Professional Documents
Culture Documents
FORMATION OF COMPANY
MEANING OF COMPANY
According to Section 2(20) of the Companies Act, 2013, “company means a company
incorporated under this Act or under any previous company law”.
Company is a voluntary association of persons formed for the purpose of doing business,
having a distinct name and limited liability
DEFINITION
According to Justice Lord Lindley, “associations of many persons who contribute money of
money’s worth to a common stock and invest in some trade and business and who share
profit and loss arising therefore”.
1. Incorporated Association
A company comes into existence on incorporation or registration under the Companies
Act.
A Joint Stock Company may be incorporated either as a private or a public company.
For the purpose of incorporation,
Min. no. of persons is SEVEN in case of public company
Min. no. of persons is TWO in case of private company
An association of 10 persons in case of banking business
If not registered as a company under any law, it becomes an illegal association.
2. Separate Legal Entity
Independent corporate existence
A company formed and registered under the Companies Act is a distinct legal entity
CASE : Saloman Vs. Saloman and Co. Ltd (1897)
Lee and Company
3. Limited Liability
Limited liability means “you have to pay as much as you have agreed to pay”
Unlimited liability means “you have to pay as much as you owe”
A company itself is fully liable to pay its debts so long as there are assets available to pay
the debts
4. Separate Property
A company is capable of owning, enjoying and disposing of property in its own name.
Company is a legal person
The property of the company will not be considered as the joint property of the members
constituting the company although the assets and capital of the company are contributed
by members
A member does not even have an insurable interest in the property of the company -
benefit
CASE : Macura Vs. Northern Assurance Co. Ltd
5. Perpetual Succession
The death or insolvency of a member does not affect the corporate existence of the
company
6. Transferability of shares
Under Section 56 of the companies Act, 2013, the shares of a company are freely
transferable and can be sold or purchased in the share market
7. Common seal
As a company is an artificial person, it cannot sign its name on a contract. So it functions
with the help of a seal
Common seal is used as a substitute for its signature
KINDS OF COMPANIES
1. Chartered Company
It a company is incorporated under a special monarch. It is called a chartered company. For
ex: East Indian company, the chartered bank of Australia, China and India were Incorporated
by the grant of a special royal charter. These companies are not there in India at present
2. Statutory Company
A company which is created by a special act of the legislature is called a statutory company.
The state bank of India, industrial finance corporation, life Insurance, corporation of India etc
are the examples of this kind.
3. Registered Company
A company brought into existence by registration with the Registrar of the companies under
the companies act of 1956 is called registered company.
2. Public Company
Public Company is a company which requires atleast 7 members to form and there is
maximum limit. It can invite the public to subscribe its shares and debentures and it does
not restrict the transfer of its shares from one shareholder to another.
3. Unlimited company
The companies in which the liability of the members is unlimited is called unlimited
company.
In these companies, each member gives a guarantee for the debts of a company upto a
certain extent. Ex: Trade associations, clubs and societies which formed to promote social
and cultural Activities.
In these companies, liability being limited by shares, The member is called upon to pay
only the unpaid amount on the shares held by him.
4. Government company
A company in which not less than 51% of share capital is held By the central government
and or any state government or governments is called a Government company. For Ex:
Hindustan Aeronautics Limited (HAL), Indian Telephone Industries (ITI),Bharath
Electronics Limited (BEL).
5. Foreign Company
A foreign company is that company which is incorporated in a Foreign country, but which
has established a place of business in India. Under section 592 of companies act, every
foreign company must, within 30 days of the Establishment of the business field with the
registrar the following documents.
A company which has control over another Company is called holding company in other
words, a company which holds more than 50% of the share capital in other company is called
a holding company. A company which is controlled by other company is called a subsidiaries
company.
Ex: Company A has 60% of share capital in Company B Here, Company A is called a
Holding company and Company B is called a subsidiary Company.
It refers to a company, in which only one person holds the Entire share capital, but in order to
meet the statutory requirements of minimum number Of members, some of dummy members
mostly his relatives, friends, hold one or two Shares each.
2. End words of the name 2. It uses the word private 2. It uses the word limited in his name
limited in its name.
4. Prospectus 4. It is not required to file 4. It must file the prospectus with the
prospectus with registrar of registrar of the company.
the company.
6. MOA / AOA 6. Atleast 2 members must 6. Atleast 7 members must sign MOA &
sign memorandum of AOA.
association and articles of
association
7. Public issue of capital 7. It is prohibited from 7. It can invite public to subscribe capital.
inviting public to subscribe
capital
8. Transfer of Shares. 8. No shares are transferable 8. Shares are freely transferable an they
and cannot be quoted in the can be quoted on stock exchange.
stock exchange.
10. Minimum capital 10. It requires atleast Rs. 5 10. It requires atleast Rs. 1 lakh.
requirement. lakhs.
11. Statutory meeting 11. It doesn’t require to hold 11. It must hold statutory meeting and file
statutory meeting. a statutory report with registrar of
company within 6 months from the date of
obtainment of business commencement
certificate.
12. Share warrant 12. It cannot issue share 12. It can issue share warrant.
warrant
13. Quorum. 13. Minimum 2 members 13. Minimum 5 members must be present
must be present to conduct to conduct the meeting.
meeting.
A Private Company can be converted into Public Company by altering its articles of Association
and passing special resolutions and by deleting those provisions relating to-
a) restriction of transfer of shares.
b) the limitations of the maximum membership
c) prohibition of invitation to the public for subscribing to it shares.
Duties of a secretary while converting the Private Company into a public company.
a) To arrange a board meeting in consultation with directors and finalize the plan of
Conversion and all general meeting for passing resolution for the conversion of the
Company.
c) To issue notices and circulars of the extra-ordinary general meeting as per the decision Of
the board.
g) To get from the registrar a new certificate of in corporation, the changed name.
h) To take steps to raise additional capital from the public if needed for the further
Expansion of business.
As per the Company’s amendment Act 1960, the conversion of public company into Private
company requires the approval of the central government. The public Company should put the
proposal before the central government regarding the Conversion of public company into private
company ltd. The central government After scrutinizing (Verifying) the proposal, they permit the
conversion into a private Company. Only if it is in the interest of the company.
Duties of the Secretary and the steps for the conversion of public company into private Company
ltd.
a) To arrange board meeting with the board of directors for calling an extra-ordinary
General meeting.
c) To get the special resolution passed at the extra-ordinary general meeting, regarding The
conversion of public into private company.
d) To file with the registrar, copies of special resolution within 30 days of the date of
Resolutions.
e) To apply to the central government with necessary documents for the approval of
Concern.
f) To publish about the conversion in leading newspapers and the newspaper clippings to
Be sent to government.
g) After obtaining the approval of the central government to file with the registrar within
one month of proposal.
FORMATION OF A COMPANY
In the formation of a public limited company mainly four stages are involved
Promotion
Incorporation
Capital Subscription
Promotion is the process of organising and planning the finances of a business enterprise
under the corporate form.
It is the taking of such steps that would persuade a number of persons to come together
for the achievement of a common objective through the company form of organisation
The persons who undertake the task of promotion are called promoters
PROMOTER
a) Who has been named as such in the prospectus or is identified by the company in the
annual return referred to in section 92 or
b) Who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise or
Promoter is a person who brings a company into existence. A company may have several
promoters. A promoter may be an individual, a firm or a corporate body. One existing company
can promote another new company. Everyone who is connected with the formation of a company
may not be a promoter – i.e., one who acts in professional capacity is not a promoter in the eye
of the law (CAs, Experts, Engineers, Solicitors, accountants, valuers etc.
1. DISCOVERY OF IDEA
A promoter analyses the amount of capital required & the degree of risk involved
2. DETAILED INVESTIGATION
3. ASSEMBLING OF RESOURCES
Promoter makes contracts for purchase of material, land, machinery, recruitment of staff
etc.
Preparing documents like MOA, AOA and Prospectus and filing it in the ROC
Promoter signs a contract with different parties before the incorporation of the company.
Generally, company approves these contracts after incorporation but in case it does not
approve, then promoter is personally liable for these contracts.
6. NAMING OF A COMPANY
Solicitors are appointed to deal with the legal matters of the company
RIGHTS OF A PROMOTER
3. Right to remuneration.
TYPES OF PROMOTERS
Professional Promoters
Financial Promoters
Technical Promoters
Entrepreneurial promoters
Specialized Institutions
Government
STAGE 2 : INCORPORATION
After taking all preliminary steps of for registration an application along with the necessary
documents stamp duty, registration fees etc. has to be made to the registrar for the issue of
certificate of incorporation. After scrutinisation of the document, if the registrar is satisfied he
will issue a certificate of incorporation.
No repeated names
b) FILING OF DOCUMENTS
An undertaking by directions to take and to pay for any qualification shares. This is
not required for private company.
In case of private co. capital is raised from members or through arrangement from bank
In case of public limited company, the share capital is raised from public which will
include the following:
To commence the business the business commencement certificate is required. To obtain this
the following conditions must be filled.
1. A prospectus or a statement in lieu of prospectus has to be filed with the registrar of the
company
2. The number of shares allotted should not be less than the minimum subscription as
mentioned in the prospectus.
3. If the directors have taken up and paid for any qualification shares, the amount paid on such
shares should not be less than the amount paid by other member.
4. A declaration is that no money is refundable to the applicants of shares if they fail to make
full payment of shares.
5. A declaration of compliance by one of the directors or secretary that shares have been
allotted for the amount not less the minimum subscription and also that all the conditions
regarding the commencement of business have been complied with.
6. The registrar after receiving the declaration of compliance with the provisions of section 149
from the secretary or one of the directors along with required filing fee, will scrutinize the
declaration and if satisfied will issue a certificate to commence the business. From the date of
this certificate, the company is entitled to commence its business.
2. To help the promoters in drawing up the financial plan for the approval of the business.
3. To attend all preliminary meetings of promoters and keep a record of proceedings of their
meetings.
4. To get the approval from the registrar for the proposed name of the business.
8. To send a notice of the registered office of the company to the registrar within the 30
days of the date of registration.
MEMORANDUM OF ASSOCIATION
It is the principal document in the formation of a company and is also called charter of the
company. It contains fundamental conditions upon which the company is allowed to be
incorporated or registered. It defines the relationship of the company with the outside world
1. Name Clause:
This clause contains the name of the company. The name selected should not be similar
to that of the existing company. The name of the company must be approved by the
central govt. The name of the Public company must have limited and private company
must have private ltd. If company is formed not with the object of declaring dividend, but
to promote culture, art etc. The central government may permit the company to drop the
word limited.
In this clause the name of the state in which the registered office of the company is
situated is mentioned. This clause fixes the jurisdiction (limit) of the court for all the legal
matters and that of the registrar of the company for the company manners.
3. Object Clause:
This clause defines the object for which the company is formed. The object should be
legal and must not be inconsistent with the companies act. The object must not be the
general. A company is not legally allowed to carry any business other than specified in
this clause.
4. Liability Clause:
This clause states that the liability of members is limited to the face value of the shares up
by them. If a members has already paid some amount on shares, he can called upon to
pay only the unpaid amount on shares.
5. Capital Clause:
In this clause, particulars regarding the amount of share capital with which the company
is proposed to be registered and the division of share capital into a fixed amount are
included.
The subscribes to the memorandum will give a declaration to this clause and express the
desire to purchase a number of shares mentioned against the respective names.
Name of the company gives a distinctive identity to the company. But there are situations
which may warrant the company to change its name (Voluntary or compulsory)
File with ROC a copy of the special resolution and also a copy of the central
government’s approval
Change of name shall not be allowed to a company if it has defaulted in filing its annual returns
or its financial statements or defaulted in repaying its depositors or debenture holders
Procedure for Compulsory change:
The name of the company is found to have been registered with a name that is identified with or
too closely resembles any other company or when the registered proprietor of a trademark lodges
a complaint to that effect and it is found to be so, the central government may issue an order
directing the company to change its name and this should be done within 3 months
ii. Change from one city to another within the same state and Jurisdiction (Section 12)
d. Form No. MGT 14 shall be filed to ROC within 30 days of passing the special
resolution
iii. Change within the same state but other jurisdiction or local limits 9i.e., from one
ROC to another ROC)
a. Approval of shareholders through a special resolution
b. Company shall publish a notice in dailies (at least 1 English and 1 vernacular
newspaper) and serve individual notice to each debenture holder and creditor of the
company indicating the matter of application and stating that any person whose
interest is likely to be affected and stating that any person whose interest is likely to
be affected by the proposed alteration may intimate his nature of interest and grounds
of opposition to the Regional Director with a copy to the company within 21 days. If
no objection is received within the said period, the person concerned shall be deemed
to have given his consent to the change.
This provision is applicable only in those states where there are more than one ROC. At present,
two states have two ROCs
c. A certified copy of the order of the CG and altered copy of MOA should be filed
within such time and such manner as may be prescribed
d. The ROC of the state where the new registered office is being shifted to, shall issue
fresh certificates of incorporation indicating the alteration
g. Other requirements:
Advertise the application in at least one vernacular daily and one English daily
in the district
h. Shifted of registered Office shall not be allowed for a company if any inquiry,
inspection or investigation is initiated against the company or any prosecution is
pending against the company under the Act.
3. CHANGE IN OBJECTS
Filing the copy of the resolution along with altered MOA with the ROC
The effective date of alteration of objects clause is the date when the ROC registers the
alteration
Alteration of objects of a company which has raised money from the public through
prospectus and still has unutilized amount out of the money so raised, cannot change its
objects for which the money was raised through prospectus unless the following conditions
are fulfilled:
Details of such resolution have been published in the newspaper (at least in 1 English and
1 vernacular newspaper) and shall b placed in the company’s website (if any) indicating
therein justification for the change.
4. ALTERATION OF LIABILITY
However, section 18 permits a company of any class registered under this Act to convert
itself in some other class of company by altering its MOA & AOA
By using these provisions, if an unlimited company gets converted into limited company
or vice-versa, the liability of the members will be changed and thereby leading to
alteration of liability clause of MOA.
This can be done by passing a special resolution and informing the ROC.
5. ALTERATION OF CAPITAL CLAUSE
Section 61 of the Act provides that a limited company having a share capital may, by passing an
ordinary resolution in a general meeting alter the capital clause of its memorandum; provided
authority to alter is given to it by its AOA. An alteration is required to be filed with the ROC in
Form No. SH – 7 within 30 days.
Section 61(1) provides that the Capital Clause can be altered in any of the following ways:
By increasing its authorized share capital by such amount as the company requires
By cancelling shares which have been taken up or agreed to be taken up and diminishing
the amount of its share capital by the amount of shares cancelled.
The articles are the internal regulation of the company on the basis of which its internal affairs
are managed. They lay down the powers of directors, share holders and officers.
According to section 5(1), the articles of a company shall contain the regulations for
management of the company. The articles of association of a company are its bye-laws or rules
and regulations that govern the management of its internal affairs and conduct of its business.
Calls on shares
Lien on shares
Nomination
Forfeiture of shares
Alteration of capital
Buy back
Share certificates
Borrowing powers
Winding up
To arrange board meeting for the alteration of articles and also to fix up the date, time and
place of extra-ordinary general meeting.
To see that the alterations don’t violate the provisions of company law.
To issue notice of general meeting to the members 21 days before the meeting
To get the resolution passed at the extra-ordinary general meeting.
To file an altered printed copy of articles of association to the registrar within 3 months of
resolution.
MOA AOA
It is a character which sets out the It is the Bye-law of the company for
constitution of a company internal administration
It states the objects for which the company It states the rules for carrying out the
is formed business
If defines limits and powers of company It defines rights and duties of directors,
members etc.
Features of Prospectus
There must be an invitation to the public; An offer is not to be treated as invitation to public
if it is
The invitation must be made “by or on behalf of the company or in relation to an intended
company”
Objects of Prospectus
Declaration about the issue of allotment letters and refunds within the prescribed time
Statement by the BODs about the separate bank account where all money received out of
the issue are to be transferred and disclosure of details of all money including utilised and
unutilised money out of the previous issue in the prescribed manner.
Contents of the directors, auditors, bankers to the issue, expert’s opinion, if any, and of
such other persons, as may be prescribed
The authority for the issue and the details of the resolution passed there for
Main objects of public offer, terms of the present issue and such other particulars as may
be prescribed
Main objects and present business of the company and its location, schedule of
implementation of the project
Particulars relating to management perception of risk factors, gestation period, extent of
progress, deadlines for completion of project, legal action pending or taken by a
government, department or a statutory body during the last 5 years preceding the year of
the issue of Prospectus
Details of directors including their appointments and remuneration, and such particulars
of nature and extent of their interests in the company as may be prescribed
contribution
The Statement in Lieu of Prospectus is a document filed with the Registrar of the Companies
(ROC) when the company has not issued prospectus the public for inviting them to subscribe for
shares
Statement in Lieu of Prospectus is similar to actual Prospectus but without the invitation
to the public for subscribing to the shares of the company.
The statement in lieu of Prospectus is prepared for the purpose of record and it is filed
with ROC before allotment of share
The prospectus contains a summary of the past and present prospects of the company
The prospectus expressly invites the public to buy shares issued by the company
It is the basis of share issue. The contents of prospectus are considered legal evidence in
the event of dispute between share holder and the company
1. Civil Liability,
2. Criminal Liability, and
3. Liability under the Law of Contract.
1. Civil Liability
An aggrieved shareholder who purchased shares by placing reliance on the misleading
prospectus has
b. Remedies against the Promoters, Directors, Experts, and Persons authorized the issue of
the Prospectus
2. Criminal Liability
1. If a prospectus contains any untrue statement, every person who authorized the issue are
punishable with fine up to Rs.50,000 or with imprisonment up to 2 years or with both.
2. Anyone who fraudulently (knowingly) makes any misstatement in the prospectus to induce
persons to invest money in the company is punishable with imprisonment up to 5 years or with
fine up to Rs.1,00,000 or with both.
3. Liability under General Law of Contract
Under the general law, the aggrieved shareholder can recover damages from all or any of the
persons responsible for the issue of the prospectus. The necessary thing is to prove that there is a
fraudulent misstatement or non-disclosure.