Formation

&
REGISTRATION
Of a
Company

CONTENTS:
Introduction

What is a company?
Characteristics of a company
Formation of a company
Promotion
Meaning of promoter
Steps in promotion
Incorporation of a company
Documents used in the formation
of a company
Steps of incorporation
Effect of Certificate of
Incorporation
Conclusiveness of incorporation
Difference between Preincorporation & Provisional
contracts
Certificate of Commencement of
Business
Case studies

INTRODUCTION:

Company is a separate legal entity which is

registered under the companies act. Every country
has a different procedure of registration. In India
companies are registered under Companies act
1956. Formation of company is not at all an easy
task. Company registration in India requires certain
procedure to be followed. New company
registration is always advisable as it will legally
benefit an organization. Incorporation of a
Company is yet another important area of concern.
The Companies Act of 1956 sets down rules for the
establishment of both public and private
companies. The most commonly used corporate
form is the limited company, unlimited companies
being relatively uncommon. A company is formed
by registering the Memorandum and Articles of
Association with the State Registrar of Companies
of the state in which the main office is to be
located.

WHAT IS A COMPANY?
Company is a voluntary association of persons
formed for the purpose of doing business having a
distinct name and limited liability. It is a juristic
person having a separate legal entity distinct from
the members who constitute it, capable of rights
and duties of its own and endowed with the
potential of perpetual succession. The Companies
Act, 1956,Sec 3 (1) (i), states that 'company'
includes company formed and registered under the
Act or an existing company i.e. a company formed
or registered under any of the previous company
laws. Company is separate legal entity distinct from
its shareholders. The major constituents of a
company are its members, who are the ultimate
owners and its directors. It is an important feature
of the company form of business, that there is a

gap between the ownership and control over the

affairs of the company. In real sense the members
are the owners of a company, but it is being
managed by the directors who are elected
representatives of its members, because it is
absolutely necessary for it to have a human agency
called as the Company's board of directors.

CHARACTERISTICS OF A COMPANY:
1. Separate legal entity
2. Incorporated body
3. Artificial legal person
4. Perpetual succession
5. Limited liability
6. Common seal
7. Right to own property
8. Right to sue
9. Right to enter in to contracts
10. Flexibility of investment
11. Separation of control from ownership.
FORMATION OF A COMPANY:
Formation of a company is a complete process
involving several legal formalities and procedural
decisions. Formation of a company involves the
following stages:
Promotion
Incorporation
Flotation or capital subscription
Commencement of business
A private company has to complete only the first two
stages while a public company must undergo all four
stages.

MEANING OF PROMOTION:
The term promotion refers to the sum total of
activities by which a business enterprise is brought
in to existence. It is the process of planning and

organising the finances and other resources of a

business enterprise in the corporate form.

WHAT IS A PROMOTER? [Sec 43(5)]:

Persons who perform the task of promotion are
known as promoters or entrepreneurs. A promoter
conceives the idea of a business enterprise,
analyses its prospects, works out a tentative
scheme of organisation, brings together the
necessary resources of money, material, machinery,
men and managerial ability, and floats an
enterprise.
A joint stock company may be promoted in any of
the following two ways:
By converting an existing partnership or
proprietorship firm into a joint stock company;
By setting up a new company all together to take
up a new line of business.
STAGES IN PROMOTION:
1. DISCOVERY OF BUSINESS IDEA:
The process of business promotion begins with
the conception of an idea or a business
opportunity. The idea may relate to the starting
of a new business or the taking over of an
existing undertaking. At this stage a preliminary
analysis is also made to ensure that the idea
deserves the time and cost of detailed
investigation.
2. DETAILED INVESTIGATION:
Once the idea has been conceived, a thorough
investigation is made to establish the soundness
of the proposition in terms of technical feasibility
and commercial viability. Detailed investigation
involves the study of market demand, availability
and costs of raw material, machinery and other

factors of production. Such investigation may be

conducted by expert engineers, financial
analysts, valuers etc.
3. ASSEMBLING:
Once the promoter is convinced of the feasibility
and profitability of the proposition, he takes
steps to give the idea a practical shape.
Assembling also involves making contracts for
the purchase of materials, buildings, machinery,
tools, capital, etc. Decisions have to be made
regarding the size, layout, etc. of the enterprise.
Plans are prepared for the procurement of
required workers and executives.
4. FINANCING OF PROPOSITION:
a. At this stage, financial plans are prepared with
respect to capitalisation, capital structure, time
and method of capital issue etc.
b. The financial requirements are estimated and
the sources from which the money will come
are decided.

INCORPORATION OF A COMPANY (Sec 35):

Incorporation implies the registration of the company
as a body corporate with the registrar of companies it
is the legal process through which an enterprise
obtains recognition as a separate legal entity. A
company is said to be incorporated when it receives
the certificate of incorporation. Incorporation involves
three major steps:
(a) Preparation and filing of necessary documents
(b) Payment of necessary fees
(c) Obtaining the certificate of incorporation
DOCUMENTS USED IN THE FORMATION OF A
COMPANY:
1. Memorandum of Association

2. Articles of Association
3. Prospectus
4. Statement in Lieu of Prospectus
These documents are explained below:
1. MEMORANDUM OF ASSOCIATION [Sec 2(28)]:
The memorandum of Association is the most
important document of a company. It defines the
objects and powers of a company and the
companys relationship with the outside world. The
memorandum of Association sets out the
constitution of the company. It is, so to speak, the
charter of the company and provides the
foundation on which the structure of the company
is built. It enables persons who deal with the
company to know its permitted range of activities.
Contents:
I. Name Clause (Sec 20)
II. The Situation (Domicile) Clause
III. The Objects Clause (Sec 13 & 149)
IV. The Liability Clause (Sec 13)
V. The Capital Clause ( Sec 13)
VI. The Subscription or Association Clause. (Sec
14 & 15)
2. ARTICLES OF ASSOCIATION [Sec 2(2) & 26 to 29]:
The Articles of Association of a company contain
the rules and regulations relating to the
management of its internal affairs. They define the
rights, powers and duties of the management, the
mode and form in which the business of the
company is to be carried on. Articles lay down the
relations between the company and its members
and among the members. Articles of Association
must not contain anything against the
Memorandum of Association or against the
Companies Act 1956 or public policy.

3. PROSPECTUS:
The term prospectus has been defined under
section 2(36) of the Companies Act as any
document described or issued as a prospectus and
includes a 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 or for inviting
deposits from the public. It should be duly signed
by the directors of the company.
4. STATEMENT IN LIEU OF PROSPECTUS:
A public company having share capital need not file
and publish a prospectus if it wants to raise its
capital privately without public notice. In such a
case, it must file a statement in lieu of prospectus
, with the Registrar of Companies at least three
days before the allotment of shares. It must be
duly signed by all the directors. It should be dated
and should indicate when it was delivered to the
Registrar. The statement must not contain any
untrue or mis-statements.

STEPS OF INCORPORATION:
1. APPROVAL OF NAME (Sec 20):
Before the registration of a company, it is
essential to obtain the approval of the
registrar of companies regarding the proposed
name of the company. For this purpose an
application is made to the registrar.
An application in Form No. 1A needs to be filed
with the Registrar of Companies (ROC) of the
state in which the Registered Office of the
proposed Company is to be situated. The
application is required to be signed by one of the
promoters. The details to be state in the said
application are as follows:

I.

II.

III.
IV.
V.

Four alternative names for the proposed

company. (The name can be coined names from
the objects of the proposed company or the
names of the directors, etc. but should
definitely be indicative of the main object of
the company. Justification for the name needs
to be specified along with the application)
Names and addresses of the promoters
(Minimum 7 for a public company while 2 for
private company).
Authorized Capital of the proposed company.
Main objects of the proposed company.
Names of other group companies. On
submitting the application, the ROC scrutinizes
the same and sends the approval / objections in
about 10 days to the applicant. On fulfilling of
the objections a formal letter of name approval
is issued.

2. FILING OF DOCUMENTS:
An application for registration of the company is
made to the registrar of companies, the
application should be in the prescribed form and
the following documents should be submitted
with the application:
i. Memorandum of association duly signed and
stamped. It must be signed by at least seven
persons in case of a public company and by at
least two persons in case of a private company.
ii. Articles of association duly signed by the
signatories of the memorandum and properly
stamped. A private company must file its own
articles of association but a public company
may not prepare and file its own articles of
association. If it does not file its articles, the
model articles as set in table of the companies
act will be applicable.

iii.

iv.
v.

vi.

vii.

viii.

ix.

A list of directors with their full names,

addresses, ages and occupations. In case such
a list is not filed subscribers to the
memorandum will be deemed to be the
directors.(Form no.32)
A copy of the letter from the registrar in which
the name of the company was approved.
Notice of address of the registered office of the
company has to be submitted as per section
146. However, this notice may be filed within 30
days of incorporation.(Form no. 18)
As per section 266, in the case of a public
limited company, a written consent of the
persons who have agreed to act as first
directors of the company, along with a written
undertaking to take and pay for the
qualification shares, prescribed in the articles,
have to be submitted. A company without share
capital and a private company need not file this
document.(form no. 29)
The agreement, if any, which the company
proposes to enter into with any individual for
appointment as its managing or whole time
director or manager.
Statutory Declaration stating that all the
requirements of law necessary for registration
have been duly complied with has to be
submitted as per section 33(2). This declaration
may be signed by an advocate of the supreme
court or a high court or an attorney, pleader
entitled to appear before a high court, or a
chartered accountant practising in India and
engage in the formation of the company, or by
any person who is named as a director,
managing director, manager or secretary of the
company in its articles of association.
Power of attorney with a view to fulfilling
various formalities that are required for

incorporation of a company, 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 the company
secretary. The Power of Attorney must be
prepared on a non-judicial stamp of the value
prescribed by the Stamp Act of the concerned
state.
3. PAYMENT OF FEES:
Along with the above documents, the company
must pay the prescribed filing fees, stamp duty
and registration fees. The amount of registration
fees varies according to the amount of
authorised capital of the company.
4. REGISTRATION:
The registrar of companies will carefully
scrutinise the documents filed by the company. If
he is satisfied that all the requirements
regarding registration have been duly complied
with, he will enter the name of the company in
the register.
5. CERTIFICATE OF INCORPORATION:
After registration, the Registrar will issue a
certificate to the company. This certificate is
called the Certificate of Incorporation. It is dated
and signed by the Registrar. The company
becomes a distinct legal entity with perpetual
succession and common seal from the date
mentioned in this certificate. The Certificate of
Incorporation is a conclusive proof of the fact
that the company was duly incorporated. The
company comes into existence from the date of
the certificate and its existence cannot be

challenged even if a defect is found in the

Certificate of Incorporation.
Sec 35 states that the certificate, once issued, is
conclusive evidence that the company has been duly
registered i.e., all the requirements in respect of
registration and of matters precedent and incidental
thereto have been complied with.

EFFECT OF CERTIFICATE OF INCORPORATION:

From the date of incorporation mentioned in the
certificate of incorporation, such of the subscribers of
the memorandum and other persons, as may from
time to time be members of the company, shall be a
body corporate by the name contained in the
memorandum, capable forthwith of exercising all the
functions of an incorporated company and having
perpetual succession and a common seal but with
such liability on the part of the members to
contribute to the assets of the company in the event
of its being wound up as is mentioned in the Act.
(Sec. 34)
CONCLUSIVENESS OF THE CERTIFICATE OF
INCORPORATION:
According to section 35 of the Act, the certificate of
incorporation given by the registrar in respect of any
association shall be conclusive evidence that all the
requirements of the Act have been complied with in
respect of registration and matters precedent and
incidental thereto, and that the association is a
company authorised to be registered and duly
registered under the Act. Accordingly, if memorandum
is found to be materially altered after signature but
before registration, or is signed by only one person
for all the seven subscribers or the signatories be all

infants, the certificate would be nevertheless

conclusive and would not affect the status and
existence of the company as a legal person although
such irregularities might give rise to claims between
the subscribers.

DIFFERENCE BETWEEN PRE-INCORPORATION &

PROVISIONAL CONTRACTS:
Contracts entered into by a company after
incorporation but before it becomes entitled to
commence business are called provisional contracts.
They are called provisional because they are subject
to the company receiving the certificate to commence
business. Since a public company has to comply with
certain statutory requirements before it may be
allowed to commence business, unlike a private
company, it cannot commence business merely on
receipt of certificate of incorporation. Provisional
contracts automatically become valid, if the public
company receives the certificate to commence
business; otherwise, they become void. Preincorporation contracts on the other hand, are
contracts made before the company is granted the
certificate of incorporation. Such contracts cannot be
enforced by or against the company after its
incorporation unless these contracts were absolutely
necessary for incorporation of the company and the
company has adopted the same. Pre-incorporation
contracts are relevant to both private as well as
public companies. (Sec 149)
CERTIFICATE OF COMMENCEMENT OF BUSINESS:
A certificate of commencement of business is a
certificate which authorises a public company to
commence its business from the stated. This
certificate is issued by the Registrar of Companies
when the company fulfils the prescribed formalities.
This certificate is a conclusive proof that the company

has complied with all the legal formalities and that it

is legally entitled to commence business. A Private
company can commence business immediately after
getting the certificate of incorporation, but a public
limited company having a share capital and issuing a
prospectus cannot start its business immediately
after incorporation. It must obtain the Certificate of
Commencement of Business. In order to obtain this
certificate, the company must file with the Registrar
of Companies the following documents:
1. A declaration that shares payable in cash have
been allotted equal to an amount not less than
the minimum subscription and that such cash has
actually been received from shares allotted for
cash.
2. A declaration that the directors have taken up
their qualification shares and that they have paid
in cash the application and allotment money on
the shares held by them in the same proportion
as others.
3. A declaration that no money is liable to become
refundable to the applicants by reason of failure
to apply for or to obtain permission for shares or
debentures to be dealt in on any recognised
stock exchange.
4. A statutory declaration in the prescribed form
duly verified by a director or the secretary of the
company stating that the requirements relating
to the commencement of business have been
duly complied with.
The Registrar of Companies will scrutinise these
documents and if he is satisfied that they are in order,
he shall issue a Certificate of Commencement of
Business. The company becomes entitled to start its
business with effect from the date mentioned in this
certificate.

Case
studies

Case study:
1. moosa goolam ariff vs. ebrahim gulam ariff:

The memorandum was signed by two adult

persons and by a guardian of the other five
members, who were minors. The Registrar,
however, registered the company and issued
a certificate of incorporation. The court held
the certificate to be conclusive for all
purposes.
Hadjee Goolam Ariff, a wealthy Mahomedan
merchant residing at Rangoon, being dissatisfied
with the conduct of his two elder sons was minded
to dispose of the bulk of his property for the
benefit of his two junior wives and his five younger
children, who were all minors at the time. With this
object he applied for and obtained five separate
orders under the Act of 1890 for the appointment of
one and the same person as guardian of each of his
minor children in order that the children by their
guardian might accept the benefits which he
intended to confer upon them. Being also desirous
that his property should remain in one mass, intact
and undistributed, he procured the registration of a
Limited Company called the Goolam Ariff Estate
Company, Limited. To this Company in return for
shares there was transferred so much of his
property as was retained by him together with the
undivided shares in his estate which he had
conveyed to his junior wives and his minor children.
Hadjee Goolam Ariff died on the 15th of May 1902,
having made his will on the 19th of the previous
month. It was proved by his eldest son, Ebrahim
Goolam Ariff, one of the executors therein named,
on the 23rd of June 1902. From that time to the
present there has been continuous and persistent
litigation in which Ebrahim Goolam Ariff has
endeavoured to set aside the disposition which his

father made. In all these attempts Ebrahim Goolam

Ariff failed except in his appeal in the present suit
to the Chief Court of Lower Burma. On that appeal
the order was made from which the present appeal
to His Majesty has been brought.
The object of the present suit was to have it
declared that the Goolam Ariff Estate Company
Limited was not duly incorporated and that the
property conveyed to the Company should be
transferred to the persons entitled to the same."
The validity of the conveyances to the testator's
junior wives and his minor children had been
established in a suit, No. 146 of 1902, which
ultimately came before this Board. But the validity
of the incorporation of the Company had not been
expressly determined.
5. The main grounds of defence to the present suit
were: (1) That the certificate of incorporation of the
Company was conclusive; and
(2) That the question raised by the suit was "rest
judicata."
In dealing with the first question their Lordships
will assume that the conditions of registration
prescribed by the Indian Companies Act were not
duly complied with, that there were not seven
subscribers to the Memorandum of Association, and
that the Registrar of Companies ought not to have
granted a certificate of incorporation. As a matter
of fact a certificate of incorporation was granted. In
their
Lordships'
opinion
the
certificate
of
incorporation is conclusive for all purposes.
The provisions of the Indian Companies Act of 1956
as regards the incorporation of Companies are the
same as those contained in the Imperial Act of
1862, except that it is specially provided in Section
40 of the Indian Act that it is not the duty of the

Registrar to require evidence as to whether the

subscribers to the Memorandum are competent to
contract. Probably this provision was introduced
because, according to the Indian law, the contract
of an infant is not voidable but void,
And it would lead to endless confusion and expense
if the Registrar were to take upon himself the duty
of ascertaining whether the signatories to the
Memorandum were or were not of full age.
Memorandum of Association must be signed by at
least seven persons, this view is sufficient to
determine the case in favour of the appellants, but,
in as much as the question of rest judicata was very
fully argued. It was admitted by the learned
Counsel for the respondents that the alleged
invalidity of the incorporation of the Goolam Ariff
Estate Company. Limited, might have been made a
ground of attack in the suit, No. 146 of 1902, in
which the validity of the dispositions made by
Hadjee Goolam Ariff was attacked.
Their Lordships, therefore, think that the question
raised in the present suit is res judicata, and on
that ground as well as on the ground that the
certificate of incorporation is conclusive, their
Lordships think that the suit fails and ought to be
dismissed.

2. Subhash Medical Stores vs. Commissioner of

Income-Tax on 17/2/1984:
Ramesh Chandra Moondra, in his individual
capacity, was running a business known as Subhash
Medical Stores, Bhilwara, since November, 1955. He
executed a sale deed on July 1, 1959, for a
consideration of Rs.4,500. For the goodwill, in the
name of his wife, Smt. Chandra Kanta Moondra, and
his brother's wife, Smt. Shanta N. Maheshwari. On
the same date the two ladies entered into a
partnership by executing a partnership deed and
the partnership business came to be known as M/s.
Subhash Medical Stores, Bhilwara. The firm got
registered with the Registrar of Firms and a bank
account was also opened in the name of the firm
mentioning the two ladies as its partners. However,
the business continued to be carried on by Ramesh
Chandra Moondra, as an employee of the registered
firm on a remuneration of Rs.250 p.m. It was he

who operated the bank account on behalf of the

partners. The information regarding the individual
business converted into partnership firm was sent
to the Sales Tax Department also. The prayer was
rejected by the Income-tax Officer on the ground
that the two ladies had no knowledge about the
business and Ramesh Chandra Moondra was really
in control of the business. In the opinion of the
Income-tax Officer the firm in the partnership of the
two ladies was not genuine and was rather a device
to evade tax. An appeal against the order of the
Income-tax Officer rejecting the application for
registration was filed before the AAC of Income-tax,
but with the same result. The Appellate Tribunal
also rejected the appeal filed by M/s. Subhash
Medical Stores, Bhilwara, in grievance to the
refusal of registration of the firm under the Indian
Companies Act.
The applications were, therefore filed for making
reference to the High Court regarding the question
as to whether the partnership created by the
partnership deed dated July 1, 1959, was genuine
or not and whether the income-tax authorities were
justified in rejecting the prayer of the partners to
register the firm. The Tribunal was of the opinion
that the transaction between Ramesh Chandra
Moondra and the alleged partners of the firm, viz.,
Smt. Chandra Kanta Moondra and Smt. Shanta N.
Maheshwari, was a benami transaction and did not
involve any liability.
The question emerging in the matter is as to
whether the execution of sale deed by Ramesh
Chandra Moondra in favour of his wife and sister-inlaw for a petty amount of Rs. 4,500 and the
creation of the partnership can be said to be
genuine or it was a scam transaction to avoid tax
liability, in the individual capacity.

The income-tax authorities, including the Tribunal,

were influenced by the facts that:
i. A flourishing business was sold for a petty
amount of Rs.4,500,
ii. The business of the firm was operated by
Ramesh Chandra Moondra for a petty
remuneration of Rs. 250 p.m. ,
iii. The two ladies were close relatives of Ramesh
Chandra Moondra ,
iv. The two ladies had no knowledge whatsoever
of the working of the business,
v. The two ladies had limited education.

The distinguishing feature is that here the sole

proprietor of the business, Subhash Medical Stores, viz.,
Ramesh Chandra Moondra, has stepped out of the
business and the partnership constituted of two ladies
who happened to be his close relations. The criticism is
also levelled against the document of sale of the
business to the two ladies on the ground of inadequate
consideration. The quantum of amount Ramesh Chandra
Moondra had for the sale is not of much importance for
the reason that it is the amount only for the goodwill of
the business. His amount in the business remained in
his name and interest was calculated for that amount.
The statements of the two ladies were that they had
extra money whereas Ramesh Chandra Moondra did not
appear to have any at that time and, therefore, they
formed the company.
The Tribunal attached much importance to the fact that
the two ladies had limited education and they had little
or no knowledge about the business carried on by the
firm. These factors should not come in the way of the
partners claiming registration, because there is nothing
illegal in getting the business conducted through some
person employed by the partners or by someone

authorised by them. The income-tax authorities should

not have misconstrued the provisions of the partnership
deed upon irrelevant considerations. It is correct that
mere registration of a firm under the Partnership Act
will not entitle the firm, as of right, to be registered
under Companies Act 1956, because the question of tax
is involved The income-tax authorities are of course
expected to take into consideration the facts and
circumstances of a given case to find out whether in the
garb of a scam transaction, the assesse was avoiding
liability to tax. However, if from the circumstances taken
as a whole, it can be deduced that it is not an unlawful
attempt to avoid payment of tax and at the most, it may
be a legal device to reduce tax liability, there is no
justification for rejecting the request for registration
under the Companies Act 1956.
In view of the facts and circumstances of the case
discussed above and the law applicable on the point, we
are of the opinion that the income-tax authorities were
in error in refusing the registration of the assesse firm.
There was no satisfactory material before the Tribunal
to come to the conclusion that the firm constituted by
the deed dated July I, 1959, was not genuine.
Therefore the question was answered under reference
in the negative, i.e., in favour of the assesse (Ramesh
Chandra Moondra) and against the Commissioner of
Income-tax.

3. Jubilee cotton mills ltd. Vs. mr. Lewis :

In this case jubilee cotton mills filed the documents
for the incorporation of the company on the 6 th of
January with the Registrar of companies. After
scrutinizing all the documents the Registrar of
companies issued the Certificate of Incorporation
two days later on the 8th of January, but the
Certificate of Incorporation was dated 6 th January
instead of 8th January. During the process of
incorporation of the company, the company allotted
shares to Mr. Lewis on the 7th of January. The
question arose whether the allotment of shares to
Mr. Lewis is valid or otherwise.
Held that the allotment was not void on the ground
that it was made before the company was
incorporated. But if a company has been
incorporated with illegal objects, the illegal objects
would not become legal by the issue of the
certificate.
Certificate
of
incorporation
constitutes
the
companys birth certificate and the company
becomes
a
body
corporate
with
perpetual
succession and a common seal.
Sec. 35 states that the certificate, once issued, is
conclusive evidence that the company has been
duly registered i.e., all the requirements in respect
of registration and of matters precedent and
incidental thereto have been complied with.

From the date of incorporation mentioned in the

certificate of incorporation, such of subscribers of
the memorandum and other persons, as may from
time to time be members of the company, shall be a
body corporate by the name contained in the
memorandum, capable forthwith of exercising all
the functions of an incorporated company and
having perpetual succession and a common seal
but with such liability on the part of the members
to contribute to the assets of the company in the
event of its being wound up as in mentioned in the
Companies Act 1956.
Hence since the Certificate of Incorporation is
considered to be conclusive evidence relating to
registration. The company had been registered
during the allotment of shares. Hence, the
allotment of shares to Mr. Lewis was valid. As the
certificate was dated 6th of January and the shares
were allotted on the 7th of January, the certificate is
conclusive. The company had commenced business
after receiving the certificate technically as per the
dates therefore; the allotment of shares is valid.

BIBLIOGRAPHY:

 Business law by K.R.Bulchandani

Legal aspects of business by Akhileshwar
Pathak
All India Report
www.wikipedia.com
www.google.co.in
www.indiankanoon.org
www.managementforum.com
www.lexvidhi.com

Thank
you