LEGAL ENVIRONMENT OF BUSINESS

TOPIC: FORMATION AND INCORPORATION

OF A COMPANY.

WHAT IS A COMPANY?
Section 3(1)(i) of the Companies Act, 1956 defines a company as: a company formed and registered under this Act or an existing Company. A company is a voluntary association of persons formed for the purpose of business activities. A company has distinct name and limited liability, it is a juristic person having a separate legal entity different from its members who constitute it, capable of rights and duties of its own and endowed with a potential or perpetual succession.

PROCESS OF INCORPORATION OF A COMPANY

The Companies Act, 1956 prescribes specific procedures for incorporation and registration of companies. The whole process of formation and incorporation of a company may be divided into four stages:

PROMOTION

REGISTRATION

FLOATION

COMMENCEMENT OF BUSINESS

PROMOTION
Promotion is the first stage in the formation of a company . It involves conceiving a business opportunity & taking an initiative to form a company so that practical shape can be given to exploiting the available business opportunity.

LEGAL POSITION & DUTIES OF A PROMOTER

A promoter is neither the trustee nor the agent of the company, he promotes.
CASE: Erlanger v. New Sombrero Phosphate Co.

Promoter stands in a fiduciary position towards the company. In other words, he is not allowed to make secret profits. CASE: Gluckstein v. Barnes

PROMOTERS REMUNERATION
For any bond a promoter has no right to get any remuneration for the services rendered by him in endorsing the company. In rehearse; even so, he takes remuneration for his work. The typical techniques of taking remuneration are as follows: (1) He may sell his own property to the company for cash. (2) Take commission on shares sold, (3)Paid Lump Sum by the company.

LIABILITIES OF A PROMOTER
Section 56 lays down matters to be stated and reports to be set out in the prospectus. He may be held liable for the non-compliance of the provisions of this section.
Section 478 & 519 A promoter may be liable to public examination like any other director or officer of the company if the court so directs on a liquidators report alleging fraud in the promotion or formation of the company. Section 62 a promoter is liable for any untrue statement in the prospectus to a person who has subscribed for any shares or debentures on the faith of the prospectus.

Section 63,68 The promoters are criminally liable for the issue of prospectus containing untrue statements. Section 68 imposes severe penalty on promoters for doing so.

Section 543 A company may proceed against a promoter on action for deceit or breach of duty where the promoter has misapplied or retained any property of the company or is guilty of misfeasance or breach of trust in relation to the company.

Registration-Incorporation Of Companies.

 According to section-12, for Public Company- at least seven persons

Private Company- at least two persons

to subscribe to the memorandum of association. It goes on to state that Any seven or more persons or where the company to be formed will be a private company, any two or more persons, associated for any lawful purpose may, by subscribing their names to the memorandum of association, and otherwise complying with the requirements of this Act in respect of registration, form an incorporated company, with or without limited liability.

Procedure for registration of the company:

1. a.

Company Type: Public Company

b.

Private Company

2.Company Name:

a) b) c)

Central Gov.-Undesirable name. Check availability with ROC. According to the companies general rules and forms, 1956 , vide rule 4A, the promoters of a company need to make an application in Form No. 1A,checking for the desirability and the availability of the proposed name.(the meaning of section 20 of the Act). Some prescribed fee has to be paid.

d)

Company Name Cont.:

ROC examines the desirability of the name.

If name desirable: a) b) c) d) The ROC intimates the applicants. 60 day period assigned for registration. In case of failure-30 day extension. Name shall lapse.

 If name undesirable: a) b) c) d) ROC intimates applicants within 3 days. May ask for extra details. Ask for resubmission. 2 chances against the one time fee.

Corporate Identity Number:

The ROC is required to allot the corporate identity number to the companies registered on or after 1st November 2000.

Preparation of Memorandum and Articles of Association

The memorandum of association is a document which defines the area within which the company can act. It entails the following things: 1. 2. 3. 4. The object for which the company is being formed. The capital which it shall be allowed to raise. The nature of liability of its members. The name of the state where the registered office of the company shall be located.

Articles of Association

The articles of association which contains the rules and regulations defining the internal management of the company is also required to be prepared.

 The subscriber needs to add: 1. 2. 3. 4. 5. Address, Description, Occupation Signature needs to be attested by the witness. The subscriber should also mention the number and the nature of the shares subscribed by them

 Where executant to the memorandum is an illiterate: The subscriber should put his thumb impression or mark. The person writing for him should write against the name of the subscriber, the number of shares taken by him. The memorandum and articles have to be stamped according to the stamp act applicable to the state where the company is incorporated.

Other Documents

Power of Attorney: executed in favour of: 1. one of the promoters

2.
3.

an advocate
other professional like the chartered accountant or the company secretary.

 CONSENT OF DIRECTORS NOTICE OF REGISTERED ADDRESS

STATUTORY DECLARATION

Certification of incorporation
After scrutinizing the documents filed and on being satisfied that they are in order, that the requisite fee has been paid and that all other legal requirements have been duly compiled with, the registrar will enter the name of the company in the register of Companies and shall certify under his hand that the company is incorporated.

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 member of the company.

Conclusiveness of certificate of incorporation

According to section 35 of the act, the certificate of incorporation given by the registrar in respects of any association shall be conclusive evidence that all requirements of the act have been compiled with in respects of registration and matters precedent and incidental thereto, and the association is a company authorized to be registered and dully registered under the act.

Contd
Moosa v. Ibrahim ILR [1930] 40 cal. 1 (PC)
The memorandum of association of a company was signed by the two adults and by a guardian of other five members, who were minors. The registrar, however, registered the company and issued under his hand a certificate of incorporation. The court held the certificate to be conclusive for all the purposes. Lord Macnaughten observed: their lordships will assume that the condition of registration prescribed by the Indian companies act were not duly compiled with;

Jubilee Cotton Mills Ltd. V. Lewis [1924] A.C. 1958

The registrar issued a certificate of incorporation on January 8, but dated it January 6th, which was the date he received the documents. On January 6, the company made an allotment of shares of Lewis. Held, that the certificate was conclusive evidence of incorporation on January 6 and that the allotment was not the void on the ground that it was made before the company was incorporated.

Provisional contracts
Contracts which are entered into by a public company after obtaining the certificate of incorporation but before getting the certificate to commence business are known as provisional contracts [section 149(4)].

Such contracts are so called because they are provisional only and are not binding on the company until the company is entitles to commence business and on the date they shall become binding, without any need for ratification [section 149(4)].

A company can do only such acts as, by its memorandum, it is expressly or impliedly authorized to do. Any transaction which is not so authorized is ultra vires (beyond the power) and is null and void ab inito. Neither the company nor the other party to the contract can enforce it

Flotation/Raising of capital
When a public company has been registered and has received its certificate of incorporation, it is ready for flotation, that is to say, it can go ahead with raising
A private company is prohibited from inviting public to subscribe to its share capital. In the case of public company also, the promoters may not invite public to subscribe to its share capital and may arrange the capital privately as in the case of the private company. In such a case, the intention of the promoters is to take advantages of incorporation not available to a private company, for instance, to have unlimited numbers of members, to confer unrestricted right to transfer share on the members, etc.

AN EFFORT BY:

1. KANIKA SHARMA 2. DIPALI BAMZAI 3. AVINASH KR. SINGH 4. SUDHANSHU AGRAWAL 5. HARSH KAPADIA