CHAPTER 7

FORMATION OF A COMPANY
State with reason whether the following statements are True or False.
• Articles of association is the main document of a company
False, Memorandum of Association is the principal document of a company. Articles of
association is the subsidiary document containing rules or bye laws for internal management
• Acts against the Memorandum are ultra vires
True, if a company does anything that is not provided for in the Memorandum of Association, it
will be treated as ultra vires i.e. beyond the legal power and authority of the company
• Articles define a company's relationship with the outside world.
False, Articles are the rules for internal management of the affairs of a company. Memorandum
of association defines the relationship of the company with the outside world.
• In the event of conflict between the Memorandum and Articles, the provisions of the Articles
will prevail.
False, In the Event of any conflicting provisions, the provisions of Memorandum of Association
will supersede the provisions of Articles of Association
• It is necessary to get every company incorporated, whether private or public.
True, Incorporation/registration of every company is must with the Registrar of Companies.
Every company (public or private) must get Certificate of Incorporation to have legal status.
• Experts who assist in the preparation of necessary documents for registration of a company
are called promoters.
False, The experts who assist promoters in the preparation of necessary documents for
registration are the professionals like merchant bankers, auditors etc. They are not called
promoters.
• Statement in lieu of prospectus can be filed by a public company going for a public issue
Ans: True, if the company can make arrangements for raising the capital privately so that pubic
appeal is unnecessary, the company is required to prepare a Statement in lieu of prospectus.
• A private company can commence business after incorporation.
Ans: True, a private company can commence business after receiving Certificate of
Incorporation.
• A company can ratify preliminary contracts after incorporation
Ans: False, 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. It cannot ratify a preliminary contract.
• Every company must file Articles of Association.
Ans: False, it is not compulsory for a public ltd. Company to file Articles of Association. It
may adopt Table F of the Companies Act, 2013.
Multiple Choice Questions
• The application for registration of a company should be presented to the registrar of the state
in which the _______________ of the company is to be situated.
(a) Manufacturing plant
(b) The first branch
(c) Business office
(d) Any of the above
Answer: (c) Business office
• Among the following documents, which are not mandatory to be submitted to the registrar
along with an incorporation application by a private company?
(a) Address of registered office and undertaking
(b) Undertaking and statement of capital
(c) Statement of capital, address of the office, and list of directors
(d) List of directors and statement of capital
Answer: (a) Address of registered office and undertaking
• If a company is instructed to change its name, which resembles the name of an existing
company then the company can change the name by ______.
(a) Passing a special resolution
(b) Obtaining permission from the Central Government
(c) Passing an ordinary resolution
(d) Both a and b
Answer: (c) Passing an ordinary resolution
ORDINARY RESOLUTION: When at the general meeting, simple majority is required to
move the resolution, it is called as Ordinary Resolution. At least 51% members should be in
favor of the motion.
SPECIAL RESOLUTION: When at the general meeting, super majority is required to pass the
resolution, it is known as Special Resolution. At least 75% members should be in favor of the
motion.
• If the company can make arrangements for raising the capital privately, so that pubic appeal
is unnecessary, the company is required to prepare a _________________.
(a) Prospectus
(b) Statement in lieu of Prospectus
(c) Certificate of Prospectus
(d) None of the above
Answer: (b) Statement in lieu of Prospectus
• 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
Answer: (b) Registrar of Companies
• Preliminary Contracts are signed ______.
(a) Before the incorporation
(b) After incorporation but before the capital subscription
(c) After incorporation but before the commencement of business
(d) After commencement of business
Answer: (a) Before the incorporation
• The application for registration of a company should be presented to the _______________
of the state-appointed under Companies Act 1956.
(a) Controller
(b) Registrar
(c) Governor
(d) Registration officer
Answer: (b) Registrar
• The company will be considered as a separate person and different from its members from
the date (when the) _____________.
(a) Start of business
(b) Apply for registration
(c) Receive incorporation certificate
(d) Mentioned in the certificate
Answer: (d) Mentioned in the certificate
• ___________ cannot give an invitation to the public to subscribe for any shares in or
debentures of the company.
(a) Subsidiary Company
(b) Statutory Company
(c) Private Company
(d) Registered Company
Answer: (c) Private Company
• Powers, rights, remuneration, qualification, and duties of directors are discussed clearly in
_____.
(a) Memorandum of Association
(b) Articles of Association
(c) Prospectus
(d) None of the above
Answer: (b) Articles of Association
• 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
• 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, Commencement of Business
(d) Capital Subscription, Promotion, Incorporation, Commencement of Business
Ans: c
• A proposed name of Company is considered undesirable if
(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
• The company needs to obtain prior permission from central government when it changes the
address of its registered office from
(a) One city to another city
(b) With in the same city
(c) One state to another
(d) One country to another country
Ans: c
• A copy of the ________________ must accompany each from of application for shares
offered to the public.
(a) Memorandum of association
(b) Prospectus
(c) Articles of association
(d) None of the above
Ans: b
• The shares of a _______________ company can be freely transferable
(a) Private ltd
(b) Public ltd
(c) Partnership
(d) all of the above
Ans: b
• Which of the following is not a clause of memorandum of association
(a) Registered Office
(b) Capital
(c) Subscription
(d) Directors
Ans: d
• 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
• When the registered office of a company is changed within a city then it has to be intimated
to the registrar within ……..days of such change
(a) 28
(b) 30
(c) 60
(d) 90
Ans: 30

Very Short Type Questions

• Mention two certificates required for Joint Stock Company.
Answer: (a) Incorporation certificate
(b) Commencement of Business Certificate.
• What are qualification shares?
Answer: To ensure that the directors have some stake in the proposed company the articles
usually have a provision requiring them to buy a certain number of shares .They have to pay for
these shares before the company obtain certificate of commencement of business .These are
called qualification shares
• At what stage public company can start its business?
Answer: After getting commencement of business certificate a public company can start its
business
• How many members have to sign the Memorandum of Association in public limited
companies?
Answer: At least 7 members have to sign the Memorandum of Association in public limited
companies
• How many members have to sign the Memorandum of Association in private limited
companies?
Answer: At least 2 members have to sign the Memorandum of Association in public limited
companies
• Who are the first directors of the company?
Ans. The members who will sign the prospective company's Memorandum of Association must
be decided by the promoters. The people who sign the memorandum are also the company's first
directors.
• What do you mean by Formation of the company?
Ans. The formation of a business is a lengthy process that requires the fulfillment of numerous
legal formalities and processes. It involves four distinct stages, which are Promotion,
Incorporation, Subscription of capital and Commencement of Business. In contrast to public
limited businesses, which are forbidden from raising capital from the public, private corporations
are not required to produce a prospectus or complete the formality of a minimum subscription.
• When a company is said to be born?
Ans. A company is legally born on the date printed on the Certificate of Incorporation. It gains
the ability to enter into legally binding contracts. On that date, it becomes a legal entity with
perpetual succession. The Certificate of Incorporation serves as solid documentation of a
company's legal existence.
• Explain technical feasibility?
Ans. Technical feasibility refers to the analysis of an idea that may be good but technically not
possible to execute. It may so that the required raw material or technology is not easily available.
• Explain financial feasibility?
Ans. Every business activity requires funds. The promoters must calculate the amount of money
needed to pursue the selected business prospects. If not able to arrange funds, then the project
needs to be given up.
• Explain Economic feasibility?
Ans. The promoters must calculate the amount of money needed to pursue the selected business
prospects.
• Name the process by which the shares of a company are allowed to be trade on a stock
exchange
Ans: Listing of shares
• A public company with share capital is required to file a document with the registrar of
companies in case it does not want to make a public issue through prospectus name this
document
Ans: Statement in lieu of prospectus
Long Answer Type Questions
• "Promoter enjoys a fiduciary position with the company" Explain?
Ans. The reasons are:
➢ A firm's promoters have a fiduciary relationship with the company, which they must not
abuse. They can only make a profit if it is publicly acknowledged, and they must not
create any hidden gains. The corporation can withdraw the contract and recoup the
purchase price paid to the promoters if there is a non-disclosure.
➢ It can also sue for damages for losses incurred as a result of material information not
being disclosed.
➢ Promoters are not legally entitled to reimbursement for expenses incurred in the
company's promotion. The company, on the other hand, may choose to reimburse them
for their pre-incorporation costs.
➢ The corporation may also pay the promoters a lump sum payment or a commission on the
purchase price of a property obtained through them or on the shares sold as compensation
for their efforts.
➢ The corporation may also provide them stock or debentures, or give them the option to
buy the securities at a later date.

• List down the documents needed for registration.

OR
Jindal and his brothers wanted to start a new business of steel. To start up a business what
documents are required to be submitted by them to the registrar of companies?

Ans. The documents needed for registration for incorporation.

➢ Memorandum of Association
➢ Articles of Association
➢ Consent of proposed directors
➢ Agreement
 ➢ Statutory declaration
➢ Receipt of payment of fee
EXPLAIN ALL OF THESE IN DETAIL

• Define Promoter?
Ans. A promoter, according to Section 69, is a person
a. A person who has been named as such in a prospectus or is identified by the company in the
annual return in section 92; or
b. A person who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
c. A person who is in agreement with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act.

• Explain the process of capital subscription?

Ans. To raise money from the general public, you must take the following steps:
Step 1. Approval by the Securities and Exchange Commission (SEBI):
SEBI (Securities and Exchange Board of India), our country's regulatory body, has set standards
for information disclosure and investor protection. A public company inviting funds from the
general public must make adequate disclosure of all relevant information and must not conceal
any material information from the potential investors.
Step 2. Filing of Prospectus:
A copy of the prospectus or statement in lieu of the prospectus is filed with the Registrar of
Companies.
A prospectus is defined as "any document described or released as a prospectus, including any
notice, circular, advertisement, or other document inviting public deposits or inviting public
offers for the subscription or purchase of any securities of a body corporate."
Step 3. Bankers, Brokers, and Underwriters are appointed:
Raising money from the general people is a huge undertaking. The money for the application
will be received by the company's bankers. The brokers try to sell the shares by handing out
application forms and pushing people to apply. If the public does not subscribe to the shares, the
underwriters agree to buy them.
Step 4. Minimum Subscription:
To prevent enterprises from coming into business with insufficient finances, the corporation
must collect applications for a specific minimum number of shares before proceeding with the
allotment of shares. This is referred to as the 'minimum subscription' under the Companies Act.
As per SEBI Guidelines the limit of minimum subscription is 90 percent of the size of issue.
If applications received for the shares are for an amount less than 90 percent of the issue size, the
allotment cannot be made and the application money received must be returned to the applicants.

Step 5. Application to Stock Exchange:

At least one stock exchange is approached for approval to trade in its shares or debentures.
If such permission is not granted before the expiry of ten weeks from the date of closure of the
subscription list, the allotment shall become void and all the money received from the applicants
must be refunded to them within 8 days.
Step 6. Allotment of Shares:
Till the time shares are allotted, application money received should remain in a separate bank
account and must not be used by the company.
If the number of shares allocated is less than the number applied for, or if no shares are allotted
to the applicant, any excess application money must be returned to the applicants or added to the
money owed for allocation. Allotment letters are issued to the successful allottees. Within 30
days of allotment, a "return of allotment." signed by a director or secretary, is filed with the
Registrar of Companies.

• Mr. Mohan conceived an idea to start a garment business. He consulted a Company secretary
to get the details. Company secretary helped list down Mr. Mohan's function in the process of
starting up the business. Explain briefly the function of the promoter?
Ans: 1. Identification of business opportunity
2. Feasibility studies – Technical, financial and Economic feasibility
3. Name approval
4. Fixing up Signatories to the MoA
5. Appointment of Professionals
6. Preparation of necessary documents

EXPLAIN ALL OF THESE IN DETAIL

• Distinguish between Memorandum of Association and article of association
• Explain the various clauses of MoA
CASE STUDIES
• A group of seven friends decided to jointly set up a public company in a rural area where
the people were facing a serious unemployment problem .All of them jointly selected a
place where the companies registered office would be situated .Along with it the advice
of business specialist it was also decided what procedure would be followed for the issue
and allotment of shares. All the friends wanted the company to have a singular
recognition and people should get immediate attraction towards his product. It was felt
that the very name of the company could become a reason for its recognition .After
detailed discussion the companies name was decided as Murti limited .Then they jointly
completed all the formalities of the formation of the company.

1) Define and explain the two important documents used in the formation of the company
coating the lines from the above para which help you identify these documents
Ans: The two important documents used in the formation of company are memorandum of
association and Articles of Association (Explain these documents in detail)
2) State any one value highlighted in the above para
Ans: Generation of employment opportunities or upliftment of rural areas

• Yamuna limited invited general public to subscribe for his public issue of 10 crores( 10
lakh shares of rupees 100 each )through issue of prospectus .However the company
received applications for 8 lakh shares .Can the company proceed with allotment of
shares? Give reason in support of your answer.
Ans: No, Yamuna limited cannot proceed with allotment of shares as minimum subscription has
not been received
In order to prevent companies from commencing business with inadequate resources it is
provided that a company must receive the amount of minimum subscription in cash within 120
days from the date of issue.
Subscription is 90% of issued amount according to SEBI guidelines otherwise the allotment
cannot be made and the application money received must be return to the applicant within the
next 10 days

• A limited was issued certificate of incorporation by the registrar on 10th February 2018
.However the date mention on the certificate was 1st February 2018 .The company
entered into a contract for purchase of land with B limited on 5th February 2018. Now B
limited is not interested to sell the land as it is getting a higher price from another firm.
Can A limited file against B limited? Give reasons in support of your answer.
Ans: Yes, A limited can file a case against be limited as the company was in existence on 5th
February 2018 .Although wrong date was entered in the certificate still certificate of
incorporation is a conclusive evidence of regularity of incorporation of a company irrespective of
any deficiency. So the contract is valid and B limited under an obligation to honour the contract
.