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

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

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 1

Applied Concept

Rajan has developed an innovative solar-powered irrigation pump that can reduce water usage by 50%. He wants to produce it on a large scale but lacks the capital to do so alone. He is advised to form a company. With reference to this situation, explain the feasibility studies Rajan must conduct before deciding to form a company.

Rajan must first conduct a technical feasibility study to determine whether the raw materials, technology, and manufacturing processes required for mass production of his solar pump are readily available in the market or can be imported without difficulty.
He must then assess financial feasibility to estimate the total capital required for setting up the manufacturing facility, supply chain, and marketing; if the required funds are so large that they cannot reasonably be raised by floating a company, the idea must be reconsidered.
Finally, Rajan must conduct an economic feasibility study to evaluate whether the solar irrigation pump can be sold at a price that makes the business profitable after accounting for all costs, as a technically and financially feasible project that is not profitable would not justify forming a company.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 2

Applied Concept

Priya and her partners are incorporating a new public limited company called 'GreenFuture Energy Limited.' They have prepared the required documents but are unsure about how many people must sign the Memorandum of Association and what information must be provided. Advise them.

Since GreenFuture Energy Limited is a public limited company, the Memorandum of Association must be signed by at least seven members; for a private company only two signatures would be required, but that is not applicable here.
Each signatory must provide information about their name, address, and occupation, and must also specify the number of shares they are subscribing to in the memorandum; the memorandum must be duly stamped and witnessed.
The signatories are typically the first directors of the company; they must also provide their written consent to act as directors and undertake to purchase the qualification shares as specified in the Articles of Association.

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 3

Applied Concept

Mr. Verma, a promoter, entered into a contract with a supplier on behalf of 'TechBuild Ltd.' before the company was incorporated. After incorporation, the company refused to honour the contract. The supplier is now suing Mr. Verma personally. Is the supplier's claim valid? Explain with reference to the concept of preliminary contracts.

Yes, the supplier's claim against Mr. Verma is valid. The contract entered into by Mr. Verma before TechBuild Ltd. was incorporated is a preliminary contract (pre-incorporation contract), which is not legally binding on the company.
TechBuild Ltd. cannot ratify a preliminary contract because ratification requires the principal (company) to have existed at the time the agent acted; since the company did not exist, there is no valid ratification possible, and the company cannot be forced to honour it.
Since the company is not bound and cannot be made liable, Mr. Verma as the promoter who signed the contract remains personally liable to the supplier; he bears full liability for the pre-incorporation commitment he made on behalf of the yet-to-be-incorporated company.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 4

Applied Concept

Sunita Ltd., a newly incorporated public company, issued shares to the public. It received applications for only 70% of the issue size. The directors wish to proceed with allotment. Are they legally permitted to do so? Explain, with reference to SEBI guidelines on minimum subscription.

No, the directors of Sunita Ltd. are not legally permitted to proceed with allotment. As per SEBI guidelines, the minimum subscription required before a public company can allot shares is 90% of the size of the issue.
Since Sunita Ltd. received applications for only 70% of the issue — which is below the 90% threshold — the condition of minimum subscription has not been met, making allotment invalid and impermissible.
The company must now cancel the proposed allotment and return all the application money received from the applicants; the application money should have been held in a separate bank account and cannot be used by the company until allotment is complete.

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 5

Applied Concept

Arun, the promoter of a newly formed company, purchased a piece of land at Rs. 20 lakhs on behalf of the company but sold it to the company at Rs. 35 lakhs without informing the board or shareholders about his personal gain. Can the company take any action against Arun? Explain the legal position of promoters.

Yes, the company can take action against Arun because promoters occupy a fiduciary position with the company and are not permitted to make secret profits from their dealings. Arun's gain of Rs. 15 lakhs without disclosure is a clear violation of this duty.
The company can rescind (cancel) the contract with Arun and recover the purchase price of Rs. 35 lakhs paid to him; it can also claim damages for any additional losses suffered as a result of Arun's non-disclosure of material information.
Had Arun disclosed his profit to the shareholders and obtained their consent, the transaction would have been permissible; the legal wrong lies entirely in the concealment, emphasising that promoters may earn profit only through full and transparent disclosure.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 6

Applied Concept

Kapil wants to name his new company 'UNESCO Tech Innovations Limited'. The Registrar of Companies rejected his application for the name. Explain the reasons for rejection with reference to the rules governing name approval.

The Registrar rightly rejected the name 'UNESCO Tech Innovations Limited' because it violates the provisions of 'The Emblem and Names (Prevention of Improper Use) Act 1950', which prohibits using names that suggest patronage of or association with international bodies.
UNESCO (United Nations Educational, Scientific and Cultural Organisation) is explicitly listed in the schedule to this Act as a body whose name and emblem cannot be used by private entities, as it could mislead the public into believing the company is affiliated with or endorsed by UNESCO.
Kapil must now submit an alternative application with three new names in order of priority; the selected name must not be identical to any existing company, must not be misleading about the company's nature, and must comply with all restrictions under the Act.

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 7

Applied Concept

Neha Ltd. was incorporated with a Certificate of Incorporation issued on 15th March. It was later discovered that one of the signatories to the Memorandum had forged the signature of another person. The affected party wants the incorporation to be declared invalid. Will the court agree? Explain.

No, the court will not declare the incorporation of Neha Ltd. invalid. The Certificate of Incorporation is conclusive evidence of the legal existence of the company; once issued, it cannot be challenged on the grounds of defects or irregularities in the registration process.
The Companies Act explicitly provides that even if a signature on the Memorandum of Association was forged, the Certificate of Incorporation remains valid and the company continues to exist as a legal entity from the date mentioned on the certificate.
The only legal remedy available in a situation where a company is registered improperly is to approach the appropriate authority to wind up the company; the birth of the company itself cannot be questioned after the certificate has been issued.

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 8

Applied Concept

With reference to the formation of a company, explain what happens if a newly incorporated public company fails to obtain listing permission from any stock exchange within ten weeks of closing its subscription list.

If a public company fails to obtain permission from at least one recognised stock exchange within ten weeks from the date of closure of the subscription list, the allotment of shares made by the company becomes void — meaning it is treated as if no allotment ever took place.
The company is then legally obligated to return all the money received from the applicants within eight days of the allotment becoming void; failure to return the money within this period results in the company becoming liable to pay interest on the amount due to each applicant.
This provision exists to ensure that investors in a public company have access to a liquid market for their shares; without listing, shareholders have no platform to sell their shares, making their investment illiquid and potentially trapping their capital.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 9

Applied Concept

Ramesh, a sole proprietor running a garment business, is considering converting it into a private limited company. His friend advises him that he only needs to complete two stages of company formation. Explain whether this advice is correct and why private companies do not need to go through the capital subscription stage.

The advice is correct. A private limited company needs to complete only two stages: Promotion (identifying the opportunity, conducting feasibility studies, getting name approved, preparing documents) and Incorporation (filing documents with the ROC and receiving the Certificate of Incorporation).
Private companies are legally prohibited from inviting the general public to subscribe to their shares or debentures; they raise capital only from their own members, directors, and close associates, which eliminates the need for a public issue and prospectus.
Since private companies do not raise funds from the public, there is no requirement to fulfil SEBI's minimum subscription norms, apply for stock exchange listing, issue allotment letters to thousands of applicants, or file the capital subscription-related formalities with the ROC.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 10

Applied Concept

Meera wants to start a small handicraft business and is considering forming a One Person Company. Her lawyer informs her that she cannot incorporate more than one OPC. She also wants to know if she can convert the OPC to a private limited company immediately after formation. Advise her.

Meera's lawyer is correct that no person can incorporate more than one OPC or be a nominee in more than one OPC at the same time; this restriction ensures that the OPC framework is used only for genuinely single-person enterprises and not as a tool for multiple corporate registrations.
Regarding conversion, Meera cannot voluntarily convert her OPC into a private limited company or any other type of company for a period of two years from the date of its incorporation.
The only exception to this two-year restriction is if Meera's OPC's paid-up share capital exceeds Rs. 50 lakh or its average annual turnover during the relevant period exceeds Rs. 2 crore, in which case mandatory conversion is required; otherwise, she must wait for two full years before voluntarily converting.

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

Priya and her partners are incorporating a new public limited company called 'GreenFuture Energy Limited.' They have prepared the required documents but are unsure about how many people must sign the Memorandum of Association and what information must be provided. Advise them.

Sunita Ltd., a newly incorporated public company, issued shares to the public. It received applications for only 70% of the issue size. The directors wish to proceed with allotment. Are they legally permitted to do so? Explain, with reference to SEBI guidelines on minimum subscription.

Kapil wants to name his new company 'UNESCO Tech Innovations Limited'. The Registrar of Companies rejected his application for the name. Explain the reasons for rejection with reference to the rules governing name approval.

Neha Ltd. was incorporated with a Certificate of Incorporation issued on 15th March. It was later discovered that one of the signatories to the Memorandum had forged the signature of another person. The affected party wants the incorporation to be declared invalid. Will the court agree? Explain.

With reference to the formation of a company, explain what happens if a newly incorporated public company fails to obtain listing permission from any stock exchange within ten weeks of closing its subscription list.

Meera wants to start a small handicraft business and is considering forming a One Person Company. Her lawyer informs her that she cannot incorporate more than one OPC. She also wants to know if she can convert the OPC to a private limited company immediately after formation. Advise her.

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