UNIT 4: Company formation
Question Bank Answer
1. Name the mandatory clauses of a Memorandum of Association of a Company.
Answer: The compulsory clauses of an MOA of a company are as follows:
Name clause
Registered Office Clause
Object Clause
Liability Clause
Capital Clause
Association Clause
One-Person Company Clause
The company can add additional clauses, like rights attached to various classes of shares, if
required.
2. Explain the types of shares.
Answer:
Equity shares: Equity shares are the shares that are traded on the stock exchange. They
are also called ordinary shares. The owners of these shares have voting rights, entitled to
dividends, and are the most common type of shares that are traded.
Preference shares: Preference shares are shares that give ‘preference’ to its
shareholders to the dividends of the company ahead of equity shareholders. The amount of
dividend is fixed however these shares do not carry voting rights like equity shares.
Preference shareholders get priority over equity shareholders in the event of company
liquidation as well. There are also convertible preference shares that can be converted into
equity shares at a later date.
3. Explain different types of debentures.
Answer:
Following are the type of debentures in India:
Registered and bearer debentures: A registered debenture is registered in the company
and can be transferred by the issuance of a transfer deed. Bearer debentures, on the other
hand, have no record of them in the company registers and can be transferred by mere
delivery.
Secured and unsecured debentures: Secured debentures have a charge on the
company’s assets. So secured debenture holders can recover their principal amount or any
unpaid interest out of the company’s mortgaged assets. Unsecured debentures have no
such charge or rights.
Redeemable and non-redeemable debentures: Redeemable debentures’ principal
amount is paid back in a fixed amount of time whereas non-redeemable debentures cannot
be paid back in the lifetime of the company and only on liquidation.
First and second debentures: First debentures are those that are repaid before other
debentures whereas second debentures are those that are repaid thereafter.
Convertible and non-convertible debentures: Convertible debentures are those that
can be converted into shares according to pre-decided terms and conditions. Non-
convertible debentures cannot be converted into shares.
4. Explain the name clause of memorandum.
Ans: Promoters of the company have to make an application to the registrar of Companies for
the availability of name. The company can adopt any name if :
i) There is no other company registered under the same or under an identical name;
ii) The name should not be considered undesirable and prohibited by the Central
Government(Sec.20).
iii) Once the name has been approved and the company has been registered,then
a) the name of the company with registered office shall be affixed on outside of the
business premises;
b) if the liability of the members is limited the words “Limited” or “Private Limited” as the
case may be, shall be added to the name; [Sec 13(1) (1)]:
5. Explain Registered Office Clause of MOA.
Ans: Memorandum of Association must state the name of the State in which the registered
office of the company is to be situated. It will fix up the domicile of the company. Registered
Office of a company is the place of its residence for the purpose of delivering or addressing
any communication, service of any notice or process of court of law and for determining
question of jurisdiction of courts in any action against the company.
6. Explain Object Clause of MOA.
Ans: It not only shows the object or objects for which the company is formed but also
determines the extent of the powers which the company can exercise in order to achieve the
object or objects. Stating the objects of the company in the Memorandum of Association is not a
mere legal technicality but it is a necessity of great practical importance. It is essential that the
public who purchase its shares should know clearly what are the objects for which they are
paying
7. Explain Capital and Liability Clause of MOA.
AnS:. Capital Clause
In case of a company having a share capital unless the company is an unlimited company,
Memorandum shall also state the amount of share capital with which the company is to be
registered and division there of into shares of a fixed amount[Sec.13 (4)].
Liability Clause
In the case of company limited by shares or by guarantee, Memorandum of Association must
have a clause to the effect that the liability of the members is limited. It implies that a
shareholder cannot be called upon to pay anytime amount more then the unpaid portion on the
shares held by him.
8. Explain Alteration of Memorandum of Association.
ANs: Alteration of Memorandum of association involves compliance with detailed formalities
and prescribed procedure. Alternations to the extent necessary for simple and fair working of
the company would be permitted. Alterations should not be prejudicial to the members or
creditors of the company and should not have the effect of increasing the liability of the
members and the creditors.
9. Define Shares.
ANs: Shares are small divisions of a company’s capital. When a company goes public for the
first time and gets listed on the stock exchanges to raise capital from the market, investors buy
a share or number of shares in the company.
10. Define Debentures.
Ans: Debentures are long term debt instruments that a company issues under its seal. One
difference between share and debentures is that debentures become borrowed capital for the
company. It is like a loan that a company has taken from the debenture holders which is
supposed to pay back with interest in due time.
11. Explain board functions.
ANs: The board is responsible for running the affairs of the company in a lawful and efficient
manner, while striving to improve the company's value creation. The value created is
expected to be shared by all shareholders and employees of the company.
The board's functions include the following:
• strategic planning;
• selection, performance appraisal and compensation of senior executives;
• succession planning;
• communication with shareholders;
• ensuring the integrity of financial controls and reports;
• ensuring that ethical standards are maintained and that the company complies with
the laws of Nigeria.
• The composition of the board must guarantee diversity of experience, while taking
into consideration the compatibility, integrity, availability and independence of the board's
members.
• The code also recommends the creation of a remuneration committee. The committee
must be composed wholly or mainly of non-executive directors. The remuneration of
executive directors must be fixed by the committee.
• To ensure effective control over the affairs of the company, the board of directors
should meet regularly and allow the company to take independent professional advice where
necessary. Annual general meetings should be conducted in a manner that enables
discussions with and contributions from shareholders.
12. How are managing directors appointed?
ANs: A managing director must be an individual (a real person) and can be appointed for a
maximum period of five years.
A managing director of a pre-existing company can be appointed as a managing director of
another company as long as the board of directors of the first company are aware and approve
of this new appointment.
13. Explain conditions for appointing managing directors?
ANs: The following conditions are applicable when appointing a director:
1. He or she should not have been sentenced to imprisonment for any period, or a fine
imposed under a number of statutes.
2. They should not have been detained or convicted for any period under the Conservation
of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.
3. He or she should have completed twenty-five (25) years of age, but be less than the age
of seventy (70) years. However, this age limit is not applicable if the appointment is approved
by a special resolution passed by the company in general meeting or the approval of the
Central Government is obtained.
4. They should be a managerial person in one or more companies and draws
remuneration from one or more companies subject to the ceiling specified in Section III of Part
II of Schedule XIII.
5. He or she should be a resident of India. ‘Resident’ includes a person who has been
staying in India for a continuous period of not less than twelve (12) months immediately
preceding the date of his or her appointment as a managerial person and who has come to
stay in India for taking up employment in India or for carrying on business or vocation in India.
14. Define Meeting?
Ans: A meeting is a gathering or assembly of two or more persons at a pre-decided date, time
and place for transacting certain lawful business.
15. Explain winding up of company?
Ans: Winding up of a company means the end of the life of a company. It is the permanent
closing down of its business.
A company is the creature of law. It, therefore, cannot die a nature death. The termination of
its existence is affected by law. Thus winding up of the company is a legal procedure in which
all the affairs of the company are wound up its assets and liabilities are determined assets are
sold out and claims of the creditors met out of sale proceeds. The balance if any is distributed
among shareholders in proportion of their shareholdings. This work is done the liquidator.
