Chapter 4 Documents Related to Formation of a Company Solutions

Group ‘A’

Group ‘B’

(a) Capital clause

(1) Details of capital structure of a company

(b) Liability clause

(9) Extent of liability of members

(c) Acts beyond the Powers of Memorandum

(7) Ultra-Vires

(d) Red Herring Prospectus

(6) Incomplete Prospectus

(e) Shelf Prospectus

(2) Used for multiple issues of shares

1C. Write a word or a term or a phrase that can substitute each of the following statements.

1D. State whether the following statements are True or False.

1E. Find the odd one.

1F. Complete the sentences.

1G. Select the correct option from the bracket.

Group ‘A’

Group ‘B’

(1) …………………….

Memorandum of Association

(2) Liability clause

………………………….

(3) Incomplete Prospectus

………………………….

(4) ………………………

Establishes relationship between the company and its members

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 the company and its members

1H. Answer in one sentence.

1I. Correct the underlined word and rewrite the following sentences.

1J. Arrange in proper order.

2. Explain the following terms/concepts.

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

1. The Articles of a company stated that while borrowing any money from outsiders, the document must have the signatures of the Managing Director (MD) and any one of the Director. 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.

Question (a).
Can the MD be held punishable for his act?
Answer:
He can be held liable for his actions and can be insisted to pay back the loan amount.

Question (b).
Under which Doctrine can Mr. X take action against the company?
Answer:
Under Doctrine of Indoor Management.

Question (c).
Explain the Doctrine.
Answer:

2. Mr. A entered into a contract with Star Limited Company and as advance payment gave a cheque of ₹ 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.

Question (a).
Did Mr. Sam have the authority to accept the cheque? Why?
Answer:
Sam did not have the authority to accept the cheque because usually, individual directors do not have the authority to act on the company’s behaviour unless expressly authorized.

Question (b).
Can Mr. Sam’s action be called as Ultra-Vires? Why?
Answer:
Mr. Sam’s action cannot be called ultra-vires because any act done by him beyond the powers of the memorandum is called Ultra-Vires.

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

Question (a).
Can the company with immediate effect start producing T.V. serials? Why?
Answer:
No, a company cannot start producing T.V. serials with immediate effect. A company cannot indulge in activities other than those provided in the object clause. The activities carried outside the scope drawn by the Memorandum of Association are called Ultra-Vires activities.

Question (b).
How can the object clause of the company be altered?
Answer:
A special resolution must be passed in the General Meeting for altering the object clause.

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

Question (a).
Which clause of Memorandum needs to be altered?
Answer:
The capital clause of the memorandum needs to be altered.

Question (b).
In which meeting the alteration can be approved?
Answer:
A capital clause is altered by passing an ordinary resolution in a general meeting of the company.

Question (c).
Which document should the company issue to invite the public to buy its shares?
Answer:
The prospectus is the document issued to invite the public to buy its shares.

5. A Company stated in its prospectus that it has been making profits for 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 ROC on 1st January 2017 and was issued to the public on 10th February 2018.

Question (a).
Can Mr. X state that there was mis-statement in the prospectus?
Answer:
Yes, Mr. X can state mis-statement in the prospectus.

Question (b).
If found guilty which two types of liability will the company and its officers face?
Answer:

Question (c).
Can the prospectus be valid for the issue to the public on 10th February 2018?
Answer:
No, the prospectus will not be valid for the issue to the public on 10th February 2018.

6. A Company plans to offer Rights Issues.

Question (a).
Which document must it send to its shareholders for offering the rights issue?
Answer:
Letter of the offer must be sent to its shareholders for offering the rights issue.

Question (b).
Instead of the rights issue, if the company wants to issue shares to the public which document must it issue for inviting the public to subscribe to it.
Answer:
The prospectus is the document to be issued by the company if it wants to issue shares to the public instead of rights issues.

Question (c).
Name the document which is called an incomplete prospectus.
Answer:
Red Herring prospectus is called an incomplete prospectus.

4. Distinguish between the following.

5. Answer in brief.

The following are four clauses of Memorandum of Association:
(i) Name Clause:

(ii) Registered office clause:

(iii) The object clause:

(iv) Liability clause:

6. Justify the following statements.

7. Answer the following questions.

The Memorandum of Association contains the following clauses:
1. Name clause:

Alteration of name clause: A company can change its name by passing a special resolution and by obtaining approval from the central government.

2. Address clause:

Alteration of address clause: A company may change its Registered office from

3. Object clause:

Alteration in object clause: In order to alter its object clause, a company must pass a special resolution.

4. Liability clause:

Alteration of liability clause: If a company wants to make any alteration in its liability clause then it must pass a unanimous resolution in a meeting.

5. Capital clause:

Alteration of the capital clause: A company can alter its capital clause by passing a special resolution and by obtaining approval from the company law board.

6. The Association clause or Subscription clause:

Meaning:
In simple words, the Memorandum of Association of a company means

Features of Memorandum of Association:
The following are the features of the Memorandum of Association:

Contents of Articles of Association:

Alteration of Articles of Association:

Meaning: Prospectus is a document that contains information about various aspects of the company and invests the investors to buy the securities offered by the company.

Contents of Prospectus:
A prospectus must contain the following:
(i) Information and Reports:
As per the Companies Act, the 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 a lead merchant banker, registrar to the issue, name of the stock exchange where the shares are listed.

(ii) 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 the Companies Act.

(iii) Statement of an Expert:
A prospectus may contain a statement made by an expert like Company Secretary, Chartered Accountant, Cost Accountant, Valuer, Engineer, etc., relating to matters that they have looked into.

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