Unit – VII: Stages in Formation of a Company
Very Short answer Question (One mark each):
Q.1. By whom the qualification shares are subscribed?
Ans: The directors of the company subscribe the qualification shares.
Q.2. How many signatories are required for the Memorandum of Association of a public Limited Company?
Ans: Seven members are required to sign the Memorandum of Association of a public limited Company.
Q.3. How many signatories are required for the Memorandum of Association of a Private Company?
Ans: Two members are required for the Memorandum of Association of a private company.
Q.4. When can a private company commence business? 2015
Ans: A private company can commence business after obtaining Certificate of Incorporation.
Q.5. When can a public company commence business?
Ans: A public company can commence business after obtaining certificate to commence business.
Q.6. What documents specify the objectives of the company?
Ans: - Memorandum of Association specifies the objects of the company.
Q.7. Which document is issued by a company to invite public to purchase its shares? 2010
Ans: - Prospectus is issued by a company to invite public to purchase its shares.
Q.8. What is a company?
Ans: An association of a number of individuals for the purpose of carrying on some legitimate business.
Q.9. What document specifies the objectives of the company?
Ans: Memorandum of Association specifies the objects of the company.
Q.10. Name the document called ‘Doctrine of indoor management’.
Ans: Articles of association
Q.11. Name the document called ‘Charter of the Company’.
Ans: Memorandum of association
Q.12. Which Clause defines the powers of the Company?
Ans: Object Clause
Q.13. Name the document which contains rules and regulations for internal management of the company. 2008
Ans: Articles of Association.
Q.14. What is meant by Incorporation of a company?
Ans: Incorporation of a company means the registration of company as a corporate body under the provisions of Companies Act 1956.A Company comes into existence from the date of incorporation.
Q.15. What is certificate of Incorporation?
Ans: A certificate of Incorporation is a certificate issued by the Registrar of the companies that company is incorporated. With this certificate the company becomes a separate legal entity.
Q.16. What is the difference between Certificate of Incorporation and Certificate of Commencement?
Ans: Certificate of Incorporation is the birth certificate of the company. A company is born on the date mentioned on Certificate of Incorporation it becomes a separate legal entity. The certificate of commencement of business is an evidence to start the operations of the business. The company can start its functioning after getting certificate of commencement.
Short answer type Questions (Two/Three/five marks each):
Q.1. What are the stages in the formation of a company? 2007
Ans: - There are four stages in the formation of a company:
c) Subscription of Capital
d) Commencement of Business.
Q.2. What do you mean by promotion? Mention the steps involved in promotion.
Ans: Promotion refers to the process of establishing new business enterprises .It is grabbing a business opportunity & converting it into a new company. Promotion includes the preliminary work incidental to formation of a company.
Following are the steps of promotion:
a) Discovery of Idea
b) Finding the promoters to launch company
c) Assembling the preposition
d) preparing important Documents
e) Formation or getting the company registered.
Q.3. Who is a promoter of a company? What are various types of Promoters? 2006, 2009
Ans: A promoter is the person who does the required work before the formation of the company for its incorporation. A promoter plans and organises the business and fulfills all the legal formalities so that new company can come into existence. It may be an individual, a firm, an association of persons.
Promoters may be classified into the following categories:
a) Professional Promoters
b) Entrepreneur Promoter
c) Occasional Promoter
d) Financial Promoter
e) Government Promoter
Q.4.What is the functions or role of promoters? 2007, 2008, 2010
Ans: The functions of promoters are:
a) Identification of Business Opportunity: The promoters identify an opportunity which can be taken by a business firm
b) Detailed Investigation: Detailed examination to satisfy them regarding profitability of the proposition
c) Ensuring availability of resources: The promoter arranges human resources, material, machinery and equipment etc. for the company
d) Preparing preliminary Documents: Prepares the necessary documents required for obtaining the certificate of incorporation and certificate of commencement of business.
e) Entering into preliminary contracts: Enter into contracts with different parties before incorporation of company.
f) Naming a company: The promoters have to select a name of the company.
Q.5. What are the documents which are required for the Incorporation of a company? 2006, 2009, 2015
Ans: The documents which are required for the Incorporation of a company:
a) Memorandum of Association
b) Articles of Association
d) Consent of proposed directors
f) Statutory declaration
g) Document evidence of payment evidence fees
Q.6. What is Memorandum of association? Name the clauses of Memorandum of Association. Mention its importance. 2008
Ans: Memorandum of association is the most important document of a company. It contains the fundamental on which a company is incorporated. The company is bound to act according to the objects and powers contained in its Memorandum of association. It also regulates the relationship of the company with the rest of the world
There are six clauses of Memorandum of Association:
a) Name Clause
b) Registered office Clause
c) Object Clause
d) Liability Clause
e) Capital Clause
f) Association Clause
Importance of Memorandum of association:
a) It is the foundation of a business which shows the capacity to contract of a company.
b) It is constitution of a company which relates with the outside world.
c) No company is allowed to do any act outside the scope of activities as laid down in the memorandum.
Q.7. Explain various clauses of Memorandum of Association. 2010
Ans: Memorandum of Association is the fundamental conditions on which the company is incorporated. It is the charter of the company. Its clauses are:
a) Name Clause: Under this clause the corporate name of the company is stated with the name “limited” or “Private Limited” as the last word in this name. The name should not be identical with the name of any registered company.
b) Registered office Clause: Under this clause the company is required to mention the place in which the company is situated.
c) Objects clause: The object clause must contain the main object of the company and the other objects related with it for the completion of main object. The company is not entitled to carry any of the business which is not mentioned in the object clause.
d) Liability Clause This clause stated that the liability of members is limited to the amount unpaid on their shares.
e) Capital Clause: It shows the amount of share capital with which the company is going to be registered and its division.
f) Association Clause: This clause signifies the desire of the subscribers to form them into a body corporate.
Q.8. What is Prospectus and a statement in lieu of prospectus? What is its importance? Mention its contents. 2006, 2009
Ans: Prospectus is the circular or invitation given to the general public to subscribe to the shares of the company or invest money in the company.
If a company does not want to issue a prospectus to the public for subscription of the shares, a statement in lieu of prospectus is required to be issued to the public for necessary information. The nature of the information of this document is more or less similar to that given in the prospectus.
Importance of Prospectus:
a) It is an invitation to the public to subscribe to the shares and debentures of the company.
b) It informs about the background and future prospects of the company.
c) It informs the general public regarding the business policies and programmes of the company.
Usually the following are contents of prospects
a) Company’s name and the address of its registered office
b) The main object of the company
c) The number and classes of the shares
d) Qualification shares of the directors
e) The names and addresses of the Director, Managing director or manager
f) The minimum subscription
g) The time of opening and closing of the subscription list
h) Registrar to the issue
i) Underwriters to the issue
j) Bankers to the issue
Q.9. What is Article of Association? Mention its importance and Contents.
Ans: Article of Association contains the rules & regulation for the internal management of the company. These rules and regulations are framed to carry the objects of the company as stated in the memorandum of association. The articles are subordinate to Memorandum. 2007, 2010
Importance of articles of association
a. It defines the objectives of the company that are to be achieved.
b. This is the subsidiary document of the company.
c. Articles define the relationship of the members and the company.
Contents of Articles of association
a) Different classes of shares and their rights
b) Procedure of making an issue of share capital and allotment thereof
c) Procedure of issuing share certificates
d) Forfeiture of shares and the procedure of their re-issue
e) Procedure for transfer and transmission of shares
f) Conversion of shares into stock
g) Alteration of share capital
h) Borrowing powers of directors
Q.10. Distinguish between Memorandum of Association & Article of Association. 2006, 2015
Ans: - The difference between Memorandum of Association & Article of Association is given here:
BASIS OF DISTINCTION
MEMORANDUM OF ASSOCIATION
ARTICLE OF ASSOCIATION
It is the constitution of a company .It defines limits, powers and objects of the company.
It contains rules and regulation for the internal management of the company.
It governs relationship of company with the external world.
It governs internal relationship between the members of the company.
It is the primary document. It is the foundation of the company.
It is the secondary document & it is based on the memorandum of association.
It is a compulsory document for all the companies.
It is compulsory for private companies, unlimited companies and companies limited by guarantee.
Alteration can only be done by the permission of court.
It can be altered according to the need of the management by passing a resolution.