Indemnity

According to  the principle of indemnity when a damage is caused to an insured property a compensation equivalent to the damage shall  be paid.

In  other words , the insurance policy will compensate only up to the extent loss or damage , thereby leaving no  possibility for making profits .

This principle is not applicable to life insurance or property accident insurance. it is because the value of is human life or part of the human body cannot be assessed in terms of money.

Eg : if  we assessed the damage of a vehicle after met with an accident , that the damaged value will compensate for the insured  by the insurer.

                Why Indemnity Principle is important ?

- Avoid  making profits from insurance
-  Differentiate  insurance from gambling 
- Control the insurance fund by compensating only the actual amount of the damages.

                Concepts Relating to Indemnity

       Over  Insurance

Over insurance is insuring a property for a value more than the true value ( current market value ) of that property. In this case if  there is a damage , compensation is paid only on the assessed value of the damage .

Eg : If a machine worth Rs 70,000 is insured for Rs 90,000 it  is an over insurance.

- In the event of partial damage - Partial damage is assessed and compensated to cover the loss of the insured.
- In the event of a full damage - The value prevailing on that date will  be assessed and payments are made ( the market value as at that date will be paid ) .  otherwise compensation is not paid in the amount stated in the policy .

Under  Insurance

Under Insurance refers to  the insurance a property of an asset less  than the real value ( current market value ) of the property or asset.

Eg : Property valued at 200,00 being insured at 120,000 

 - Here if the partial damage caused is Rs. 60,000 the compensation paid is as follows

                                  120,000  x  60,000 
                                  _______________
                                     200,000 

- If there is a total damage only 120,000 is paid as compensation.

                  

          What are the sub principles of Indemnity?

- Contribution
- Subrogation 

                             Contribution

This principle means that if a particular  property were to be insured  with several insurance  companies and if a damage is  caused to such  property compensation is paid on the basis of the proportion of the values of the respective policies issued by the companies .

Eg : If a motor vehicle  valued at Rs. 500,000  is insured in 4  companies A, B, C and D for the following different values.

A = 300,000
B = 200,000
C = 150,000
D = 350,000

If there  is a total damage for that particular asset.  This is the way how the  insurance companies going to compensate for the loss.

A = 500,000  x 300,000 = 150,000
       _________________
             1,000,000

B = 500,000 x 200,000 =  100,000
       ______________
         1,000,000

C = 500,000 x 150,000 = 75,000
       ______________
             1,000,000

D = 500,000 x 350,000 = 175,000
       _______________
              1,000,000 


                                      Subrogation


Under subrogation , an insurer will take over all the ways in which an insured will  receive compensation , if  the said insurer  has already paid compensation for a damage or loss to the insurer.


Eg: suppose "D" has  fully insured his car with janashakhti insurance, and "R" has insured her car with Ceylinco insurance. Think that "D's car  is fully damaged and written off, after it meets with an accident with "R's car . subsequently "D' s insurance company Janashakhti pays full damage  to "D".  Although "D" can receive compensation under "R's insurance policy , he  will not be   eligible for any claims from "R's insurance company since that right now  belongs to 'D' s insurance  company , not "D".

  The total an insurer receives under subrogation shall not exceed that amount it  paid  out to the insured  and the residual value  of the asset belongs to the insurer who ultimately bears the loss due to damages.

Letter of subrogation is given to the insurer by the insured to transfer the ownership of  the value that is received from the other sources.

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Principles of insurance

                  Principles  of  Insurance

- Utmost good faith
- Insurable interest
- Indemnity
-  Contribution
- Subrogation
- Proximate- Cause

                       Utmost Good Faith

The principle of utmost good  faith, implies that the insured should tell to the insurer  all information about life or property which is being insured and also the insurer should reveal to the insured all  the information and  conditions  affecting the agreement.

This information is much more needed in making a decision as to whether the insurance risk is accepted or not and to determine the premium.

Both parties involved in policy are required to notify any subsequent changes in above information.

                The Facts that should be revealed by the Insured under the principles of Utmost Good Faith

In Life Insurance

- Name of the person 
- date of birth
- Health condition 
- Income
- occupation
- Information regarding dependents
- Civil status 
- Residence

In Property ( general) Insurance

- The cost of the property
- Thee present value of the property
- If mortgaged details of such mortgage
- Estimated life of the asset

The Facts that should be disclosed by  the insurer under the principle of Utmost good Faith

- The value of the policy
- The value of the premium
- The conditions
- The conditions for renewal
- Thee surrender value and the relevant provisions to  make it  a paid up policy.
- Instances when compensation is not  paid
- Maturity of the policy
- The other benefits

Why Utmost Good Faith Considered as a special Principle of Insurance ?

This principle differentiate insurance contract from other commercial contracts. Normally commercial contracts are subject to the doctrine of  " CAVEAT EMPTOR". That means " let the  buyer be aware "
. But in insurance  , parties involve in the agreement should not be worried about the risk that they have due to the principle of Utmost Good Faith. Because it ensure that the contract trustworthy .

Why this principle is breached by an insured party what the available options with the insurer?

- cancel the insurance agreement
- Avoid of compensate for the damages
- Take a legal action against insured
- Ex - gracia /Ex -  Gration payment

               Ex - gracia / Ex - gration payment

When an insured doesn't reveal certain important facts to the insurer , the insurer will not be liable to pay claims to the insured under the policy . But , Considering many factors if the insurer decides to pay the claim to the insured foregoing the mistakes of the insured , it is known as ex - gration payment .

In several situations insurer decides to claim  for damages although the insured breached the  principle of Utmost Good Faith

- Misrepresentation of information by the insurance agent 
- When insured misunderstood the conditions and the information regarding to the insurance agreement.

                                                Insurable Interest

This is the legal right of a person to insure property or life . To obtain that right the following three requirements have to be fulfilled.

 - There should be an object , life or property which is liable to be damaged.
- What is intended to be insured should be that property or life .
- An advantage of having the property and a disadvantage of  losing the property .

Examples for insurable interest 

- Husband towards his wife and the wife towards her husband .
- For a singer regarding his voice .
- For a motor vehicle owner and the driver.
- For a film director regarding the actors and actresses acting in his film.
- For the owner and the tenant regarding a building  .
- the employer has an insurable interest over his employees.

If the public can take a cover to any life or property without considering the ownership of it, they will damage  those property of life and make profits. But this principle avoid to make profit by harming public property and life

                               Proximate Cause

When a damage is caused  to an insured property compensation could be claimed only when the damage is caused by an insured risk. Even though it had occurred due to many causes if the proximate cause has been covered by the insurance policy, compensation can be obtained .

Eg: A building could be  damaged due to an earthquake , cyclone or  due to fire simultaneously . Think that  the property will be damaged owing to fire. Then if the property is protected under  fire insurance policy  then the insured is eligible to rightfully claim compensation.

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Insurance Business

               WHAT IS INSURANCE ?

Insurance  is a risk transfer mechanism. Risk means uncertainty about future occurrences.

Insurance us a common fund created by people  who face similar risk to compensate for the actual losses due to the damages considered under the policy of it.

Eg: For similar risk, all  motor cycle riders face the similar risk of happening an accident. So insurance companies collect fund from those riders and pay for the accident.

Insurance has evolved to  compensate for the losses and damages that would be caused to the property , due to fire, theft, and accidents and also the effects of accidents on the lives of  individuals thereby causing debility and death, Accordingly the main objectives of insurance is to get risk coverage for unexpaeted risks in the future or to minimize the future risks.

 What does it mean by premium ?

The price of insurance is called insurance premium

Criteria to be considered to identify Insurable risks 

-  Predictability  -  Is the degree to  which a correct prediction or forecast the damage.
- Causality - It should be a pure risk
- Unconnected - Unconnected with other losses occurred for property and life
- Verifiability - The cause , time, place and volume of the damage should be analyzed.

                What are the insurable Risks ?

It cant be possible to give  insurance for all risks. There are few characteristics of the insurable risks .

- Must have an insurable interest ( Eg : Own life,  Own property )
- The risk must involve a loss that is capable  of financial measurement . ( Eg : Vehicle, building )
- There must be large number of similar risks . ( homogenous)
- Only pure risks can be insured ( Eg : An accident)
- The loss must be entirely fortuitous nature.
- The risk that is to be insured should not be against the public policy.

                                    Non insurable Risks

- Risks caused by natural and inherent factors.
Eg : Depreciation , evaporation , Drying up , Obsolescence, aging 
- Future business losses.
- Risks arising due to wrong managerial decisions.

                             An Insurance agreement

Insurance agreement is the contract between the insurer and the insured after accepting an offer by the insurer from the insured.

                       Parties Related to Insurance

1. First party ( insured)

That is the person who obtains the insurance cover. Installments ( premium ) have to be paid as per the agreement and he has the right  to claim compensation in the event of a  loss. He is the person who forwards the insurance proposal .

2. Second Party ( insurer0

This is the institution which bears or undertake the insurance risk. This institution insures various risks pertaining to persons and properties and pays compensation , when a loss occurs.

3. Third Party 

 All other parties ( persons and property ) other than those who are involved in the insurance agreement (Policy)

               Why  do we need Insurance ? ( Benefits of Insurance)

- It gives peace of mind
- It provides financial security. 
- Protection for family
- Insurance provides assistance to business enterprises .
- Insurance provides financial stability to commerce, industry and the community.
- Insurance serves as a basis of credit.
- Insurance provides funds for investment.
- Insurance plays a vital part in the reduction of losses.



                               

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Resolutions

Resolutions means decisions taken by  the shareholders .under the companies Act decision can be taken by the shareholders by the following manner.

1) At a meeting of shareholders - by passing resolution . such resolution can  be

   a) An ordinary resolution
   b) A special resolution
   c) A resolution that requires Special notice

2) Without a meeting - by way of a  written resolution signed by the shareholders

3) Without a Meeting - by way of unanimous agreement in written by the shareholders ( Applicable only for private Companies)

1. Ordinary Resolutions:

Types of resolutions that can be resolved by 51 % simple majority of the attended shareholders and proxies are known as ordinary resolutions. Normally resolutions pertaining to internal matters belong to this catergory.

Specially to:
- Elect Directors
- Remove Directors
- To change no. of Directors
- Matters concerning letter of incorporation and Articles of Association.

 An ordinary resolution can be passed in a private Company by giving 15 working days notice. But in a public company 10 working days notice should be given.

2. Special Resolution

Types of resolutions, which should be passed by 3/4 of the shareholders and proxies attending a meeting with the required quorum , belong to htis catergory.

Special Resolutions is passed in following occasions

- Change of name of the company
- Alter the company objectives
- Merging the company
- to reduce the stated share capital
- When reserve capital is made
- Approve major Transaction
- Approve an amalgamation of the company

Shareholders resolutions in writing

For the first time in srilanka the shareholders resolution can be passed by way of  writing without convening general meetings. Subject to the provisions contained in the articles, a resolution in writing signed by not less than 85 % of the shareholders who would be entitled to vote on that resolution, is as valid as if had been passed at a meeting at those shareholders . however, if the secretary to the treasury is the holder of a share in the company his consent in favor of such resolution is mandatory.

Dissolution / winding up of companies:

modes if winding up;

-Voluntary Winding up
- By court order
- Under the supervision of the court

1. voluntarily winding up

A company may wound up voluntary
- By expiry of time ( when the period , if any fixed for the duration of the company by the AOA)
- By completion of venture
- when the company resolves by special resolution that the company wound up 
- Where the company resolves by extra ordinary resolution to  the effect that it cannot , by reason of its liabilities continue its business and that is advisable to wind up.

2. Winding Up by court

- By passing special  resolution by members stating that the company should be wound up  by court
- Failure to  commence business activities after one year from the  date  of incorporation
- Company does not have directors
- Members are below the  minimum  statutory limit 
- When company fails to repay debt
-  Anny occasion when court decides to dissolve  under just and equitable conditions.

3. Winding up under the supervision of court

When a company has passed a resolution for voluntary winding, the court may make an order that the voluntary winding up shall continue but subject to the supervision of the court.

Court will appoint a liquidator to carry out the liquidation subjeect to the supervision of the court.

Who  is a liquidator what are the functions that performed by him ?

Powers of liquidator

- Disposal of movable and immovable properties of the company
- signing all deeds and other documents of the company
- Pledge the company assets and borrows money
- Settlement of creditors
- Arranging with creditors to settle their  dues.
- Use of common seal of the company.

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Stated Capital

The stated capital of a company is the sum of total of money received and and receivable to a company in respect of
             - The issue of  shares
             - Invitation of subscribe
It is possible to  reduce the  stated capital by an amount required , by passing a special resolution

   
                                          

                           Meetings

In every company there are  two types of meetings
   1. Directors meetings ( Board  Meetings)
   2. Share holders Meetings ( General Meetings)

1. Directors Meetings

  Directors meetings can be convened  whenever , the directors think it is necessary. Members cannot take part in the directors meetings . in these meetings decisions regarding the day to day management of the company  are made.  the article of the company is providing the  guidelines for  the directors meetings

 2. Share holders Meetings ( General Meetings )

there are two types of share holders meetings 
a) Annual  General  Meeting (AGM)
b) Extra  Ordinary General Meeting (EGM)

Regulations Pertaining to  Holding Meetings:

1. As  per companies Act, it is compulsory to send notice to  all share holders.
2. In the case of private companies and share holders and the case of other companies 3 share holders (including directors) will complete the required quorum
3.. Another person can be nominated by the share holder to attend the meeting on behalf
4. A share holder who has not paid what he should pay in return for shares cannot attend meetings
5.In the event of voting , one share holder has one vote  if raising of hands is the methodology  to cast the vote in the meeting
6 . In a secret ballet , one share as one vote

  Types of meeting

Annual General Meeting

1. private or unlimited companies : not  less than 15  days notice
2. Other companies : not less than 15 days notice
3. Relevant section 135

Meetings to consider special resolutions or resolutions requiring special notice

1. Private or unlimited company: not less than 15 days 
2. Other companies ;  Not less than 15 days
3. Relevant section 143

Other Meetings

1. Private or unlimited : not less  than 5 days
2.  Other companies :  not less  than 10 days 
3.  Relevant section 135

Annual  General Meeting ( AGM)

AGM will  have be held once in  each calender year , not later than 6 months after the balance sheet date . The first AGM should be held within 18 months. Subsequent AGM must held within 15 months from the previous AGM

 Objectives of AGM

 - to inform share holders the company's business activities and development in the previous year.
- To  get approved interim divident paid and final divident payable to shareholders 
- To inform shareholders the plans for the forthcoming year .
-  To elect Board of Directors for the next year.
-  To elect Auiditors
- To allow shareholders to make proposals for future development  of the company

* Minimum period of notice for the calling of AGM is 15 days in private and public companies

Note  

Holding of AGM is compulsory for all companies . Failure to comply with the  requirement and / or failure to send annual report to the registrar of companies will  be punishable offence .
If AGM is not held within the required time framework , any  share holder has a right to call on court order.

Extra- ordinary meetings

As per section128 of the act , the Board of Directors or request made by shareholders who own 1/10 of the share capital can call for  extra- ordinary meetings on request . As such, following parties have the rights to call for an extra meeting .

- By Board of Directors
- On request by 1/10 of share holders
- in the absence of a share capital  , or a request by 1/10 of the members who hold voting powers.

Occasions when extra ordinary meetings are  hold:

1. When the company  has to be dissolved on an emergency situation .
2. Merging of the company.
3. When the company encounters financial  difficulties .
4. To remove directors or to elect directors.
5.When a  no- confidence motion against  directors is to be   discussed
6. When the company is made a subsidiary
7.Sudden change in market conditions
8.to stop certain business activities and commence new line of business
9. to change the memorandum and articles

Proxy:

  
In a public company when a shareholder is unable to a attend a meeting. he can authorize a person to represent  him at the meeting . such a person appointed by the shareholders is known as a proxy. A proxy can vote or speak on behalf of the shareholder.

Proxy letter:

The  letter , which grants  proxy powers to  a person  by the shareholders , is a proxy  letter, normally a proxy  form is sent with the annual report to every  shareholder.

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Certificate of Incorporation

This is the document issued by the registrar of companies indicating than an institution has been registered as a  company.  This is equivalent to  a birth certificate of a person .   Legal personality is confirmed  after the receipt of this certificate.


 The following information is included in the  certificate of Incorporation.

- The name and the  registration Number of the  company
- The date of Registration of the company
- Whether the relevant company is limited company , unlimited company  or a company  Limited by Guarantee.
- Whether  the company is a  private  or a public company.
- Whether the company is an off shore company.

                                                   Prospectus

Prospectus is an offer to the public to participate or to  purchase the  shares of a company or any debenture by issuing a corporate Statement , notice, Circular or in any other invitation that is not an offer , it should be ignored and those too get included.

section from 36- 44 of the companies act deal with the prospectus and all corporate statements issued should  include there in specifically the  information given in part 01 of the schedule four of the  companies act and also what is specifically mentioned in the schedule  2 should be shown in the prospectus.

Main Topics to be included in a Prospectus

 

- Business activities expected to be attended by the company during the  first five years.
- Deferred shares if any.
- Details of directors.
- Specific number  of shares the directors should take.
- particulars of minimum participation.
- Period of opening and closing of participation list
- Manner of applying for  sdhares and how payment should be  made.
- Amount to be paid  at the time of application for shares and allotment of shares.
- Details of Auditing of the company.
- Particulars of subsidiary companies administrated.
- Particulars of Assets and Liabilities.

    

                           Minimum Subcription

The amount of capital  referred to in the prospectus is the minimum amount of capital to be obtained from the issue of  the share capital  which is known as the minimum subscription . unless this minimum amount  is  recieved on application no share capital offered by the company to the public should be alloted .  ( This is stated in section 45 of the companies Act)

The following expenditure could be settled by using minimum subscription .

- Purchase of fixed assets.
- Settlement of initial expenditure.
- Settlement of debts for the above purpose.
- To provide for working capital.

 

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Registration as a Limited company

All limited companies should be registered at the office of the registrar of companies under the companies act no  07 of 2007  and for that the following documents should be submitted.


- The promoters of the company should sign  and hand over the form duly issued by the registrar of companies.
- Company's  Article Of Association.
- Statement of share  holders regarding the name of the  company.
- The statement of consent obtained from the directors regarding thee willingness to work as directors.
- The statement of consent obtained from the  first Secretary to function as the secretary.

 Matters included in the scheduled Application Issued by the Registrar of Companies.

 

The promoters ( the original members) of the company should duly fill the required forms and hand over to the registrar of companies . This is known as form No. 1 .  the details included therein are 

- The name of the proposed company .
- Whether limited, Unlimited or a Company limited by Guarantee
- Registered address of the company.
- Names,  addresses and identity card numbers of persons who have consented   to work as incentive directors.
- Names of two inception share holders.
- Names , address and identity card numbers of persons those who have consented to  work as the inceptive secretary.
- Applied  share holders Names, Addresses and identity card numbers etc.

                         Articles of Association

1. The most important document which should be forwarded to  the registrar of companies duly signed by the promoters is the article of association . this is equivalent to the  agreement between the share holders and the company. this relates to the internal administration of the company  .  some of the provisions could be amended on a special motion being passed.

2. The companies act no 07 of  2007 states that the articles  should have the following provisions.
              - objectives of the company
              -  Right and duties of the share holders of the company
              - The management and administration of the company.

3. the contents are as follows. ( only a  few)
   - Objectives of the company
   - Provisions on the issue of shares
   - Rights and duties  of share holders .
   - Provisions relating to the payments of dividents.
   - Provisions relating to the company meetings.
   - provisions regarding voting and quorum
   - Provisions on the appointment and removal of company directors,  duties and responsibilities of the directors
   -  Powers of the directors.
  - Accounting and Auditing.
Provisions in dissolution of company

provisions regarding the use of name of a Limited Company

There are several provisions governing the naming of a limited company listed inn  the  companies act no 07 of 2007
  
 - In all companies except Quoted  Companies , the  word  " Ltd"
should be included at the end of the name of the company.

- If it is a private Company the word " Private" should be inserted before the word Company . if it is a public company the word "Public"
should be used before the name of the company.

- Equivalent names to  the existing company  names or misleading names should not be used.

-  Without the written approval of the Minster of trade the words " chamber of commerce , the president , Srilanka , State,Cooperative , Corporation "should not be  used.

Names of the company could be changed with the prior approval of the registrar of Companies by passing a special resolution by the company.

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Public limited company

A public  limited company or  one which can offer shares or securities  to the public which can them openly. the shares are freely transferable and there is no limitation as to the minimum  number  of share holders to be  one . it has a legal personality and has limited liability. it is incorporated under the companies act.

Features of public limited company

1. minimum number of share holders is one. as regards the maximum there is  no limit.
2. shares or other securities could be  offered to the  public to  purchase openly ( shares or securities could be sold to  the public openly )
3. shares can be transferred freely
4. subject to statutory control  and the  control of share holders.
5. has a legal  personality
6. liabilty is limited 
7.board of directors minimum of 02 , maximum unlimited.
8.after examination of the capacity  to pay back  loans , dividents or any other payments could  be made.
 9. it is compulsory to  maintain accounts and render statements  of accounts to the registrar of companies 
10. when indicating the company's name the word " The public Company" should  be indicated
11. could be registered in  the share market as a  quoted  company
12. any large scale business could be undertaken
13. there is  continuous  existence.
14. taxes could  be paid in the name of the company
15. accounting and auditing is compulsory
16.  could be dissolved voluntarily or under  the supervision of the judiciary or by the   judiciary.

Disadvantages of a Public Company

1. the initial  cost of  establishment is  exceessive
2. should abide  by the rules and regulations of  the  companies act
3. having the losses within the business itself
4. possibility  of acquisition by another company ( possibility of becoming a subsidiary )
5. difficulties  in management.

 Difference between private companies and public companies.

       private limited co.                                     public limited co.

1. maximum number of                              1. no  limit in the case of 
    members  is 50                                            maximum membership

2.No authority to  sell                                 2. shares or securities
   shares or securities                                      could be sold publicly

3. minimum number of                               3. minimum number of
    directors is one                                           directors is two

4. shares not transferable                           4. shares could be
    freely.                                                         transferred freely

5. Cannot be registered in                          5. can be registered in the
   a share market as a                                     share market as quoted     quoted company                                        company

6. Distribution of profit                             6. Distribution of profit
  could be made without                                cannot be made
  checking the payment                                 without checking the
   of loans                                                       payments of loan

7. Not compulsory to                               7. It is  compulsory to
  render the annual                                       render the statement of
  report along  with the                                 accounts along with the  the statement accounts.                               annual report.
  

 

 

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