Joint Stock Company Exercise Solutions | KalviGavani

Joint Stock Company: Exercise Solutions

How to Use This Page

1. Read the textbook first — These solutions are for revision, not a replacement for the textbook chapter. 2. Attempt all questions yourself before checking the answers. This helps identify gaps in understanding. 3. Focus on the MCQs and short answers for quick revision, and the detailed answers for in-depth understanding. 4. Use the Key Concepts table for a rapid recap before exams. 5. Check the Exam Checklist at the end to ensure you have covered every topic.

Key Concepts (Quick Recap)

I. Choose the Correct Answer (MCQ)

Q1. Relationship between outsiders and company defined in ......... (a) Articles of Association (b) Memorandum of Association (c) Prospectus ✓ (d) Table A

Q2. Table A of Companies Act is a ......... (a) Model of MOA (b) Model of Partnership Deed (c) Model of AOA ✓ (d) Model of Prospectus

Q3. Created by Special Act of Parliament/State Assemblies ......... (a) Chartered Company (b) Registered Company (c) Private Company (d) Statutory Company ✓

Q4. Board of directors elected by ......... (a) Government (b) Public (c) Registrar (d) Shareholders ✓

Q5. Companies established by charter granted by King/Queen ......... (a) Chartered companies ✓ (b) Statutory companies (c) Registered companies (d) Government companies

Q1 (Additional). Max members in private limited company ......... (a) 50 (b) 100 (c) 150 (d) 200 ✓

Q2 (Additional). Max members in private company ......... (a) 10 (b) 50 ✓ (c) 200 (d) Unlimited

Q3 (Additional). One Person Company included in ........ Act (a) 1956 (b) 2010 (c) 2013 ✓ (d) 2015

Q4 (Additional). On basis of liability, companies classified into ........ types (a) 2 ✓ (b) 3 (c) 4 (d) 5

Q5 (Additional). ........ companies established by Special Act (a) Chartered (b) Statutory ✓ (c) Registered (d) Government

Q6 (Additional). MOA consists of ........ clauses (a) 5 (b) 6 ✓ (c) 7 (d) 4

Q7 (Additional). Government company share capital not less than ........ (a) 25% (b) 40% (c) 49% (d) 51% ✓

Q8 (Additional). Who convenes Board of Directors meetings? (a) Shareholders (b) Board of Directors ✓ (c) Managing Director (d) Registrar

Q9 (Additional). ........ contains rules for internal management of a company (a) Table A ✓ (b) MOA (c) Prospectus (d) AOA

Q10 (Additional). Minimum number of members to start a public company is ........ (a) 2 (b) 5 (c) 7 ✓ (d) 10

Q11 (Additional). A company's life is ........ (a) Limited to the lives of its members (b) Dependent on the Managing Director (c) Perpetual ✓ (d) Limited to 100 years

Q12 (Additional). The common seal of a company is ........ (a) A rubber stamp ✓ (b) A digital signature (c) A trademark (d) A logo

Q13 (Additional). Which clause of MOA specifies the state in which the registered office is located? (a) Name clause (b) Situation clause ✓ (c) Objective clause (d) Liability clause

Q14 (Additional). The capital clause of MOA mentions ........ (a) Authorised share capital ✓ (b) Paid-up capital only (c) Reserve capital (d) Working capital

Q15 (Additional). A subsidiary company is one where the holding company controls ........ (a) Less than 25% shares (b) Exactly 50% shares (c) More than 50% of total share capital ✓ (d) All the shares

II. Fill in the Blanks

1. A company is an artificial person created by law with a separate legal entity. 2. The MOA contains 6 clauses. 3. Table A is a model set of Articles of Association. 4. Prospectus defines the relationship between outsiders and the company. 5. A private company must have a minimum of 2 shareholders and maximum of 200. 6. A government company must have not less than 51% of paid-up share capital held by the government. 7. One Person Company (OPC) was introduced in the Companies Act 2013. 8. Perpetual succession means the company continues regardless of member deaths or transfers. 9. The liability of a shareholder is limited to the unpaid amount on the face value of shares. 10. Board of Directors meetings are convened by the Board of Directors. 11. A public company must have a minimum of 7 members. 12. The name clause of MOA states the legal and recognized name of the company. 13. The association clause of MOA states the number of shareholders willing to associate (7 for public, 2 for private). 14. A chartered company is established by a charter granted by the King or Queen. 15. Section 2(36) of the Companies Act defines a prospectus. 16. The situation clause of MOA specifies the state in which the registered office of the company is situated. 17. A company can sue and be sued in its own name because it is a separate legal entity. 18. The common seal is the official signature of the company used on legal documents. 19. An association not for profit is registered under Section 8 of the Companies Act 2013 (formerly Section 25). 20. The minimum number of directors in a private company is 2.

III. True or False (with corrections)

1. True or False: MOA defines the company's rules for internal management. — False. MOA defines the company's relationship with outsiders. AOA (Articles of Association) contains rules for internal management.

2. True or False: A private company can have a maximum of 50 members. — False. The maximum number of members in a private company is 200 (as per the Companies Act 2013). The old limit was 50.

3. True or False: Prospectus defines the relationship between the company and outsiders. — True. Prospectus is "the only window through which a prospective investor can look into the soundness of a company's venture."

4. True or False: Table A is a model of Memorandum of Association. — False. Table A is a model of Articles of Association, not MOA.

5. True or False: A company has perpetual succession. — True. A company does not cease to exist unless specifically wound up. Membership may change but that does not affect the life of the company.

6. True or False: Statutory companies need to use 'Limited' in their name. — False. Statutory companies enjoy autonomous status and need not use 'Limited' in their name.

7. True or False: A company is a natural person. — False. A company is an artificial person created by law, not a natural person. It has no physical existence but is recognised as a legal entity.

8. True or False: The liability clause of MOA states whether the liability of members is limited or unlimited. — True. The liability clause clearly specifies the extent of member liability — limited by shares, limited by guarantee, or unlimited.

9. True or False: A holding company and a subsidiary company are the same. — False. A holding company controls another company (subsidiary) by owning more than 50% of its share capital or controlling its Board composition. They are distinct entities.

10. True or False: A government company must have 100% government shareholding. — False. A government company requires not less than 51% of paid-up share capital to be held by the government. The remaining can be held by private shareholders.

11. True or False: The capital clause of MOA mentions the authorised share capital of the company. — True. The capital clause specifies the total authorised share capital, categories of shares, and their nominal value.

12. True or False: A public limited company can have just 2 members. — False. A public limited company must have a minimum of 7 members. A private company can have a minimum of 2 members.

13. True or False: The common seal of a company acts as its official signature. — True. The common seal is used on all legal documents and acts as the official signature of the company since it is an artificial person.

14. True or False: An association not for profit can use 'Limited' in its name. — False. An association not for profit registered under Section 8 of the Companies Act 2013 is specifically exempted from using 'Limited' or 'Private Limited' in its name.

15. True or False: Multi-national companies operate only in one country. — False. Multi-national companies operate in more than one country and carry out production, marketing, and research on an international scale.

IV. Match the Following

Additional Match the Following:

V. Answer Briefly (2-mark answers)

Q1. Types of companies: Companies can be classified on the basis of: (i) Incorporation — Chartered, Statutory, Registered; (ii) Membership — Private, Public, One Person Company; (iii) Member liability — Limited by shares, Limited by guarantee, Unlimited; (iv) Control — Holding, Subsidiary; (v) Nationality — National (domestic), Multi-national (foreign).

Q2. Define a Company: L.H. Haney — "A company is an artificial person created by law having a separate legal entity with a perpetual succession and a common seal." Key features include: it is created by law (not a natural person), has a separate legal identity from its members, enjoys perpetual succession, and uses a common seal as its official signature.

Q3. Limited liability: The liability of a shareholder is limited to the unpaid amount on the face value of shares held. For example, if a shareholder holds a share of Rs. 100 and has paid Rs. 80, their liability is limited to the remaining Rs. 20. This protects personal assets of shareholders from the company's debts.

Q4. Two characteristics of a company: (i) Separate Legal Entity — distinct from its members, considered an artificial person; (ii) Capacity to sue and be sued — in its own name, distinct from members. Other characteristics include perpetual succession, limited liability, and a common seal.

Q5. Chartered Company: Established by King or Queen. Powers and privileges specified in the charter. Cancellation power rests with the King/Queen. Examples include the East India Company and the Bank of England. These companies enjoyed special privileges and monopolies granted by the sovereign.

Q6. Perpetual succession: A company does not cease to exist unless specifically wound up or the task for which it was formed is completed. Membership may change but that does not affect the life of the company. Death, insolvency, or transfer of shares by any member does not affect the company's existence. This is one of the most important features distinguishing a company from a partnership.

Q7. Articles of Association: A document containing the purpose of the company and duties and responsibilities of its members. Must be filed with the Registrar of Companies. It is subordinate to the MOA — it cannot contain anything contrary to the MOA. It governs the internal management and day-to-day operations of the company.

Q8. Objective clause: Summarizes the main objectives for establishing the company with reference to shareholding requirements and use of financial resources. Ancillary objectives must also be stated. The company cannot undertake any activity beyond what is stated in the objective clause — any such act is considered ultra vires (beyond the powers) of the company.

Q9. What is a Common Seal? A common seal is the official signature of the company. Since a company is an artificial person, it cannot sign documents personally. The common seal is a rubber stamp engraved with the name of the company, and it is affixed on all legal documents, contracts, and share certificates to authenticate them. It is kept in the custody of the Board of Directors.

Q10. Distinguish between MOA and AOA: MOA (Memorandum of Association) defines the relationship between the company and outsiders and contains 6 clauses. It is the supreme document of the company. AOA (Articles of Association) contains rules for internal management of the company. It is subordinate to the MOA — nothing in the AOA can override the MOA. Altering the MOA requires special procedures compared to the AOA.

Q11. What is a Statutory Company? A statutory company is created by a Special Act of Parliament or State Assembly. Examples include the Life Insurance Corporation of India (LIC) and the State Bank of India (SBI). These companies enjoy autonomous status and need not use the word 'Limited' in their name. Their powers, privileges, and functioning are governed by the provisions of the Act under which they are created.

Q12. What is an Association Not for Profit? Under Section 8 of the Companies Act 2013 (formerly Section 25), the Central Government may license an association to register as a company with limited liability without adding 'Limited' or 'Private Limited' to its name. Such associations are formed for promoting commerce, art, science, religion, charity, or any other useful purpose. They cannot distribute profits to members — profits must be applied towards the objectives of the association.

VI. Answer in Detail (5-mark answers)

Q1. Contents of Memorandum of Association (6 clauses): The Memorandum of Association is the charter or constitution of the company. It defines the scope of the company's activities and its relationship with outsiders. It contains 6 clauses:

(i) Name Clause — Specifies the legal and recognized name of the company. A public company must end its name with 'Limited' and a private company with 'Private Limited'. The name should not be identical or too similar to an existing company's name.

(ii) Situation Clause — States the physical location (state) where the registered office of the company is situated. This determines the jurisdiction of the Registrar and the courts. The company must have a registered office from the date of commencement of business.

(iii) Objective Clause — Summarizes the main objectives for establishing the company with reference to shareholding requirements and use of financial resources. Ancillary objectives (objectives incidental or ancillary to the main objectives) must also be stated. The company cannot undertake activities beyond this clause — any such act is ultra vires.

(iv) Liability Clause — States the extent of liability of members. It specifies whether the liability of members is limited by shares, limited by guarantee, or unlimited. In a company limited by shares, the liability is limited to the unpaid amount on the shares held.

(v) Capital Clause — Specifies the authorised (or nominal) share capital of the company, categories of shares (equity and preference), and their nominal value. This is the maximum capital the company can raise through issuance of shares.

(vi) Association Clause — Contains the names of shareholders who are willing to associate themselves with the company, the number of shares taken by each, and their signatures. A minimum of 7 persons must sign for a public company and 2 for a private company.

Q2. Contents of Articles of Association: The Articles of Association is a document that contains the rules and regulations for the internal management of the company. It is subordinate to the MOA — nothing in the AOA can be contrary to the MOA. The contents include:

• Amount of shares, capital, value and type of shares (equity, preference, etc.)
• Rights of each class of shareholders (voting rights, dividend rights, etc.)
• Rules regarding issue of shares and debentures
• Procedures for making calls on shares (amount, timing, notice period)
• Manner of transfer and transmission of shares
• Declaration and payment of dividends
• Borrowing powers of the company and limits thereof
• Rules regarding appointment, remuneration, qualification, and removal of directors
• Procedure for proxy, quorum, meetings (AGM, EGM, Board meetings)
• Procedures for keeping books of accounts and audits
• Use and custody of the common seal of the company
• Procedures for winding up of the company

A company may adopt Table A (the model set of Articles) either wholly or with modifications, or it may register its own Articles.

Q3. Prospectus: Per Section 2(36) of the Companies Act, a prospectus is any document inviting the public to buy shares or debentures. It also applies to advertisements inviting deposits from the public. It is described as "the only window through which a prospective investor can look into the soundness of a company's venture."

Matters specified in a prospectus:

• Main objectives of the company
• Names, addresses, and occupations of the signatories to the MOA and the number of shares held by each
• Names, addresses, and occupations of the directors and the remuneration payable to them
• Number and classes of shares and debentures issued
• Qualification shares of directors (minimum shares a director must hold to qualify)
• Number and description of shares agreed to be issued other than cash within the preceding two years
• The minimum subscription amount
• Details of underwriting contracts
• Details of property purchased with shares or debentures

Importance of a prospectus:

• It helps investors make informed decisions about investing in the company
• It protects investors by requiring full disclosure of material facts
• Any misstatement or omission in the prospectus makes the directors liable to compensate investors for losses
• It is a legal document and any false information can lead to legal action

Q4. Multi-National Company: A multi-national company (MNC) is a huge industrial organisation which operates in more than one country. It carries out production, marketing, and research on an international scale. Key characteristics:

• International operations — The company has production facilities, offices, or subsidiaries in multiple countries. Examples: Microsoft, Nokia, Nestle, Coca-Cola, IBM, Pepsi, Sony.
• Global profit maximisation — MNCs seek to maximise profits worldwide, not just in the home country. They take advantage of cheaper labour, raw materials, and favourable regulations in different countries.
• Large scale operations — MNCs operate on a massive scale with enormous capital resources, advanced technology, and professional management.
• Advanced technology — They bring advanced technology and management techniques to the host countries.
• Transfer of resources — MNCs transfer capital, technology, and managerial know-how across countries.
• Can be domestic or foreign — An MNC may be a domestic company operating abroad or a foreign company operating in the host country.

Impact on host countries:

• Provides employment opportunities and transfer of technology
• May exploit local resources and labour
• Can lead to outflow of profits to the home country
• May affect local businesses and industries

Q5. Holding and Subsidiary Company: Holding Company (Section 2(87)): A company is a holding company of another if it controls the composition of the Board of Directors of that other company, or exercises or controls more than one-half of the total share capital of that other company.

Subsidiary Company: The company over which the holding company exercises such control. A subsidiary company operates under the direction and control of its holding company.

Ways a company becomes a holding company: 1. By controlling more than 50% of the equity share capital of another company 2. By controlling the composition of the Board of Directors of another company (i.e., having the power to appoint or remove the majority of directors)

Example: If H Ltd. holds more than 50% of S Ltd.'s equity share capital, then H Ltd. is the holding company and S Ltd. is the subsidiary company.

Key points:

• A holding company and its subsidiary are separate legal entities — the subsidiary is not a branch or division of the holding company
• The subsidiary maintains its own separate accounts and legal identity
• The holding company prepares consolidated financial statements that include the subsidiary's financials
• A company can be both a holding company and a subsidiary (e.g., H controls S, which controls T — H is holding company of S, S is holding company of T, and S is subsidiary of H)

Q6. Classification by Incorporation (3 types): (i) Chartered Companies — Established by a charter granted by the King or Queen. Powers and privileges are specified in the charter. The cancellation power rests with the sovereign. Examples: East India Company, Bank of England, Chartered Bank of India. These companies enjoyed special privileges and monopolies granted by the sovereign. They are the oldest form of companies and are rare in modern times.

(ii) Statutory Companies — Established by a Special Act of Parliament or State Assembly. They enjoy autonomous status and need not use 'Limited' in their name. Their powers, privileges, and functioning are governed by the provisions of the Act under which they are created. Examples: Life Insurance Corporation of India (LIC), State Bank of India (SBI), Industrial Finance Corporation of India (IFCI). These are created for public utility services and national importance.

(iii) Association Not for Profit — Per Section 8 of the Companies Act 2013 (formerly Section 25), the Central Government may license an association to register as a company with limited liability without adding 'Limited' or 'Private Limited' to its name. Conditions: (a) the association is formed for promoting commerce, art, science, religion, charity, or any other useful purpose; (b) it intends to apply its profits (if any) towards promoting its objectives; (c) it prohibits payment of dividends to members. Examples: trade associations, chambers of commerce, charitable organisations.

Common Mistakes to Avoid

1. MOA vs AOA — MOA defines the company's relationship with outsiders (6 clauses). AOA contains rules for internal management. Don't confuse them. 2. Prospectus defines relationship with OUTSIDERS — This is a common MCQ trap. Prospectus, not MOA, defines the external relationship. 3. Private company max 200 members — Not 50 (that was the old limit). The Companies Act 2013 raised it to 200. 4. Government company = 51% government shareholding — Not 50% or 49%. Must be "not less than 51%." 5. Table A is a model of AOA — Not MOA. It provides model articles for companies. 6. MOA has 6 clauses — Not 5 or 7. Name, Situation, Objective, Liability, Capital, Association. 7. Perpetual succession means membership changes don't affect the company — The company continues regardless of member deaths or transfers. 8. Section 8 (not Section 25) — While Section 25 was the old provision, the Companies Act 2013 uses Section 8 for associations not for profit. Check which version your textbook references. 9. Common seal is a rubber stamp — It is not a digital signature or logo. It is specifically a rubber stamp engraved with the company name. 10. AOA is subordinate to MOA — The AOA cannot contain anything contrary to the MOA. If there is a conflict, the MOA prevails.

Exam Checklist

• [ ] Can define a company (L.H. Haney's definition)
• [ ] Know all 6 clauses of Memorandum of Association
• [ ] Can list contents of Articles of Association
• [ ] Understand prospectus and its contents
• [ ] Can classify companies by incorporation (chartered, statutory, not-for-profit)
• [ ] Know private company limits (2 members min, 200 max, 2 directors min)
• [ ] Can explain holding and subsidiary company relationship
• [ ] Know government company = 51% government shareholding
• [ ] Understand perpetual succession and limited liability
• [ ] Know the difference between MOA and AOA
• [ ] Know that prospectus is defined under Section 2(36)
• [ ] Can explain common seal and its significance
• [ ] Know the capital clause mentions authorised share capital
• [ ] Can describe multi-national companies with examples
• [ ] Know Section 8 (Companies Act 2013) for associations not for profit
• [ ] Can distinguish between chartered, statutory, and registered companies
• [ ] Understand the ultra vires doctrine in relation to the objective clause