Assignment

Ques1: State the usual steps to be taken in the formation of a company under the companies’
act 2013?
Ans: The four stages of formation of a company are:-
1. Promotion Stage
This is the first stage of the company and the word promotion refers to the allocation
of various activities designed for a particular company or the enterprises. At the time
of this stage, the company needs a lot of things for the establishments like capital,
property, and business objects efficiency and so on. The promotion stage includes
various stages to fulfil the desired result of the first stage.
a. Discovery of Idea
Discovery of Idea means finding or limiting about the particular new idea for
establishing the new business.
b. Take action
(i) Detailed investigation – at the time of investigation the promoters reaches
the investigation stage for the collecting of particular source of the data
from the market.
(ii) Assembly of the necessary materials - After the investigation, now is the
time to assemble the resources of the company and keep it in a safe place
and prepare it for your company formalities.
2. Registration or in cooperation stage.
At this the stage it is compulsory to decide the name, location and the legal
documentation of the company.
Procedure for the registration of a company
At the time of the registration there are various legal documents required for the
incorporations of the company. The documents are:
a. Memorandum of Association
MoA is a document that is seen a a very important document for any company.
In this document, the proper description of a seal of the company and its
members names, address, professions, signatures are the most necessary.
Contents of MoA
i. Name Clause
ii. Domicile Clause
iii. Object Clause
iv. Liability Clause
v. Capital Clause
vi. Subscription Clause
b. Articles of Association
 AoA includes the internal and the sub internal rules of the company, which are
made for the fulfilment of the work explained in the memorandum document of
the company.
c. Others Agreement:
After both the documents, the promoters of the company submit the other
documents along with MoA to the register office.
3. Capital subscription stage
In this stage, the promoters of the company will be deciding the capital structure of the
company because managing any company for their capital is an important task.
4. Commencement of the business stage
At this stage the company gets legal approval certificate from the registrar office for the
purpose of the running a specific company or the business. When the company’s legal
documents are verified by any registrar under section 149(1) and section 149(2) then
the company gets legal certificate to run the business.

Ques 2: Define memorandum of Association. What does it contains?

Ans: A memorandum of Association (MoA) is a legal document prepared in the formation and
the registration process of a limited liability company to define its relationship with
shareholders. The MoA is associate to the public and describes the company’s name, physical
address of the registered office, names of shareholders and the distribution of shares

1. Name Clause of Memorandum of Association

The name of the company should be stated in this clause. A company is free to select
any name it likes. But the name should not be identical or similar to that of a company
already registered. It should not also use words like King, Queen, Emperor, Government
Bodies and names of World Bodies like U.N.O., W.H.O., World Bank etc. If it is a Public
Limited Company, the name of the company should end with the word ‘Limited’ and if it
is a Private Limited Company, the name should end with the words ‘Private Limited’.

2. Situation Clause of Memorandum of Association

In this clause, the name of the State where the Company’s registered office is located
should be mentioned. Registered office means a place where the common seal,
statutory books etc., of the company are kept. The company should intimate the
location of registered office to the registrar within thirty days from the date of
incorporation or commencement of business. The registered office of a company can be
shifted from one place to another within the town with a simple intimation to the
Registrar. But in some situation, the company may want to shift its registered office to
another town within the state. Under such circumstance, a special resolution should be
 passed. Whereas, to shift the registered office to other state, Memorandum should be
altered accordingly.

3. Objects Clause of Memorandum of Association

This clause specifies the objects for which the company is formed. It is difficult to alter
the objects clause later on. Hence, it is necessary that the promoters should draft this
clause carefully. This clause mentions all possible types of business in which a company
may engage in future. The objects clause must contain the important objectives of the
company and the other objectives not included above.

4. Liability Clause of Memorandum of Association

This clause states the liability of the members of the company. The liability may be
limited by shares or by guarantee. This clause may be omitted in case of unlimited
liability.

5. Capital Clause of Memorandum of Association

This clause mentions the maximum amount of capital that can be raised by the
company. The division of capital into shares is also mentioned in this clause. The
company cannot secure more capital than mentioned in this clause. If some special
rights and privileges are conferred on any type of shareholders mention may also be
made in this clause.

6. Subscription Clause of Memorandum of Association

It contains the names and addresses of the first subscribers. The subscribers to the
Memorandum must take at least one share. The minimum number of members is two
in case of a private company and seven in case of a public company
Ques 3: Define Article of Association? Can AoA be altered?

Ans: The Articles of Association or AOA are the legal document that along with the
memorandum of association serves as the constitution of the company. It is comprised of rules
and regulations that govern the company’s internal affairs.
The articles of association are concerned with the internal management of the company and
aims at carrying out the objectives as mentioned in the memorandum. These define the
company’s purpose and lay out the guidelines of how the task is to be carried out within the
organization. The articles of association cover the information related to the board of directors,
general meetings, voting rights, board proceedings, etc. This document often defines the
manner in which the shares are to be issued, dividend to be paid, the financial records to be
audited and the power to be given to the shareholders with the voting rights. The articles of
association can be considered as the user manual for the organization that comprises of the
methodology that can be used to accomplish the company’s day to day operations.

Can AoA be Altered: Yes, the companies have wide powers to alter their articles. Articles of
Associations maybe altered by passing a special resolution. The company must file the
registered copy of the special resolution within 30days from the date of its passing.

Limitations

1. The alteration must not be inconsistent with organization beyond the provisions of the
memorandum.
2. The alteration must not provide for anything which is opposed to the provision of the
act.
3. The alteration of article must be made in a good faith for the benefits of the company as
a whole.
4. The AoA must constitute a fraud on minority.
5. No alteration can be made in article which has effect of converting the public company
into a private company, unless such alteration has been approved by the central
government.
6. The alteration must not sanction anything which is illegal.
Ques 4: What is a prospectus? Who are liable for misstatement in a prospectus? Explain the
extent of civil and criminal liability for such misstatements?

Ans: The definition of prospectus in the Indian Companies act 1956 states that, “a prospectus
means any document described or issued as prospectus and includes any notice, circular,
advertisement or other document inviting deposits from the public for the subscription or
shares in or debentures of a body cooperate.

Misstatement
The company issued the prospectus to invite people to purchase their shares. It is the duty of
the company to see that the statements mentioned in it are of true nature. The company is
bound to prepare such prospectus which contains everydetail regarding the company. Omission
of single fact may instead the investors. Thus the company, director or a promoter is liable if
any of the statement mentioned in it is of untrue nature.

Civil Liability
When a person has subscribed for securities of a company acting on any statement include, or
the inclusion or omission of any matter, in the prospectus which is misleading and the sustained
any loss or damages as a consequence there of, the company who
a. Is a director at the time of the issue of prospectus
b. Has authorized himself to be named and is name in the prospectus as the director of the
company or has agreed to become such director, either immediately or after an interval
of time.
c. Is a promoter of the company
d. Has authorized the issue of the prospectus
e. Is an expert referred to in subsection (s) of section 26, shall, without prejudice to any
punishment to which any person may be liable under section 36 be liable to pay
compensation to every person who has sustained such loss or damages.

Criminal Liability

Under this chapter every person who authorizes the issue such mis leading prospectus shall
be liable under section 447
1. Imprisonment for a term which may not be less that 6 months but which may extend to
10yrs
2. Amount not less than the amount involved in fraud but it may extend 3 times the
amount of fraud
3. Or both fine and imprisonment
Ques 5: Write short note on statement in lieu of prospectus

Ans: Statement In Lieu Of Prospectus (Section 70)

A company having a share capital which does not issue a prospectus or which has issued a
prospectus but has not proceeded to allot any of the shares offered to the public for
subscription, shall not allot any of its shares or debentures, unless at least three days before
the allotment of shares or debentures, this has been delivered to the Registrar for registration
a ‘statement in lieu of prospectus’ signed by every person who is named therein as a director
or a proposed director of the company or by his agent authorized in writing, in the form
and containing the particulars set out in Part I of Schedule III and setting out the reports
specified in Part II of Schedule III subject to the provisions contained in Part III of that
Schedule (Section 70).

A private company on becoming a public company shall deliver to the Registrar a statement in
lieu of prospectus in the form containing the particulars specified in Part I of Schedule IV with
report set out in Part II of Schedule IV subject to the provisions contained in Part III of that
Schedule [Section 44(2) (b)].

If the company acts in contravention of the provisions, the company and every director who is
at fault shall be punishable with fine which may extent to Rs. 1,000/-. If the ‘statement in lieu
of prospectus’ include any untrue statement, any person who authorized the delivery of the
statement in lieu of prospectus shall be, punishable with imprisonment up to two years or
with fine which may extent to Rs. 5,000/- or with both. He can avoid liability if he proves
either that the statement was immaterial or that he had reasonable ground to believe that
the statement was immaterial or that he had reasonable ground to believe that the statement
was true. The civil and criminal liability for mis-statements or misrepresentations is the same
as in the case of a prospectus [Section 70(5)]