Formation of Company

NCERT Solution

Long Answer Type

Question 1: 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?

Answer: It is necessary for a public company to get its share listed on a stock exchange. The company needs to get listed on at least one stock exchange because shares issued to public can only be traded through a stock exchange. 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, the allotment shall become void. In this situation, all the money received from the applicants will have to be returned within eight days.

Question 2: What is meant by the term ‘Promotion’? Discuss the legal position of promoters with respect to a company promoted by them.

Answer: The first stage in formation of a Company is ‘Promotion’. Promotion involves identifying a business opportunity and taking initiative to give practical shape to the business idea so that it can be exploited for doing business.

Position of Promoters:

Promoters take various activities to get the Company registered and get it to the position of commencement of business.
A promoter is neither an agent nor a trustee of the Company. They are personally liable for all the contracts which are made before the formation of the Company; in case the same is not ratified by the Company after incorporation.
The promoters enjoy a fiduciary position with the Company which they must not misuse. They can make a profit only when it is disclosed but they cannot make secret profits. In case of non-disclosure, the Company can rescind the contract and recover the purchase price to the promoter. The Company can also claim damages for the loss suffered due to non-disclosure.
The promoters are not legally entitled to claim the expenses during promotion of the Company. But the Company may choose to reimburse them for pre-incorporation expenses.
The Company may also remunerate the promoters for their efforts a lump sum amount or a commission on the purchase price of property purchased through them or on the shares sold.
The Company may also allot shares or debentures to the promoters or give them an option to purchase securities at a later date.

Question 3: Explain the steps taken by promoters in the promotion of a company.

Answer: Following are the steps taken by promoters in the promotion of a Company:

Identification of a business opportunity: This is the first step in promotion of a Company. A business opportunity can be from various existing businesses or it can be an altogether new opportunity.
Feasibility Studies: While many business ideas look fanciful, most of them may not be realistic enough to be turned into a reality. The promoters have to undertake feasibility study from various perspectives. A business idea should be technically, financially and economically feasible. Technical feasibility means that suitable technology is available for turning the idea into a reality. Financial feasibility means that the business idea is lucrative enough to attract potential investors. Economic feasibility means that the business is likely to earn profit in the long run.
Name Approval: The promoters have to find a suitable name and submit an application to the Registrar of Companies in the State in which the Company plans to base its registered office.
Fixing up signatories to the Memorandum of Association: The promoters have to decide about the signatories to the Memorandum of Association. These are the people who are usually the first Directors of the Company. They take up the qualification shares in the Company if necessary.
Appointment of Professionals: The promoters need services of certain professionals to prepare necessary documents which are to be submitted to the Registrar of Companies. Mercantile Bankers, auditors, etc. are examples of such professionals.
Preparation of necessary documents:

Question 4: What is a ‘Memorandum of Association’? Briefly explain its clauses.

Answer: Memorandum of Association defines the objectives of the business. It is the most important document of the Company. The different clauses of Memorandum of Association are as follows:

The name clause: This clause contains the name by which the Company will be known. The name needs to be approved by the Registrar of Companies.

Registered Office Clause: This clause contains the name of the state in which the registered office of the Company is going to be situated. The exact address of the office may not be required at this stage but needs to be furnished within 30 days of incorporation.

Objects Clause: This clause defines the purpose of the Company. A Company cannot legally take up an activity which is beyond the definition of this clause. This clause contains the main object and other objects.

Liability Clause: This clause limits the liability of members to the amount unpaid or the shares owned by them.

Capital Clause: This clause defines the maximum limit of capital which can be raised by the Company through the issue of shares. This clause explains the authorized capital of the Company; along with the division of capital into a number of shares with each share having a fixed value.

Association Clause: This clause contains the willingness of association of members to the Memorandum of Association. In case of a public company, the Memorandum of Association must be signed by at least seven members and this number is minimum 2 in case of a private company.

Question 5: Distinguish between ‘Memorandum of Association’ and ‘Articles of Association.’

Answer:

Basis of Difference	Memorandum of Association	Article of Association
Objectives	It defines the object for which company is formed.	It contains rules pertaining to internal management of the company.
Position	This is the main document and is subordinate to the Company Act.	This is a secondary document and is subordinate to both Memorandum of Association and Companies Act.
Relationship	It defines the relationship of the Company with outsiders.	It defines the relationship of members and the Company.
Validity	Acts beyond MoA are invalid and cannot be ratified even by a unanimous vote of members.	Acts which are beyond AoA can be ratified by members if they do not violate the MoA.
Necessity	It is a mandatory document.	It is not a mandatory document.
Alteration	Alteration of MoA is very difficult, and in many cases certain approval statutory authority is required.	It can be altered by special resolution being passed by the members.

Question 6: What is the effect of conclusiveness of the ‘Certificates of Incorporation’ and ‘Commencement of Business’?

Answer: The Certificate of Incorporation is a conclusive evidence of regularity of incorporation of the company. This means that after the Certificate of Incorporation, the Company comes into existence and becomes a legal entity. The Company becomes legally entitled to enter into contracts. This also means that irrespective of any deficiency in the formalities during the process of incorporation, once the certificate of incorporation has been issued no one can question the legal validity of the Company.

On the issue of certificate of incorporation, a private company can commence its business because it does not need to raise capital from public. However, a public company needs to complete the formality of capital subscription before it can commence the business.

In case of a public company, once the company is able to raise the minimum subscription through shares; it needs to apply to the registrar with proper documents in order to get the Certificate of Commencement of Business.

So, it can be said that the ‘Certificate of Incorporation’ has conclusiveness only in case of a private company. But in case of a public company, conclusiveness lies with the ‘Certificate of Commencement of Business’.