CMA Intermediate · Business Laws and Ethics

Company Types, Promotion, Formation and Related Procedures for CMA Inter

This chapter covers what a company is, its kinds, who promotes it, how it is incorporated, what its memorandum and articles contain, how it raises capital through a prospectus, and how a Producer Company is formed. Solve questions by naming the rule first, then applying it to the facts given.

What this chapter covers

This chapter follows a company from idea to registration and first fundraising. You start with what makes a company a separate legal person, then learn the kinds of companies. Next come the promoter, the documents filed for incorporation, the memorandum and articles, and the prospectus. The chapter ends with the Producer Company, a special type with its own formation rules.

Most questions are theory or short case facts. A typical case asks whether a company can be formed with certain persons, which document governs a situation, or who is liable for a false statement. So you need exact conditions, not just general ideas.

This chapter is the base for the rest of the paper. Later chapters on directors, meetings, share capital and winding up all assume you know the company's legal status and the role of its constitutional documents. Learn it well once and the later chapters become easier.

This is a foundation chapter in a paper with 15 compulsory MCQs of 2 marks each, and its rules are easy to turn into one-line MCQs: who can form which company, what a document must contain, and what happens on false information. It also feeds descriptive answers where you can score step marks by stating the rule, the condition and the conclusion. Because the rules are fixed and listed, careful learning here gives reliable marks.

Company Types, Promotion, Formation and Related Procedures: topics in the order to study them

1Meaning and Features of a CompanySeparate legal entity, perpetual succession and limited liability are the ideas every later topic builds on.
2Kinds of CompaniesOnce you know what a company is, you can sort types by liability, membership, control and public or private status.
3Promotion and Role of PromotersPromotion is the first stage in a company's life, so it comes before the legal act of registration.
4Incorporation and Registration of a CompanyThis is the filing process that turns the promoters' plan into a legal person, and it ties to the next topic's documents.
5Memorandum and Articles of AssociationThese are filed for registration and govern the company afterwards, so learn them right after the process.
6Prospectus and Capital Raising DocumentsA company raises money from the public only after it exists, so this follows formation.
7Producer Company Formation and RegistrationIt is a special case, so study it last, when you can compare it with the ordinary company rules you have already learned.

How to prepare Company Types, Promotion, Formation and Related Procedures

Treat this chapter as a set of conditions to memorise and then apply to short facts. Use the Act's wording as your base and your own words for answers.

Read each topic once for understanding. Write the one-sentence meaning of company, promoter, memorandum, articles and prospectus in your own words.
Build a comparison table on paper for the kinds of companies. Compare minimum and maximum members, liability, transfer of shares and public invitation. Learn each figure exactly as in your study material.
Learn the incorporation filing list. For the documents under section 7, know that the memorandum and articles are signed by all subscribers, and a declaration of compliance is given by a professional engaged in the formation (advocate, chartered accountant, cost accountant or company secretary in practice) and by a person named in the articles as director, manager or secretary.
Learn the consequences. Know that the Registrar issues a certificate of incorporation and allots a corporate identity number, and that false or suppressed information leads to action under section 447 and possible Tribunal orders.
For the Producer Company, learn section 378C (who can form, thirty days, limited by shares, never public) and section 378G (mutual assistance principles, items the articles must contain).
Practise 15 MCQs on this chapter and time yourself. Then write two or three short answers in the format: rule, condition, application, conclusion.
Revise with a one-page sheet of numbers, lists and conditions the day before the exam.

Common mistakes in Company Types, Promotion, Formation and Related Procedures

Mixing up the memorandum and the articles.
Fix: Remember that the memorandum states the company's basic terms and objects, while the articles are the internal rules. Write one line on the purpose of each before answering.
Quoting member limits or share-transfer rules from memory without checking the exact condition.
Fix: Make a comparison table and revise it often. Always state the condition along with the number.
Saying the promoter is an agent or trustee of the company that does not yet exist.
Fix: Describe the promoter as the person who takes the steps to form the company and stands in a fiduciary position. Do not claim agency before incorporation.
Mixing up the stages from filing to certificate to corporate identity number.
Fix: Write the order: filing under section 7, registration by the Registrar, certificate of incorporation, then the corporate identity number. Use it in case answers.
Treating a Producer Company as an ordinary public company because it has many members.
Fix: Remember that section 378C(5) treats it as if it were a private limited company without a member limit, and says it can never become a public limited company.
Giving section numbers you are not sure of.
Fix: Use only section numbers you have learned well, such as 7, 378C and 378G, and state other rules in plain words.

Last-day revision: Company Types, Promotion, Formation and Related Procedures

A company is a separate legal person from its members, with perpetual succession.
Know the types of companies by liability: limited by shares, limited by guarantee and unlimited.
A private company restricts transfer of shares and cannot invite the public to subscribe to its securities.
The promoter takes the steps to bring a company into existence, so learn the promoter's role and fiduciary position in plain words.
Under section 7, documents are filed with the Registrar within whose jurisdiction the registered office is proposed to be situated.
Section 7 requires the memorandum and articles signed by all subscribers and a declaration of compliance by a professional and a named officer.
On incorporation, the Registrar issues a certificate of incorporation and allots a corporate identity number.
A company must keep copies of the documents originally filed at its registered office until dissolution.
False or incorrect particulars, or suppressed material information, make the person liable for action under section 447.
The Tribunal can regulate management, make members' liability unlimited, remove the name or wind up the company where incorporation was obtained by false information, after giving the company a hearing.
A prospectus invites the public to subscribe to securities, so learn its purpose and the need for accurate statements.
A Producer Company needs ten or more individuals who are producers, or two or more Producer Institutions, or a combination of ten or more individuals and Producer Institutions.
The Registrar registers a Producer Company within thirty days of receiving the documents, and its members' liability is limited to the amount unpaid on shares.
A Producer Company is treated as a private limited company with no limit on members and can never become a public limited company.
Producer Company articles must contain the mutual assistance principles, including one member one vote irrespective of shareholding.

Company Types, Promotion, Formation and Related Procedures practice questions

Company Types, Promotion, Formation and Related Procedures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Company Types, Promotion, Formation and Related Procedures: frequently asked questions

How many people are needed to form a Producer Company?

Section 378C(1) allows any ten or more individuals, each being a producer, or any two or more Producer Institutions. A combination of ten or more individuals and Producer Institutions also qualifies. They must also comply with the other requirements of the Chapter and the Act.

Can a Producer Company become a public limited company?

No. Section 378C(5) says that once registered it becomes a body corporate as if it were a private limited company, without any limit on the number of members. It says the Producer Company shall not, under any circumstance, become or be deemed to become a public limited company.

What happens if false information is used to incorporate a company?

Under section 7, the person giving false or incorrect particulars or hiding material information is liable for action under section 447. The promoters, first directors and the professionals making the declaration are also liable. The Tribunal can also pass orders such as regulating management, making members' liability unlimited, removing the company's name from the register or winding it up, after hearing the company.

Which documents are filed with the Registrar for incorporation?

Section 7(1) lists the memorandum and articles signed by all subscribers, a declaration of compliance and declarations by subscribers and first directors. It also lists the address for correspondence, particulars of subscribers and first directors, and the directors' interests in other firms or bodies corporate along with their consent to act. Learn the main items and the purpose of each.

How should I answer a descriptive question from this chapter?

State the rule first, then the condition it depends on, then apply it to the facts in the question and end with a clear conclusion. Use section numbers only when you are sure of them. This format earns step marks even if your final conclusion differs from the examiner's.