RBSE Class 11 Business Studies Notes Chapter 3 Company

Rajasthan Board RBSE Class 11 Business Studies Notes Chapter 3 Company

Company Business System

The Company Business system was formed to resolve the issues of high risks, limited investment, unlimited liability or unsafe investment.
The company form of organization came into existence in undivided India, with the establishment of East India Company in the year 1600 which was formed by the virtue of Royal Charter.
As British government passed Joint Stock Company Act, 1844, at the same time, in India also, Joint Stock Companies Act, 1850 was formed.
Joint Stock Company Act, 1850 was formed in India. This act rejected the theory of ‘Limited Liability’.
A new Company Act was enacted in 1855 in England to fill the spaces of limited liability.
In 1857, a new act was passed for the establishment of companies with limited liability except for banking and insurance business.

To grant the benefit to banking and insurance, a new act was introduced in 1860.
After forming the act of 1860, several amendments were made in Indian Companies Act in 1866, 1882 till 1913.
In the end of 1950, the government of India appointed a special committee under the chairmanship of H.C. Bhabha who presented his report in the year 1952.
In 1956, the report was accepted and a new law was made.
Company Act 1956 had 658 sections and 15 schedules.
Company Law 1956 was effective till 30 August 2013.

Company’s Act 2013

To replace the Companies Act of 1956, a new companies bill was presented and approved in Lok Sabha on 18th December 2012 and in Rajya Sabha on 8th August 2013.
On 29th August 2015, the honourable President of India gave his assent to this bill, and finally, Indian Companies Act 2013 came into existence.
Companies Act of 2013 contains 29 chapters, 470 sections and 7 schedules.

Features of Company Act, 1913

In context to collection of investment by a company, the rules of prospectus were made more harsh and effective.
The duration for first annual general meeting of the company was reduced from 18 months from the date of incorporation to 9 months.
The debentures issued by the company as debt – investment would not be included in loans.
The maximum number of members for a private company was increased to 200 from 50.
The incorporated cases in new law had been given the definition of ‘Pretence’ and strict action would be taken against it.
The act introduced the new concept of one-man company.

Company

The word ‘Company’ has originated from two Latin words ‘Corn’ and ‘Pairs’, which mean ‘bread’ and ‘together’ respectively.
Initially, the word ‘company’ was used for the group of those persons who assemble to eat bread together.
Company is an artificial person whose real business is done by some live persons to help some live persons.

Features of Company

Company is an artificial person.
A company enjoys separate legal existence from its members.
The existence of a company is shown through its common seal.
Company is a voluntary association, which is formed with a motive of earning profit.
The liability of members is limited.
The part of business can be transferred easily.

Classification of Companies
(A) On the basis of mode (Source of Incorporation.)
(i) Chartered company (Incorporated by Royal Charter).

These are incorporated under Royal charter issued by the king or head of the state.
Chartered companies were popular in England. These companies are no longer found in India. East India Company is a form of this type of company only.

(ii) Statutory company (Incorporated under special Act)

These companies are formed under a special Act of Parliament of a state legislature.
LIC (Life Insurance Corporation of India) – Industrial Finance Corporation of India, Damodar Valley Corporation, RBI, etc. are the examples of statutory company.

(iii) Registered Companies

These are the companies formed and registered under the provisions of Companies Act, 2013 as well as Companies Act prevalent before.
These companies are operated by a special Act, like banking, electricity and insurance companies.

(B) On the Basis of liability of Members
(i) Companies limited by share

The shareholders of such companies are not liable to pay anything more than the value of shares held by them, whatever be the liabilities of the company.
Such companies have to use the word ‘Liability’ on compulsory basis.

(ii) Companies limited by guarantee section 2(21)

In this company, the liabilities of members is limited to their capital investment.
Such companies are formed to promote social Interest and to promote art, science, culture, religion, etc.
Chamber of Commerce is the best example of such type of companies.

(C) On the basis of number of members
(i) One-person company

It means to have one member only.
It is an incorporated legal entity having its existence separate from its single member.
It should at least have one director, the maximum limit of directors is 15.
The concept of OPC in India has been adopted under Companies Act 2013.

(ii) Private Company

It is mandatory to use ‘Private Limited’ at the end of its name for such companies.
Prohibits any invitation to the public to subscribe to its shares and debentures.
The number of its members (except OPC) is limited to 200.

(iii) Public Company

A public company invites investment to raise its share capital. For this, it has to issue prospectus as public invitation to subscribe its shares.
It should have a minimum of seven members and there is no limit on maximum number of members.
Any public company can’t commence its business unless it gets permission from the registrar of companies.

(D) On the basis of control
(1) Holding Company

The company that has control on one or more than one company is called holding company.
A holding company can have its control over subsidiary companies by purchasing 51% or more shares of subsidiary companies.

(2) Subsidiary Company

The other holding company controls this company7.
The important decisions of this company are taken by another holding company.

(3) Associate Company

A type of company which has a considerable control of another company on itself, but is not its subsidiary.
The total control and business decisions are done under an agreement.

(E) On the basis of capital
(1) Listed company

These companies are listed in stock market iBSE. NSE).
The shares and debentures issued by such companies can be freely traded.

(2) Lmlisted company

These companies are not listed in the stock market.
The shares and debentures issued by7 the companies cannot be traded freely.

(F) Other Comapnies

Government Company
Foreign Company
FERA Company
Defunct/Dormant Company

Distinguish between Partnership and Company

→ Partnership is governed by Partnership Act 1932, while company is enacted under Indian Companies Act 2013.

→ Registration is not mandatory in partnership, but when number of members exceed the given limit, registration is mandatory in company.

→ All the partners have unlimited liability in partnership, while all the members have limited liability upto the amount of unpaid shares.

→ The maximum limit in partnership is 50, that can increase upto 100 with the permission of central government, while in a company, the maximum limit for private company is 200 and there is no maximum limit for a public company.

→ In case of partnership, the business might be dissolved in case of death, insolvency or lunacy of any partner, while there is no effect of all this on the company.

Difference between Public Company and Private Company

→ Minimum limit of members in a public company is 7, while it is 2 in a private company.

→ There is no restriction on maximum limit of number of members in a public company, while in a private company, maximum number of members cannot exceed 200.

→ A public company must issue a prospectus for inviting public for the purchase of its shares, while a private company cannot issue a prospectus.

→ Minimum 3 directors should be there in a public company, while there should be at least 2 directors in case of private company.

→ A public company can give 11% of its net profit as remuneration to its directors, while there is no such limit in a private company.

→ In public company, shares can be fully transferred, while in a private company, the restrictions contained in articles of association apply in this context.

→ It is compulsory to submit annual report to LOC in case of public company, while it is not required in case of a private company.

Documents of formation of a Business
Memorandum of Association

It is the most important document of a company.
It determines the powers and range of activities within which a company works.
Every company should have it.
It is a public document, determining the relation of the company with the outside world.
It is made under Company Act.
It creates a contract between the third parties and the company.

Forms of Memorandum of Association

Table A : MOA of a company limited by shares.
Table B : MOA of a company limited by guarantee, and not having share capital.
Table C : MOA of a company limited by guarantee and having a share capital.
Table D : MOA of an unlimited company without share capital.
Table E : MOA of an unlimited company having share capital.

Importance of Memorandum of Association

It protects the interest of investors.
It protects the interest of creditors.
It provides the right path and helps in taking appropriate decisions for the company.
It helps the other parties who deal with the company.
It serves the nation’s interest too.

Contents of MOA
(1) Name of the company or name clause

It is an important clause because it gives an identity to the company.
Legal provisions need to be considered while selecting the name of the company. The name should not be identical or closely related to an existing company. The proposed name should not be undesirable in the opinion of central government.
The company should present application in the prescribed form along with the required fees, before the ROC to get the proposed name registered. This can only be made till 60 days.
If the company has not been incorporated, then the reserved name shall be cancelled and the company is liable to a penalty which may extend up to one lakh rupees.

(2) Registered office of company or Domicile Clause

The MOA of every company must mention the name of the state in which the registered office of the company is to be situated.
Within 15 days of incorporation of the company, address of registered office should be given, so that information and documents can be sent on specified address.
If any default is made in complying with the requirements of provisions related to display of address of registered office and name of the company, the company and every officer who is at default shall be liable to a penalty fee of ₹ 1000 for every day during which the default continues but shall not exceed ₹ 1 Lakh.

(3) Objects of Company or Object Clause

According to Companies Act, 2013 section 4(l) C, in the object clause of MOA, those objects are mentioned, for which the company is formed.
In object clause, words must be selected carefully, so that object can be understood in right and precise terms.
The object clause must not be rigid, doubtful and ambiguous.

(4) Liability of a company or liability clause section 4(l) a of Companies Act 2013 states the liabilities of the members which can be limited or unlimited.

(5) Capital of a company or Company Clause

Section 4(l) C states that the division of capital into equity share capital and preference share capital is also mentioned.
A company without share capital does not have this clause in its MOA.

(6) Declaration for Subscription or Subscribers Clause

This clause contains the name of signatories to the MOA.
The association contains declaration by the subscribers.

(7) Nomination Clause

In case of OPC’S MOA, the name of such person to be stated who will become member of company in case of death or incapability to make contracts of the subscriber.
Such name is written by taking written consent of nominee.

Alterations of MOA

A company can make a change in clauses of its MOA according to the procedure prescribed in company law and by passing an ordinary resolution.
A company can make a change in name, registered office, objective, liability and capital clause by following the procedure and regulations under Companies Act.

Effects of activities outside of Rights

If a company works outside the rights then members can make a petition in the court.
If any activity has been done from company’s money, then the activity would belong to the company.
If a person, bank or institute provides loan to the company for an unwanted activity, then they cannnot recover the loan, and repayment depends upon the wish of the company.

Articles of Association

It is an important document which regulates the internal arrangement of a company.
It clearly defines the rights, powers and duties of directors.
It states those modes and form in which business is carried on.
It is an alterable document and changes can be made in AOA according to the provisions of Companies Act.
It is to be printed, divided into paragraphs and numbered consecutively for its registration.

Form of AOA

Table F – AOA of a company limited by shares.
Table G – AOA of a company limited by guarantee and having share capital.
Table H – AOA of a company limited by guarantee not having share capital.
Table I – AOA of an unlimited company having share capital.
Table J – AOA of an unlimited company not having share capital.

Contents of AOA

Rights and duties of the officers.
Amount of share capital issued, number of shares and their face value.
Allotment of shares.
Registration of shares and rights and priviliges of different categories of shareholders.
Share warrants and dematerialisation.
Registration of shares and rights and priviliges of different categories of shareholders.
The appointment of directors, their powers, duties and their remuneration.
Duties and responsibilities of the manager.

Alteration of AOA

A company can alter its AOA by passing a special resolution.
The changes made in articles should not be contrary to any law or Company Act.
Changes are made effective only when they get registered with ROC.

Difference between MOA and AOA

MOA is the charter of the company, while AOA is a subsidiary document.
MOA determines and defines the power and sphere of activities of a company, while AOA controls the internal management and operations of company.
MOA determines the status and external relations of the company while AOA defines the internal rules and management.
It is very difficult to make changes in MOA, while this is easier in case of AOA.
MOA defines the relationship between company and external agencies, while AOA defines relationship between company and its members.

Doctrine of Constructive Notice

Doctrine of constructive notice protects the company against outsiders :
It is expected from every person dealing with the company to not only have read those documents but also to understand their making and after having understood entered into contract with the company.
If any person suffers any loss due to lack of information about MOA by entering into contract with the company, no company liability is held.

Doctrine of Indoor Management

This doctrine seeks to protect outsiders against actions of the company.
The doctrine of indoor management was propounded in 1856 in Royal British Bank Vs Terquand case.
The doctrine of constructive management is based on the presumption that a person dealing with the company is having complete knowledge about the company’s MOA and AOA.

Important Definitions
Definitions of Company

(1) According to Prof. Haney, “A joint stock company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.

(2) Justice Lord Lindly has given an exhaustive definition of the company. According to him, “By a company is meant an association of many persons who contribute money or money’s worth to a common stock and employ it for some common purpose. The common stock so contributed is demited in terms of money and is called the Capital of the Company. The persons who contribute to it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.”

(3) Chief Justice of America, Marshal, has expressed this views with regard to a companv as “JSC is an artificial person invisible, intangible and existing only in the eyes of law, being a mere creation of law, it possesses only the properties which the charter of its creation confers upon it either expressively or as incidental to its very existence. Perpetuity and its personality are the important features of a company because of which it can work as a person and exit and entry of the members also do not affect its continuity.”

(4) According to the definition given by Companies Act, 2013 Section 2 (20) Company means any company formed and registered under the act or under any previous company law.

Definition of Memorandum of Association
(1) According to Section 2(56) of Companies Act, 2013 : Memorandum means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company laws or of this law. But this definition is not an exhaustive one. This definition does not mention the features of MOA, and to understand the nature and status of MOA in more clear words, the following definitions will be helpful.

(2) Lord Cairns : Observed that MOA of a company is its charter and defines the limitations on the powers of the company established under the act that it contains in it, both that which is affirmative and that which is negative and that it states affirmatively, the ambit and extent of vitality and power which by law are given to the corporation and it states negatively that nothing shall be done beyond the ambit.

(3) According to Justice Bowen, MO A lays down those fundamental conditions upon which the company is allowed to be incorporated. They are conditions introduced for the benefit of the creditors and the outside public as well as of the shareholders.

(4) Justice Charlesworth : It is the charter of a company defining and confining the powers of the company.

Definitions of Articles of Association

According to Section 2(5) of Indian Company Act 2013, AOA of a company is originally framed or altered from time-to-time in pursuance of any previous companies law or of this act.
According to Justice Charlesworth, AOA is a document which defines the mutual rights of members of company and regulates the modes and form in which the business of company is to be carried on.
According to Supreme Court of India, Articles of Association regulates the internal management and define the powers of governing body of the company, (based on Naresh Chand Sanyal.

Company Class 11 RBSE Notes Important Terms

• Incorporation — Incorporation means registration of a company at the registrar’s office. It results in the isolation of company as a separate individual entity and does its activity.

• Holding Company — A type of company which has an indirect control over all other Companies. Such type of companies are called Holding company.

• Subsidiary Company— The company which is controlled by another company is called subsidiary company.

• Government Company — The company who’s fraction of investment with 51% part is possessed either by central or state government, is called government company.

• Foreign Company — The company whose amalgamation or registration is done in a foreign country, but the business is in India only, is called foreign company.

• FERA Company — Type of company which is employed in India under Foreign Currency Regulation Act, 1973, is called FERA company.

• Defunct/Dormant Company — A type of company in which no activities have taken place from the last 2 years. Meaning no description of documents have been presented, such company is called defunct company.

• Memorandum of Association — Memorandum of Association is a very important part of company. It is a written document which includes the strength of a company and also the area of work upon which the company runs its business.

• Articles of Association – It is the second most important document of the company. It contains purpose of the company and the duties and responsibilities are defined and recorded clearly.

• Fundamental Document — A document without which no company can be formed. It is the cornerstone of a company.

• Prospectus – It is a legal document that offers securities for sale.

• Disinvestment— Disinvestment is the reduction of some kind of asset for financial, ethical or political objective or sale of an existing business by a firm.

• Global Enterprise – It is a consulting firm at the forefront of knowledge building on three cutting edges. It provides strategic consultancy services as well as facilitation, project management and networking services.

• Privatisation – The change of investment and management from public sector enterprise to private sector enterprise is called Privatisation. In this, the government sells its fraction of ownership to private units and public, hence transfer of management is also done in this.

• Globalisation — The process by which business or other organizations develop international influence or start operating on an international scale, is known as globalisation. Here, the world shrinks into a small village and people can easily communicate with each other.
NCLT : National Company Law Act.
CSR : Corporate Social Responsibility
OPC : One Person Company
BOD : Board of Directors