Company Law - Important Short notes

Write short notes on the following:

1.       Prospectus

2.       Issue of share in consideration other than cash

3.       Calls-in-Arrears

4.       Calls-in-Advance

5.       Minimum Subscription

6.       Preliminary Expenses

7.       Statement in lieu of Prospectus

1. Prospectus: Prospectus is an invitation to the public to subscribe for its shares or debentures. A prospectus has been defined as "any document described or issued as a prospectus and included notice, circular advertisement or other document inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate." The main purpose of the prospectus is to pursue the public to purchase the shares or debentures of the company.

A public company is required to publish a prospectus whenever it wants to make a public issue of its shares or debentures. Everything stated in the prospectus must be correct because prospectus is the basis of contract between the company and the intending purchaser of shares.

2. Issue of Shares in consideration other than cash: A company may issue shares for consideration other than cash to the vendors who sell their whole business or some assets to the company or to the promoters for rendering services to the company. When shares are so issued, there is no receipt of cash and hence it is termed as issue of shares for consideration other than cash.

3. Calls-in-Arrears: It often happens that some shareholders fail to pay the amount on allotment and or calls due on the shares held by them. The total of the unpaid amounts on account of one or more installments is known as ‘Calls-in-Arrears’. The Articles of Association of a company usually empower the directors to charge interest at a stipulated rate on calls in arrears. In case the Articles are silent in this regard, the rule contained in Table A shall be applicable. Table A represents the model Articles of Association framed under Companies Act 1956. It provides the rate of interest must not exceed 5 per cent.

4. Calls-in-Advance: Sometimes, it so happens that a shareholder may pay the entire amount on his shares even though the whole amount has not been called up. The amount received in advance of calls from such a shareholder should be credited to "calls in advance" account and should be shown separately from the called up capital in the Balance Sheet.

The company can receive calls in advance if the article permits. Interest is usually paid on calls in advance and the article specifies the rate of interest. The maximum rate of interest allowed on calls in advance is 6% per annum.  It should be noted that calls in advance are not entitled to any dividend.

5. Minimum Subscription: However a company invites the general public to subscribe to its share capital. An individual who is interested to subscribe to the share capital of the company sends an application to the company with application money. The Company Act 1956 provides that the directors of the company fix the amount of the application money but it can in no case be less than 5 per cent of the face value of the shares.

Therefore no allotment shall be made unless the amount of share capital stated in the prospectus as the minimum subscription has been subscribed and the company thereof has received the sum of at least 5 per cent in cash.

6. Preliminary Expenses: Expenses incurred to the formation of a company are called ‘Preliminary Expenses’. Preliminary expenses include the following: -

Ø  Expenses incurred in order to get the company registered.

Ø  Expenses incurred for the preparation, printing and issue of prospectus.

Ø  Cost of preliminary books and Common Seal.

Ø  Duty payable on Authorized Capital.

Ø  Underwriting Commission etc.

Preliminary Expenses are to be written off out Securities Premium Account or it may be written off out of the Profit & Loss A/c gradually over some period. The balance left of preliminary expenses is to be shown in the asset side of the balance sheet of the company under the heading of ‘Miscellaneous Expenditure’.

7. Statement in lieu of Prospectus: A public company, which does not raise its capital by public issue, need not issue a prospectus. In such a case a statement in lieu of prospectus must be filed with the Registrar 3 days before the allotment of shares or debentures is made. It should be dated and signed by each director or proposed director and should contain the same particulars as are required in case of prospectus proper.