes the cause of the sufferings of the peoples and dissolution of the small firm.

Conflict of Interest

There are various groups in the joint stock company who have different voting rights, power, and share in the dividend. This disparity creates a conflict of interest between shareholders and management groups and among different types of shareholders which results in misunderstanding friction and exploitation of shareholders.

An Absence of Mutual Spirit

It is highly essential for the successful operation of the company that there must be a spirit of mutual help among the members. But this quality cannot be found in the company due to the transferability of shares.

Social Drawbacks

The following are the drawbacks of the growth of joint-stock company:

• Just the rate of wages is not paid to workers.
• Working conditions are not improved.
• Fringe benefits are not provided.
• Human prestige is injured.
• Devices of manipulation have been developed.
• An unhealthy atmosphere within the industry has affected the health of employees.

So the foregoing defects have created great hatred and discrimination between the employers and employees.

Corruption and Fraud

Some shrewd promoters present a very bright picture in the prospectus to attract capital from the public. Thus they deceive innocent investors for the accomplishment of their selfish ends. Moreover, big industrialists create corruption in the political life of the country.

Concentration of Wealth

After the introduction of the joint stock company, the combination among the various business units has been taking place to a great extent which causes the concentration of wealth into few hands. It has split up the society into two groups i.e. rich and poor. The rich have become richer and the poor have become poor.

Leakage of Secrecy

As there is compulsion by law for a public company to publish its accounts and submit various reports to the registrar, the secrecy cannot be maintained forever. Employees may leak out the secrecy of trade agreements, techniques or production, formula, and other necessary matters.

Bogus Report

Directors know the internal affairs of the company, but they do not present a true picture before the shareholders in their respective meetings. So interested parties may not know the actual performance of their business.

Lack of Freedom

There is much interference during the operation of the joint-stock company from various government authorities. There is also a compulsion by law to submit various reports to the registrar’s office. So this organization cannot perform its function freely.

Methods for Directors Appointment

In joint stock company, shareholders are owners of the company too. Each share holder’s certificate is its ownership paper. This paper can be sold and bought in the market without disturbing all processes.

Selection by Promoters

The first directors of the company are selected by promoters. Their names are generally laid down in the articles of association. But their appointment cannot be valid unless they submit the following two declarations to the Registrar’s offices.

1. Written consent to act as directors.
2. An agreement in writing to take and pay for his qualification share

The foregoing provision does not apply to a private company.

Appointed by the Subscribers

If the articles are silent to describe the first directors of the company, the subscriber to the memorandum is to be deemed the first directors of the company and subsequent directors are to be elected by shareholders in the general meeting.

Elected by Members

The first directors of the company have to retire on the occasion of the first annual general meeting, so the necessary number of directors will be elected by members, in this meeting. Thereafter all such directors shall retire on the expiry of the term laid down section 180 in companies ordinance 1984.

Nomination by the Directors

Natural Appointment

A casual vacancy is caused by death disqualification or the resignation of directors. It may generally be filled up by the board of directors without the prior consent of the shareholders. Such directors will hold office for the remainder of the term of the director in whose place he is appointed under section 180 in companies Ordinance 1984.

Special Appointment

In addition to the directors elected or deemed to have been elected by shareholders a company may have directors or other special interests by virtue of contractual arrangements under section 182 in companies Ordinance 1984.

NUMBER OF DIRECTORS

In case of Public Company

There must be at least seven directors for the management of the company under section 174 of the Company Ordinance 1984. A maximum number of directors are appointed according to the provision of the Articles of Association. Under Section 177 all directors shall be liable to retire on the expiry of the term laid down in section 180.

In case of Private Company

Its shareholders may elect at least two directors and a maximum number of directors will be described by the Articles of Association. The provision of the retirement of directors does not apply to a private company.

Role or Position of Directors

The directors are representative of the shareholders. He is one of those persons who is authorized to conduct the management of the company. The directors are collectively known as the “Board of Directors.” They frame policies and take decisions to realize the objects of the company.

Directors have two positions in the Joint Stock Company

As an Agent

Directors are considered special agents of the company and not ordinary agents. The contract made by them will bind the company so long as they act within the scope of their authority. So they are not personally responsible for the contracts they made on behalf of the company. As agents, they have the authority to act in all matters but their powers are limited by the Articles of Association.

As Trustee

• Directors are trustees for the company to some extent.
• They are of the powers placed in their hand to exercise them for the company’s benefits.
• They are empowered to make calls, to allot shares, to issue and forfeit shares.
• They are trustees of the company but not for individual shareholders or any third person.

The Circumstances causes Winding Up

Expiry of Fixed Period

Where the period is fixed for the duration of the company by the Articles, it. maybe winding up on the expiry of the period. But the company has to pass an ordinary resolution in general meetings to wind up.

Happening of Event

A company may be wound up on the happening of the event on which (under the Articles) the company is to be dissolved.

Special Resolution

A company may be wound up voluntarily if the company passes a special resolution for this purpose.

Heavy Liabilities

A company may be wound up if the company passes an extraordinary resolution that it cannot continue its business due to its heavy liabilities.

The Ways to Dissolve Company

Statutory Report or Meeting: Procedure in Member’s Voluntary Winding Up

Where default is made in submitting the statutory report to the registrar’s office or in holding the statutory meeting within the prescribed time or any two consecutive annual general meetings under section 305 (b) in company ordinance 1984.

Statutory Declaration

The majority of directors make a statutory declaration of solvency for submission to the registrar intimating him that have made a full inquiry into the company’s affairs, they are of the opinion that the company will be able to pay its debts in full within three years from the commencement f the winding-up,

Special / Ordinary Resolution

After the declaration of solvency has been submitted to the registrar, the company in general meeting passes the ordinary or special resolution as the case may be for the winding up of the company.

Appointment of Liquidator

The company in general meeting appoints a liquidator to wind up the company’s affairs and distribute its assets. The remuneration of the liquidator may be fixed in this meeting. On the appointment of a liquidator, all the powers of directors and other officers end except so far as the company in its general meeting or the liquidator himself sanctions their continuance. Within ten days after the appointment of a liquidator, the notice regarding the appointment must be sent to the registrar.

Final Process of Winding Up

If the winding up continues for more than one year, the liquidator has to call a general meeting of the company at the end of each year. When the company’s affairs are fully wound up, he has to call the final meeting of the shareholders. At this meeting, the liquidator must submit a final account of the company’s affairs to the members. Within one week after the final meeting, the liquidator must file with the registrar a copy of the accounts and a return of the holding of the meeting. At the end of three months from the date of registration of return, the company is dissolved and its name is struck off the Register of Joint Stock Companies.

Inability to Pay Its Debts:
Creditors Voluntary Winding Up

Where the company is unable to pay its debts in the following situation. 

If a creditor whose debt exceeds $50,000 or one percent of its paid-up capital whichever is less under section 306

(a) Has served notice requiring payment and is not paid within 30 days.

If execution in favor of creditor remains unsatisfied or

If the court is fully satisfied that the company is quite unable to pay its debts.

The procedure for a creditor’s voluntary winding up is as follows:

Solvency Declaration

Statutory declaration regarding the solvency of the company is not necessary in case of the creditor’s voluntary winding up.

General Meeting

A general meeting of the company will be called for the purpose of passing the extraordinary resolution. This resolution is required for the winding up of the company because it cannot continue its business because of its liabilities.

Creditor’s Meeting

The company must call a meeting of the creditors on the same day or on the following day after the general meeting of the company. A notice must be sent in writing to each creditor for this purpose.

Statement of Company’s Position

The directors of the company must lay before the creditors a full statement of the company’s position, a list of creditors, and their estimated claims. A director of the company, appointed by other directors must preside at the creditor’s meeting.

Intimation to Registrar

The information regarding the notice of resolution passed must be sent to the registrar within ten days from the date of the creditor’s meeting.

Appointment of Liquidator

The creditors and the company at their respective meeting may nominate a person to act as liquidator. If different persons are nominated by creditors and companies respectively, the opinion of the creditors shall hold good.

Committee of Inspection

The creditors and the members at their respective meetings may appoint a committee of inspection consisting of five persons in each committee.

Liquidator’s Powers and Duties

The liquidator may exercise his power for the winding up of the company with the sanction of the committee of inspection or in the absence of such committee, with the creditors.

Liquidator’s Remuneration

The liquidator’s remuneration is fixed by the committee of inspection or, if there is no such committee, by the creditors

After the Expiry of One Year

If winding up continues for more than one year, the liquidator must. call the meeting of .creditors and members at the end of each year. He must lay before the meeting an account of his acts for the winding up during the preceding year.

At the End of Winding Up

On completion of the winding up, the liquidators have to cal final general meeting of the members and a meeting of creditors. The notice for these meetings must publish in the gazette and newspapers at least ten days before the meeting.

The liquidator has to lay his reports regarding the accounts and assets of the company before the meeting. Within one week after the date of the meeting, the liquidator must submit to Registrar a copy of his accounts and a return of the holding of such meeting.

Dissolution of the Company

At the end of three months from the date of registration return, the company is dissolved and it ceases its legal entity.

Winding up of a Joint Stock Company Under Supervision of Court

When the court is of the opinion that it is just and equitable that the company should be wound up due to its mismanagement, dead-lock, fraudulent, or any other reasonable grounds.

Resolution

At first, the company has to pass special or extraordinary resolutions to wind up voluntarily.

Petition for Subject to Supervision

When there are frauds or irregularities in the voluntary winding up, the petition may be presented by one or more of the competent parties for winding up under the supervision of the court.

Supervision Order

If it thinks fit, the court may order that the voluntary winding up shall continue but subject to the supervision of the court and on such terms and conditions as the court thinks just.

Power of the Court

The court has the power to appoint an additional liquidator to remove any liquidator. But generally, the liquidator appointed by the company for the voluntary winding up continues in office subject to his giving of security.

Dissolution of the Company

When the supervision order is made, the liquidator may exercise all his powers in a voluntary winding up. On completion of the winding-up, the court will make an order that the company is dissolved.

Special Resolution

A Joint stock company may be wound up by the court if a special resolution is passed for this purpose.

Failure to Commence Business

When the company does not commence business within a year from its incorporation or suspends business for a year.

Reduction in Number of Members

Where the number of members of a public company is reduced below seven or in case of private company below two.

A contract is an agreement between two or more persons to do or not to do some particular thing, such agreement being enforceable at law. According to section 2 (h) 1872 contract act, It is an agreement enforceable by law

Therefore, is an agreement the object of which is to create an obligation. In other words, It is a combination of two ideas- Agreement and obligation.

Contract = Agreement + Obligation

An agreement creating and defining obligation between the parties

SALMOND

“An agreement as the source of a legal commitment import that one party shall be bound to some performance, which the other shall have a legal right to enforce”.

LEAK

“This undertaking is an agreement enforceable at law made between two or more persons by which rights are acquired by one or more to act or forbearance on the part of the other or others”.

ANSON

Example

If there is an agreement between X and Y, that X will construct a house for Y, and Y will pay rupees 5 Laces to X, the agreement contracts.

The term agreement is wider than the term “Contract”. An agreement may exist without any legal obligation and it covers a variety of transactions which may not be enforceable by law.

All contracts are, therefore, agreement, but all agreement are not necessarily contracts. An agreement can be a contract only when it is enforceable at law.

Difference Between Void & Voidable Contract

Examples

If A delivers goods to B under a mistaken belief that B is C and B sell these goods to D, who is a bonafide purchaser, for value without notice, A can recover the goods from D because D purchased the goods from a man who had himself no title under a void contract.

If however, B obtain the goods from A by a fraudulent or misrepresentation and then sells them to D, a bonafide purchaser, A cannot recover the goods from D until A has avoided the contract with B.

Essential of Valid Contract

Agreement

There should be an agreement between the two parties i.e. purposer and acceptor. One making the proposal and others accepting it. The proposal and acceptance must be made in accordance with the rules contained in the contract Act.

Example

X Offers to sell his house to Y for Rs.7 laces Y accepts the offer to purchase the house for Rs.7 laces. This is an acceptance by which agreement may be made between proposer and acceptor

Creation of Legal Relationship

The intention of the agreement must be to create legal relations between the proposer and acceptor. The agreement must be capable of performing with terms clear and certain.

Example

X offers to sell his car to Y for Rs.3 laces and Y is ready to purchase it at Rs. 3 laces. There is a contract as it creates a legal relationship between X and Y.

Competent to Contract

Every person is not competent to enter into a binding contract. Under section II, the persons who are not competent to contract are those (i) who have attained the age of majority according to the law by which they are governed. (ii) Who are of sound mind, and (iii) who are not disqualified by any law to which they are subject. Minor has no capacity to contract so his agreement is void. He is not liable to perform what he has promised to do under an agreement.

Free Consent

For the validity of an agreement, it is essential that it must have been made by the free consent of the parties. Under Section 13, two or more persons are said to consent when they agree upon the same thing in the same sense. It is when there are consent that the parties are said to of the same mind. When one party has a different thing in mind or when each understands the thing in different way, there is no consent by the promise.

Under section 14, consent is said to be free when it is not caused by (1) Coercion (2) Undue influence (3) Fraud (4) Misrepresentation or (5) mistake as defined in relevant sections. It is an important essential for the validity of a contract. Where there is consent, but not free consent, there is generally a contract voidable at the option of the party whose consent was not free.

Consideration

Consideration is indispensable for every contract. An agreement is invalid if it has been concluded without any consideration. It is an act i.e. past, present or future done or to be done at the request of the promisor, by the promise or any other person. For the validity of an agreement, the consideration must be lawful

Example

X agrees to sell his car to Y for Rs.5 laces. Here X’s promise to sell his car is for Y’s consideration to pay Rs.5 laces. Similarly, Y’s promise to pay Rs.5 laces is for X’s consideration to sell his car to Y

Capability of Performance

The contract must be made for definite, certain and capable of performance terms. An agreement, the meaning of which is not certain and clear or capable of being made certain are void.

Example

• X agrees to sell to Y a hundred ton of oil. There is nothing whatever to show what kind of oil was intended to sell. The agreement is void for uncertainty
• X agrees to sell to Y five hundred tons of rice at a price to be fixed by Z. There is no uncertainty to void because the price is being capable to stay certain.

Not Expressly Declared Void

In order to make a valid contract, an agreement must not be one of those that are expressly declared by law to be void. The agreement that is expressly declared to be void is as follows:

1. Agreements in restraint of Marriage.
2. Agreement in restraint of trade.
3. Agreements by way of a wager.
4. Agreement to do impossible acts.
5. Agreements in restraint of legal proceedings.

Legal Relationship

An agreement is a contract only when it is made with a lawful object. Under section 23, “Every agreement of which the object or consideration is unlawful is void.”

Example

X, Y and Z enter into an agreement for the division among them of gains acquired, or to be acquired, by them by fraud, the agreement is void as its object is unlawful

Other Legal Requirements

The agreement must be in writing, attested by the witness and registered. If so required by any provision of law in force in our country. Some agreements such as:

1. Agreements to the transfer of immovable property
2. Agreement to pay a time-barred debt
3. Agreement to refer the disputes to an arbitrator for arbitration is such agreement which must be reduced to writing and registered before they can be legally enforced.

Holding Company and Trust are two main types of limited partnership and joint stock company. The major differences in both are their structures as well as few other things.

Holding Company: is a company which actually holds shares of other producers and services providers. These companies are not producing goods and services by themselves but they earn a profit this way. Advantages and Disadvantages of holding companies must be considered before setting up.

Trust Company: is a type which administrate things in any company on their behalf. They are not owners – they are just Legally authorized bodies or trustees. Trustor (The owner) gives rights to trustee (Trust company) to invest, estimate, manage and hold things on third party behalf; also known as beneficiary.

Formation

• Its process for formation is very complicated. Consent of the proposed members is necessary for its formation
• A holding company may be formed easily without the consent of its subsidiaries

Management

• It is managed and supervised by the Board of Trustees
• Board of Directors is liable to manage the holding company and its subsidiaries

Objective

• It is formed to create a monopolistic situation in the market. Therefore its objects are illegal and regarded against the welfare of the public
• Its objects are legal. Therefore its activities are not considered against the public interest

Right of Issue

• Trust can issue a trusted certificate to its member’s companies. It has no right to issue any kind of shares certificate
• Holding company can issue the share certificate to its members. It cannot issue trust certificates

Position

• It is a strong form of combination. A member company cannot easily come out of the trust
• It is a comparatively loose form of combination. The holding company can easily give up control of its subsidiaries

Centralized Control

• In the trust, the member companies surrender their shares to the Board of Trustees. Thus they secure the centralized control and become the “Beneficiaries” of the trust agreement. It has pros and cons too.
• Majority of the shares of limited company must be secured by holding company in order to obtain centralized control

The business combination is formed when two or more business undertaking units combine to carry on business together for achieving economic benefits.

It is also originated when a number of different business concerns of the same line combine together under one management with a view to achieving some definite objects of mutual benefits.

At present we find a general tendency to form a cartel, trust, holding companies, pool, and amalgamation, etc at home or abroad for the object of increasing capital volume, specialization, and standardization. Rival firms combine together in order to avoid the heavy cost of the competition.

Forms of Business Combinations

At present we find a general tendency to form a cartel, trust, holding companies, pool, and amalgamation, etc at home or abroad for the object of increasing capital volume, specialization, and standardization. Rival firms combine together in order to avoid the heavy cost of the competition.

These business combination forms have different types; entirely depend upon missions, agreements, benefits of both parties.

Trade Association

It is a voluntary association of traders, merchants, and industrialists who belong to a particular place and who engage in similar nature of business. It is formed for the achievement of common purposes.

For example, Cloth Merchants Association, Leader Traders Association, Iron Merchants Association. A common fund is established in which each member contributes for the protection of their interest.

Objective of Trade Associations

• To Encourage the friendly relation among the members.
• To avoid the competition among the members.
• To promote the interest and welfare of its members.
• To arrange the supply of raw material and labours.

Chamber of Commerce

It is an association of various merchants, industrialists, and businessmen who belong to a particular city or district. It is formed to promote trade, commerce, and industrial activities in the country. Its management is conducted by an elected executive committee.

The government has also the right to appoint some members. Its recommendations are considered very useful in formulating budgets and other trade and commercial policies. These chambers remain in close touch with the Ministry of Commerce.

Objectives of Chamber of Commerce

• To protect the interest of its members.
• To promote the business activities in the country.
• To remove or minimize the effect of trade restrictions.
• To collect the information relating to trade, commerce, industry and shipping.
• To settle the disputes arising among the members inside or outside the business.

Pool

A pool is a device to regulate production, divide the territory of the market, and distribute the profit of its members. Under this system, members do not lose their entity so it is deemed a stable form of combination.

Objectives of Pool

• To avoid competition among its members.
• To regulate the supply of production.
• To control the prices of product.
• To avoid over production.
• To minimize the expenditure on distribution.
• To earn handsome profit of their goods.

Cartel

It is an association .of independent producers and businessmen to design certain arrangements for jointly conducting their marketing functions. A joint selling agency is to be organized for performing marketing functions.

All the participating members agree with the cartel to dispose of their entire product to it. Then the cartel arranges to supply the goods to the market. It is a loose type of combination where the member units enjoy full independence. So they can easily come out of the cartel at any time.

The form of the combination was first introduced in Germany.

Objectives of Cartel

• To achieve economy of large scale distribution.
• To eliminate unnecessary competition.
• To limit the supplies of their product.
• To improve the quality of the product and condition of sale.
• To control the price of their products.

Rings

This is an organization of producers who combine to restrict the output they produce for the purpose of securing some monetary gain. All the members agree with the ring that they would not produce the goods in excess of the quota fixed for them. Defaulters are to be fined by the rings. It is usually organized to exploit the consumers.

Objectives of Rings

• To avoid over production.
• To control the supply of the product.
• To secure monetary gain by controlling price.

Trust

Trust is another kind in which the stockholders transfer a majority of their stock or shares to a Board of Trustees in exchange for trust. certificates This is the combination of several joint-stock companies which is managed by the Board of Trustees who control the shares of stock of its members.

Trust is formed to control the production and distribution. As it enjoys a sound financial position it can achieve the benefits of large-scale production. This is a strong vertical type of combination. Its members cannot easily come out of the trust.

Trust originated in the U.S.A in 1879 but due to its harmful activities for the public, it was declared illegal by the court in 1890.

Objectives of Trust

• To increase capital volume for large scale production.
• To enjoy the benefits of large scale organization.
• To achieve the economies in production and distribution.
• To control the market.
• To regulate the prices and output.

Corner

This is the combination of speculators which is generally organized in the share market. Under this system, entire goods or shares available on the particular market are purchased by the corner with the object of reducing the supply to the minimum.

Thus its members are in a position to achieve monetary gain by affecting prices. But in the modem age, this device cannot be successful due to fast means of transport and communications.

Objectives of Corner

• To establish a temporary monopoly of the market.
• To charge high prices of their goods.
• To control the supply of the particular commodity.

Informal Agreement

This is the form of mutual understanding or agreements among the competing business with the object of controlling the prices of the product and regulating the market. This is the simplest and loose form of combination which is generally based on oral agreement among the rival units.

A member can be expelled from the combination if he fails to abide by any rules and regulations but it may also come to an end if the members are violating rules. This is also known as Gentlemen’s, Agreement.

Objectives of Informal Agreement

• To avoid unnecessary competition among the constituent units.
• To control the prices of the product.
• To improve the condition of the scale.
• To restrict output of the competing members.
• To reduce the cost of marketing the product.

Syndicate

This is the organization of producers and manufacturers who combine to regulate the product and price. This is a loose type of combination in which member units have complete independence in the matter of internal administration of their own units.

It can be formed at a local, national and international level. The following procedure is to be adopted by the syndicate.

• Its members cannot dispose of their product directly in the market, but entire output of its members are purchased by syndicate at agreed prices.
• Syndicate arranges to sell the product of its members in the market at reasonable prices.
• The profit earned by the syndicate is distributed among the members in agreed producers.

Objectives of Syndicate

• To avoid competition among the producers.
• To regulate the output and prices of the product.
• To locate reasonable market for the products of its constituent units.
• To dispose of the output at handsome prices.

Holding Company

A holding company is a device to control the majority of other company’s shares. Under this system, any company may become holding if a sufficient number of shares are purchased by it.

The company whose shares are owned by the holding company is named a subsidiary company. A company may itself be a holding company and at the same time be a subsidiary to another company.

Objectives of Holding Company

• To eliminate competition.
• To obtain the benefit of large scale production.
• To achieve economy in the field of management and production.
• To increase the efficiency of business by modern technique.
• To control market and to avoid over production.
• To enjoy the research results and patent rights of each other.
• To increase the financial stability of the subsidiary company before the general public.

Amalgamation

When two or more joint-stock companies which are already established combine into large one amalgamation comes into existence. New combination companies generally take over all the assets and obligations of the old companies.

Each company of the amalgamation lost its separate entity. For example, if X company and Y company combined together under the new name of X and Y company it is called amalgamation.

Objectives of Amalgamation

• To achieve the economies of large scale production.
• To increase the financial resources.
• To attain the benefit of technical and scientific development.

Merger

When a joint-stock company takes over the entire ownership of one or more than one business unit. It is known as a merger. So two or more firms absorb into one in exchange for stock and shares. In case of a merger, each firm loses ~ its separate entity. For instance, if y company merges with the A company, y company will lose its identity.

Objectives of Merger

• To eliminate competition.
• To secure benefit of large scale production.
• To control market.
• To achieve the economies in management, production and distribution.
• To hire the services of expert and efficient persons.
• To enjoy taxes and other exemption facilities.
• To increase the efficiency of business by adopting technique, improved formula and scientific invention.

Types of Business Combination

Vertical Business Combination

The vertical combination takes place when the various departments of large industrial units combine together under single management. Under this arrangement, constituent units link up all the stages of production i.e. from purchasing raw material to its finishing.

Objectives of Vertical Business Combination

• To regular the supply of raw material
• To achieve economy in the purchasing and other sectors.
• To locate the assured market for their products
• To minimize the cost per unit.
• To eliminate competition.
• To avoid over production.
• To reduce the middle man’s commission.
• To supervise the management and production of effectively.

Horizontal Business Combination

When two or more similar nature business units combine under one management Horizontal combination comes into form. For instance, two or more textile industrial undertakings unite under single management it is called a horizontal combination. It is also known as a parallel combination

Objectives of Horizontal Business Combination

• To achieve benefits of large scale production.
• To avoid competition.
• To obtain economy in management and production.
• To regulate the prices of product.
• To hire the service of outstanding talented persons.
• To increase the efficiency of constituent units.
• To produce the goods at minimum cost.
• To supply the goods at possible lowest prices.
• To secure the market of the product.
• To introduce the improved method of production.
• To avoid over production.

Circular Business Combination

When different natures of industrial business units combine into a single large company under one managing authority it is called a circular combination. It is also named a lateral combination.

For example, if sugar; chemical, and glass industries are combined together under one controlling authority, a circular combination takes place.

Objectives of Circular Business Combination

• To establish the cordial relation among the constituent units.
• To supervise the production and management most effectively.
• To promote the cooperation in financing advertising, research and other overheads.

Diagonal Business Combination

The diagonal combination takes place when two or more business units rendering subsidiary services unite under the main industry. Suppose if repairing and distributing units are combined with the textile industrial units, it is called diagonal combination.

Objectives of Diagonal Business Combination

• To maintain the quality of the product.
• To reduce the cost per unit.
• To achieve the economy in various overheads.
• To promote the efficiency of business