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Class 11 Business Studies Chapter 7 Formation of a Company
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Formation of a Company
Chapter: 7
VERY SHORT TYPE QUESTIONS ANSWERS (1 MARK EACH)
A. Multiple Choice Question:
1. Minimum number of member to form a private company is-
(a) 2
(b) 3
(c) 5
(d) 7
Ans: (a) 2
2. Minimum number of members to form a public company is
(a) 5
(b) 7
(c) 12
(d) 21
Ans: (b) 7
3. Application for approval of name of a company is to be made to –
(a) SEBI.
(b) Registrar of companies.
(c) Government of India.
(d) Government of the state in which company is to be registered.
Ans: (b) Registrar of companies.
4. A proposed name of company is consider undesirable of
(a) It is identical with the name of an existing company.
(b) It resembles closely with the name of an existing company.
(c) It is an emblem of Government of India, United Nations etc.
(d) In case of any of the above.
Ans: (d) In case of any of the above.
5. A prospectus is issued by-
(a) A private company.
(b) A public company seeking investment from public.
(c) A public enterprise.
(d) A public company.
Ans: (d) A public company.
6. Stages in the formation of a public company are in the following order-
(a) Promotion, commencement of business, incorporation, capital subscription.
(b) Incorporation, capital subscription, commencement of Business, Promotion.
(c) Promotion, Incorporation, capital subscription, commence of business.
(d) Capital subscription, Promotion, Incorporation, commencement of business.
Ans: (a) Promotion, commencement of business, incorporation, capital subscription.
7. Preliminary contracts are signed-
(a) Before the incorporation.
(b) After incorporation but before capital Subscription.
(c) After incorporation but before commencement of business.
(d) After commencement of business.
Ans: (a) Before the incorporation.
8. Preliminary contracts are:
(a) binding on the company.
(b) binding on the company, if ratified after incorporation.
(c) binding on the company, after incorporation.
(d) not binding on the company.
Ans: (d) Not binding on the company.
True/False Answer Question
1. It is necessary to get every company incorporated, whether private or public.
Ans: True.
2. Statement in lieu of prospects can be filed by a public company going for a public Issue.
Ans: True.
3. A private company can commence business after incorporation.
Ans: True.
4. Experts who help promoters in the promotion of a company are also called promoters.
Ans: False.
5. A company can satisfy preliminary contracts after incorporation.
Ans: False.
6. If a company is registered on the basis of fictitious names, its incorporation is invalid.
Ans: True.
7. Articles of Associations the main document of company.
Ans: False.
8. Every company must file Articles of association.
Ans: False.
9. A provisional contract is signed by promoters before the incorporation of the company.
Ans: False.
10. If a company suffers heavy issues and its assets are not enough to pay off its liabilities, the balance can be recovered from the private assets of tis members.
Ans: False.
Short & Long Answer Questions
1. Following are the stages in the formation of a company-
Ans: (a) Promotion.
(b) Incorporation.
(c) Capital subscription.
(d) Commencement of business.
2. List the documents required for the incorporation of a company.
Ans: Following are the documents required for the incorporation of a company:
(i) Memorandum of Association.
(ii) Articles of Association.
(iii) Consent of proposed directors.
(iv) Agreement if any, with proposed managing or whole time director.
(v) Statutory declaration.
3. What is a prospectus? Is it necessary for every company to file a prospectus?
Ans: Prospectus is an invitation to the public to subscribe to the share capital of the company. The prospectus is generally circulated to the public in printed pamphlets. The incorporation of the company may also be advertised in news papers with a short summary of the prospectus.
It is not necessary for every company to file a propositus. A private Limited Company does not issue prospectus, but a public limited company is required to prospectus or a statement in lieu of prospectus.
4. Explain the term Minimum Subscription.
Ans: After getting the certificate of incorporation, a private company can start its business. A public company can start its business only after issuing minimum subscription. Minimum subscription is a minimum amount of share mention in the prospect, which must be issued by the public company for getting the certificate of commencement of business.
5. Briefly explain the term “Return of Allotment”.
Ans: If the allotted shares are less than the number applied for or where no shares are allotted to the applicant, the excess application money is to be returned to the applicants or adjusted towards allotment money due from them. A letter of return of Allotment is issued to the successful allottees signed by a director or secretary.
6. At which stage in the formation of a company does it interest with SEBI.
Ans: At the stage of capital subscription in the formation a company, is to interact with SEBI.
7. Distinguish between preliminary contracts and provisional contracts.
Ans: Preliminary contracts are those contract, where during the promotion of the company, promoter enter with third parties on behalf the company.
But, provisional contract are contract which are signed after incorporation but before the commencement of business.
Secondly, Preliminary contracts are not legally binding on the company. A company after coming into existence may, if it so chooses, decide to enter into fresh contracts with the same terms and conditions to honour the contracts made by the promoters.
But, Provisional contracts become enforceable only after the company gets the certificate of commencement of business.
8. What is meant by the term promotion. Discuss the legal position of promoters with respect to a company promoted by them.
Ans: Promotion of a company refers to the sum total of the activities of all those who participate in the building of the enterprise up to the organisation of the company and completion of the plan to exploit the idea.
Following are the legal position of promoter:
(i) Promoters perform various legal articles to get a company registered and get it to the position of commencement of business.
(ii) Legally promotions are not entitled to claim the expenses incurred in the promotion of the company.
(iii) As because the promoters are neither agents not trustees, so they are personally liable for all the contracts which are entered by them for the company before its incorporation, which are not ratified by the company later on.
(iv) Promotes of a company enjoy a fiduciary position with the company, which they must not misuse.
(v) Promoter of a company can make a profit only if it is disclosed but must not make any secret profits. In the event of a nondisclosure, the company can rescind the contract and recover the purchase price paid to the promoters.
9. Explain the steps taken by promoters in the promotion of a company.
Ans: Following are the steps taken by promotes in promotion of a company:
(i) Promotion stage: Promotion is the first stage in the formation of a company. The term promotion refers to the aggregate of activities designed to bring into being an enterprise to operate a business The meaning of promotion and the steps to be taken in promotion business are. Discovery of any idea, detailed investigation, Assembling the requirements. Financing the proposition.
(ii) Incorporation or Registration stage: Incorporation or Registration is the second stage in the formation of a company. It is the registration that brings a company into existence. A company is properly constituted only when it is duly registered under the Act and a certificate of incorporation has been obtained from the Registrar of companies.
(iii) Capital subscription stage: Under capital subscription stages comes the task of obtaining the necessary capital for the company. For this purpose, soon after the incorporation, a meeting of the board of directors is convinced deal with the following business-
(a) Appointment of the secretary.
(b) Appointment of bankers, Solicitors and brokers etc.
(c) Adoption of draft prospectus or statement in lieu of prospectus.
(d) Adoption of underwriting contract, if any.
Besides the above mentioned business, the Board also decides whether-
(i) a public offer for capital subscription is to the made. and
(ii) listing of shares at a stock exchange is to the secured.
(iii) After the above formalities have been completed, the directors of the company file a copy of the prospectus with the registrar and invite public to subscribe to the shares of the company by putting the prospectus in circulation.
(iv) Commencement of business stage : After getting the certificate of incorporation a private company can start its business. A public company can start its business only after getting a certificate of commencement of business.
The registrar scrutinises the documents. If is satisfied, then issues a certificate known as certificate of commencement of the business.
10. What is a Memorandum of Association? Briefly explain it clauses.
Ans: Memorandum of Association is the most important document of company. It contains the fundamental rules regarding constitution and activities of the company. It specifies the activities to be undertaken by a company. It contains the information regarding capital, liability of the members and objectives of the company. A company cannot go beyond what has been mentioned in the memorandum of association. It also determines the relation of the company with the outside world. A company can not engage in any trade of business which is outside the Provision of memorandum association. Any action outside the memorandum of association will be void and inoperative. So a memorandum of association is regarded as the constitution of a company.
11. Distinguish between Memorandum of Association and Articles of Association.
Ans : The following are the differences between a memorandum of association and an articles of association.
12. What is the effect of conclusiveness of the certificate of incorporation and commencement of business.
Ans: A company is legally born on the date printed on the certificate of incorporation. The company becomes a legal entity with perpetual succession on such date. The certificate of incorporation is a conclusive evidence of the regularity of the incorporation of a company. If a unsuspecting party enters into a contract with the company and subsequently if it is found that the incorporation of the company was improper and hence invalid. So once a certificate of incorporation has been issued the company has become a legal business entity irrespective of any flaw in its registration. Thus, the certificate of Incorporation is conclusive evidence of the legal existence of the company. Following are the examples, which show the impact of the conclusiveness of the certificate of incorporation-
(i) Certificate of Registration was filed 6th January, certificate of incorporation was issued on 8th January. But, the date mentioned on the certificate was 6th January It was decided that the company was in existence and the contracts signed on 6th January were considered valid.
(ii) A person forged the signatures of others on the memorandum. The incorporation was still considered valid.
Hence, the certificate of incorporation once issued is a conclusive evidence of the existences of the company.
13. Is it necessary for a public company to get its share listed on a stock exchange? What happens if a public company going for a public issue fails to apply to a stock exchange for permission to deal in its securities or fails to get such permission.
Ans: Yes, it is necessary for a public company to get its share listed on a stock exchange. If a public company going for a public issue facts to apply to a stock exchange for permission to deal in its securities or fails got such permission, this the certificate of commencement of business will be not issued to that public company Because a declaration that no money is payable or liable to become payable to the applicants because of his failure of the company to either apply for or obtain permission to deal in its securities on a stock exchange.
ADDITIONAL QUESTIONS & ANSWERS
1. What do you mean by promotion of a company?
Ans: Promotion is the first stage in the formation of a company. A promoter takes the initiative in the starting of a company. He visualises the future and plans accordingly. He searches for business opportunities and possibilities. As soon as he foresees chances of commercial prospects in any line, he begins to work. He brings into existence a company and develops opportunities for profitable investment. He is a specialist in their line of work.
In the words of C.W. Gerstenberg, “Promotion is the discovery of business opportunities and subsequent organisation of funds, property and managerial ability into a business concern for the purpose of making profits from the newly floated enterprise.”
2. What do you mean by Promoter?
Ans: A promoter is the beginner of a business enterprise and creator of a new thoughts and ideas. The person or group of persons taking necessary steps to perform the task of initiating from the planning to setting up a new business upto its commencement is known as promoter. The promoter identifies the area of business opportunities, analyses its prospects and initiate necessary steps to form a company. A promoter may be an individual, a firm, an association or even a company.
3. How can a company alter the objective clause of a memorandum of association?
Ans: The object clause of the memorandum of association of company is the most important clause. Its change may effect the activities of the company. This clause is a limitation on the company beyond which it cannot carry its activities.
The object clause can be altered by passing a special resolution and getting the permission of the company Law Board. A copy of the special resolution should be filed with the Registrar of the company within 30 days of passing the resolution. A petition is also given to the company Law Board for issuing a confirmation of alteration. After the alteration is allowed by the Law Board a printed copy of altered memorandum must be submitted to the Registrar of Companies within three months of the order.
4. What is an Articles of Association?
Ans: Articles of association may be defined as a statute which contains the rules and regulation framed for the internal management of the company. The articles dealt with by laws relating to day-to-day management of the company. It is a supplementary document to the memorandum of association. Memorandum of association frames the objectives of the company and articles devise way to achieve them. The articles of association can not contain anything which is contrary to companies. Act and also to the memorandum of association.
5. What are the contents of an Articles of Association?
Ans: The contents of an articles of association are mentioned below:
(a) The amount of share capital issued, different types of shares. Calls on shares, forfeiture of shares, transfer and transmission of shares and rights and privileges of different categories of shareholders.
(b) Powers to alter as well as reduce share capital.
(c) The appointments of directors, powers, duties and their remunerations.
(d) The appointment of managers, managing directors etc.
(e) The procedure of holding and conducting of various meetings.
(f) Matters relating to maintaining of accounts, declaration of dividends and providing reserve etc.
(g) Procedure of winding up the company.
6. What are the contents included in a prospectus?
Ans: The following contents are to be generally included in a prospectors:
(i) Name and full address of the company.
(ii) Full particulars about the signatories to the memorandum of association and the number of shares taken up by them.
(iii) The number and classes of shares. The interest of shareholders in the property and profits of the company.
(iv) Names, addresses and occupations of the members of the Board of Directors.
(v) The minimum subscription fixed by promoters after taking into account all financial requirements at the beginning.
(vi) If the company acquires any property from vendors, their full particulars are to be given.
(vii) The full address of the under writers if any and the opinion of the directors that the underwriters have sufficient resources to meet their obligations.
(viii) The time of opening of the subscription list.
(ix) The nature and extent of interest of every promoters in the promotion of the company.
(x) The amount payable on application, allotment and calls.
(xi) Particulars about reserves and surpluses.
(xii) The amount of preliminary expenses.
(xiii) The name and address of the auditors.
(xiv) Particulars regarding voting right at the meeting of the company.
(xv) A report of the auditors regarding the profits and losses of the company.
7. Mention the distinctions between a private and public company.
Ans: The distinctions between a private and a public company are mentioned below:
8. Briefly explain the clauses of Memorandum of Association.
Ans: (i) Name Clause: This clause contain the name of the company with which the company will be known which has already been approved by the Register of companies.
(ii) Registered office Clause: This clause contains the name of state, in which the registered office of the company is Proposed to be situated.
(iii) Objects Clause: This is Probably the most important clause of the memorandum. It defines the Purpose for which the company is formed. A company is not legally entitled to undertake an activity, which is beyond the objects stated in this clause.
(iv) Liability Clause: This clause limits the liability of the members to the amount unpaid on the shares owned by them.
(v) Capital Clause: This clause specifies the maximum Capital which the company will be authorised to raise through the issue of shares. The authorised share capital of the Proposed Company along with its division into the numbers of shares having a fixed face value is specified in this clause.
(vi) Association Clause: In this clause the signatories to the memorandum of Association state their intention to be associated with the company and also give their consent to purchase Qualification shares.
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