PROMOTER

1. Professional Promoter.

2. Occasional Promoter.

3. Financial Promoter.

4. Entrepreneurial Promoter.

The promoter has to take the following preliminary steps:-

1. Ascertainment of availability of the proposed name of the company.

2. Application for Licence.

3. SEBI’s approval to draft Prospectus.

4. Prepare & finally get printed the company’s Memorandum and Articles of Association.

Functions of a Promoter.1. To conceive an idea of starting a

business.

2. To conduct the negotiation for the purchase of the business.

3. To collect the requisite number of person.

4. To decide on the following

Memorandum of Association

Meaning: It contains the fundamental conditions upon which alone the company is allowed to be incorporated.

It’s purpose is to enable shareholders and those who deal with the company to know what it’s permitted range of activities are.

Contents of Memorandum of Association (MA)

1.Name Clause

2.Registered Office Address Clause

3.Objects Clause

4.The Capital Clause

5.The Liability Clause

6.The Association Clause

Company Law

Articles of Association

Articles of Association(AA)are the rules regulations and bye-laws for the internal management of the affairs of the company

AA next only in importance to the MA. AA are framed with the object of carrying out the aims and objectives as set out in the MA.

Contents of Articles of Association

1Share Capital,Rights of Shareholders,Variation of these Rights,Payment of Underwriting Commission.

2.Lien on shares.3.Transfer of shares 4.Transmission of shares5.Forfeiture of shares 6.Conversion of shares in to

stocks7.Calls on shares8.Share warrants9.Alteration of Capital…………………………..[cont’d]

10. General Meetings and Proceedings thereat

11.Voting rights of members ,voting & proxies

12.Directors,their appointment,remuneration,qualifications,

powers and proceedings of Board of Directors (Board).

13.Manager14.Secretary15 .Dividends and reserves16.Accounts ,audit and borrowing

powers.17.Capitalization of profits18.Winding up.

Form and signature of Articles

• The Article shall be –

a)printed,

b)divided in to paragraphs,and

c)signed by each subscriber of the

Memorandum(who shall add his

address,description and

occupation,if any)in the Articles.

Limitations to Alterations(AA).

• 1.Must not be inconsistent with the Act• . [Eg., alteration can’t give powers

to company to buy it’s own shares].• 2.Must not conflict with emorandum.• 3.Must not sanction anything illegal.

Cont’d…..Limitations to alteration[AA]

• 4.Must be for the benefit of the company. [Brown Vs British Abrasive Wheel

Co.Ltd.]1919• 5.Must not sanction anything illegal.• 6.Must not increase liability of members[unless

there is a written consent].• 7.Alteration by special resolution only. [Even clerical errors must be set right by

a special resolution].

…Limitations to alterations[AA] Cont’d

• 7.Breach of contract.• 8.Approval of Central Government when a private co.

is converted in to public co.• 9.No power of the court to amend Articles.• 10.Alteration may be with retrospective effect. The Articles may be altered from a back date [Eg., the inclusion of a lien clause which gives the

company a lien on fully paid shares of members for debts incurred both before and after the inclusion of the clause.

Regulations required in case of an unlimited company,company limited by guarantee and private company limited by shares[Sec.27]

• 1.Unlimited Company:• In case of an unlimited company ,the

Articles shall state—• No .of .Members with which company is to

be registered• If it has a share capital,the amount of

share capital with which company is to be registered.[Sec.27(1)]

Form & Signature of Articles

• The Articles shall be , * printed, * divided in to paragraphs & * signed by each subscriber of the

Memorandum( who shall add his address,description and occupation,if any) in the presence of at least one witness who will attest the signature and like wise add his address,description and occupation if any.

Procedure for Alteration of Articles of Association

• COMPANIES HAVE BEEN GIVEN VERY WIDE POWERS TO ALTER THEIR ARTICLES

• A company may by passing special resolution,alter regulations contained in it’s Articles anytime.

• A copy of every special resolution altering the Articles shall be filed with the Registrar within 30 days of it’s passing.

• Any alteration so made in the Articles shall be as valid as if originally contained in the Articles.[Sec.31(1)].

Legal Effect of Memorandum & Articles

• The MA & AA ,when registered ,bind a company and the members thereof to the same extent as if they respectively had been signed by the company and to each member.

• The legal implications of these documents may be discussed as to how far these documents bind:

1.Members to the company:

• As between the members and the company ,the Memorandum and Articles constitute a binding contract .

Eg.,[Borland’s Trustee v/s. Steel Bros.Co.Ltd]1901.

The Articles of the company as altered provided that that the shares of a member who became bankrupt should be sold to certain persons at a fair price .B ,a share holder, became bankrupt and his trustee inbankruptcy claimed that he was not bound by the altered Articles.Held, Articles were a personal contract between B and the company,and as such B and his trustee were bound.

2.Company to members:

• A company is bound to the members: A company is bound to the members in the same

manner as the members are bound to to the company .It can,therefore,exercise it’s rights ,as against any member ,only in accordance with the Memorandum and Articles.

A member can obtain an injunction restraining a company from doing an ULTRA VIRES act.

Eg.,[Wood v/s Odessa Waterworks Co.Ltd.,]1889

• The Articles of O.W .Co. provided that the directors may with the sanction of the company at general meeting declare a dividend to be paid to the members.A resolution was passed to give the shareholders debenture bonds instead of paying the dividend in cash.

A member filed a suit to restrain the directors from acting on the resolution as it was not in accordance with the Articles of the company.The directors were restrained from acting on the resolution.

3.Members inter se[Among themselves].

• The Articles &Memorandum constitute a contract between them [ all members]and also binding on each member as against the other or others.Such a contract can ,however ,be enforced through the medium of the company.

Eg.,[Rayfield v/s Hands]1960.

• The Articles of a company provided that if a member wanted to transfer his shares ,he must inform the directors of his intention and the directors must take the said shares equally between them at a fair value.The directors refused to take the shares and argued that the Articles did not impose any liability upon them.

• Held the directors were obliged to take the shares .The Articles imposed an obligation on them not as directors but as members of the company (I.e., in their capacity as members )and it was not necessary for the company to be a party to that action.

4. Company to the outsiders:

• The Articles do not constitute any binding contract between the company and an outsider.

• An outsider cannot take advantage of the Articles to found a claim there on against the company.This is based on the general rule of law that a stranger to a contract cannot acquire any rights and liabilities under the contract.

• If the Articles provide that the company on incorporation shall purchase certain property and appoint the vendor as one of the directors ,the vendor ,on becoming a shareholder ,cannot sue the company on the basis of the Articles.

Eg.,[Eley v/s Positive Government Association Co.]1876.

• The Articles of a company provided that E should be the solicitor of the company for life and could be removed from office only for misconduct.E took office and became a shareholder. After some time the company dismissed him without alleging misconduct.E sued the company for damages for breach regulations in the Articles.

Held, the Articles did not constitute any contract between the company and an outsider and as such no action would lie.

Constructive Notice of Memorandum &Articles

• Every outsider dealing with a company is deemed to have notice of the contents of the Memorandum and Articles of Association,which on registration with the Registrar assume the character of public documents.

This is known as Constructive Notice of Memorandum and Articles

Doctrine of Indoor Management

• There is one limitation to the Doctrine of Constructive Notice of Memorandum and Articles of a company.

“The outsiders dealing with the company are entitled to assume that as far as the internal proceedings of the company are concerned,everything has been regularly done.”

The outsiders need not enquire in to the regularity of the internal proceedings as required by MA &AA.

This limitation of the doctrine of Constructive Notice is known as “Doctrine of Indoor Management”.

Turquand Rule[Doctrine of Indoor Management.]

• Royal British Bank V/s Turquand[1856] The directors of a company had issued a bond to T .They

had the power under the Articles to issue such such bond provided they were authorized by a resolution passed by the shareholders at a general meeting of the company.Held,T could recover the amount of the bond from the company on the ground that he was entitled to assume that that the required resolution had been passed.[This is also known as Doctrine of Indoor Management or Turquand’s rule.].

Exceptions to the Doctrine of Indoor Management.

• 1 .Knowledge of irregularity:Where a person dealing with a company has actual or constructive notice of the irregularity as regards internal management ,he cannot claim the benefit under the rule of indoor management .

Eg., for Knowledge of Irregularity.

• [T.R.Pratt(Bombay)Ltd v/s.Sassoon Co.Ltd.]1936.

Company A lent money to Company B on mortgage of it’s assets.The procedure laid down in the Articles for such transactions was not complied with.The directors of two of companies were the same.Held,the lender had notice of the irregularity and hence the mortgage was not binding.

2 .Negligence: Where a person dealing with a company could discover the irregularity if he had made proper inquiries,he cannot claim the benefit of the rule of indoor management.

Eg., for Negligence.

• [A L Underwood v/s. Bank of Liverpool]1924.

The sole director of a company in this case paid in to his own account checks drawn in favor of the company .Held the bank was liable as it ought to have made proper inquiries before creating the account of the director.

3. Forgery:[Ruben v/s. Great Fingall Cosolidated Co.Ltd.(1906)]

• A company can never be held bound for forgery.Eg; A share certificate was forged by a secretary of a company.The secretary then issued it to R under the seal of the company .R, the holder of the certificate ,claimed to be entitled to be registered as the holder of the shares.Held the certificate did not confer any right on the shareholder.

4.Acts outside the scope of apparent authority:

• If an officer of a company enters in to a contract with a third party and if the act of the officer is beyond the scope of his authority,the company is not bound.

Eg., [Kreditbank Cassel V/s Schenkers Ltd(1927)].A branch manager of a company drew and indorsed bills of exchange on behalf of the company.He had no authority from the company to do so .Held company was not bound.

5.Company,management and project.

• a]History and main objects,and present business of the company.

b] Subsidiary(ies)of the company,if any.

c] Promoters and their background .

d] Names, addresses and occupation of manager,managing director and other directors including nominee directors and whole time directors (giving their directorships in other companies).

5. ………..Cont’de] Location of project.f] Plant and machinery ,technology,process ,etc.g] Collaboration ,any performance guarantee or assistance in marketing by the collaborators. h] Infrastructure facilities for raw materials and utilities like water ,electricity, etc.i] Schedule of implementation of the project and progress made so far ,giving details of

land acquisition ,civil works,installation of plant and machinery ,trial production,date of commercial production etc.

j] The products: (i)Nature of product/s-consumer/industrial and users. (ii) Approach to marketing and proposed marketing set up (iii) Export possibilities and export obligations,if any (in case of a

company providing any “service” particulars, as applicable, be furnished).k) Future prospects-expected capacity utilization during the first three years from the date of

commencement of production,and the expected year when the company would be able to earn cash profits and net profits. Stock market data for shares/debentures of

the company high/low price in each of the last three years and monthly high/low during during the last six months(where applicable).

6. Particulars in regard to the company and other listed companies under the same management:

Which made any capital issue during the last three[3] years.

• Name of the company.• Year of issue.• Type of issue(public/rights/composite).• Amount of issue. • Date of closure of issue.• Date of completion of delivery of share/debenture certificates.• Date of completion of project ,where object of the issue was

financing of a project.• Rate of dividend paid.

7.(a)Outstanding litigations pertaining

to;[i] matters likely to affect Operation and finances of the company including disputed tax liabilities of any nature;and [ii] criminal prosecution launched against the company and the directors for alleged offences under the enactments under Companies Act 1956.

(b) Particulars of default ,if any, in meeting statutory dues, institutional dues, and towards instrument holders like debentures, fixed deposits and arrears on cumulative preferences shares,etc.

(c) Any material development after the date of the latest balance-sheet and it’s impact on performance and prospects of the company.

8.Management Perception of risk factors:

• [i.e., sensitivity to foreign exchange rate fluctuations,difficulty in availability of raw materials or in marketing of products,cost/time over run, etc].

1.Liability for damages for misstatement in the prospectus (Section.62).

• Every director,promoter and every person who authorizes the issue of the prospectus (no matter whether he has seen it or not) is liable to pay compensation to the aggrieved party(who subscribes for any shares or debentures on the faith of the prospectus) for loss or damage he may have incurred by reason of any untrue statement in the in the prospectus.

Section 64 continues…….

• 2.Intention to offer shares or debentures to the

public:Normally,an allotment of,or an agreement to allot,any shares in or debentures to an Issuing House is deemed to have been made with a view to the shares or debentures being offered for sale.

• 3.Additional Information:

a]Worth of shares or debentures which are offered b]Issuing House to be deemed director. c]Signing of prospectus by at least two directors.

Mis-statements in prospectus and their consequences.

• The ‘Golden Rule’ for framing of prospectus.A prospectus is a document which holds out to the public

as to what a company is ,what it proposes to do and what it’s prospects are.

It invites deposits deposits from the public or invites offers from the public to subscribe to the share capital and debentures of the company.It is therefore but reasonable that there must be full,frank and honest disclosure of all material facts with scrupulous accuracy in a prospectus and no material fact should be mis-stated or with held.

Continued…….

• Mis-statements and non-disclosure of material facts in a prospectus are fatal to the contract for the purchase of shares and debentures.As such the greatest care is necessary in it’s preparation.The obligations imposed on those responsible for the issue of a prospectus are not only to state accurately all the relevant facts,but also not to omit any fact which may be relevant.This is the

‘golden rule as to framing of prospectus’ which was laid down in New Brunswick & Canada Rly &Land

Co.Vs.Muggerbridge,(1860).

Liability for Mis-statements in Prospectus:

• If there is any misstatement of material fact in a prospectus or if the prospectus omits any material fact , there may arise:

I. Civil Liability.

II.Criminal Liability.

I.Civil Liability:Any person who has been induced to subscribe for shares on the faith of the statement in a prospectus that is untrue has has remedies against the company ,and it’s directors,promoters and experts.

Annual Return of the Company having Share capital.(Sec.159)

• Every company having share capital ,shall,within 60 days from the date of the annual general meeting ,file every year with the Registrar a return known as the “Annual Return”.The return shall contain the following particulars regarding—

• (1) The Registered office address of the company.• (2)If any part of the register of it’s members and

debenture holders is kept in a foreign country, the name of the country and the address of the place where it is kept.

Cont’d…

• 3.The shares and debentures,giving a summary ,distinguish wherever possible between shares issued for cash,bonus shares, and shares other than bonus shares issued as fully or partly paid otherwise than in cash.

• 4.Particulars of the indebtedness of the company in respect of all shares(including mortgages) which are required to be registered with the Registrar.

Cont’d…….

• 5.A list containing the names,addresses, descriptions and occupations,if any, of members and debenture holders, past and present, and stating the number of shares or debentures held by each.

• 6.Particulars with respect to directors, managing directors, managers, and secretaries,past and present.

Cont’d……

• If any of the five preceding returns has given full particulars required as to past and present members and the shares held and transferred by them and the shares held by them.

• The copy of the annual return filed with the Registrar shall be signed by director and by the manager or secretary ,if any ,or by 2 directors.

Cont’d……..

• The return shall be accompanied with a certificate signed like wise stating, that the return states facts as they stood on the day of the annual general meeting.

• The fact that no annual general meeting was held is no justification for not complying with the requirements of Sec.159

Annual Return of a company not having share capital:

• It shall state the following particulars:

1. The Registered Office Address Of Co.

2.The names of members and respective dates on which they became members and the names of persons who ceased to be members since the date of the last AGM and the dates on which they ceased to be members.

Cont’d…….

• 3. All such particulars with respect to the persons who,at the date of the return,were the directors,it’s manager and it’s secretary;

• 4. A statement containing the particulars of the total amount of indebtedness of the company in respect of charges which are to be registered with the registrar.

Cont’d…..

• The copy of the Annual Return filed with the Registrar shall be signed by a director and by the manager or secretary , if any,or by two directors.

• The return shall be accompanied with a certificate signed likewise stating, that the return states facts as they stood on the day of annual general meeting.

Formation of a

Company

Stages in formation

• Promotion stage.

• Incorporation stage.

• Capital subscription stage.

• Commencement of business stage.

Promotion

• It refers to all those steps which are taken to get a company going.

• It is the process of organising & planning the finances of a business enterprise under the corporate form.

• It is the discovery of an idea,assembling of business elements & the provision of necessary funds.

Promoter

• Person/s with an intention to form a company & who take the necessary steps to carry that intention into operation.

• He directs solicitors to prepare the memorandum & other necessary documents for filing with the Registrar.

• Chooses a name for the company,raises necessary funds,decides about location of the registered office.

• Selects the persons who will be directors.• Promoter may be an individual,a partnership

firm,or even a company.

Legal position of a promoter

• Fiduciary position.• Duties of promoter-

Not to make secret profits To disclose the facts relating to property he wants to

sell to the company. No unfair use of position. To disclose all private arrangements which he has

made to make profits by promoting a company.

Legal position (contd..)

• Liabilities of promoters where he makes secret profits-

Company may rescind the contract & recover the price paid except where third parties have acquired rights therein & it is not possible to restore.

The company may recover the profits without claiming rescission

Company may sue him for damages for breach of fiduciary duty.

Legal position (contd..)

• Liabilities under Companies Act,1956-

Liability for misstatements in the prospectus-u/s 62(1).He may be criminally liable u/s 63 & he may be sued for failure to set out matters or reports specified in section 56.

Liability for misfeasance or breach of trust-u/s 543-

Liability to public examination-u/s 478.

Promoter’s remuneration

• Lump sum either in cash or in the form of share and debentures.

• Commission on the purchase of price of the business taken over by the company.

• May be inducted to the board.• May sell his own property to the company at an inflated

price provided full disclosure is made• May be given an option to buy share of the company at

Par when the market price is higher.• Where remuneration is paid to thepromoter it must be

disclosed in the prospectus if paid within 2 years preceding the date of prospectus( Clause 15, Part I of Schedule II)

Pre-Incorporation/ Preliminary Contracts

• It is a contract made by the promoter on behalf of the company before its Incorporation.

• These contracts are not binding on the company as before incorporation the company is a non entity.

(Natal Land & Colonisation V/s Pauline Colliery Syndicate ,1904)

Legal position of Pre-Incorporation Contracts

• Not binding on the company.• Not binding on other party.• No ratification.• Personal liability of promoter –

- except where the company make the contract in terms of pre-incorporation contract.- Where company does not do so within a certain period either party shall have the right to rescind the contract. (Kelner v Baxter, 1866)

Provisional contracts

• These are made by a public company after incorporation but before commencement of business.

• This becomes binding only when the company gets the certificate of commencement of business-u/s 149.

• However the company can rescind provisional contracts which are fraudulent or voidable.

Incorporation /Registration stage

• PRELIMINARY STEPS-• Ascertain the availability of proposed name

from the Registrar by submitting three proposed names in order of priority.

• Prepare & get printed the MoA & AoA & a draft copy of the prospectus.

• Appoint underwriters,bankers,solicitors,auditors & assemble requisite number of signatories to the MoA.

• Get the MoA subscribed by the requisite number of persons(7 & 2 in the case of public & private company respectively).

Incorporation (contd..)• FILING OF DOCUMENTS-• MoA duly signed by the subscribers-u/s 33(1)(a).• AoA ,if any, duly signed by the subscribers to the MoA.• The agreement which the company proposes to make with

an individual for appointment as its managing or whole-time director-33(1)(c).

• The written consent of the directors to act as such & to take up qualification shares-u/s 266.

• A statutory declaration that all requirements of the Act have been complied with-to be signed by-

An advocate of the supreme or High court An attorney or pleader entitled to appear before a High court. A CS or a CA in hole time practice & engaged in the formation. A person named in the AoA as director,manager or secretary.

• The address of the Registered office within 30 days of incorporation.