Chapter formation-of-a-company: Formation of a Company Short Questions | business studies Class 11 CBSE

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Chapter formation-of-a-company: Formation of a Company Short Questions | business studies Class 11 CBSE | ByteNotes.in

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Question 1

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What are the three stages in the formation of a company?

The three stages are Promotion, Incorporation, and Capital Subscription.
Promotion involves identifying a business opportunity and preparing documents; Incorporation involves registering the company with the ROC; Capital Subscription involves raising funds from the public through issue of securities.
Private companies undergo only the first two stages since they cannot raise funds from the public and are exempt from capital subscription requirements.

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Question 2

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Who is a promoter as defined under Section 69 of the Companies Act, 2013?

A promoter is a person who has been named as such in a prospectus or identified by the company in its annual return under section 92.
A promoter also includes a person who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise.
Additionally, a person in accordance with whose advice, directions or instructions the Board of Directors is accustomed to act is also considered a promoter, excluding those acting purely in a professional capacity.

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Question 3

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What is the significance of the Certificate of Incorporation?

The Certificate of Incorporation is the birth certificate of the company, marking the date from which the company comes into legal existence as a separate legal entity.
It grants the company perpetual succession and the capacity to enter into valid contracts from the date mentioned on the certificate.
It is conclusive evidence of the legal existence of the company, meaning that even if there were defects in registration, the certificate cannot be challenged once issued.

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Question 4

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What is meant by 'minimum subscription' in the context of company formation?

Minimum subscription refers to the minimum amount for which a public company must receive applications before it can proceed to allot shares to applicants.
As per SEBI guidelines, the minimum subscription must be at least 90 per cent of the size of the share issue.
If applications received are for an amount less than 90 per cent of the issue size, allotment cannot be made and the application money must be refunded to all applicants.

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Question 5

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What is a prospectus and what purpose does it serve?

A prospectus is any document described or issued as a prospectus, including any notice, circular, advertisement or document inviting deposits from the public or inviting offers for subscription or purchase of securities of a company.
It serves as an invitation to the public to apply for shares, debentures, or other securities of the company or to make deposits with it.
Investors base their investment decisions primarily on information in the prospectus; therefore, it must not contain any misstatement and all material information must be fully disclosed.

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Question 6

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State the meaning of 'Return of Allotment'.

Return of Allotment is a statement filed with the Registrar of Companies after shares have been allotted to applicants.
It contains the names and addresses of shareholders and the number of shares allotted to each, and must be signed by a director or secretary.
This return must be filed with the ROC within 30 days of allotment as a statutory requirement under capital subscription.

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Question 7

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Distinguish between preliminary contracts and provisional contracts.

Preliminary contracts (pre-incorporation contracts) are contracts entered into by promoters with third parties before the company is incorporated, whereas provisional contracts are entered into after incorporation but before the company receives its certificate to commence business.
Preliminary contracts are not legally binding on the company, and the company cannot ratify them; the promoters remain personally liable. Provisional contracts become binding on the company once the commencement certificate is received.
A company may enter into fresh contracts on the same terms as a preliminary contract if it so chooses, but it cannot be forced to honour the original preliminary contract.

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Question 8

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What is the Objects Clause in the Memorandum of Association?

The Objects Clause is the most important clause of the Memorandum of Association; it defines the purpose or purposes for which the company is formed.
A company is not legally entitled to undertake any activity that is beyond the objects stated in this clause; such acts are ultra vires and void.
An act which is essential or incidental for the attainment of the main objects is deemed valid even if not explicitly mentioned in the clause.

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Question 9

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What is the role of underwriters in capital subscription?

Underwriters are persons appointed by a company when it is not assured of a good public response to its share issue; they provide a guarantee of subscription.
They undertake to purchase the shares that are not subscribed by the public, ensuring that the company raises the required capital.
In return for this guarantee and risk assumption, underwriters receive a commission known as underwriting commission; their appointment is not compulsory.

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Question 10

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What is the fiduciary position of promoters with respect to the company?

Promoters hold a fiduciary position with the company, meaning they must act in good faith and in the best interests of the company they are forming.
They are not permitted to make secret profits from their dealings with the company; any profit must be fully disclosed to the company or its shareholders.
If a promoter makes an undisclosed profit, the company can rescind the contract, recover the purchase price paid, and also claim damages for losses suffered due to non-disclosure.

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Question 11

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What is meant by the Liability Clause in the Memorandum of Association?

The Liability Clause specifies that the liability of the members of the company is limited to the amount unpaid on the shares owned by them.
For example, if a shareholder holds 1000 shares of Rs. 10 each and has paid Rs. 6 per share, their maximum liability is limited to Rs. 4 per share, i.e., Rs. 4,000.
This clause protects shareholders from unlimited personal liability, which is one of the key advantages of the company form of organisation over partnerships or sole proprietorships.

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Question 12

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State any three functions performed by promoters during the promotion stage.

Promoters identify business opportunities by analysing potential markets, products, or services and assess their technical and economic feasibility with the help of experts.
They fix the signatories to the Memorandum of Association, usually the first directors of the company, and obtain their written consent to act as directors and take up qualification shares.
They prepare the necessary legal documents such as the Memorandum of Association, Articles of Association, and consent of directors required for company registration.

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Question 13

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What is a Statutory Declaration and who can sign it?

A Statutory Declaration is a declaration affirming that all legal requirements pertaining to the registration of the company have been complied with; it is one of the documents to be submitted to the Registrar.
It can be signed by an advocate, a Chartered Accountant, a Cost Accountant, or a Company Secretary in practice who is engaged in the formation of the company.
It may also be signed by a person named in the Articles as a director, manager, or secretary of the company being incorporated.

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Chapter formation-of-a-company: Formation of a Company | Short Questions

What are the three stages in the formation of a company?

Who is a promoter as defined under Section 69 of the Companies Act, 2013?

What is the significance of the Certificate of Incorporation?

What is meant by 'minimum subscription' in the context of company formation?

What is a prospectus and what purpose does it serve?

State the meaning of 'Return of Allotment'.

Distinguish between preliminary contracts and provisional contracts.

What is the Objects Clause in the Memorandum of Association?

What is the role of underwriters in capital subscription?

What is the fiduciary position of promoters with respect to the company?

What is meant by the Liability Clause in the Memorandum of Association?

State any three functions performed by promoters during the promotion stage.

What is a Statutory Declaration and who can sign it?

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