11th SP Chapter 4 Exercise (Documents related to formation of a company) Maharashtra Board – Free Resource

11th SP Chapter 4 Exercise

Chapter 4 – Documents related to formation of a company

Q.1 (A) Select the correct option and rewrite the sentences.

1) ………… is a primary document of the company which contains the aims and objectives of the company.
a) Memorandum of Association
b) Articles of Association
c) Prospectus

2) ………… describes the relationship between company and outsiders.
a) Memorandum of Association
b) Articles of Association
c) Prospectus

3) The ……….. clause describes the range of activities a company can undertake.
a) Name
b) Capital
c) Object

4) Any act done by the company beyond the powers of Memorandum is called as ………. .
a) Doctrine of Indoor management
b) Ultra Vires
c) Mis-statement

5) …………. acts are void or legally ineffective.
a) Object clause
b) Main Object
c) Ultra Vires

6) ………. clause contains the details of liability of the members.
a) Name
b) Liability
c) Object

7) ………. clause states the amount of Authorised capital with which the company is registered.
a) Liability
b) Object
c) Capital

8) ………. contains rules and regulations for internal management of the company.
a) Articles of Association
b) Prospectus
c) Memorandum of Association

9) Articles establish a relationship between company and ……….
a) Members
b) Outsiders
c) ROC

10) ………. is an invitation to the public to subscribe for the shares of the Company.
a) Memorandum
b) Prospectus
c) Articles of Association

11) For making multiple issue of shares within a year, a company can prepare a ………. Prospectus.
a) Abridged
b) Shelf
c) Red Herring

12) ………. is an incomplete prospectus.
a) Red Herring Prospectus
b) Shelf Prospectus
c) Abridged Prospectus

Q.1 (B) Match the pairs.

Group A	Group B
a) Capital clause	1) Details of capital structure of a company
b) Liability clause	2) Used for multiple issue of shares
c) Acts beyond the powers of Memorandum	3) Abridged Prospectus
d) Red Herring Prospectus	4) Describes main objectives
e) Shelf Prospectus	5) Used for Rights Issue
	6) Incomplete Prospectus
	7) Ultra Vires
	8) Doctrine of Indoor management
	9) Extent of liability of members
	10) Articles of Association

Answers.
a. 1) Details of capital structure of a company
b. 9) Extent of liability of members
c. 7) Ultra Vires
d. 6) Incomplete Prospectus
e. 2) Used for multiple issue of shares

Q.1 (C) Give one word/phrase/term for the following statements.

1) Primary document of a company which states aims and objectives of a company.
Answer: Memorandum of Association

2) Document which establishes company’s relationship with outsiders.
Answer: Memorandum of Association

3) Document which states the limits within which a company has to operate.
Answer: Memorandum of Association

4) Document which contains, Name Clause, Registered Office Clause, Capital Clause, etc.
Answer: Memorandum of Association

5) Document which is subordinate to the Memorandum of Association.
Answer: Articles of Association

6) Document which contains rules and regulations for internal management.
Answer: Articles of Association

7) Term used for acts beyond the scope of Memorandum of Association.
Answer: Ultra Vires

8) Clause which describes the main activities a company can undertake.
Answer: Object clause

9) Clause which gives details of authorized capital or Registered Capital.
Answer: Capital clause

10) Clause which describes the extent of liability of members.
Answer: Liability clause

11) Last clause of Memorandum which contains name, signature and other details of all the subscribers to the Memorandum.
Answer: Subscription clause

12) Document which establishes relationship between a company and its members.
Answer: Articles of Association

13) Document issued by public company inviting public to subscribe to its shares.
Answer: Prospectus

14) Prospectus attached with every share application form.
Answer: Abridged Prospectus

15) Prospectus used for multiple issue of shares within a year.
Answer: Shelf Prospectus

16) It is an incomplete prospectus.
Answer: Red Herring Prospectus

17) This prospectus does not contain information about quantum of shares to be issued or the price at which shares will be issued.
Answer: Red Herring Prospectus

Q.1 (D) State True or False.

1) Memorandum of Association and Articles of Association is prepared at the time of incorporation of a company. (True)

2) Memorandum of Association describes the nature and character of the company. (True)

3) Memorandum establishes relationship between Company and Members. (False)

4) Any act done by the company beyond the powers of Memorandum is Ultra Vires. (True)

5) Articles of Association can have provisions which contradicts the Memorandum. (False)

6) Memorandum need not have a Liability Clause. (False)

7) Articles of Association is subordinate to Memorandum. (True)

8) Memorandum contains rules and regulations for internal management of a company. (False)

9) Every subscriber who signs the Memorandum must also sign the Articles. (True)

10) Entrenched Articles cannot be easily altered. (True)

11) Prospectus can be issued by a private company. (False)

12) Only public companies can issue Prospectus. (True)

13) Prospectus must be issued within 1 year from the date of filing it with the ROC. (False)

14) Actions can be taken against a company or its officers for misstatements in prospectus. (True)

15) Every company has to issue shelf prospectus every time it offers shares to the public. (False)

16) Red Herring prospectus does not contain details of the price at which shares will be sold by the company. (True)

17) Letter of offer is issued at the time of Rights Issue. (True)

Q.1 (E) Find the odd one.

1) Name Clause, Rights of Board Directors, Object clause.

2) Rights of shareholders, Appointment and remuneration of Directors, Liability clause.

3) Shelf prospectus, Abridged Prospectus, Articles of Association.

Q.1 (F) Complete the sentences.

1) The documents which states the aims and objectives of a company is called as Memorandum of Association.

2) Any act done by the company which goes beyond the powers of Memorandum of Association will be called as Ultra vires.

3) The document which is subordinate to the Memorandum of Association is called Articles of Association.

4) The document which contains the rules and regulations governing internal management of a company is called Articles of Association.

5) The document issued by a company to invite investors to buy its securities is called as Prospectus.

Q.1 (G) Complete the following table.

Group A	Group B
1) Primary document	Memorandum of Association
2) Liability clause	Details of liability of members
3) Incomplete Prospectus	Red Herring Prospectus
4) Articles of Association	Establishes relationship between company and its members

Q.1 (H) Answer in one sentence.

1) Which document contains the aims and objectives of the company?
Answer: Memorandum of Association contains the aims and objectives of the company.

2) What does the capital clause describe?
Answer: The capital clause states the amount of capital with which the company is registered.

3) When is Abridged Prospectus issued?
Answer: The abridged prospectus is issued only in case of a Public offer made by a company.

Q.1(I) Correct the underlined word and rewrite the following sentences.

1) Articles of Association states the aims and objectives of the company.
Answer: Memorandum of Association

2) Prospectus is subordinate to Memorandum of Association
Answer: Articles of Association

3) Prospectus contains liability clause.
Answer: Memorandum of Association

Q.1(J) Arrange in proper order

1)
a) subscription clause
b) Name clause
c) Object clause

Answer:
a) Name clause
b) Object clause
c) Subscription clause

Q.2 Explain the following terms/concepts.

1) Memorandum of Association
Answer:
a) It is a primary document of a company as it states the purpose for which the company is formed. It describes the range of activities a company can undertake.
b) Lord Cairns, “The Memorandum of Association of the company is its charter and defines the limitation of the powers of the company.”

c) It contains following clauses :
1) The Name Clause
2) The Address Clause (Registered Office Clause)
3) The Objects clause
4) The Liability Clause
5) The Capital clause
6) The Association or Subscription Clause

2) Articles of Association
Answer:
a) Articles of Association is the second most important document which needs to be filed with the ROC along with the Memorandum at the time of incorporation of a Company.
b) This document is subordinate (secondary) to the Memorandum.

c) It is like the Bye-Laws of the company as it contains rules and regulations that govern the internal management of the company.
d) It defines the powers, rights, and duties of the Board of Directors and officers and also the manner in which the business of the company will be carried on.
e) It establishes a relationship between the company and its members and also between the members.

3) Name Clause
Answer:
a) This clause mentions the name of the company.
b) As a Company is a legal entity distinct from its members, it has to have its own name to establish its separate identity. The promoters choose a name for the Company.
c) In case of a Public company Limited by shares or Guarantee, the last word of the name
should be ‘Limited’. e.g. ‘Tata Steel Ltd’

d) Similarly for a Private Company Limited by Shares or Guarantee, the last word of the name
should be ‘Private Limited’ e.g. ‘Posco India Pvt. Ltd’
e) The Companies Act states that every company shall paint or affix its name and the address of its registered office outside its place of business.

4) Object Clause
Answer:
a) This clause defines the objects for which a company is formed. It indicates the range of
activities a company can undertake.
b) This clause states in detail the Main Objects for which the company is to be incorporated and also describes any other activities it may undertake if necessary, in achieving its main objects.

c) A company cannot do anything beyond or outside the scope of its objects. It can do anything which is incidental to and consequential upon the objects specified in this clause.
d) Any act done by a company beyond the scope of its objects, will be ‘Ultra-Vires’ and will be void and have no legal validity.

5) Liability Clause
Answer:
a) This clause states the extent of liability of the members of the company.
b) In the case of a company limited by shares, this clause states that the liability of the member is limited to the extent of the amount unpaid on the Face Value of Shares held by the member.

c) Similarly in the case of a company limited by Guarantee, this clause states the amount which every member guarantees to pay towards the assets of the company at the time of winding up or towards the cost or expenses at the time of winding up.
d) In the case of an Unlimited liability company with or without share capital, this clause states that the liability of its members is unlimited.

6) Capital Clause
Answer:
a) This clause states the amount of capital with which the company is registered. This capital is hence called as Registered Capital.
b) This is the maximum capital that the company is authorized to raise, hence it is also called as Authorized Capital.

c) In case of a company with share capital, this clause states the total amount of share capital in terms of total number of shares and the fixed value per share called as Face Value of the share.
d) If a company wants to issue more shares to raise more funds than the amount of Authorized Capital, then the Company has to alter the capital clause.

7) Registered Office Clause
Answer:
a) This clause states the name of the State in which the Registered Office of the Company will be located.
b) Every company must have its Registered office within 30 days of its Incorporation.

c) A Registered office is a must as
i) It establishes the domicile (location) of a company.
ii) It is the address to which all communications, notices, etc. will be sent.
iii) It is also the place where all statutory books, records and documents of the company will
be kept.
iv) The address clause also indicates the jurisdiction of the court where cases can be filed by
the company against others.

8) Ultra Vires act
Answer:
a) The word ‘Ultra’ means beyond and the word ‘Vires’ means the powers. Thus ‘Ultra Vires’
means beyond the powers of the Memorandum.
b) The Doctrine of Ultra Vires states that any activity done by a company which is beyond the powers of the company will be null and void or legally ineffective even if all the members have agreed to such act.

c) The acts which are Ultra-vires are considered null and void. The company cannot sue
anybody nor can any third party file a case against the company for such acts.
d) Members of a company can get an injunction from the court to stop the company from
doing any act which is Ultra Vires.

9) Doctrine of Indoor management
Answer:
a) It is an accepted fact that certain information which is internal to a company cannot be known by outsiders. Hence they act in accordance to the information they get from the Memorandum of Association and Articles of Association.

b) Doctrine of Indoor Management states that persons entering into a contract with the company need not inquire whether the company or its officers have properly followed the internal proceedings as stated in the Articles. It is assumed that the company acts as per its Memorandum and Articles of Association.
c) Doctrine of Indoor Management protects the interest of outsiders when they act based on
the Memorandum and Articles of Association of a Company as outsiders are not bound to inquire into the regularity of internal proceedings.

10) Prospectus
Answer:
a) When a Public company, is collecting capital by issuing shares to the public has to issue a
document called ‘Prospectus.’ Prospectus is a document which contains information about various aspects of the company and invites investors to buy the securities offered by the company.

b) Section 2 (70) of the Companies Act, 2013 defines a prospectus as “any document described or issued as a prospectus and includes a Red Herring Prospectus or shelf prospectus or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.”
c) The prospectus must contain true and factual disclosures as investors decide to invest based on the information given in the prospectus.

11) Mis-statements in Prospectus
Answer:
a) As the investors make their decision to invest based on the information given in the prospectus, care should be taken to ensure all information is accurate and no material fact is omitted.
b) An untrue statement or misstatement means –
i) The statement is misleading in form or content, or
ii) Where any inclusion of a statement or its omission is likely to mislead the reader.
c) If an investor has bought shares of a company based on a prospectus which had misleading information or suppressed material information, then he can take action against the Company.

12) Abridged Prospectus
Answer:
a) It contains the main contents of a prospectus but in brief. It is attached with the application form issued by the company while offering its securities.
b) The abridged prospectus is issued only in case of Public offer made by a company.

13) Shelf Prospectus
Answer:
a) A public company may raise funds from the public by issuing securities as and when it needs more funds. For every such issue, fresh prospectus is to be issued. The process of preparing and registering a prospectus is very time-consuming.
b) Thus, instead of preparing fresh prospectus for every issue, a company can prepare ‘Shelf Prospectus’. Shelf prospectus can be used for all issues made by the company upto one year from the date of first offering of securities under that prospectus.

c) However, an ‘Information Memorandum’ is to be filed with the ROC every time a subsequent offer of securities is made during the validity period of one year of the shelf prospectus.
d) The Information Memorandum contains latest material facts such as any new charges created on assets of the company, changes in the financial position from that of the succeeding offers, etc.

14) Red Herring Prospectus
Answer:
a) A Red herring prospectus is a kind of incomplete prospectus as it does not include complete particulars of the quantity of securities offered or the issue price of the securities being offered.
b) It is usually issued at the time of IPO or for any issue done under the Book Building process.
c) A Red Herring prospectus shall have the same obligations that are applicable to prospectus.
d) A Company must file a Red Herring Prospectus with ROC at least 3 days prior to the opening of the subscription list and the offer.

Solution of other subjects
Solution of all Chapters of SP
1 – 2 – 3 – 4 – 5 – 6 – 7 – 8

Q.3 Study the following case/situation and express your opinion.

1) The Articles of a company state that while borrowing any money from outsiders, the document must have the signatures of the Managing Director (MD) and any one of the Directors. The Articles of Association clearly stated the procedure to be followed while borrowing money. The Managing Director did not follow all the procedures but still borrowed money from Mr. X. Mr. X assumed that the MD has followed the required procedures.

a) Can the MD be held punishable for his act?
b) Under which Doctrine can Mr. X take action against the company?
c) Explain the Doctrine.

Solution:
a) Yes, MD can be held punishable for his act.
b) Under doctrine of indore management, Mr. X can take action against the company.
c) Doctrine of Indoor Management states that persons entering into a contract with the company need not inquire whether the company or its officers have properly followed the internal proceedings as stated in the Articles. It is assumed that the company acts as per its Memorandum and Articles of Association.

2) Mr. A entered into a contract with Star Limited company and as advance payment gave a cheque of Rs 1 lac to a Director Mr Sam. Mr. Sam is not the Managing Director. Articles state that only the MD is authorized to sign any contracts or receive any payments on behalf of the company.

a) Did Mr. Sam have the authority to accept the cheque? Why?
b) Can Mr. Sam’s action be called as Ultra Vires? Why?

Solution:
(a) Mr. Sam does not have the authority to accept the cheque from the outside party because Mr. Sam although a director but not a managing director of the company. As per’ the provisions made in the articles only managing director has the authority to sign contracts and receive any payment.
(b) Mr. Sam’s action can be called ultra Vires because accepting a cheque of Rs 1 lac, by a director Mr. Sam, is an act beyond the scope and authority or power of articles of the company.

3) The Object clause of the Memorandum of a company stated the main object as the manufacturing of plastic chairs and tables and any other activity in furtherance of achievement of its main activity. The Board of Directors wants to now also produce TV. Serials and feels that the shareholders may give their permission.

a) Can the company with immediate effect start producing TV. Serials? Why?
b) How can the object clause of the company be altered?

Solution:
(a) The company cannot start producing TV serials immediately. This is because producing a TV serial is not the main object for Which company is incorporated. A company cannot do anything beyond or outside the scope of the objects. The object of producing TV serials is a completely different object from the main object of manufacturing plastic chairs and tables.
(b) The object clause of the company can be changed by passing a special resolution in the General Meeting of the shareholders. The resolution which is passed by 3/4th (75%) majority of votes is called special resolution.

4) A public limited company has issued all the shares mentioned in its Memorandum as Authorized Capital. Now the Company wants to make a public issue of 10,000 shares at face value of Rs 100 Per share, to raise more funds for its expansion activities.

a) Which clause of Memorandum needs to be altered?
b) In which meeting the alteration can be approved?
c) Which document should the company issue to invite the public to buy its shares?

Solution:
a) Cpital clause of Memorandum needs to be altered.
b) Capital clause is altered by passing an Ordinary Resolution in the General Meeting of the Company.
(c) The company has to issue a document called ‘Prospectus’ to invite the public to buy its shares.

5) A Company stated in its prospectus that it has been making profits since the last 5 years. However, Mr. X. an investor found out that two years back the company had not made any profit. The prospectus was filed with the ROC on 1 st Jan, 2017 and was issued to the public on 10th Feb 2018.

a) Can Mr. X state that there was a misstatement in the prospectus?
b) If found guilty which two types of liability will the company and its officers face?
c) Can the prospectus be valid for issue to the public on 10th Feb 2018.

Solution:
(a) Yes, Mr. X can state that there was a misstatement in the prospectus.
(b) If found guilty the company and its officers will face civil liability and criminal liability for misstatement in the prospectus.
(c) Prospectus cannot be valid for the issue to the public on 10th February 2018.

6) A Company plans to offer Rights Issue.

a) Which document must it send to its shareholders for offering the Rights Issue?
b) Instead of Rights Issue, if the company wants to issue shares to the public, which
document must it issue for inviting the public to subscribe for it?
c) Name the document which is called as incomplete prospectus.

Solution:
(a) A document called ‘Letter of Offer’ a company must send to its shareholders for offering the Right issue.
(b) If the company wants to issue shares to the public, for inviting the public to subscribe for it. the company has to issue Abridged prospectus.
(c) Red herring prospectus is called an incomplete prospectus.

Q.4 Distinguish between the following.

1) Memorandum of Association and Articles of Association.

Points	Memorandum of Association	Articles of Association
1) Meaning	It is the document which defines the aims and objectives of the company.	It is the document that contains the rules and regulations for internal management of the company.
2) Status	It is the primary document without which no company can be formed.	It is the second most important document prepared at the time of incorporation of the company. It is subordinate to Memorandum.
3) Scope	It lays down the area beyond which the activities of the company cannot go. It lays down the boundaries within which the Articles will be framed.	It provides the regulations within the boundaries laid down by the Memorandum.It thus lays down the scope within which company can function.
4) Contents	It lays down the range of activities a company can do and cannot do. It contains the Name of the company, state in which Registered office is located, capital structure, details of objects of company, liability of members, etc.	It lays down rules and regulations for internal management of the company. It contains details of allotment of securities, appointment, duties and powers of directors, auditors, officers, winding up procedure etc.
5) Relation	It defines relationship between company and outsiders.	It defines relationship between Company and members and between the members.
6)Contradict	It cannot contain anything which contradicts the Companies Act or any other statute.	It cannot contain any provisions that contradict the Companies Act as well as the Memorandum.
7)Alterations	The process of Alteration of Memorandum is little complicated as approval of Central Government may be needed at times.	Altering the Articles is a simple process as often only a special resolution is needed to alter it.

Q.5 Answer in brief.

1) State any four clauses of the Memorandum of Association.

Answer: Refer to Question No 7 (1)

2) State any four contents of the Articles of Association.

Answer: Refer to Question No 7 (3)

3) State the Statutory requirements in relation to Prospectus.

Answer:
Following are the Statutory requirements in relation to Prospectus:

1) Draft Prospectus to be made Public

A draft prospectus filed with SEBI by the company should be made available to the Public and to the Stock Exchanges where the company wants to list its shares.

2) Signed by Directors

Prospectus must be signed by all Directors or by the duly authorized attorney.

3) Registration of Prospectus

A copy of the prospectus must be registered (filed) with the ROC before issuing it to the public.

4) Dating of prospectus

A prospectus has to be dated. The date on the prospectus is considered as the date of publication of the prospectus.

5) Issuing prospectus to the Public

Prospectus must be issued to the public within 90 days from the date of registering a copy with the ROC.

Solution of other subjects
Solution of all Chapters of SP
1 – 2 – 3 – 4 – 5 – 6 – 7 – 8

Q.6 Justify the following statements.

1) Memorandum of Association defines the limitations of the powers of the company.

Answer:
a) The Memorandum of Association is a basic or fundamental or primary document of a company.
b) It contains the following clauses: Name clause, Address clause, Object clause, Liability clause, Capital clause, and Association of subscription clause.
c) The entire business centers around its object clause. The object clause of the Memorandum of Association defines the area beyond which the company cannot do anything.

d) It determines the powers of the company. It helps the stakeholders to know what is its permitted range of operation.
e) A company is governed by a Memorandum of Association and any act beyond it shall be considered as ultra-vires.
f) Hence, the Memorandum of Association defines the limitations of the power of the company.

2) Ultra vires acts are null and void.

Answer:
a) The word ‘Ultra’ means beyond and the word ‘Vires’ means the powers. Thus ‘Ultra Vires’ means beyond the powers of Memorandum.
b) The Doctrine of Ultra Vires states that any activity done by a company which is beyond the powers of the company will be null and void or legally ineffective even if all the members have agreed to such act.
c) Company cannot undertake any object or activity not stated in the object clause.
The acts which are Ultra-vires are considered null and void.
d) The company cannot sue anybody nor can any third party file a case against the company for such acts.

3) Contents of Articles can be altered.

Answer:
a) ‘Articles’ means Articles of Association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act.
b) The Articles regulate the internal management of a company. It states the relationship between the company and its members.
c) The articles, being the internal regulations of a company can be altered easily by passing a ‘Special Resolution’ at a general meeting.
d) The articles are required to be altered from time to time as per changes made by the government in the company law or as per changing situations in the corporate sector.
e) Thus, the Articles of Association can be altered.

4) Doctrine of Indoor Management protects outsiders who are unaware of the correctness of internal proceedings of a company.

Answer:
a) It is an accepted fact that certain information which is internal to a company cannot be known by outsiders.
b) Hence they act in accordance to the information they get from the Memorandum of Association and Articles of Association.
c) Doctrine of Indoor Management states that persons entering into a contract with the company need not inquire whether the company or its officers have properly followed the internal proceedings as stated in the Articles.

d) It is assumed that the company acts as per its Memorandum and Articles of Association.
e) Doctrine of Indoor Management protects the interest of outsiders when they act based on the Memorandum and Articles of Association of a Company as outsiders are not bound to inquire into the regularity of internal proceedings.

5) Prospectus is an important document issued by a public company.

Answer:
a) A prospectus usually is in the form of a statement giving all material information about the company and showing its future prospectus.
b) It aims at inviting investors to subscribe to its shares and debentures. It is a must for every public company to prepare its prospectus.
c) It is through the prospectus that the prospective investors know the details of the shares offered by the company.

d) Otherwise, the investors would have no idea of the shares that a public company is selling. All detailed information about a company like its business management, financial structure, etc., are provided in the prospectus.
e) The main idea to issue a prospectus is to collect capital for the company from the general public. It should contain true, fair, and correct information.
f) Hence, the prospectus is very important for a public company.

6) Company and officers responsible for issuing Prospectus are liable for misstatements in Prospectus.

Answer:
a) The prospectus is a written document giving an invitation to the public to purchase shares or debenture of the company.
b) It provides all the necessary information about a company, its business, its management, financial structure, etc., of a company.
c) A prospectus must be prepared very carefully and accurately. It should contain true and correct information and honest disclosure of facts.

d) A company and all those officials can be held responsible for any misstatements in the prospectus.
e) These people have to face severe consequences. The shareholder can cancel the contract.
f) Persons authorizing the issue of prospectus containing mis-statement are punishable with imprisonment of two years and a fine up to ₹ 5,000. Thus, I agree with the above statement.
g) Thus, Company and officers responsible for issuing Prospectus are liable for misstatements in Prospectus.

Q.7 Answer the following questions

1) Briefly explain the clauses of Memorandum of Association.

Answer:
The following are Clauses of Memorandum of Association:

1) The Name Clause

This clause mentions the name of the company. As a Company is a legal entity distinct from
its members, it has to have its own name to establish its separate identity. The promoters choose a name for the Company.

Following points should be kept in mind while choosing the name of the company
i) The name should not be identical or resemble the name of an already existing company registered under this Act or any previous Company Law.
ii) The name should not contain any words which will constitute an offence under any Law.
iii) The name or words in the name shall not offend any section of people.
iv) The name shall not violate the provisions of Emblems and Names (Prevention of Improper
Use Act, 1950)

v) The name shall not resemble any registered Trade Mark.
vi) The name should not have any word that gives an impression that the company is connected
with or has the support of Central or State Government or any Local authority.
vii) In case of a Public company Limited by shares or Guarantee, the last word of the name
should be ‘Limited’. e.g. ‘Tata Steel Ltd’

Similarly for a Private Company Limited by Shares or Guarantee, the last word of the name
should be ‘Private Limited’ e.g. ‘Posco India Pvt. Ltd’

2) The Address Clause (Registered office Clause)

The clause states the name of the State in which the Registered Office of the Company will be located. Every company must have its Registered office within 30 days of its Incorporation.

A Registered office is a must as

i) It establishes the domicile (location) of a company.
ii) It is the address to which all communications, notices, etc. will be sent.
iii) It is also the place where all statutory books, records and documents of the company will be kept.
iv) The address clause also indicates the jurisdiction of the court where cases can be filed by the company against others.

3) The Object Clause:

This clause defines the objects for which a company is formed. It indicates the range of activities a company can undertake. This clause states in detail the Main Objects for which the company is to be incorporated and also describes any other activities it may undertake if necessary, in achieving its main objects.

The Objects of the company must not be illegal, immoral, against the public policy or in contravention of the Companies Act or any other Laws. A company cannot do anything beyond or outside the scope of its objects. It can do anything which is incidental to and consequential upon the objects specified in this clause.

Any act done by a company beyond the scope of its objects, will be ‘Ultra-Vires’ and will be void and have no legal validity.

4) The Liability Clause

This clause states the extent of liability of the members of the company. In case of a company limited by shares, this clause states that the liability of the member is limited to the extent of the amount unpaid on the Face Value of Shares held by the member.

Similarly in case of a company limited by Guarantee, this clause states the amount which every member guarantees to pay towards the assets of the company at the time of winding up or towards the cost or expenses at the time of winding up.

In case of Unlimited liability company with or without share capital, this clause states that the liability of its members is unlimited.

5) The Capital Clause

This clause states the amount of capital with which the company is registered. This capital is hence called as Registered Capital. This is the maximum capital which the company is authorized to raise, hence it is also called as Authorized Capital.

In case of a company with share capital, this clause states the total amount of share capital in terms of total number of shares and the fixed value per share called as Face Value of the share.

If a company wants to issue more shares to raise more funds than the amount of Authorized Capital, then the Company has to alter the capital clause.

6) The Association or Subscription clause

This is the last clause of the Memorandum of Association and it is placed at the end. In this clause, the subscribers to the Memorandum make a declaration stating that they are desirous of forming a company as per the Memorandum and agree to take a certain number of shares in the capital of the company.

In case of a public company, the Memorandum must be signed by at least seven subscribers whereas for a Private Company – by at least two subscribers and one subscriber in case of One Person Company.

Each subscriber has to put his name, address and occupation in the presence of at least one witness who shall also put in his details.

2) Define Memorandum of Association. Explain its features.

Answer:
Memorandum of Association is a primary document of a company as it states the purpose for which the company is formed. It describes the range of activities a company can undertake.
Lord Cairns, “The Memorandum of Association of the company is its charter and defines the limitation of the powers of the company.”

Features of Memorandum of Association

i) It is a primary document of a company which states its aims and objectives.

ii) It describes and regulates the relationship between the company and outsiders viz. the
shareholders, creditors, suppliers, investors etc. who can make out from the Memorandum,
whether a company is permitted to undertake a certain activity (or transaction) or not.

iii) Every company needs to prepare its Memorandum of Association at the time of its
Incorporation and submit it along with the application for Incorporation to the ROC.

iv) It is prepared by the promoters and needs to be signed by minimum
7 persons – in case of a public company,
2 persons – in case of a private company and
1 person – in case of One Person Company.
Each subscriber must write against his name the number of shares he has agreed to
subscribe.

v) It contains following clauses :
a) The Name Clause
b) The Address Clause (Registered Office Clause)
c) The Objects clause
d) The Liability Clause
e) The Capital clause
f) The Association or Subscription Clause.

vi) As it defines the nature and character of the company, it is not so easy to alter the clauses.
The Act has laid down specific rules and provisions to be followed to alter each clause.

vii) It cannot contain anything contrary to the provisions of the Companies Act, 2013.

viii) Any act done by the company which goes beyond the powers of Memorandum will be
‘Ultra-Vires’ i.e. it will be invalid.

ix) It is a public document and any one who wants to enter into a contract with the company
is supposed to have knowledge about the contents of a company’s Memorandum of
Association.

x) Companies Act, 2013 has prescribed the format in the form of Table A, B, C, D and E for
preparing the Memorandum for different type of companies.

3) What is Articles of Association? Explain briefly its content.

Answer:
Articles of Association is the second most important document which needs to be filed with the ROC along with the Memorandum at the time of incorporation of a Company. This document is subordinate (secondary) to the Memorandum.

It is like the Bye-Laws of the company as it contains rules and regulations that governs the internal management of the company. It defines the powers, rights and duties of the Board of Directors and officers and also the manner in which the business of the company will be carried on. It establishes relationship between the company and its members and also between the members.

Contents of Articles of Association:

A Company may adopt the Model Articles as given by the Companies Act, 2013 or add additional matters as per its requirements.
The Articles of Association usually contain rules and regulations related to the following matters –

i) Share Capital – Shares and their value and their division into different types of shares.
ii) Rights of each class of shareholders and procedure for variation of their rights.
iii) Procedure relating to allotment of shares, making of calls and forfeiture of shares.
iv) Rules relating to transfer and transmission of shares and the procedure to be followed.
v) Lien of the company on shares alloted to the members for the amount unpaid by them.
vi) Increase, alteration or reduction of Share Capital.
vii) Appointment, remuneration, power, duties, etc. of the Directors and officers of the Company.

viii) Procedure for conversion of shares into stock and vice versa.
ix) Provisions related to Board, Committee and General Meetings, Voting rights of members, proxy, quorum, poll, adjournment of meeting etc.
x) Audit of accounts, transfer of money to Reserves, declaration of Dividend, etc.
xi) Borrowing powers of the Company and the mode of borrowings.
xii) Issue of Share Certificates including procedure for issue of duplicate share certificate.
xiii) Constitution and composition of Audit committee, Remuneration Committee, Corporate Social Responsibility Committee.
xiv) Provision for winding up of Company.
xv) Arbitration
xvi) Indemnity

4) Define Prospectus. Explain its contents.

Answer:
When a Public company, is collecting capital by issuing shares to the public has to issue a
document called ‘Prospectus.’ Prospectus is a document which contains information about various aspects about the company and invites the investors to buy the securities offered by the company.

Section 2 (70) of Companies Act, 2013 defines prospectus as “any document described or
issued as a prospectus and includes a Red Herring Prospectus or shelf prospectus or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.”

A prospectus must contain the following:

1) Information and Reports:

As per the Companies Act, prospectus must contain information such as the name of the issuing company, its full Registered office address with phone numbers, email address, nature, number and price of securities being offered, details of Lead Merchant Banker, Registrar to the Issue, names of Stock Exchange where the shares are to be listed, a clause on general risk, date of opening and closing of issue etc. It must also have reports on financial information. SEBI specifies the contents to be included in the prospectus.

2) Declaration:

There should be a declaration by the company saying that all the provisions of the Companies Act have been complied with and that the prospectus does not contain anything contrary to the provisions of Companies Act, Securities Contracts (Regulation) Act, 1956 and SEBI Act, 1992 and the rules and regulations made thereunder.

3) Statement of an Expert:

A prospectus may contain a statement made by an expert like a Company Secretary, Chartered Accountant, Cost Accountant, Valuer, Engineer, etc. relating to matters that they have looked into. The Expert has to give written consent to issue the prospectus.

4) Any other matter as may be prescribed by the Companies Act.

Solution of other subjects
Solution of all Chapters of SP
1 – 2 – 3 – 4 – 5 – 6 – 7 – 8

11th SP Textbook Solutions

Chapter Name	Solution Link
1) Secretary	Click Here
2) Joint Stock Company	Click Here
3) Formation of a company	Click Here
4) Documents related to formation of a company	Click Here
5) Members of a company	Click Here
6) Directors and Key Managerial personnel of a company	Click Here
7) Company Meetings – I	Click Here
8) Company Meetings – II	Click Here
9) Business Communication Skills of Secretary	Click Here
10) Correspondence with Directors	Click Here
11) Correspondence with Banks	Click Here
12) Correspondence with Statutory Authorities	Click Here

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