Formation of a CompanyClass 11 Business Studies NCERT Solutions
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Q1Long Answer Questions
What is meant by the term 'Promotion'. Discuss the legal position of promoters with respect to a company promoted by them.
Solution
Promotion
Promotion is the first and foundational stage in the formation of a company. It involves the entire process from conceiving a business idea to taking the necessary steps to give that idea a practical shape by forming a company. A promoter is a person or a group of persons who discovers a business opportunity, analyzes its prospects, assembles the required resources (men, materials, machinery, finance), prepares the necessary documents, and undertakes all other activities to get the company registered and ready to commence business.
Legal Position of Promoters
The legal position of promoters is unique. They are not considered agents or trustees of the company they are forming, primarily because the company does not exist legally before its incorporation.
- Not Agents: Promoters cannot act as agents because their principal (the company) is not yet in existence. Consequently, they are held personally liable for any contracts they enter into on behalf of the proposed company (known as preliminary contracts), unless the company, after incorporation, enters into a fresh contract to replace the original one.
- Not Trustees: While they are not technically trustees, they stand in a fiduciary position towards the company they promote. This means they have a relationship of trust and confidence with the company.
- Fiduciary Duty: Because of their fiduciary position, promoters must act in good faith and in the best interests of the company. They must not make any secret profits at the expense of the company. Any profit they make from transactions with the company must be fully disclosed. If they fail to disclose such profits, the company can rescind the contract and recover the money, or claim damages.
- Right to Remuneration: Promoters are not legally entitled to claim any expenses incurred during the promotion process. However, the company may choose to reimburse them for these pre-incorporation expenses. The company can also remunerate them for their efforts through a lump-sum payment, commission, or by allotting shares or debentures.
Q2Long Answer Questions
Explain the steps taken by promoters in the promotion of a company.
Solution
Promoters undertake several crucial steps to bring a company into existence. These steps are part of the promotion stage and are as follows:
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Identification of Business Opportunity: The process begins with the promoter conceiving a business idea or identifying an opportunity. This could be producing a new product, providing a new service, or finding a new way to make an existing product available.
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Feasibility Studies: Once an idea is identified, promoters conduct detailed feasibility studies to determine its viability. These studies are critical to avoid investing resources in an unviable project and typically include:
- Technical Feasibility: This assesses whether the idea is technically possible to execute, considering the availability of raw materials, technology, and other required inputs.
- Financial Feasibility: This study estimates the total funds required for the project and evaluates whether these funds can be arranged within the available means.
- Economic Feasibility: This analyzes the potential profitability of the project. Even if a project is technically and financially feasible, it may be abandoned if it is not expected to be profitable.
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Name Approval: The promoters select a name for the company and apply to the Registrar of Companies for its approval. The name must not be identical or too similar to an existing company's name, nor should it be misleading or violate the provisions of The Emblem and Names (Prevention of Improper Use) Act, 1950.
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Fixing up Signatories to the Memorandum of Association: Promoters decide on the people who will sign the Memorandum of Association. These individuals are typically the first directors of the company. Their written consent to act as directors is required.
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Appointment of Professionals: Promoters appoint professionals like mercantile bankers, auditors, and legal advisors to assist them in preparing the necessary legal and financial documents required for incorporation.
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Preparation of Necessary Documents: Finally, the promoter ensures the preparation of key legal documents that must be submitted to the Registrar of Companies. These include the Memorandum of Association and the Articles of Association.
Q3Long Answer Questions
What is a 'Memorandum of Association'? Briefly explain its clauses.
Solution
A Memorandum of Association (MoA) is the most important legal document required for the formation of a company. It is considered the charter of the company, as it defines the objectives for which the company has been formed and outlines the scope of its activities. A company cannot legally undertake any activity that is not mentioned in its Memorandum. It governs the company's relationship with the outside world.
The Memorandum of Association contains the following fundamental clauses:
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The Name Clause: This clause states the full name of the company, which has been previously approved by the Registrar of Companies. A public limited company must end its name with the word 'Limited', and a private limited company with 'Private Limited'.
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Registered Office Clause: This clause specifies the name of the State in which the company's registered office will be situated. The exact address of the office is not required at this stage but must be notified to the Registrar within thirty days of incorporation.
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Objects Clause: This is the most critical clause as it defines the purpose and main business activities of the company. The company is not legally permitted to conduct any business that is beyond the scope of the objects stated here. It lists the main objects and any matters necessary for the furtherance of those objects.
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Liability Clause: This clause declares that the liability of the members is limited. It specifies that each member's liability is limited to the amount, if any, unpaid on the shares they hold. This protects the personal assets of the shareholders.
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Capital Clause: This clause specifies the maximum amount of share capital that the company is authorised to raise from the public, also known as the 'authorised share capital'. It also details how this capital is divided into shares of a fixed face value.
Q4Long Answer Questions
Distinguish between 'Memorandum of Association' and 'Articles of Association.'
Solution
The Memorandum of Association (MoA) and Articles of Association (AoA) are two crucial documents for a company's formation, but they serve different purposes. The key distinctions are as follows:
| Basis of Difference | Memorandum of Association | Articles of Association |
|---|---|---|
| Objectives | It defines the objectives and the fundamental purpose for which the company is formed. It sets the boundaries of the company's operations. | These are the rules for the internal management of the company. They specify how the objectives stated in the Memorandum are to be achieved. |
| Position | It is the main, supreme charter of the company. It is subordinate only to the Companies Act. | It is a subsidiary document. It is subordinate to both the Memorandum of Association and the Companies Act. |
| Relationship | It defines the relationship between the company and outsiders, such as creditors, suppliers, and investors. | It defines the internal relationship between the company and its members, and among the members themselves. |
| Validity | Any act done by the company that goes beyond the scope of the Memorandum is considered ultra vires (invalid) and cannot be ratified, even by a unanimous vote of all members. | Acts that are beyond the scope of the Articles can be ratified by a special resolution of the members, provided they are within the powers defined by the Memorandum. |
| Necessity | Every company, whether public or private, must have its own Memorandum of Association. It is a mandatory document. | It is not compulsory for a public limited company to file its own Articles of Association. It can choose to adopt Table F of The Companies Act, 2013, which is a model set of articles. |
Q5Long Answer Questions
What is the meaning of 'Certificate of Incorporation'?
Solution
A Certificate of Incorporation is a legal document issued by the Registrar of Companies once all the formalities and legal requirements for the registration of a company have been completed to their satisfaction. This certificate is essentially the 'birth certificate' of the company, as it marks the moment the company legally comes into existence.
Key aspects of the Certificate of Incorporation include:
- Legal Existence: On the date printed on the certificate, the company is officially born. It becomes a separate legal entity, distinct from its members, with perpetual succession. This means it can own property, enter into contracts, and sue or be sued in its own name.
- Conclusive Evidence: The Certificate of Incorporation is conclusive evidence of the company's legal existence and the regularity of its registration. Once the certificate is issued, the legality of the company's formation cannot be questioned, even if procedural errors or deficiencies were later discovered in the registration process. For example, even if signatures on the Memorandum were forged, the incorporation is considered valid once the certificate is issued.
- Corporate Identity Number (CIN): Along with the certificate, the Registrar of Companies allots a unique Corporate Identity Number (CIN) to the company.
In essence, the certificate provides undeniable proof that the company has been properly formed and is recognized as a legal person under the law.
Q6Long Answer Questions
Discuss the stages of formation of a company?
Solution
The formation of a company is a structured process that can be divided into three main stages. For a private company, only the first two stages are necessary, while a public company must go through all three.
1. Promotion Stage
This is the initial stage where the idea of starting a company is conceived and explored. The key activities include:
- Discovery of Idea: A promoter identifies a business opportunity.
- Feasibility Studies: The promoter conducts detailed studies (technical, financial, and economic) to assess the viability and profitability of the business idea.
- Name Approval: An application is made to the Registrar of Companies to get a name approved for the proposed company.
- Assembling Resources: The promoter decides on the first directors, appoints professionals like bankers and auditors, and arranges for the preparation of necessary documents.
- Document Preparation: Key documents like the Memorandum of Association and Articles of Association are prepared.
2. Incorporation Stage
This is the registration stage where the company legally comes into existence.
- Filing of Application: The promoters file an application for incorporation with the Registrar of Companies of the state where the registered office will be located.
- Submission of Documents: This application is accompanied by essential documents, including the Memorandum of Association, Articles of Association, written consent of proposed directors, and a statutory declaration confirming that all legal requirements have been met.
- Payment of Fees: The required registration fee is paid.
- Issuance of Certificate of Incorporation: If the Registrar is satisfied with the submitted documents, they will issue a Certificate of Incorporation. This certificate is the official birth certificate of the company, making it a separate legal entity.
3. Capital Subscription Stage
This stage is relevant only for public companies that wish to raise capital from the public.
- SEBI Approval: The company must obtain approval from the Securities and Exchange Board of India (SEBI) before approaching the public for funds.
- Filing of Prospectus: A copy of the prospectus, which is an invitation to the public to buy shares, is filed with the Registrar.
- Appointment of Bankers, Brokers, and Underwriters: The company appoints intermediaries to manage the issue of shares.
- Minimum Subscription: The company must receive applications for at least 90% of the shares offered to the public, as per SEBI guidelines. If this is not met, the application money must be returned.
- Stock Exchange Application: The company applies to at least one stock exchange for permission to have its shares traded.
- Allotment of Shares: If minimum subscription is received, the company proceeds with allotting shares to the applicants.
Q1Short Answer Questions
Name the stages in the formation of a company.
Solution
The formation of a company involves a complex process that can be divided into three distinct stages:
- Promotion: This is the first stage, which involves conceiving a business idea, assessing its feasibility, and taking the necessary steps to form a company.
- Incorporation: This is the second stage where the company is legally registered. It involves filing the necessary documents with the Registrar of Companies and obtaining the Certificate of Incorporation, which marks the legal birth of the company.
- Subscription of capital: This third stage is applicable to public companies that intend to raise funds from the public. It involves issuing a prospectus, receiving applications for shares, and completing the allotment of shares.
Q2Short Answer Questions
List the documents required for the incorporation of a company.
Solution
The following documents are required to be submitted to the Registrar of Companies for the incorporation of a company:
- Memorandum of Association (MoA): Duly stamped, signed, and witnessed, this document defines the objectives and scope of the company.
- Articles of Association (AoA): Duly stamped and witnessed, this document contains the rules for the internal management of the company.
- Consent of Proposed Directors: A written consent from each person named as a director, confirming their agreement to act in that capacity and to buy qualification shares.
- Agreement: Any agreement the company proposes to enter into with individuals for their appointment as Managing Director, whole-time Director, or Manager.
- Statutory Declaration: A declaration stating that all legal requirements for registration have been complied with.
- Receipt of Payment of Fee: Proof that the necessary registration fees have been paid, the amount of which depends on the authorised share capital of the company.
Q3Short Answer Questions
What is a prospectus? Is it necessary for every company to file a prospectus?
Solution
A prospectus is any document, including a notice, circular, or advertisement, that invites deposits or offers from the public for the subscription or purchase of any securities (like shares or debentures) of a company. It contains crucial information about the company to help potential investors make an informed decision.
No, it is not necessary for every company to file a prospectus. A prospectus is only required for a public company that wishes to raise funds from the general public. A private company is prohibited by law from raising funds from the public and, therefore, does not need to issue a prospectus.
Q4Short Answer Questions
Briefly explain the term 'Return of Allotment'.
Solution
A 'Return of Allotment' is a legal statement that a company must file with the Registrar of Companies after it has allotted its shares. This document must be filed within 30 days of the allotment. It contains details such as the names and addresses of the shareholders (allottees) and the number of shares allotted to each of them. The statement must be signed by a director or the company secretary, and it serves as an official record of the share allotment process.
Q5Short Answer Questions
At which stage in the formation of a company does it interact with SEBI.
Solution
A company interacts with the Securities and Exchange Board of India (SEBI) during the Capital Subscription stage. This interaction is mandatory for a public company that intends to raise funds from the general public. The company must seek prior approval from SEBI before issuing its securities. SEBI, as the regulatory authority, has issued guidelines for disclosure of information and investor protection, and it ensures that the company provides all relevant information to potential investors and does not conceal any material facts.