Company Promotion and Incorporation: Promoters, Memorandum and Articles (Overview) Questions

Question 1

Define promotion of a company.

Accepted Answer

Promotion is the process of taking preliminary steps to bring a company into existence, including idea, feasibility study and completion of initial formalities.

Question 2

Who is a promoter?

Accepted Answer

A promoter is a person who undertakes to form a company and takes necessary steps for its registration and initial organisation.

Question 3

What is Memorandum of Association (MOA)?

Accepted Answer

MOA is the charter of a company which defines its objectives and scope of powers and governs its relations with the outside world.

Question 4

What is Articles of Association (AOA)?

Accepted Answer

AOA is a document containing internal rules and regulations for management and administration of the company.

Question 5

State any one duty of a promoter.

Accepted Answer

A promoter must disclose all material facts and any profit made from promotion; he should not make secret profit.

Question 6

What is Certificate of Incorporation?

Accepted Answer

Certificate of Incorporation is a certificate issued by the Registrar of Companies confirming that the company is registered and legally formed as a separate entity.

Question 7

Explain functions of promoters.

Accepted Answer

Promoters conceive the business idea and conduct feasibility studies. They select company name and arrange initial finance and resources. They prepare and draft important documents like MOA and AOA and complete incorporation formalities. They also appoint directors, bankers, auditors and other professionals and may arrange contracts for property, machinery etc.

Question 8

Explain duties and liabilities of promoters.

Accepted Answer

Promoters occupy a **fiduciary position** and must act in good faith for the company. They must make **full disclosure** of material facts and must not make **secret profits**; undisclosed profits can be recovered by the company. Promoters can be liable for breach of duty, fraud or concealment and may also incur civil/criminal liability for misstatements in prospectus as per law.

Question 9

Explain the importance of MOA.

Accepted Answer

MOA is important because it is the **charter** that defines the company’s objectives and powers. It sets the scope of activities and protects investors and creditors by informing them what the company can do. Any act beyond MOA is generally **ultra vires** and not binding on the company. Hence MOA provides legal framework and clarity of company’s purpose.

Question 10

State important clauses of MOA.

Accepted Answer

Important clauses of MOA include **Name clause**, **Registered office (situation) clause**, **Object clause** (main and ancillary objects), **Liability clause**, **Capital clause** and **Association/Subscription clause**. These clauses define the identity, location, scope, liability and capital structure of the company.

Question 11

Explain AOA and its contents.

Accepted Answer

AOA contains internal rules for management of the company and relations among members. It generally includes provisions regarding **issue/transfer of shares**, calls and forfeiture, **meetings and voting**, **appointment and powers of directors**, dividends and reserves, accounts and audit, borrowing powers and other internal administration rules.

Question 12

Differentiate between MOA and AOA.

Accepted Answer

MOA is the **charter** defining objectives and powers and mainly governs relation with outsiders, while AOA is the **internal rule book** governing management and member relations. MOA has **higher authority** and AOA cannot override MOA or law. Alteration of MOA is generally more difficult than alteration of AOA. Thus MOA sets scope; AOA explains internal working.

Question 13

Explain promoters. Discuss their functions, duties and liabilities.

Accepted Answer

A promoter is a person who undertakes to form a company and performs the preliminary work required to bring the company into existence. Promoters conceive the idea of business, arrange resources and complete legal formalities for incorporation.

**Functions of promoters:** Promoters identify business opportunity and conduct feasibility studies (technical, financial and market). They select company name and place of registered office. They draft and arrange for preparation of important documents like Memorandum of Association and Articles of Association. They negotiate and enter preliminary contracts for property, machinery and services and arrange initial finance. They also appoint directors, bankers, auditors and legal advisers and may prepare prospectus if required.

**Duties of promoters:** Promoters occupy a fiduciary position towards the company. They must act in good faith and in the best interest of the company. They must make full disclosure of all material facts and must not make secret profits. They should avoid conflict of interest and should not misuse their position.

**Liabilities:** If promoters make secret profit without disclosure, the company can recover such profit. Promoters are liable for breach of duty, fraud or concealment of material facts. They may also be liable for misstatements in prospectus which can create civil and criminal liability under law.

Thus promoters play an important role in formation of company but are bound by strict duties and liabilities.

Question 14

Explain incorporation of a company. What is Certificate of Incorporation and what is its effect?

Accepted Answer

Incorporation is the legal process by which a company is created and becomes a separate legal entity under company law. Before incorporation, the company does not have legal existence; after incorporation it can own property, enter contracts and sue or be sued in its own name.

**Procedure (overview):** The promoters arrange necessary approvals such as digital signatures and identification for proposed directors, reserve the company name, prepare incorporation documents and file them with the Registrar along with Memorandum of Association and Articles of Association. After verification and payment of fees, the Registrar registers the company.

**Certificate of Incorporation:** After registration, the Registrar issues the Certificate of Incorporation. This certificate is conclusive evidence that all legal requirements for registration have been complied with and that the company is legally formed from the date mentioned in the certificate.

**Effect:** Once the certificate is issued, the company becomes a separate legal entity with perpetual succession. Its existence cannot be challenged on the ground of irregularities in registration. The company can carry on business and exercise its powers subject to law and its constitutional documents.

Therefore, incorporation and the certificate provide legal birth and identity to the company.

Question 15

Explain MOA and AOA. Differentiate between MOA and AOA with suitable points.

Accepted Answer

**Memorandum of Association (MOA):** MOA is the charter of the company. It defines the company’s objectives and scope of powers and governs the company’s relationship with the outside world. It includes important clauses such as name clause, registered office clause, object clause, liability clause, capital clause and subscription clause. Any act beyond MOA is generally ultra vires.

**Articles of Association (AOA):** AOA is the internal rule book of the company. It lays down regulations for internal management, such as share issue and transfer, calls and forfeiture, meetings and voting, appointment and powers of directors, dividends, accounts and audit.

**Differences between MOA and AOA:**
1. **Nature:** MOA is the charter; AOA is the internal regulations.
2. **Scope:** MOA defines objectives and powers; AOA governs internal management.
3. **Relation:** MOA mainly deals with outsiders; AOA deals with members and internal administration.
4. **Authority:** MOA has higher authority; AOA cannot override MOA or company law.
5. **Alteration:** MOA alteration is generally more difficult and restricted; AOA is comparatively easier to alter as per law.

Thus, MOA sets the boundaries of company’s activities and AOA provides rules for working within those boundaries.

Company Promotion and Incorporation: Promoters, Memorandum and Articles (Overview)

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