Company Law

Q 1. What are the basic characteristics of company?

Following are the characteristics of company.

1. Legal Personality

Company has legal personality because the law has granted company status of
separate legal personality. Separate means it has separate legal personality from that
of its members, shareholders, investors. Because the law has granted this entity a
separate legal personality.

Whenever an entity is interested to register itself as a company, the entity would

fulfil certain legal conditions or certain legal formalities. And when that entity would
fulfil those legal formalities the law would grant that entity the status of legal person
and that legal person would be known as company. A company would get the status
of legal person at the time of its registration. When the company would obtain the
certificate of registration it would be considered as a complete legal person. That
legal person can do a business like a natural person but cannot do certain things like
natural person for example contract of marriage etc.

In law there are two kinds of persons. One is natural person and second one is legal
person also known as artificial person.

Principle of Separate Legal Personality

Principle of separate legal personality was established in 18 th century. The most

significant case in the history of company law. The principle of separate legal
personality was fully established in this case that is Salomon vs Salomon and
Company LTD.
❖ Case Law

Salomon was a shoe manufacturer. He was doing a business as a sole trader. He

decided to convert his sole trader ship business into a company. He for this purpose
register a company. At that time in company law it was a requirement to register a
company that you must had at least seven shareholders. Therefore, to fulfill this legal
requirement Salomon involve his family members to be the part of this company and
to become the shareholder of the company.

Salomon gave 1 share to each of his family member. The Salomon register a
company and sold his sole trader ship business to the company. Salomon sold that
business to the company for 38000 pounds. For payment of this amount the
company has issued to Salomon the 20000 shares 1 pound per share. 20 thousand
pounds the company paid to Salomon in the form of shares. 8 thousand pounds the
company paid to Salomon in form of cash. The remaining 10 thousand pounds
Salomon gave the loan to the company. From 20 thousand shares Salomon gave 1
share to each of his family member and kept all the remaining shares in his pocket
and became the majority shareholder of that company.

The company started the business and Salomon was the majority shareholder. All
his family members were also the shareholders. Salomon was also the director of the
company. In coming days, the company also obtain loan from other creditors as well.
(The loan is of two kinds. Secured and unsecured loan. If there is security against
loan that is secured and if there is no such security against that loan that would be
termed as unsecured loan). After some time, the company face insolvency or
bankruptcy. The creditors ask the company to pay back the loan. The company said
that we would pay back the loan of Salomon first and then we would pay back the
loan of other creditors because at the time of insolvency the secured loan always
paid before the unsecured loan. Salomon was a secured creditor and all other
creditors were unsecured.

The unsecured creditors said to the company that the company is nothing but the
Salomon himself because he is the majority shareholder, he is the director and he
has tried to use this medium of business against his financial interest and declared
himself as secured creditor while all other were unsecured creditors. Therefore, the
interest of unsecured should be protected because the Salomon is nothing but the
company himself therefore the payment of loan of Salomon should be paid after the
payment to unsecured creditors.

Judgment

The company refused to accept, and the unsecured creditors went to court. The court
of first instance at England after looking into mater decided in favor of unsecured
creditors that the Salomon is nothing but the company himself and therefore the
claims of unsecured creditors would be satisfied before the Salomon.

The Salomon went to the court of appeal against the decision of the court of first
instance. The court of appeal after looking into the matter again decided in the favor
of unsecured creditors that their claims should be satisfied before the claims of
Salomon.

Against that decision Salomon further moved to House of Lords. And House of
Lords finally after looking into the matter decided in favor of Salomon by saying
that the day company was registered the company became a separate legal person
from that of its shareholders form that of its members. And now the company has
obtained loan from its shareholder and that is secured loan. All other loans and
creditors are unsecured. Therefore company from the time of its registration is a
separate legal person from that of its member and can validly enter into a contract
with any of its shareholder and the law would protect that contract because the
company is a separate legal person from its member that no one can say that the
Salomon is the Majority shareholder as well as the director of the company that’s
why his claims should not be satisfied before the unsecured creditors. He is a
separate person and company is itself separate legal person it has nothing to do with
Salomon. Company can enter into any contract with Salomon and that contract
would completely protected by law.

From this case it was fully established that after the registration when the law would
grant company a separate legal personality a company would become a separate
legal personality.

2. Limited Liability

This is a second important characteristic of a company. Liability is limited when you

are liable up to the extend of your investment. Liability would be unlimited when
you are personally liable like in partnership. When a legal person does a business at
his own name then that person would be liable for his acts like a company and the
people those invested they are not personally liable but the company itself personally
liable because their personalities are separate from the personality of a company.
They are only liable up to the extent of their investment.

For instance, there is a company ABC private limited company. For a company it is
compulsory to write in its name a word limited. This word tell that the liability of
the investors is limited up to the extent of their investment. If the word limited is not
written in the title name of the company then it means it is not a company but a firm
or organization or partnership.
3. Perpetual Succession

Perpetual succession means people may come and leave the company,

but the company would stay there. When the company is brought into existence
company got the birth and the company would stay alive as long as the company is
interested to stay alive. No one can kill the company by leaving the company and no
one can kill the company by come in the company. If you are the shareholder of a
company, you can leave the company after 10 years or when you want but company
would stay there. The arrival or departure of the shareholders would not make any
impact on the existence of the company because company is a person itself.
Company would remain there unless it is dissolved by following the legal procedure.

4. Common Seal

The common seal means the stamp of the company. For instance, the ABC private
limited enters into a contract with XYZ private limited that ABC is going to by such
material for one million rupees from XYZ. They enter into a contract and finally the
contract is finalized and there would be a stamp of the company the seal of the
company ABC Pvt Ltd. Company stamp the transactions with its name that the ABC
Pvt Ltd enters in this transaction.

These four characteristics are for both private and public companies.

5. Separation of Ownership and Control

In public companies’ ownership is separated from the control. It means the people
those own the company infect do not control the company. For instance, if you are
shareholder in the company and you have bought certain shares in the company.
When you have bought the shares in the company you would not go and run the
company by yourself even though you are a shareholder, but company would be run
by its directors appointed by shareholders. When the company is own by someone
else and control by someone else that is known as separation of ownership and
control.

6. Transferability of Shares

Transferability of the shares is also a characteristic of the company that is relevant

to the public company. You have bought certain shares from stock exchange and
you can sell those shares in stock exchange the very next day if you are interested to
do. No one can stop you from doing that. This a characteristic known as
transferability of shares. You can transfer your shares from one hand to another hand
without the permission of the company whose shares you have bought. This is only
possible in case of public companies.

Q.2 What are the kinds of company?

There are two kinds of companies.

1) Companies by Special Act of Parliament

These are the companies established by the special act of the parliament. These
companies are managed by rules and regulations provided in those acts. The most
common example of these companies is PIA, Pakistan Railway. These companies
are generally known as corporation.

2) Companies by General Act of Parliament

These are the second kind of companies which are established by the general act of
parliament. There are different general acts under which the companies are
registered. In our jurisdiction that general act is known as companies act 2017.
The companies which are registered by the general act (known as companies act
2017) are of two types. Limited and unlimited companies.

i. Unlimited Companies

Unlimited companies are those in which the liability would be unlimited. In other
words, the personal liability. These types of companies are not very common.

ii. Limited Companies

Limited companies are those in which liability would be limited. There are two
further kinds of companies which are limited by liability. Companies limited by
shares and companies limited by guarantee.

a) Companies Limited by Guarantee

Companies limited by guarantee are those companies where the people those who
are the directors or owners of the company they provide in the constitution of the
company that we guarantee to contribute such and such amount at the time of the
dissolution of the company. These types of companies are known as companies
limited by guarantee.

Companies limited by guarantee are of two types. It can be for profit or not for
profit.

b) Companies Limited by Shares

Companies limited by shares are those in which the liability would be limited up to
the number of shares that you have purchased in the company. You would be liable
to pay the amount that you have purchased the shares. If the company have suffered
the loss beyond it then you are not liable because your liability is not personal.
Companies limited by shares are of three types. Single member company, private
company and public company. There is no need for second person. The single
member company was introduced in Pakistan in 2002. Before 2002 there was no
such kind of company.

1. Single member company

Single member company is a kind of company in which one person can establish a
company. There is no need for second person. It is also considered as private
company we can say that it is further subclause of private company.

2. Private Companies

Section 2(49) of Companies act defines private company ―private company means
a company which, by its articles-

(a) restricts the right to transfer its shares;

(b) limits the number of its members to fifty not including persons who are in the
employment of the company; and

(c) prohibits any invitation to the public to subscribe for the shares, if any, or
debentures or redeemable capital of the company.

For private companies we need minimum two persons or two shareholders. Private
companies are more like partnership. In private companies all the shareholders most
of the time know one another very well because these companies are mostly family
companies. In private companies’ maximum there can be 50 shareholders.

3. Public Companies

Section 2(52) defines―public company means a company which is not a private

company.
There is no limit to the number of shareholders in public companies. In public
companies you may transfer your shares to anyone else without the consent of any
shareholder as well as without the consent of the company or without informing the
company. For instance, you have bought the shares in stock exchange
now you can transfer your shares to anyone on the stock exchange. You can invite
the public to buy shares in your company but with one condition that is registration
of company. Your company must be registered and listed in the stock exchange.

Q.3 What is the Registration of Company?

Registration of the company has three stages.

1. Promotion
2. Registration/ Incorporation
3. Commencement of business

1. Promotion

Promotion is a stage in company law before the registration of a company. It means

to promote something. Promotion is not a legal term it is a kind of business term.
Promotion of the company is a comprehensive term meaning the process by which
a company is brought into existence as a corporate body. Promotion begin when
someone gives serious consideration to the formulation of the ideas upon which the
business is based. When the company is organized and ready for business the
promotion comes to an end. Anyone who is involved in the stage of promotion of
the company is called promoter. Any person can be the promoter, or any company
can be the promoter of any other company. Promoter is a person who originates a
scheme for the formation of the company. Promotions starts when an idea comes to
your mind that you should start such and such business in the medium of company.

Function of Promoter

At the stage of promotion, the function of the promoter is to register the company.
When you consider idea that you should start such and such business then you collect
all the required information for starting that business. Then as a promoter you
arrange the required capital and you would prepare the required documents for
registration of the company. Then you would submit all these documents to the
registrar office for registration. This is known as stage of promotion and when the
company would be registered the stage of promotion would be comes to an end.

Legal Nature of the Promoters

Promoters are not the shareholders or directors or managers or agents because there
is no company in existence at this stage. Promoters are in a fiduciary relationship
with the proposed company at the stage of promotion. This relationship at the stage
of promotion is known as relationship of trust. They would be liable if they do
anything which is against the interest of the proposed company

Liability of Promoters

When the company is at the stage of promotion the company might need entering
into different contracts for the benefit of the company or in the interest of the
company. At the stage of promotion, the promoters may enter into different contracts
that might be in the interest of the proposed company when the company is not
registered yet and they would be liable for those contracts. These contracts are
known as preliminary or pre-incorporation contracts. For instance, A, B and C
are the promoters and they enter into a contract with M to buy leather from M and
M has sold the leather to A, B and C in February. A, B and C obtained the leather
and promised to pay M in June. In March the company is registered but the company
couldn’t prove to be successful and was closed before June. In this case the
promoters would be liable because they enter into those contracts in their personal
capacity. We know that the company is not in existence at the stage of promotion
therefore the company cannot be liable for those contracts. Company would be liable
for those contracts only when company would re-enter into those contracts.

2. Registration or incorporation of the Company

At the stage of promotion, the function of the promoter is to register the company.
The promoters need to submit certain documents with the registrar office for the
registration of the company. The registrar office is located at the (SECP) Securities
and Exchange Commission of Pakistan. The companies are required to be registered
at SECP. Documents which are required to be submit with the registrar office at the
time of registration are the Constitutional documents of the company. There are
two main constitutional documents of the company. One is Memorandum of
Association and second one is Article of Association. They both have a different
nature and different functions.

Requirements

Promoters need to submit the statutory declaration in which the statement of

promoter is written that we as promoters have fulfilled all the legal formalities for
the registration of the company. Another requirement is the registration fee that you
need to deposit. These requirements are for both private as well as public companies.

For public companies, the pubic companies need to provide with the registrar the
consent of directors. The persons who are interested to act as director of this future
company they need to provide their consent to the registrar.
Another condition for the public company is the submission of the prospectus to the
registrar. The promoters need to submit a document known as prospectus.
Prospectus is a document that has all the details regarding the financial position and
the future plans of the company. This document is required to be submitted with the
registrar to tell the general public that what this company is going to do in future.
The public companies who are not interested to obtain the capital from the general
public they would submit a statement in lieu of prospectus. These are documents
that the promoters need to submit at the time of registration with the office of
registrar for company to get register.

After submission of these documents the registrar would examine all the documents
if the documents are completed and all the legal formalities have been fulfilled then
the registrar would accept those documents and would issue a certificate of
incorporation. This certificate of incorporation is just like the birth certificate of the
company. The name of the company and the date on which this certificate is issued
is mentioned on this certificate. This certificate of incorporation is the conclusive
evidence of the incorporation of the company. After obtaining the certificate of
incorporation no one can challenge the existence of the company. By obtaining the
certificate of incorporation the company is declared as a registered company having
separate legal personality of its own. This is called registration of the company.

3. Commencement of Business

After obtaining the certificate of incorporation a private company may start the
business any time. But the public company needs to obtain another certificate known
as certificate of commencement of business. This certificate is required only for
the public companies. For instance, they need to provide how much capital they have
or if not, then how would they arrange that capital.
There might be need of entering into different contracts after obtaining the certificate
of incorporation but before obtaining the certificate of commencement. These
contracts are known as provisional contracts. These contracts are not binding on
the company if the company would not obtain the certificate of commencement of
business. If the company would obtain the certificate of commencement of business,
then these contracts would automatically be binding upon the company. There would
be no need of further ratification and acknowledgement. After obtaining the
certificate of commencement of business a public company can start the business.

Q.4 What are the Constitutional Documents of the Company?

There are two main documents known as the constitutional documents of the
company. We need to submit these two documents with the registrar office. These
are Memorandum of Association (MOA) and Articles of Association (AOA). Both
of these two constitutional documents are completely different from one another
because their function is different.

Basic difference of these two documents is that the memorandum of association

provides certain significant information about the external world of the company
whereas the article of association regulates the relationship of the internal world.

Memorandum of Association
Memorandum of association that provides certain significant information about the
external world of the company. It contains Six Clauses.

1. The Name Clause

First clause the MOA is the name clause. Name clause of the MOA provides
the official name of the company. Except in a few rare cases, the last word of
 the name will be “Limited (Ltd)” or in the case of a private company “(Pvt)
Limited”.
2. Registered office Clause
Second clause of the MOA is the registered office clause. It provides where
the registered office or the head office of the company is situated. Wherever
the registered office of the company is situated generally company is
registered in that jurisdiction.
3. The Object Clause
Third clause of the MOA is the object clause. In this clause the object of the
company is provided. It governs the relationship between the company and
the outside world. It defines the purpose which the company is formed to
achieve or the kind of activities or business which it is to carry on. It provides
what the company can do and it is described by the Doctrine of ultra vires.
There are two theories about this clause and about ultra vires rule.
According the first theory a company can do only those acts which is provided
in its object clause. If the company would do anything which is not provided
in its object clause that would be considered as ultra vires. According to the
second theory a company can do whatever company wants as long as it is legal
or specifically not prohibited in its object clause. In companies act 2017 sec
26 the second theory was adopted in which it is provided that now the
companies would only mention their principle line of the business and they
can do anything which is legal, or they are in need of in that business unless
or until it is specifically prohibited. Principle line of the Business is generally
provided in the start of the object clause.
4. Liability Clause
Forth clause of the MOA is the liability clause. Liability clause simply
provides the liability of the company would be limited to extent of their shares.
 5. Capital Clause
Fifth clause of MOA is the capital clause. It provides what would be the
capital of the company. Capital of the company is money or assets available
for investment. A company cannot invest the capital more than that which is
provided in the capital clause. For instance, the capital of the company is
500,000 Rs divided into 500 shares of 1000 Rs each. Company cannot do the
business which is beyond 500,000 Rs.
6. Association Clause
This is the last clause of MOA. This clause states that the persons subscribing
their signatures at the end of the Memorandum are desirous of forming
themselves into an association in pursuance of the Memorandum.
Memorandum of Association must be signed by seven or more persons in the
case of a public company and by two or more persons in the case of a private
company. Signatures shall be attested by witnesses.

Alteration of the Memorandum of Association

If there would be any need of change in the clauses of MOA for instance, if the
company is interested to increase its capital or to change its principle line of business
for this purpose company is interested to alter the MOA that is known the alteration
to the memorandum of association. The company needs to pass the special
resolution for making any kind of alteration in the MOA.

There are two types of resolution in the company law. Ordinary resolution and
special resolution.

1. Ordinary Resolution
Ordinary resolution is a resolution which is passed by the simple majority that
is 51%.
 2. Special Resolution
Special resolution is a resolution that is passed by the special majority that is
3/4 of the members of the company. 75% of the members can pass the special
resolution.

After passing the special resolution company need to inform the SECP by a
responsible officer not later than sixty days from the date on which the special
resolution was passed for alteration that. After that SECP would recommend the
change and would alter the MOA accordingly only then alteration would be
considered as valid alteration.

Articles of Association
Legal nature

MOA and AOA both are constitutional documents of the company, but the MOA
always has some kind of preference over AOA. If there is any conflict between the
provisions of MOA and the provisions of AOA, the provisions of MOA would
prevail. AOA provides the regulations to control the internal management of the
company.

Registration of Articles (sec 36)

For registration purposes you need to register a company by providing the

documents known as MOA and AOA signed by the members whose names are
mentioned in the association clause of the MOA and the AOA must provide the
regulations of the company.

{36(2)} Articles of association of a company limited by shares may adopt all or any
of the regulations contained in Table A in the First Schedule to this Act. It means
at the time of registration if you would not provide your own AOA of the company
then this table A would be applicable which is the default articles of association of
the company. If you have provided your own articles of association but those articles
of association don’t deal with any of the matter that is provided in the table A then
regarding that matter table A of first schedule will be applicable. Table A provides
certain regulations for the management of internal matters of the company.

Sec 2(49) Private company means a company which, by its article, restricts the right
to transfer its shares, limit the number of its member to 50 and prohibit any invitation
to the public to subscribe for shares. These are restriction for private companies
limited by shares and this restriction would automatically be added in the AOA of a
company unless specifically excluded. These restrictions would be in addition to the
table A.

Alteration to the Articles of Association

For the alteration of AOA firstly a company need to pass a special resolution. At
least 75% of the members of the company should be in favor of that change. But
further there are restrictions which are imposed for alteration.

➢ Alteration to the Articles of Association must not be in against the provisions

of the company’s ordinance.
➢ Alteration must not attempt to legalize something which is illegal. (gambling).
➢ Alteration must not operate against the substantive rights of minority
shareholders.
➢ Alteration must not increase the liability of the existing shareholders.
➢ Alteration must not amount to the breach of contract with an outsider.
➢ No alteration can be made in bad faith.

If the alteration is made special resolution and it has no harm with in the scope of
any of the restriction, then that alteration must be informed to the registrar of the
companies and he would confirm that alteration. if there would be no objection he
would endorse that alteration and AOA would be altered accordingly. Those
alteration would also be added to the official copy of the AOA.

Memorandum and Articles of Association as a contract

Memorandum and articles of association bind the shareholders and the company to
the same extant as if they have signed those documents like a contract. Even there is
no separate contract between the members and the company, but provisions of these
document are binding upon them like a contract.

Binding on members in relation to the company

The memorandum and the articles bind the members with respect to their provisions.
The company can sue the members for enforcement of the provisions of these
documents. The members may be restrained from committing breach of the
provisions of the documents. (Bradform banking company v Briggs 1886) A, a
member, who obtained loan from the company and also obtained from a bank on the
security of his shares. The bank claimed prior charge, but it was held that the
company had priority over A’s shares. The banks charge was secondary. There was
no separate contract between the member and the company, but this stipulation was
mentioned in the AOA. Therefore, the AOA would be considered as a contract
between A and the company.

Binding on company in relation to the members

The provisions of these documents are binding upon the company in relation to its
shareholders. A member may sue the company for the enforcement of the provisions
of the documents and also for retraining it from committing breach of the provisions.
(Pender v Lushington 1877) AOA provides that every shareholder has right to vote.
A meeting was called between the directors and shareholders and they deprive one
shareholder from the right of vote. That person went to the court and the court
decided that whatever is mentioned in AOA that would be considered as a contract
between the members and the company and the company is bound by the provisions
of the AOA. Company cannot deprive a member from vote because it is against the
provisions of the contract.

Binding on members in relation to one another

Members in relation with one another are also bound by the provisions of the
documents. (Rayfield v Hands and others 1958) AOA provides that a member
wishing to transfer his shares will inform the directors of his intention and the
directors will take the shares equally at fair value. Member informed them of his
intention, but they refused to take the shares. It was held that the directors were
bound to take the shares.

Not binding on the company in relation to outsiders

The company and its members are not bound to outsiders that the AOA creates no
contract between a company and outsiders. For instance, provisions of AOA provide
that the director of the company would hold the office for five years and the majority
of shareholders passed the resolution that we are going to remove the director after
two years of his appointment. Now the director cannot bring action against the
company because AOA are not binding upon the company in relation to outsider and
there was no separate contract between the company and the director.

Doctrine of Constructive Notice

Whenever the constitutional documents are prepared and submitted with the registrar
office for registration and the registrar register the company from that day these
documents become the public documents. The public may get access to these
documents. It is always presumed that the people those who are dealing with the
company has the knowledge of the provisions of the documents. He has not only
read those documents but understood those documents. Later on, they cannot say
that we were not aware of these documents. This doctrine is known as the doctrine
of constructive notice.

Doctrine of Indoor Management

It is always presumed that a person who is dealing with the company has fair
knowledge of the documents, but he is not supposed to have the knowledge of the
internal workings of the company. For instance, MOA provides that the company
can obtain loan from the bank only after passing the special resolution. But the
company has obtained the loan from the bank and failed to pass the special
resolution. When the time of repayment of the loan was due the company said we
didn’t pass the special resolution required for obtaining the loan therefore, company
is not bound to pay back the loan. The court said that people are supposed to have
the knowledge of constitutional documents and their provisions, but they are not
supposed to have knowledge of internal workings of the company. This is doctrine
is known as doctrine of indoor management.

This is an exception and a kind of extension of doctrine of constructive notice.

Q.5 What is Capital and what are the kinds of Capital?

As a verb finance means to provide capital and as a noun finance means management
of capital. Capital means money or assets available for investment. Mainly there are
two kinds of capital. Equity capital or Share capital and Loan capital or Debt capital.

1) Share Capital

Share capital is a kind of capital that the company is obtained by issuing shares or
share capital is a capital that the general public provides the company by purchasing
certain shares in the company. if the company has issued the shares to the general
public and the general public provide the certain amount of money to the company
that is known as share capital.

When someone provides capital to the company and the company issues share to
that person at the time of this transaction, company issues a piece of paper to the
person who has provided capital to the company that paper is known as Security.
This security has two functions. (1) This security is an evidence that this particular
person has certain interest upon the assets, profit, distribution of assets of the
company. (2) This piece of paper is an evidence that you have bought certain shares
in the company these shares are known as securities. The Security and Exchange
commission of Pakistan regulates these securities.

Kinds of Share Capital

i) Authorized Capital

Authorize capital is a kind of share capital that the company is authorized to obtain
from general public. This is mentioned in the capital clause of Memorandum of
Association that’s why this authorized capital is also known as registered capital.
This is the basic amount of capital invested by the general public that’s why it is
known as Nominal capital. Company cannot issue share or cannot obtain capital
more than the authorize capital. If the company wants to obtain the capital more than
authorized capital, then company would pass the special resolution.

ii) Issued Share Capital

From the total authorized capital company has issued shares of less than that
authorized amount of capital. That is known as issued share capital. For instance,
the nominal capital of the company is 100,000 Rs that the company can raise from
the general public. The company has decided that at this stage of business we are
only in need of 80,000 Rs therefore we would only the shares of 80,000 Rs or we
would issue only eighty shares of 1000 Rs each. These eighty shares that the
company has issued or the capital that the company has obtained against these eighty
shares is known as issued share capital.

iii) Unissued Capital

The capital which is not issued by the company in the form of shares is known as
unissued capital. For instance, the nominal capital of the company is 100,000 Rs.
Company has issued the shares of 80,000 Rs. Amount that is remaining or the
remaining number of shares which are not issued by the company is known as
unissued capital that is 20,000 Rs.

iv) Paid-up Capital and Unpaid Capital

I have purchased the shares of 50,000 Rs and the company has asked me to pay
30,000 Rs at the moment. And you may pay remaining 20,000 Rs in next year. The
30,000 that I have paid to the company at the time of purchasing shares is known as
paid-up capital. And the remaining 20,000 that the company has asked me to pay in
next year is known as unpaid capital.

Called-up and Uncalled Capital

In next year the company asked me to pay only 50% of the remaining 20,000. That
is 10,000 is called called-up capital. And the remaining 50% is called uncalled
capital.

2) Loan Capital

Loan capital is a capital that the company is obtained by obtaining loan from the
investor known as creditor of the company. Money obtained by issuing debentures
known as loan capital.
Q.6 What is a debenture? What are the basic Characteristics and
kinds of Debentures?

Debenture

When the company obtained the debt capital to finance its business, company issues
the debentures which is a kind of security. Debentures are issued by the company at
the time of obtaining loan capital. Debenture is an acknowledgment of debt that the
company has obtained the debt capital from the investor.

Debenture includes debenture stock, bonds, term finance certificate and excludes the
shares. Shares are not debentures. Debentures and bonds are debt securities and have
same functions, but they are in different nature. Sometimes they are secured and
some time they are not secured.

Basic Characteristics of Debentures

1) Debenture is an acknowledgment of debt.

2) It is usually in the form of certificate issued under the seal of the company.

3) It is usually provides for the payment of a specified principle sum at a specified

date.

4) It provides for the payment of interest until the principle amount is paid back.

5) It can be secured or unsecured.

6) A debenture holder does not have right to vote at company meetings.

7) Debenture holders are the creditors of the company.

Kinds of Debentures

1) Registered Debentures
Registered debentures are those debentures that are issued by the company at the
time of obtaining loan and it is mentioned on the register that who is holding the
debenture. Interest on registered debentures is payable to the registered holders.

2) Bearer Debentures

Bearer debentures are negotiable instruments transferable by mere delivery of the

certificate to the transferee. These are unregistered debentures. A person who is
holding this debenture would enjoy the interest.

3) Secured Debentures

These debentures are secured by a charge on the assets of the company. the charge
is either fixed or floating.

4) Simple or unsecured Debentures

These are the simple debentures and do not have any charge or security against the
assets.

5) Convertible Debentures

Convertible debentures are those debentures in which the holder has a right that after
certain period of time you may convert those debentures into ordinary shares.

Q.7 What is Share and what are the kinds of Shares?

Share

The capital of the company is divided into different units of equal strength and each
unit is known as share.

Kinds of Shares

Shares are of different kinds. Following are the kinds of shares.

1) Ordinary Shares

The most common kind of the shares is ordinary shares. When a shareholder
provides certain capital to the company the company issues share to the investor and
these shares are known as ordinary shares. Shareholders have certain basic rights.
They have the right to enjoy dividend whenever the company would earn profits.
Dividend is a profit upon the shares given by the company to the shareholders.
Shareholders have right to vote at the time of decision making. Shareholders have
right to enjoy the capital of the company equal to the amount of their shares at the
time of winding up.

2) Preference Shares

Preference shares are those shares that have priority of ordinary shares as to payment
of dividend and distribution of assets on winding up. Persons who are holding the
preference share they are known as preference shareholders.

3) Cumulative Preference Shares

Whenever the company would earn the profit the company can give dividend to the
shareholders. Shareholders can’t demand the dividend as a right. If the company has
earned profit the company may announce the dividend. But when the company
would announce the dividend then shareholders can claim the dividend from the
company.

Company has earned profits in 2018 but company has decided not to announce the
dividend. Company has not earned profit in 2019 therefore the company has not
announced the dividend. Company has earned profit in 2020 therefore not announce
the dividend. In 2021 company has earned profit and declared dividend. Now the
dividend would firstly go to the preference shareholders. Secondly the dividend
would go to the ordinary shareholders. Cumulative preference shareholders would
be the first to enjoy the dividend and would get the dividend also of 18,19,20 and 21
because the cumulative preference shareholders would get the dividend of all
previous four years.

4) Convertible Preference shares

Convertible preference shares are of same kind as preference shares. Convertible

preference shareholders have right to convert their certain number of preference
shares into ordinary shares after the certain period of time.