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Difficulty: Very hardPrivate Limited Companies: Characteristics, Formation Documents, and Capital

The promoters of a newly proposed enterprise, Apex Logistics Limited, prepared their statutory incorporation documents for submission to the Corporate Affairs Commission (CAC). In their filing, they included the following proposals:

1. Stating the authorized share capital in the Memorandum of Association.
2. Insetting internal rules governing share forfeiture and directors' borrowing powers in the Articles of Association.
3. Issuing a public prospectus inviting subscriptions for 1,000,0001,000,000 ordinary shares to raise initial capital.
4. Inserting a clause restricting the transfer of shares without board approval.

Which of these proposed actions directly violates the statutory legal requirements of a private limited company and will cause the application to be rejected?

  1. Issuing a public prospectus inviting subscriptions for ordinary shares to raise capitalAnswer
  2. B
    Stating the authorized share capital in the Memorandum of Association
  3. C
    Inserting internal rules governing share forfeiture and borrowing powers in the Articles of Association
  4. D
    Inserting a clause restricting the transfer of shares without prior board approval

Answer

Issuing a public prospectus inviting subscriptions for ordinary shares to raise capital is legally prohibited for private limited companies.
Under company law, one of the defining legal characteristics of a private limited company is the explicit statutory prohibition against issuing a prospectus or inviting the general public to subscribe for its shares or debentures. Public capital solicitation is reserved strictly for public limited companies (Plcs).

Step-by-Step Solution

1
Analyze the legal definition and statutory characteristics of a Private Limited Company.
By legal definition, a private limited company restricts share transfers, limits maximum membership, and strictly prohibits any invitation to the public to subscribe for shares or debentures.
Companies legislation prohibits private companies from raising public equity to safeguard public investors.
2
Evaluate the validity of statutory formation documents.
The Memorandum of Association must contain the Capital Clause (authorized capital), while the Articles of Association govern internal regulations (share forfeiture, borrowing limits, and transfer procedures).
Memorandum regulates external relations and scope; Articles regulate internal operations.
3
Identify the non-compliant action among the promoters' proposals.
Proposal 3 (issuing a prospectus to the general public) directly violates the statutory prohibition against public capital subscription.
Public invitation is an exclusive feature of Public Limited Companies (Plc).

Key Concept

Statutory Prohibition of Public Share Subscription in Private Limited Companies
Estimated Time:1m 30s
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Topics

Private Limited Companies: Characteristics, Formation Documents, and Capital

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