Stages in Formation of Company

1. Promotion

2. Incorporation (Registration)

3. Commencement

1.Promotion

Promotion is the process of

discovery/conceptualizing a business idea,

and subsequent organisation of funds,

property and managerial abilities into a

business concern for the purpose of

making profits therefrom.

Promoter: • A promoter is one “who undertakes to form a company with

reference to a given object and to set it going and who takes

necessary steps to accomplish that purpose”.

(Twycross V. Grant (1877)

Promoter as defined u/s 2(69) : a person;

• Who has been named as such in prospectus or is identified

by the company in the annual return referred to in Sec-92;

or

• Who has control over the affairs of the company, directly or

indirectly whether as a shareholder, director or otherwise; or

• In accordance with whose advice, directions or instructions

the Board of Directors of the company is accustomed to act.

• A company may have one or many promoters.

Position of Promoter • A promoter is not an agent of the company he

promotes, as there is no principal in existence.

• Lord Cairns “The promoters of a company stands

undoubtedly in a fiduciary position. They have in

their hands the creation and moulding of the

company. They have the power of defining how,

when, and in what shape and under what

supervision, it shall come into existence, and bring

to act as a trading corporation.”

Erlanger V. New Sombrero Phosphate Co.

Consequences of Fiduciary Relationship

1. A promoter cannot make any profits at the

expense of the company he promotes, without

the knowledge of the company and if he does

so the company can compel him to account for

and surrender such profits.

Gluckstein V. Barnes (1900)

2. A promoter is not allowed to derive a profit from

the sale of his own property to the company

unless all material facts are disclosed.

Otherwise the company can either repudiate the

sale or affirm the contract and recover the

profits from promoter.

Erlanger V. New Sombrero Phosphate Co. (1878)

3. A promoter who wishes to sell his own property to the

company must make a full disclosure of his interest to :

a) Independent Board of Directors, or

b) In the Article of Association, or

c) in the prospectus, or

d) to the existing or intended shareholders.

4. The promoter shall not make an unfair or unreasonable

use of his position.

Liabilities of Promoters: – Where, at any time after the incorporation of a company, it is proved that the company

has been got incorporated by furnishing any false or incorrect information or

representation or by suppressing any material fact or information in any of the

documents or declaration filed or made for incorporating such company, or by any

fraudulent action, the promoters shall each be liable for action under section 447.

[Section 7(6)].

– Section 26 of the Companies Act, 2013 lays down matters to be stated and reports to

be set out in the prospectus. The promoter may be held liable for non-compliance of

this provision.

– Where a person has subscribed for securities of a company acting on any statement

included, or the inclusion or omission of any matter, in the prospectus which is

misleading and has sustained any loss or damage as a consequence thereof, the

promoter of the company, without prejudice to any punishment to which he may be

liable under section 36, be liable to pay compensation to every person who has

sustained such loss or damage. [Section 35(1)]

– It a company makes an offer or accepts monies in contravention of section 42 i.e.

making an offer or invitation of securities to a section of the public otherwise than

through issue of a prospectus by way of private placement basis without complying

with the requisites under the said section, inter alia its promoters shall be liable for a

penalty which may extend to the amount involved in the offer or invitation or two crore

rupees, whichever is higher. [Section 42(10)].

Liabilities of Promoters: • Failure to make full disclosure or non-disclosure concerning each

item of special business to be transacted at a general meeting will

entail inter alia the promoter a fine which may extend to fifty

thousand rupees or five times the amount of benefit accruing inter

alia to the promoter or any of his relatives, whichever is more.

Section 173 of the Companies Act, 1956 did not provide for such

fine, except for the general provision under section 629A. [Section

102(5)].

• If the Tribunal is satisfied on the basis of the information and

evidence in its possession with respect to any person who is or

was a director or an officer or other employee of the sick company,

that such person by himself or along with others had diverted the

funds or other property of such company for any purpose other

than the purposes of the company or had managed the affairs of

the company in a manner highly detrimental to the interests of the

company, the Tribunal shall, by order, disqualify inter alia the said

promoter from being appointed as a director in any company

registered under this Act for a maximum period of six years.

[Section 266(2)].

Liabilities • The promoters, inter alia, who are or have been in employment of

the company or acting or associated with the company who did not,

without reasonable cause, extend full cooperation to the Company

Liquidator in discharge of his functions and duties shall be

punishable with imprisonment which may extend to six months or

with fine which may extend to fifty thousand rupees, to with both

[Section 284(2)].

• If a company is being wound up by an order of the Tribunal and the

liquidator's report alleges any fraud in the promotion and formation

of the company, the promoter shall be liable to public examination.

(Section 300).

• Where a promoter has misapplied or retained any property of the

company or is guilty of misfeasance or breach of trust in relation to

the company, he can be sued by the company for breach of duty or

deceit, as the case may be (Section 340).

Remuneration of Promoters: • A promoter has no right against company for his

remuneration.

• Remuneration comes under Preliminary Expenses.

• Articles generally give power the Directors to pay the preliminary expenses out of the company’s funds.

• Remuneration may be given as under:

1. The promoter may sell the business/property to the company at a profit after full disclosure.

2. Commission on the purchase price of the business/property.

3. Lump sum amount as remuneration

4. Fully or partially paid shares.

5. Commission on the shares sold

6. To subscribe company’s un-issued share capital within fixed period.

Incorporation of a Company

• U/s -3(1), any seven or more persons (2 or more in case

of a private company) may form an incorporated company

for a lawful purpose by subscribing their names to

MOA and complying with other requirements in respect

of registration.

1. Reservation of Company Name: First, the applicants are required to apply for a name in Form No. INC-1. The fee

for seeking a name approval is Rs.1000/- as prescribed and 60 days are allowed for

incorporating the company. The name should not be undesirable i.e.; identical,

resembling, restricted or prohibited.

Section 4 of the Companies Act, 2013 provides that no company shall be registered by

a name which is:

(a) identical with or resembles too nearly to the name of an existing company

registered under this Act or any previous company law ; or

(b) be such that its use by the company -

(i) will constitute an offence under any law for the time being in force ; or

(ii) is undesirable in the opinion of the Central Government.

2.

STEPS, DOCUMENTS AND INFORMATION REQUIRED FOR INCORPORATION OF A COMPANY UNDER THE COMPANIES ACT, 2013

Documents to be filed with the Registrar of Companies. Section-7 prescribes the various documents and information to be filed with

RoC for registration of a new company as under:

(1) (a) Memorandum of Association (MoA). The Memorandum of Association, is

the charter of the company. This includes its objectives, its name, the address of

its registered office, the capital which the company is authorised to raise, the

nature of liability of members as well as the names, addresses and agreement of

people who agree to form a company.

For purpose of registration, the promoters have to file with the Registrar of

Companies, a duly signed and properly stamped printed Memorandum of

Association.

(b) Articles of Association (AoA). The other important document is the articles of

association which contains the rules and regulations relating to the interenal

management of the company. The AoA should be duly signed by all the

subscribers to the Memorandum in the prescribed manner.

(c) Declaration. A declaration in the prescribed form by an advocate, a chartered

accountant, cost accountant or company secretary in practice, who is engaged

in the formation of the company, and by a person named in the articles as a

director, manager or secretary of the company, that all the requirements of this

Act and the rules made thereunder in respect of registration and matters

precedent or incidental thereto have been complied with.

• (d) Affidavit. An affidavit from each of the subscribers to the

memorandum and from persons named as the first directors, if any, in the

articles that he is not convicted of any offence in connection with the

promotion, formation or management of any company, or that he has not

been found guilty Of any fraud or misfeasance or of any breach of duty to

any company under this Act or any previous company law during the

preceding five years and that all the documents filed with the Registrar for

registration of the company contain information that is correct and complete

and true to the best of his knowledge and belief;

• (e) Address. The address for correspondence till its registered office is

established.

• (f) Particulars of Subscribers. The particulars of name, including surname

or family name, residential address, nationality and such other particulars of

every subscriber to the memorandum along with proof of identity, as may be

prescribed, and in the case of a subscriber being a body corporate, such

particulars as may be prescribed.

• (g) Particulars of First Directors. The particulars of the persons mentioned

in the articles as the first directors of the company, their names, including

surnames or family names, the Director Identification Number, residential

address, nationality and such other particulars including proof of identity as

may be prescribed.

(h)Particulars of the interests of first directors in other firms or

bodies Corporate. The particulars of the interests of the persons

mentioned in the articles as the first directors of the company in other firms

or bodies corporate along with their consent to act as director of the

company in such form and manner as may be prescribed.

(i) Power of Attorney. With a view to fulfilling various formalities that are

required for incorpoaration of acompany, the promoters may execute a

power of attorney in favour of one of them or an advocate or some other

professional like the Chartered Accountant or a Company Secretary. The

power of attorney to be given on a non judicial stamp paper of appropriate

value with reference to the State in which the office of the ROC is situated

or on a paper affixing non-judicial special adhesive stamps of same value.

(j) Consent of the directors [Sec. 152(5)]. According to section 266, in

the case of a public limited company having share capital, person cannot

be appointed as a director by the Articles of Association unless, he has,

before the registration of the articles, either himself or through hixs agent,

signed and filed, with the Registrar, his consent in writing to act as director.

Consent of the directors is not required in case of private company.

(k) Particulars of Directors along with DIN (Directors Identification

Number).

• (l)Filing of Agreement. The agreement if any, which

the company proposes to enter into with any individual

for appointment as its

– managing director

– whole-time director

– manager.

• Note : A public company or a subsidiary of a public

company with paid-up capital of 5 crores or more is

required to have a managing or whole-time director or

manager.

• (m) Notice of Registered address must also be made

(n) Statutory Declaration of Compliance:

A declaration that all the requirements of the Act have

been complied with.

Such a declaration may be signed by any one of the

following :

(a) an advocate of the Supreme Court or of a High

Court, or

(b) an attorney or a pleader entitled to appear before

High Court, or

(c) a secretary or a Chartered Accountant in whole—

time practice in India and who has been engaged in

the formation of the company, or

(d) by a person named in the articles as a director,

manager or secretary of the company.

CERTIFICATE OF INCORPORATION

After the RoC is satisfied that all documents and information which is

required has been filed in the prescribed manner and along with

prescribed fee, the Certificate of Incorporation shall be issued by the

Registrar in Form No. INC-11

Every company must have a registered office from the day it starts

its business or within 30 days of getting the Certificate of

Incorporation, whichever is earlier. Memorandum of Association

must state the name of the State in which the registered office of the

company is situated.

This clause is important as it mentions the residence for the purpose

of the communication with the company. It determines the

jurisdiction of the company and also mentions the place where all

the records of company are maintained. Where the company wants

to change its registered office from one state to another then it can

do so by passing a special resolution as well as by confirmation of

Company Law Board

The legal effect of incorporation :

1. A company becomes a body corporate distinct from its members. The life of the company dates from the first moment of the day of incorporation.

2. A company has a perpetual succession and common seal. It is an immortal being. The death, bankruptcy or lunacy of any of its members does not affect the existence of the company.

3. A company can sue and be sued in its own name.

4. A company has a right to hold and alienate its own property.

5. Company’s debts and obligations are the liabilities of the company only and cannot be enforced against the individual shareholders.

CONCLUSIVENESS OF THE CERTIFICATE OF

INCORPORATION

• The certificate of incorporation not only creates

the company but also is the conclusive evidence

that all the requirements of the act regarding

registration have been complied with.

• ‘Conclusive evidence’ means that the fact of

incorporation and existence of the company as a

legal person cannot be challenged.

• that the company is duly registered.

• that the company came into existence on the date

mentioned in the certificate.

• The validity of the certificate of incorporation cannot be disputed on any grounds whatsoever. It prevents the re-opening of the matters prior to the registration.

Example : Peel’s case (1867)

• A proposed memorandum of association after signatures and before registration had been materially altered without the authority of the subscribers.

• The company was subsequently registered and the Registrar issued the certificate of incorporation.

• It was objected that the memorandum of association had not been signed by seven or indeed by any subscriber and that the provisions of the Act had not been complied with.

• To that Lord Cairns replied, “when once the certificate of incorporation is given, nothing is to be enquired into as to the regularity of the prior proceedings”

• The Certificate would be conclusive that the company was duly registered even if the signatures to MOA were written by one person or were all forged.

Example: Moosa Goolam Ariff V. Ebrahim Goolam Arif (1913)

Facts of the case are .

• The memorandum of a company was signed by two adult persons and by a guardian of other five, who were minors at that time, the guardian making a separate signature for each of the minors. The Registrar registered the company and issued under his hand a certificate of incorporation. The plaintiff contended that this certificate of incorporation should be declared void.

• The Privy Council held that the certificate of incorporation was conclusive. The memorandum shall be deemed to have been properly signed, registered and presented to the Registrar and no evidence can be admitted to the contrary, even a plea of fraud would be shut out.

• The certificate is also conclusive that the company came into existence on the date of the certificate and it must be taken to have been in existence during the whole of that day.

Jubilee Cotton Mills v. Lewis (1924)

• The memorandum and articles of association of a company were accepted by the Registrar on January 6, 1920. The certificate of incorporation was dated January 6, but was not signed by the Registrar until January 8. The company allotted shares on January 6.

• It was objected that the allotment was void on the ground that it was made before the company came into existence. It was held that the allotment was valid. The certificate of incorporation was conclusive as to the date on which the company was incorporated.

CAPITAL SUBSCRIPTION • When a company has been registered and has received certificate

of incorporation, it is ready for 'floatation', i.e., it can go ahead with

raising capital necessary to commence business and to carry on its

operations satisfactory.

• It may be noted a private company is prohibited from inviting public

to subscribe to its share capital. It has to raise the necessary capital

from friends and relatives by private agreement.

• The Companies Act requires every public company to take either

of the following two steps :

• Issue a Prospectus if public is to be invited to subscribe to its share

capital, or

• File A Statement in Lieu of prospectus' in case capital has been

arranged privately.

COMMENCEMENT OF BUSINESS

• Note. W.e.f. 29/5/15, as per the

Companies (Amendment) Act, 2015,

Section 11 regarding commencement of

Business has been completely abolished

from the 2013 Act, thereby all companies

(private or public or OPC) can commence

business immediately after obtaining the

certificate of Incorporation.