Telangana TSBIE TS Inter 1st Year Commerce Study Material 7th Lesson Commencement of Business Textbook Questions and Answers.
TS Inter 1st Year Commerce Study Material Chapter 7 Commencement of Business
Long Answer Questions
Question 1.
What are the important documents to be submitted to the Registrar of Companies for incorporation of a company?
Answer:
Documents to be prepared while formation of a company:
The important documents to be prepared by a company for its formation are discussed below:
- Memorandum of Association.
- Articles of Association.
- Prospectus.
- Other documents.
1) Memorandum of Association:
Meaning : The Memorandum of Association is the constitution of the company. It is the charter of the company. It provides the foundation on which the company structure is built. It acts as an indicator or guideline for those investors who are interested and are planning to invest in the company. A company cannot perform its operations beyond the scope of memorandum. It defines the scope of the company’s activities as well as its relation with the outside world.
Memorandum of Association is one of the documents which has to be filed with Registrar of companies at the time of incorporation of the company.
Definition:
As per Section 2(56) of the Companies Act, 2013, “Memorandum of Association is one of the documents which has to be filed with the Registrar of the Companies at the time of incorporation of the company”. The Memorandum of Association must be signed by at least seven members in case of a public limited company and two members in case of a private limited company It cannot be changed easily. So it should be prepared very carefully.
Clauses of Memorandum of Association:
The contents of the Memorandum of Association are known as clauses, which are explained in Section – B of the Act. They are as follows.
- Name clause [Section 4(1) (a)]
- Registered Office or Situation clause [Section 4(1) (b)]
- Objects clause [Section 4(1) (c)]
- Liability clause [Section 4(1) (d)]
- Capital clause [Section 4(1) (e)]
- Association clause or Subscription clause [Section 13(4) (c)]
2) Articles of Association:
Meaning: The rules and regulations framed for the internal management of the company, which are set out in a document is named as Articles of Association.
It also helps in achieving the objectives specified in Memorandum of Association. The Articles play a very important role in the affairs of the company. It is a supplementary document to the Memorandum of Association.
The Articles must be printed, divided into paragraphs, numbered consecutively, stamped adequately and signed by each subscriber to the Memorandum of Association. It is duly witnessed and filed along with the Memorandum of Association.
The private companies limited by shares, companies limited by guarantee and unlimited companies must have their Articles of Association. A public company limited by shares may or may not have its own Articles. As per section 26 of Companies Act, it can follow model set of Articles given in Table – A in Schedule -1 of the Act. The Articles of Association can be altered by passing a special resolution. Each subscriber to the memorandum must sign the articles in the presence of atleast one witness. A copy of every special resolution altering the articles should be filed with the Registrar within 30 days of its passing and attach to every copy of the articles issued thereafter.
3) Prospectus:
Meaning: Prospectus is an invitation to the public to subscribe to the shares and debentures of a public company. After incorporation of a company promoters may issue the prospectus for raising required finance.
A public company invites the people to offer to purchase the shares and debentures through an advertisement. Such an Advertisement or notice containing detailed information about the company is known as prospectus.
A private company cannot issue prospectus to secure its capital. A prospectus must contain the following requirements:
- It must be an invitation offering to the public.
- It must be issued on behalf of the company.
- It must involve an invitation of subscription or purchase.
- It must involve an invitation of shares or debentures.
Every prospectus contains an application form on which an intending investor can apply for the purchase of shares or debentures.
4) Other documents such as:
- Consent of the first directors: Directors should give return consent in form no. 29 to the Registrar of Company.
- The Power of Attorney: Promoters should execute a power of Attorney in favour of one of the promoters or an advocate who is to carry out the formalities required for registration.
- Notice of Registered Office: When the location of the registered office is finalized, prior to incorporation, the notice of it is to be filed. If not, with in 30 days of its registration it is to be submitted.
- Particulars of Directors: When a company by its articles appoints any person to act as Director, Manager, Secretary – their particulars have to be filed within 30 days along with the Memorandum of Association and Articles of Association of the company.
Question 2.
What is Memorandum of Association? Explain its clauses.
Answer:
The Memorandum of Association is the constitution of the company. It is the charter of the company. It provides the foundation on which the company structure is built. It acts as an indicator or guideline for those investors who are interested and are planning to invest in the company. A company cannot perform its operations beyond the scope of Memorandum. It defines the scope of company’s activities as well as it relation with the outside world. Memorandum of Association is one of the documents which has to be filed with Registrar of Companies at the time of incorporation of the company.
Clauses of Memorandum of Association:
The contents of Memorandum of Association are known as clauses, which are explained in Section – B of the Act. They are as follows:
1) Name Clause [Section 4(1) (a)]: A company being a separate legal entity must have a name. A company may select any name which does not resemble the name of any other company. It should not contain the words like King, Queen and name of the Government bodies. The proposed name should not be objectionable under the provisions of “Emblems and Names Act, 1950”. The word “Limited” must be used at the end of the name of a public company and “Private Limited” is used by a private company.
2) Registered Office or Situation Clause [Section 4(1) (b)]: This clause states the place and address of the registered office of the company. If the place is not decided at the time of incorporation, it can be intimated to the Registrar within 30 days from the date of incorporation or commencement of business whichever is earlier.
3) Objects Clause [Section 4(1) (c)]: This clause defines the sphere of activities of the company. This clause may be considered as the core of Memorandum of Association because it sets out the objects for which a company is formed. This clause contains a) Main objects b)Other objects. This clause offers protection to the shareholders and creditors by ensuring that the funds are not going to be risked.
4) Liability Clause [Section 4(1) (d)]: This clause contains the nature of liability of its members. It states that the liability of the members is limited to the value of shares held by them. It means that the members are liable to pay only the unpaid balance of their shares and not further else.
5) Capital Clause [Section 4(1) e)]: This clause contains the capital structure of the company. The division of capital into equity shares, preference shares and the no. of shares in each category and their value should be given. It is also mentioned that the any type of shareholders have some special rights and privileges.
6) Association Clause or Subscription Clause [Section 13(4) (c)]: This clause contains the name of the signatories to the Memorandum of Association. The full addresses and occupations of subscribers of witnesses are also given. The subscribers declare that they agree to incorporate the company and agree to take the shares stated against their names.
Question 3.
What is Articles of Association? Explain its contents.
Answer:
Meaning: The rules and regulations framed for the internal management of the company, which are set out in a document is named as “Articles of Association”. It gives the help in achieving the objectives specified in Memorandum of Association. The Articles play a very important role in the affairs of the company. It is a supplementary document to the Memorandum of Association.
The Articles must be printed, divided into paragraphs, numbered consecutively, stamped adequately and signed by each subscriber to the Memorandum of Association. It is duly witnessed and filed along with the Memorandum of Association.
Definition:
According to Section 2(5) of the companies Act, 2013, “Articles of Association of a company as originally framed or as altered from time to time in pursuance of any previous Company law or of this act, including so far as they apply to the company, the regulations contained as the case may be in Table – A to Schedule -1 of this Act”.
The private companies limited by shares, companies limited by guarantee and unlimited companies must have their Articles of Association. A Public company limited by shares may or may not have its own Articles. As per Section 26 of Companies Act, it can follow model set of Articles given in Table – A in Schedule -1 of the Act. The Articles of Association can be altered by passing a special resolution. Each subscriber to the Memorandum must sign the articles in the presence of atleast one witness.
A copy of every special resolution altering the articles should be filed with the Registrar within 30 days of its passing and attach to every copy of the articles issued thereafter.
The Contents of Articles of Association:
The Articles of Association contains the following details:
- Procedure of issuing share capital, the amount of share capital issued, types of shares, no. of shares, calls on shares, rights and privileges of different categories of shareholders must be mentioned in the Articles of Association.
- Procedure for transfer and forfeiture of shares.
- Procedure for issue of debentures and stocks.
- Powers to alter as well as reduce share capital and its procedure for alteration.
- The appointment of the directors, their powers, duties and remuneration.
- The appointment of the managing director.
- Provisions regarding conducting the General meetings, special meetings, voting, proxies, resolutions etc.
- Provisions relating to dividends and reserves.
- Rules for preliminary contracts.
- Provisions regarding the use of Common Seal.
- Preparation of Accounts and Audit and method of appropriation of profits.
- Maintenance of Bank accounts.
- Procedure for winding up the company.
- Other rules and regulations of company.
Question 4.
What is prospectus? Explain the contents of prospectus.
Answer:
Meaning:
Prospectus is an invitation to the public to subscribe to the shares and debentures of a public company. After incorporation of a company promoters may issue the prospectus for raising required finance.
A public company invites the people to offer to purchase the shares and debentures through an advertisement. Such an advertisement or notice containing detailed information about the company is known as “Prospectus”.
A private company cannot issue prospectus to secure its capital.
Definition: According to Sec 2(70) of Companies Act, 2013, prospectus can be defined as “any document described or issued as a prospectus and includes a red herring prospectus referred to in Section 32 or Self prospectus referred to in Section 31 or any notice, circular, advertisement or other document inviting offer from the public for the subscription or purchase of any securities of a body corporate”.
Prospectus must contain following requirements:
- It must be an invitation offering to the public.
- It must be issued on behalf of the company or in relation intended to a company.
- It must involve an invitation of subscription or purchase.
- It must involve an invitation of shares or debentures.
Every prospectus contains an application form on which an intending investor can apply for the purchase of shares or debentures.
Contents of Prospectus: Every prospectus should disclose the matter as specified in Part -1 of Schedule – II to the Companies Act. Some of the contents which every prospectus must include are:
- Name and full address of the company.
- The particulars of the signatories to the Memorandum of Association and the number of shares taken up by them.
- Name, address and occupations of members of the Board of Directors.
- The minimum subscription amount fixed by the promoters.
- The details of property acquired if any.
- The time of opening of the subscription list.
- The capital structure of the company and particulars of issue.
- The amount payable on application, allotment and calls.
- Basis for the issue price.
- The particulars of preferential treatment given to any person for subscribing shares or debentures.
- The addresses of the underwriters if any.
- Particular about reserves and surpluses.
- The amount of preliminary expenses.
- The name and addresss of Auditor.
- Particulars regarding voting rights at the meetings of the company.
- Management perception of risk factors.
- ‘Disclosure of investors’ grievances and redressal system.
Question 5.
Discuss the differences between Memorandum of Association and Articles of Association.
Answer:
Memorandum of Association:
As per Section 2(56) of the Companies Act, 2013, “Memorandum of Association is one of the documents which has to be filed with the Registrar of the Companies at the time of incorporation of the company”. It cannot be changed easily. So it should be prepared very carefully.
Articles of Association:
The rules and regulations framed for the internal management of the company, which are set out in a document is named as “Articles of Association”.
Difference between Memorandum of Association and Articles of Association:
| Aspects | Memorandum of Association (MOA) | Articles of Association (AOA) |
| 1. Scope | It is a constitution of the company. The company works in the frame | The articles contain by e- laws for the day-to-day working of |
| work given in the memorandum. | the company as set out in the MOA. | |
| 2. Need | MOA must be prepared by all the companies and filed with the Registrar. | Public companies may not have their own articles. They can adopt Table A of Schedule -1 as its articles. |
| 3. Relationship | It defines the relationship between the company and outside world. | It defines the relation between the company and the members among themselves. |
| 4. Alteration | It cannot be changed easily. | It can be altered easily by the special resolution of shareholders. |
| 5. Provisions | It is sub-ordinate only to the act. The company works within the legal provisions of MOA. | It is the subordinate to the Memorandum and Companies Act and cannot contain anything contrary to both. |
| 6. Legal Effects | Any act of the company beyond the scope of memorandum will become void. | Anything is done beyond the scope of the articles will not be void and it can be ratified by passing a special resolution. |
Short Answer Questions
Question 1.
What are the contents of prospectus?
Answer:
Every prospectus should disclose the matter as specified in Part -1 of Schedule – II to the Companies Act. Some of the contents which every prospectus must include are:
- Name and full address of the company.
- The particulars of the signatories to the Memorandum of Association and the number of shares taken up by them.
- Name, address and occupations of members of the Board of Directors.
- The minimum subscription amount fixed by the promoters.
- The details of property acquired if any.
- The time of opening of the subscription list.
- The capital structure of the company and particulars of issue.
- The amount payable on application, allotment and calls.
- Basis for the issue price.
- The particulars of preferential treatment given to any person for subscribing shares or debentures.
- The addresses of the underwriters if any.
- Particulars about reserves and surpluses.
- The amount of preliminary expenses.
- The name and addresss of Auditor.
- Particulars regarding voting rights at the meetings of the company.
- Management perception of risk factors.
- Disclosure of investors’ grievances and redressal system.
Question 2.
Write down any five legal requirements for prospectus.
Answer:
In order to protect the interests of investors, the Companies Act lays down the following regulations relating to the issue of prospectus. They are:
- Prospectus must be dated.
- It must be signed by every person who is named as director.
- It must be issued within 90 days of its registration either by newspaper advertisement or otherwise.
- It must not be issued unless a copy thereof has been filed with the Registrar on or before the date of its publication.
- A prospectus must be in writing. An oral invitation (through TV or firm) to subscribe for shares and debentures of a company or deposits in not a prospectus.
- Any information given in the prospectus must be true.
- If there are any misstatements or misrepresentation in prospectus, it gives rise to impose Civil or Criminal liability on a) The company, b) Promoters and Directors, c) Expert who drafted the Prospectus.
- Civil Liability: The persons responsible for misstatements or untrue statements of prospectus are liable to pay compensation to the persons, who subscribed the shares and debentures relying on such false information in the prospectus.
- Criminal Liability: The persons responsible for misstatements or untrue statements of prospectus are liable to pay a fine upto Rs. 50,000 or imprisonment upto 2 years or both.
Very Short Answer Questions
Question 1.
What is Memorandum of Association?
Answer:
1) It is an important document with clauses explaining briefly the affairs of the company to the outside world. The Memorandum of Association (MoA) is the constitution of the company. It is the charter of the company.
2) MoA is one of the document which has to be filed with Registrar of Companies at the time of incorporation of the company. A company cannot perform its operations beyond the scope of Memorandum.
Question 2.
What is Articles of Association?
Answer:
1) The rules and regulations framed for the internal management of the company, which are set out in a document is named as Articles of Association. It helps in achieving the objectives specified in MoA.
2) The private companies must have their Articles of Association. A public company limited by shares may or may not have its own Articles. As per Sec. 26 of Companies Act, public company can follow model set of Articles given in Table – A in Schedule -1 of the Act.
Question 3.
What is Minimum subscription?
Answer:
1) The minimum amount of capital to be collected by the company before the allotment of shares is known as minimum subscription. A public company cannot commence business unless the minimum subscription has been subscribed.
2) It is fixed by taking into account the following requirements.
- Amount required for the purchase of property.
- Amount need for payment of preliminary expenses.
- Amount required for working capital.
- Amount need for any expenditure in the formation of the company.
Question 4.
What is a Statement in lieu of prospectus?
Answer:
If a public limited company could get the required capital by some private management, it may not issue prospectus. But in that case, it must file a “statement in lieu of prospectus” with the Registrar, at least three days before the first allotment of shares.
- Statement in lieu of prospectus is a substitution of prospectus.
- It must be duly signed by all the directors and it is drafted strictly in accordance with the particulars set out in Part -1 of Schedule – III of the Act.
Question 5.
What is Certificate of Commencement of business?
Answer:
A private limited company can start its business immediately after incorporation. But a public company has to wait till it gets the certificate of commencement of business.
- It is an important document to be received by a public company before its commencement of business.
- In order to obtain this certificate, the company has to submit the following:
- The prospectus or statement in lieu of prospectus.
- The shares of allotted to the extent of minimum subscription.
- The directors have paid application and allotment amount towards qualification shares.
- A statutory declaration by the secretary or director stating that all the formalities are complied with.
- The Registrar will then scrutinise all the documents and if satisfied issues “Certificate of commencement of business”.