CA Inter P2 · Chapter 2
Incorporation of Company and Matters Incidental Thereto MCQs with Answers
11 multiple-choice questions on Incorporation of Company and Matters Incidental Thereto for CA Inter P2 Corporate and Other Laws. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under section 3(1) of the Companies Act, 2013, the minimum number of persons required to form a public company, a private company and a One Person Company respectively is:
- A) Seven, two and one
- B) Two, seven and one
- C) Five, two and one
- D) Seven, two and two
Show answer & explanation
Answer: A) Seven, two and one
Section 3(1) allows a company to be formed for a lawful purpose by seven or more persons for a public company, two or more persons for a private company, and one person for a One Person Company. Each must subscribe to the memorandum and complete registration.
Question 2
Pioneer Ltd, a public company, has had only five members for the last ten months and continues to carry on business. Under section 3A, Mr. Rao, a member who knows this, is:
- A) Severally liable for the payment of the whole of the debts contracted during the period after the first six months
- B) Liable only to the extent of the amount unpaid on his shares
- C) Liable for all the company's debts, including debts contracted before membership fell below seven
- D) Not personally liable at all, because the members' liability is limited
Show answer & explanation
Answer: A) Severally liable for the payment of the whole of the debts contracted during the period after the first six months
Section 3A applies where a public company's membership falls below seven, or a private company's below two, and the company carries on business for more than six months while so reduced. Every person who is a member during the period after those six months, and knows of it, is severally liable for the whole of the debts contracted during that period. He may be sued for them. The liability does not reach debts contracted earlier.
Question 3
Which of the following is NOT a clause required to be stated in the memorandum of a company limited by shares under section 4?
- A) The objects clause
- B) The procedure for transfer of shares
- C) The name clause
- D) The liability clause
Show answer & explanation
Answer: B) The procedure for transfer of shares
Section 4 requires the memorandum to state the name, the State of the registered office, the objects, the liability of members, the capital (for a company with share capital) and the subscribers. For an OPC it must also state the nominee. The procedure for transfer of shares is a matter for the articles, not the memorandum.
Question 4
Under section 5(3) and (4), entrenchment provisions can be included in the articles of a public company:
- A) Only with the prior approval of the Tribunal
- B) Only on formation, or by an amendment agreed to by all the members
- C) Only on formation, or by an amendment agreed to by special resolution
- D) Only by an ordinary resolution followed by approval of the Registrar
Show answer & explanation
Answer: C) Only on formation, or by an amendment agreed to by special resolution
Section 5(3) allows the articles to contain entrenchment provisions, under which specified provisions can be altered only if conditions more restrictive than a special resolution are met. Under section 5(4) they may be made on formation or by an amendment. In a private company the amendment needs the agreement of all members; in a public company it needs a special resolution.
Question 5
As per section 7(2), the certificate of incorporation issued by the Registrar is:
- A) Valid only after the company files its declaration for commencement of business
- B) Evidence that the objects of the company are lawful in all respects
- C) Conclusive evidence that all the requirements of the Act regarding registration have been complied with
- D) Prima facie evidence only, which can be rebutted by any member
Show answer & explanation
Answer: C) Conclusive evidence that all the requirements of the Act regarding registration have been complied with
Section 7(2) provides that the certificate of incorporation is conclusive evidence that all the requirements of the Act regarding registration and matters precedent and incidental to it have been complied with. Its validity does not depend on the later declaration under section 10A.
Question 6
Under section 10A, a company with share capital that was incorporated under the Companies Act, 2013 must file a declaration that every subscriber has paid the value of the shares agreed to be taken. This declaration must be filed within:
- A) 90 days of the date of incorporation
- B) 180 days of the date of incorporation
- C) 30 days of the date of incorporation
- D) One year of the date of incorporation
Show answer & explanation
Answer: B) 180 days of the date of incorporation
Section 10A(1) provides that such a company shall not commence business or exercise borrowing powers unless a director files a declaration within 180 days of incorporation. The declaration confirms that every subscriber to the memorandum has paid the value of the shares agreed to be taken. The company must also verify its registered office under section 12(2).
Question 7
Which of the following purposes does NOT qualify a company for a licence under section 8?
- A) Promotion of education and research
- B) Protection of the environment
- C) Promotion of sports
- D) Distribution of profits to members by way of dividend
Show answer & explanation
Answer: D) Distribution of profits to members by way of dividend
Section 8 applies to a company formed to promote commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment or similar objects. It must apply its profits or income to promoting those objects, and its articles must prohibit the payment of dividend to members.
Question 8
Bright Ltd wants to shift its registered office from Pune (Maharashtra) to Bengaluru (Karnataka). Under section 13, in addition to a special resolution, the alteration of its memorandum requires the approval of:
- A) The Registrar of Companies of Maharashtra only
- B) The Tribunal
- C) The Central Government
- D) The Securities and Exchange Board of India
Show answer & explanation
Answer: C) The Central Government
Under section 13(4), an alteration of the memorandum to shift the registered office from one State to another needs a special resolution and the approval of the Central Government. That power has been delegated to the Regional Director. A shift within the same State but outside the jurisdiction of the existing Registrar is dealt with under section 12.
Question 9
The articles of Zenith Ltd require that any borrowing above a stated limit be approved by an ordinary resolution of members. The directors borrowed above the limit without a resolution. A lender who had no knowledge of the omission wishes to enforce the loan. Which doctrine protects the lender?
- A) The doctrine of indoor management
- B) The doctrine of ultra vires
- C) The doctrine of lifting the corporate veil
- D) The doctrine of constructive notice
Show answer & explanation
Answer: A) The doctrine of indoor management
The doctrine of indoor management, from Royal British Bank v. Turquand, lets an outsider dealing in good faith assume that internal procedures such as passing a members' resolution have been followed. Constructive notice works against outsiders, but only for the contents of public documents, not whether internal steps were taken. Protection is lost where the outsider knew of the irregularity, was negligent, or the act was a forgery.
Question 10
Ruby Ltd entered into a contract that is beyond the objects stated in its memorandum. At the next general meeting, all members unanimously resolved to ratify the contract. The legal position of the contract is that it:
- A) Remains void and cannot be ratified even by the unanimous consent of all members
- B) Becomes valid from the date of the resolution
- C) Becomes valid only if the Registrar approves the ratification
- D) Becomes valid from the date of the contract, since ratification relates back
Show answer & explanation
Answer: A) Remains void and cannot be ratified even by the unanimous consent of all members
Under the doctrine of ultra vires, settled in Ashbury Railway Carriage and Iron Co. Ltd v. Riche, an act beyond the objects of the memorandum is void ab initio. It cannot be ratified even by all the members, because the company never had the capacity to do it. An act ultra vires the directors but intra vires the company can be ratified by members.
Question 11
Under section 12(1), a company must have a registered office capable of receiving and acknowledging all communications and notices addressed to it:
- A) Within six months of its incorporation
- B) Before applying for incorporation
- C) Within thirty days of its incorporation and at all times thereafter
- D) Only after it commences business under section 10A
Show answer & explanation
Answer: C) Within thirty days of its incorporation and at all times thereafter
Section 12(1) requires every company, within thirty days of incorporation and at all times thereafter, to have a registered office capable of receiving and acknowledging all communications and notices. Verification of the registered office is filed with the Registrar within the same period.