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UNIT 2 Company LAW

Company Law (Karnataka State Law University)

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UNIT 2 COMPANY LAW

PROCEDURE OF INCORPORATION

Incorporation of a Company under Companies Act, 2013 the basic procedure for
Incorporation of a Company under Companies Act, 2013:

1. Obtain Digital Signatures

Nowadays various document prescribed under the Companies Act, 2013, are required to be
filed with the digital signature of the Managing Director or Director or Manager or Secretary
of the Company, therefore, it is compulsorily required to Obtain a Digital Signature
Certificate from authorized DSC issuing authority for at least one director to sign the E-forms
related to incorporate like form INC.1 and other documents.

2. Obtain Director Identification Number [Section 153]

As per 153 of the Companies Act, 2013, every individual intending to be appointed as
director of a company shall make an application for allotment of Director Identification
Number in form DIR.3 to the Central Government in such form and manner and along with
such fees as may be prescribed.

Therefore, before submission of e-Form INC.1 for availability of name, all the directors of
the proposed company must ensure that they are having DIN and if they are not having DIN,
it should be first obtained.

3. Name availability for proposed company

As per section 4(4) read with Rule-9 of Companies (Incorporation) Rules, 2014,application
for the reservation/availability of name shall be in Form no. INC.1 along with prescribed fee
of Rs. 1,000/-. In selection of Company name should be in accordance with name guidelines
given in Rule-8 of Companies (Incorporation) Rules, 2014.

Note: MCA has prescribed certain rules for name availability so it is advisable to check
guidelines for the same before applying for name. Refer Rule-8 of Companies
(Incorporation) Rules, 2014.

After approval of name ROC will issue a Name availability letter w.r.t. approval for
availability of name for a proposed company.

Validity of Name approved by ROC: As per section 4(5), maximum time for which name
will be available has been prescribed in the law itself under section 4(5). The name will be
valid for a period of 60 Days from the date on which the application for Reservation was
made.

Note: The applicant cannot start business or enter into any agreement, contract, etc. in the
name of the proposed company until and unless a certificate of registration is issued by the

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registrar of companies as per the provisions of the Companies Act, 2013 and the rules made
there under.

4. Preparation of the Memorandum of Association (MOA) and Articles of Association

(AOA)

Drafting of the MOA and AOA is generally a step subsequent to the availability of name
made by the Registrar. It should be noted that the main objects should match with the objects
shown in e-Form INC.1. These two documents are basically the charter and internal rules and
regulations of the company. Therefore, it must be drafted with utmost care and with the
advice of the experts and the other object clause should be drafted in a very broader sense.

As per section 4(6) the memorandum of a company shall be in respective forms specified
in Tables A, B, C, D and E in Schedule I as may be applicable to such company.

As per section 5(6) the articles of a company shall be in respective forms specified in Tables
F, G, H, I and J in Schedule I as may be applicable to such company.

5. Application for incorporation of a private company

As per Rule-12 of Companies (Incorporation) Rules, 2014, application for incorporation of a

private and Public company, with the Registrar, within whose jurisdiction the registered
office of the company is proposed to be situated, shall be filed in Form no. INC 7 [Rule 12 to
18] along with Form no. INC.22 for situation of registered office of the Company, (as the
case selected in form no. INC 7) and DIR -12 with the following attachments:

Form no. INC 7 Attachments: (Read with Section 7 of Companies Act, 2013)

i. Memorandum of Association as per Table A of schedule I

ii. Articles of association as per Table F of Schedule I

iii. Declaration in Form No. INC-8 by Professionals. (As per Rule-14 of Companies
(Incorporation) Rules, 2014, A declaration in the prescribed form by an advocate, a CA,
CMA or CS 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 there under in respect of registration and matters
precedent or incidental thereto have been complied with;)

iv. Affidavit from each of the subscriber to the Memorandum in Form No. INC-9 as perRule-
15 of Companies (Incorporation) Rules, 2014, (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;)

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v. Proof of residential address (the address for correspondence till its registered office is
established;)

vi. For verification of signature of subscribers [Pursuant to rule 16 (1)(q) of companies

(Incorporation) Rules, 2014 in form no. INC – 10

vii. NOC in case there is change in the promoters (first subscribers to Memorandum of
Association)

viii. Proof of Identity (the particulars of name, including surname or family name, residential
address, nationality and such other particulars of every subscriber to the memorandum and
the particulars of the persons mentioned in the articles as the first directors of the company
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;)

ix . Entrenched Articles of Association, if any.

Note: Where the articles contain the provisions for entrenchment, the company shall give
notice to the Registrar of such provisions in Form No. INC.7, as the case may be, along with
the fee as provided in the Companies (Registration offices and fees) Rules, 2014 at the time
of incorporation of the company.

x. PAN Card (in case of Indian national)

xi. Copy of certificate of incorporation of the foreign body corporate and proof of registered
office address

xii. Certified true copy of board resolution/consent by all the partners authorizing to subscribe
to MOA

xiii. Optional attachment, if any

xiv. Form no. DIR.12:

As per Rule-17 of Companies (Incorporation) Rules, 2014, the particulars of each person
mentioned in the articles as first director of the company and his interest in other firms or
bodies corporate along with his consent to act as director of the company shall be filed in
Form No.DIR-12 along with the fee as provided in the Companies (Registration offices and
fees) Rules, 2014. Along with the above details in the Form no.INC.7, Form no.DIR 12 to be
filed with the following attachments:

Attachments:

1. Declaration by first director in Form INC-9 is mandatory to attach in case of a new

company.

2. Declaration of the appointee Director, in Form DIR-2;

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3. Interest in other entities of director it is mandatory to attach in case number of entities

entered is more than one.

4. Optional attachment(s), if any

xv. Form no. INC 22:

As per Rule 25 of Companies (Incorporation) Rules, 2014, verification of registered office

shall be filed in Form No.INC.22 along with the fee.

Section 12(2) of the Companies Act, 2013 states that the Company shall furnish to the
Registrar verification of its registered office within a period of thirty days of its incorporation
in such manner as may be prescribed.

Section 12(4) of the Companies Act, 2013 states that Notice of every change of the situation
of the registered office, verified in the manner prescribed, after the date of incorporation of
the company, shall be given to the Registrar within fifteen days of the change, who shall
record the same.

Along with the above details in Form No. INC.7, Form no.DIR.22 to be filed with the
following attachments:

Attachments:

1. Proof of Registered Office address (Conveyance/Lease deed/Rent Agreement along

with the rent receipts) etc.; or

(the notarized copy of lease / rent agreement in the name of the company along with a copy
of rent paid receipt not older than one month; or the authorization from the owner or
authorized occupant of the premises along with proof of ownership or occupancy
authorization, to use the premises by the company as its registered office); and

1. Copies of the utility bills as mentioned above (not older than two months) (the proof
of evidence of any utility service like telephone, gas, electricity, etc. depicting the
address of the premises in the name of the owner or document, as the case may be,
which is not older than two months)

2. List of all the companies (specifying their CIN) having the same registered office
address, if any;

3. Optional attachment, if any

PURPOSE OF THE E-FORM 7

From above we can easily understand that lots of Information is to be arranged for
Incorporation of a Company under Companies Act, 2013. So it is also important to
understand the purpose of E-Form INC-7.

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E-Form INC-7deals with incorporation of a new company (other than OPC). This E-Form is
accompanied by supporting documents such as details of Directors/subscribers, the
Memorandum of Association (MoA) and Articles of Association (AoA) and evidence of
payment of stamp duty. Once the E-Form is processed and found complete, a company is
registered and CIN is allocated.

Please note the following:

1. User is required to file E-Form INC-7 for incorporation of Company other than OPC
within sixty days from the date of application of reservation of name in E-Form INC-
1.

2. It is suggested that E-Form DIR-12 and E-Form INC-22 should be filed together at
the time of filing of E-Form INC-7 when address for correspondence is the address of
registered office of the company.

3. In case the address for correspondence is not the address of the registered office of the
Company, user is required to file INC-22 within 30 days of its incorporation.

4. Stamp duty on E-Form INC-7, Memorandum of Association (MoA) and Articles of

Association (AoA) can be paid electronically through the MCA portal and in such
case submission of physical copies of the uploaded E-Form INC-7, MoA and AoA to
the office of ROC is not required.

5. Payment of stamp duty electronically through MCA portal is mandatory in respect of

the States which have authorized the Central Government to collect stamp duty on
their behalf.

6. Now eStamp duty payment is to be done online through MCA portal for all the states.

7. User is required to scan the photograph of every subscriber with MOA and AOA.

DUTY OF REGISTRAR TO SCRUTINISE THE DOCUMENTS

If after filling the Requisite forms for incorporation with the Registrar of Companies along
with fees, ROC is satisfied with the contents of the documents filed, ROC will issue the
Certificate of incorporation in Form no.INC 11 as directed by Rule-18 of Companies
(Incorporation) Rules, 2014.

Declaration at the time of commencement of business

As per Rule-24 of Companies (Incorporation) Rules, 2014, the declaration filed by a director
shall be in Form No. INC.21 along with the fee as and the contents of the form shall be
verified by a Company Secretary in practice or a Chartered Accountant or a Cost Accountant
in practice:

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Provided that in the case of a company requiring registration from sectoral regulators such as
Reserve Bank of India, Securities and Exchange Board of India etc, the approval from such
regulator shall be required.

Pursuant to Section 11(1)(a) of the Companies Act, 2013 and Rule 24 of the Companies
(Incorporation ) Rules, 2014, Declaration prior to the commencement of business or
exercising borrowing powers in Form No. INC.21 along with the following attachments:

a. Specimen signature in form INC.10.

b. Certificate of Registration issued by the RBI (Only in case of Non-Banking Financial

Companies)/ from other regulators

c. (Optional attachment(s) (if any)

Additional Information:

As per Rule-16(1) of Companies (Incorporation) Rules, 2014, Particulars of every subscriber

to be filed with the Registrar at the time of incorporation:

a. Name (including surname or family name) and recent Photograph affixed and scan with
MOA and AOA,

b. Father’s/Mother’s/ name,

c. Nationality,

d. Date of Birth:

e.cPlace of Birth (District and State):

f. Educational qualification:

g. Occupation:

h. Income-tax permanent account number:

i. Permanent residential address and also Present address (Time since residing at present
address and address of previous residence address (es) if stay of present address is less 24
than one year) similarly the office/business addresses.

j. E-mail id of Subscriber;

k. Phone No. of Subscriber;

l. Fax no. of Subscriber (optional)

Explanation.- information related to (i) to (l)shall be of the individual subscriber and not of
the professional engaged in the incorporation of the company;

m. Proof of Identity:

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For Indian Nationals:

 PAN Card (mandatory) and any one of the following

 Voter’s identity card

 Passport copy

 Driving License copy

 Unique Identification Number (UIN)

For Foreign nationals and Non Resident Indians

 Passport

n. Residential proof such as Bank Statement, Electricity Bill, Telephone / Mobile Bill:

Provided that Bank statement Electricity bill, Telephone or Mobile bill shall not be more than
two months old.

o. Proof of nationality in case the subscriber is a foreign national.

p. If the subscriber is already a Director or Promoter of a Company(s), the particulars relating

to:

1. Name of Company

2. Corporate Identity Number

3. Whether Interested as a Director or Promoter

q. the specimen signature and latest photograph duly verified by the banker or notary shall be
in the prescribed Form No. INC.10.

Disclaimer: This write up is intended to start academic discussion on few significant

interpretations under Companies Act, 2013. It is not intended to be a professional advice and
should not be relied upon for real time professional facts. Readers are advised to refer
relevant provision of law before applying or accepting any of the point mentioned above.
Author accepts no responsibility whatsoever and will not be liable for any losses, claims or
damages which may arise because of the contents of this write up.

CERTIFICATE OF INCORPORATION

As per the companies act, 2013, certificate of incorporation is not conclusive proof of
everything prior to incorporation being in order Sub section (5) (6) and (7) of section 7 make
furnishing of any false or incorrect particulars of any information or suppression of any
material information or suppression of any material information punishable with a
minimum of six month imprisonment which may extend up to 10years and also fine which
shall not be less than amount involved in the fraud but which may extend to three times

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the amount involved in the fraud. Besides the aforesaid penalty, the tribunal may, on a
application made to it, and on being satisfied that the situation so warrants,-(a)Pass such
orders, as it may think fit, for regulation of the management of the company including
changes, if any, in its memorandum and articles, in public interest or in the interest or in
the interest of the company and its members and creditors; or(b)Direct that liability of the
members shall be unlimited; or(c)Direct removal of the name of the company from the
register of companies; or(d)Pass an order for the winding up of the company; or(e)Pass such
other orders as it may deem fit However, before making any order, as aforesaid,-1.The
company shall be given a reasonable opportunity of being heard in the matter; and 2.The
tribunal shall take into consideration the transaction entered into by the
company,including the obligations, if any, contracted or payment of any liabilityYou should
also note that the certificate of incorporation is not the conclusive proof with respect to
the legality of the object of the company mentioned in the objects clause of the
memorandum of association. As such, if a company has been registered whose objects are
illegal, the incorporation does not validate the illegal objects.In such case the remedy
available is to wind up the company

Sections 34 and 35 of the Companies, Act, 1956 provided for the

conclusiveness of the Certificate of Incorporation. But this concept seems to have lost its
efficacy because Section 7(7) of the new Companies Act, 2013 empowers the Tribunal to
pass an order for the winding up of the company or remove the name of the company
from the Register of Companies. The Tribunal can take such an action when it is proved
that the company had been 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 incorporation or by any fraudulent action.
However, before making any order, the Tribunal shall give the company a reasonable
opportunity of being heard. Thus, as per section 7 (7) of the Companies Act, 2013,the
Certificate of Incorporation is no more conclusive.

 Certificate of Incorporation Under Companies Act 2013

 Certificate of Incorporation Under Companies Act 2013, Companies act India,
Certificate of Incorporation under companies acts
 Sections 34 and 35 of the Companies, Act, 1956,Certificate of
Incorporation Under Companies Act 2013

According to Section 2(56) of the Companies Act 2013, the “Memorandum” refers to the
memorandum of the company as drawn up initially during the formation of the company or
as changed periodically to carry out any action as per any other law of the Act.

Memorandum of Association is a document of prime importance for a company. It depicts

the objectives, extent of authority, competency, liabilities and legal rights of the company.
The memorandum acts as a legal code or constitution for a company and regulates the
relationships between the company and its shareholders, investors, beneficiaries and other
members.
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A memorandum of association allows people like the shareholders, creditors, investors and
other members of a company to know the purpose for which a company has been formed. It
allows them to know the range of activities that the company is permitted to be involved in
and authorises them to learn about the company’s objectives.

The memorandum of association also curbs the company’s flexibility by preventing it from
getting involved in any kind of activities other than the ones mentioned in the memorandum
while the company is in its initial stages of formation.

Some definitions and purpose of the Memorandum of Association as observed by judges such
as Lord Cairns, Lord Macmillan, Lord Selborne and Charles Worth in historical cases
can be accessed here.

Contents of Memorandum of Association

Under Section 4 of the Companies Act 2013, a Memorandum of Association should comprise
of the following clauses as discussed below:

 Name Clause: It is mandatory to mention the name of the company while drafting the
Memorandum of Association. A company may select any name that it prefers but it
should not be identical to an existing company. The chosen name of the company as it
appears in the Memorandum of Association should be exactly the same as the one
approved by the Registrar of Companies. A Public Limited Company should end with
the word “Limited” and likewise, a Private Limited Company should end with the
words “Private Limited”.

A company should restrain from using words like “King, Queen, Emperor,
Government Bodies and names of World Bodies like U.N.O., W.H.O., World Bank
etc”. In order not to mislead the public a company must not use a name which is
prohibited under the Emblems and Names (Prevention of Improper Use) Act of
1950. A company is restricted from using any name which may connect it to the
government of the state, without obtaining prior permission from the government.

 Situation Clause: The Memorandum of Association of a company must contain the

name of the state where the company operates and the jurisdiction of the Registrar of
Company must be specified. It is mandatory for the company to have the registered
office within 15 working days. Likewise, the verification of the registered office must
be completed in 30 days. This procedure is done to fix the domicile of the company
which may or may not be the place where the company is operating.

In the event of a change in location of the registered office the memorandum needs to
be altered, the procedure for the same is mentioned below.

 Object Clause: The objective for which the company is formed must be mentioned in
the Memorandum of Association. It is one of the key clauses and should be drafted
carefully mentioning all the types of businesses that the company may possibly
engage in the future. A company is legally prohibited from carrying out any activity

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that is not specified in the object clause. The objects are classified as ‘Main Objects’,
‘Ancillary Objects’ and ‘Other Objects’. The objects must be stated articulately and
must not be ambiguous in nature. The objects must not also be illegal or against the
prohibition of the Act or the public policy of the country.

 Liability Clause: The liabilities of the members of the company must be clearly
stated in the Memorandum of Association. They may be limited by shares or by
guarantee. In case of unlimited liability company, the entire clause can be eliminated.

When a company is limited by shares, the liability of its members remains limited to
any unpaid amount on the shares owned by them. When it is limited by guarantee the
members of the company are liable to pay the amount stated in the memorandum at
the time of liquidation of the company. In case of unlimited companies, the liability of
the members is unlimited, involving personal assets.

 Capital Clause: The maximum amount of authorised capital that can be generated by
the members of the company is ought to be specified in the Memorandum of
Association. Stamp duty is applicable on this amount. Although there is no legal limit
to the maximum amount of capital that can be raised by a company, it cannot increase
the authorised share capital once it has been incorporated. The denomination for each
such share has to be either RS 10 or RS 100 in case of equity and preference shares
respectively. A company should make sure that the raised authorised capital is
sufficiently high for further expansion of business in the future. All other rights and
privileges, as agreed upon by shareholder, creditors, investor and other members of
the company may also be specified in this charter.

It is not mandatory for an unlimited company having an authorised share capital to

mention it in the memorandum.

 Association or Subscription Clause: The amount of authorised capital and the

number of shares owned by each member of the company should be mentioned in the
Memorandum of Association of the company. The subscribers to the memorandum
must own a minimum of one share each. Each subscriber must write the number of
shares owned by him and sign the memorandum in the presence of at least one
witness who is required to attest the signature.

Form of Memorandum

The memorandum of a company should be formulated in accordance with the respective

forms as mentioned in the tables A, B, C, D & E under Schedule 1 of the Companies Act,
2013.

 Form in Table A is applicable to companies that are limited by shares.

 Form in Table B is applicable to companies that are limited by guarantee and do not
have an authorised share capital.

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 Form in Table C is applicable to companies limited by guarantee and have an

authorised share capital.

 From is Table D is applicable to unlimited companies that do not have an authorised

share capital.

 Form in Table E is applicable to unlimited companies that have an authorised share

capital.

Printing and Signing of Memorandum of Association

It is mandatory for every company to print its Memorandum of Association and have it
signed by each of its members. The address, occupation and shares held by each member of
the company must also be mentioned in this charter.

For the formation of a Private Limited Company, a minimum of 2 members are necessary.
For a Public Company, it is 7. In case of a One Person Company, the nominee has to be
stated in the Memorandum of Association as in case of death of the founding member or his
incapacity to perform, the legal rights of the company will be transferred to him or her.

Alteration, Amendment & Change in Memorandum of Association under Companies

Act 2013

A memorandum of association needs to be amended if any of the following changes occur in

the company:

 An alteration in the name of the business.

 A change in the office of registration.

 An alteration in the object clause of the business.

 An alteration in the authorised capital of the business.

 Any adjustments made in the legal liabilities of the members of the business.

The procedures for making any amendments in the Memorandum of Association as

prescribed under Section 13 of the Companies Act 2013:

 It is advisable to conduct a board meeting to uphold the proposal to the members of

the company for consideration, by passing a special resolution.

 It is recommended to issue a notice of an Extraordinary General Meeting in which the

special resolution will be passed. The notice must mention the location, date, day and
time of the meeting and a statement specifying the objective of the meeting and the
business to the carried out in the meeting.

 As mentioned under Section 102 of the Act, an explanatory statement must

accompany the notice for the meeting.

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 As specified under Section 61 of the Act, in the event of an amendment of the

authorised share capital, approval of the members by way of an ordinary resolution is
necessary. However, for amendment of all other clauses, approval of members by
special resolution is mandatory.

 For amendment of a Memorandum of Association with the Registrar of Companies, a

company must file a special resolution which has been passed by its shareholders. In
order to register the special resolution, Form MGT 14 is required to be filed
within 30 days of passing such a motion.

 A validated copy of the special resolution, the notice and the explanatory statement of
the Extraordinary General Meeting must be attached with Form MGT 14, along with
the altered memorandum of the company.

 In the event of an alternation in the name of the company or a change in the registered
office, a copy of approval from the Central Government is necessary.

 Any such alterations and amendments made under Section 13 of the Act shall not be
in effect unless registered.

A Memorandum of Association is a document of vital importance in the incorporation of a

company. It should be drafted with utmost sincerity. To amend and alter the name of the
organisation, the office of registration, object clause, the authorised share capital of the
company and any other legal liabilities, the company is required to a follow a complicated
legal procedure as mentioned in the scope of this article. All other social responsibilities and
supporting activities and range of other related activities should also be clearly stated in the
Memorandum of Association to provide flexibility to undertake new projects as and when the
opportunities arise. Hence it is advisable to present the company’s scope of activities in a
more generic manner instead of mentioning any particular area of focus

ARTICLES OF ASSOCIATION

. Articles of Association is an important document of a Joint Stock Company. It contains the

rules and regulations or bye-laws of the company. They are related to the internal working or
management of the company. It plays a very important role in the affairs of a company. It
deals with the rights of the members of the company between themselves.

The contents of articles of association should not contradict with the Companies Act and the
MoA. If the document contains anything contrary to the Companies Act or the Memorandum
of Association, it will be inoperative. The pvt concern that are limited by shares and those
limited by guarantee and unlimited companies must have their articles of association. Public
companies may not have their articles but may adopt Model articles given in Table A of
Schedule I of Companies Act, 1956. If a public company has only some articles of its own,
for the rest, articles of Table A will be applicable.

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Articles that are profound to be registered should be printed, segmented well and sequenced
consecutively. Each subscriber to Memorandum of Association must sign the articles in the
presence of at least one witness.

Contents of Articles of Association

The articles generally deal with the following

1. Classes of shares, their values and the rights attached to each of them.

2. Calls on shares, transfer of shares, forfeiture, conversion of shares and alteration of capital.

3. Directors, their appointment, powers, duties etc.

4. Meetings and minutes, notices etc.

5. Accounts and Audit

6. Appointment of and remuneration to Auditors.

8. Dividends and Reserves

9. Procedure for winding up.

10. Borrowing powers of Board of Directors and managers etc.

11. Minimum subscription.

12. Rules regarding use and custody of common seal.

13. Rules and regulations regarding conversion of fully paid shares into stock.

14. Lien on shares.

Alteration of Articles of Association

The alteration of the Articles should not sanction anything illegal. They should be for the
benefit of the company. They should not lead to breach of contract with the third parties. The
following are the regulations regarding alteration of articles:

A company may alter its Articles with a special resolution. Due importance and care should
be given to ensure that the alteration of AoA does not conflict with the provisions of the
Memorandum of Association or the Companies Act. A copy of every special resolution
altering the Articles must be filed with the Registrar within 30 days of its passing.

1. The proposed alteration should not contravene the provisions of the Companies Act.

2. The proposed alteration should not contravene the provisions of the Memorandum of
Association.

3. The alteration should not propose anything that is illegal.

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4. The alteration should be bonafide for the benefit of the company.

5. The proposed alteration should in no way increase the liability of existing members.

6. Alteration can be made only by a special resolution.

7. Alteration can be done with retrospective effect.

8. The Court does not have any power to order alteration of the Articles of Association.

CONCEPT OF PROMOTER:

Before look upon the term ‘Promoter‘ we have to know first of all the meaning of the
term ‘Promotion’. So, the ‘Promotion’ is a term of wide import denoting the preliminary
steps taken for the purpose of registration and flotation of the company. And the persons who
assume the task of promotion are called ‘Promoters’. A promoter may be individual,
syndicate, association, partner or company. It is the Promoter who undertakes does and goes
through all the necessary & incidental requirements keeping in view the object of proposed
company in order to bringing to existence as such incorporated company.

                   Meaning:

So far as meaning of promoter is concerned, it means A person who involves in the

promotion the company. A promoter is a person who does all necessary preliminary work,
incidental to the formation or promotion of the company. To be a promoter one need not
necessarily be associated with the initial formation of the company; one who subsequently
helps to arrange floating of its capital will equally be regarded as a promoter.

                   Definition:

The expression ‘promoter’ has not been defined under the Companies Act, although the term
is used expressly in Sections 2(69), 35, 39, 40, 300, and 317 of the New Company Act,
2013. Even in English law, no general statutory definition of ‘Promoter’ is available.

As per Section 2(69) of the Act, 2013 defines the term ‘Promoter’, it means a person-

(a). who has been named as such in a prospectus or is identified by the company in the
annual return 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

(c). in accordance with whose advice, directions or instructions the Board of Directors of
the company is accustomed to act:

Provided that nothing in sub-clause (c) shall apply to a person who is acting
merely in a professional capacity;

So, in other words we can defines the expression ‘promoter’ to mean a promoter who has a
party to the preparation of prospectus or of a portion thereof containing the untrue statement,
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but does not include any person by reason of his acting in a professional capacity in procuring
the formation of the company.

Certain attempts has been made by the Judiciary to define the term ‘promoter’. Cockburn
C.J., in the case of Twycross v. Grant described a ‘Promoter’ as “one who undertakes to form
a company with reference to a given project, and to set it going, and who takes the necessary
steps to accomplish that purpose”.

In USA, securities Exchange Commission Rule 405(a) defines a promoter as a person who,
acting alone or in conjunction with other persons directly or indirectly takes the initiative in
founding or organizing the business enterprise.

                 . Types of Promoter:

“A promoter is the one who envisages an idea for setting up a particular business at a given
place and carries out a variety of formalities required for starting a business.” A promoter is
the one who envisages an idea for setting up a particular business at a given place and carries
out a variety of formalities required for starting a business. A promoter may be an individual,
a firm, an association of persons or a company.

The promoters may be professional, occasional, financial or managing promoters.

Professional promoters handover the company to the shareholders when the company starts.
Unfortunately, such promoters are very scarce in the developing countries.

They have played an important role in many countries and helped the business community to
a great extent. In U.K. Issue house, in U.S. Investment Bank and in Germany, Joint Stock
Banks have played the role of promoters very significantly.

Occasional promoters are those whose main interest is the floating of companies. They are
not in promotion work on regular basis but take up promotion of some companies and then go
to their earlier profession. For example, engineers, lawyers etc. may float some companies.

Financial promoters do the task of promoting the financial institutions. They generally take
up this work when financial environment is favorable at the time. Managing promoters
played a significant role in promoting new companies and then got their managing agency
rights.

A promoter is neither an agent nor a trustee of the company as it is a non-entity before

incorporation. Some legal cases have tried to spell out the standing of promoters.

FUNCTIONS OF PROMOTER

A promoter plays a very important role in the formation of a company. A promoter

may be an individual, an association or a company. In their capacity as promoters, they
perform the following functions in order to incorporate a company and to set it going. To
originate the scheme for formation of the company:

 Promoters are generally the first persons who conceive the idea of business.

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 They carry out the necessary investigation to find out whether the formation of a
company is possible and profitable.

 Thereafter they organize the resources to convert the idea into a reality by forming a
company; or in other words we can say that it is the promoter –

 who settles the name of the company thereby ascertain the name will be acceptable by
the registered of the office;

 who settles the content or details as to the Articles of the companies; (here, articles
implies Articles of association & Memorandum of association),

 who nominates the directors, bankers, auditors and etc.;

 who decides the place where registered office (head office) have to be situated;

 who prepare the Memorandum of Association, Prospectus and other necessary

documents and file them for incorporation.

In this sense, the promoters are the originators of the plan for the formation of a company. To
secure the cooperation of the required number of persons willing to associate themselves with
the project: The promoters, in accordance with whether they want to incorporate a private or
public company, try to secure the co-operation of persons needed to from the company.
Minimum number of members required to from a public company is seven and that for a
private company the minimum number is two. Depending upon the form chosen, the
promoters may decide upon the number of primary members.

To seek and obtain the consent of the persons willing to act as first directors of the company:
The company has a system of representative management and is managed by individuals
appointed as directors. The first directors of the company are, however, generally appointed
by the promoters. The promoters seek the consent of some individual whom they seem
appropriate so that they agree to be the first directors of the proposed company. To settle
about the name of the company: The promoters have to seek the permission of the Registrar
of companies for selecting the name of the company.

PRE-CONTRACTUAL AND POST CONTRACTUAL OBLIGATIONS WITH

RESPECT TO: STATUS, DUTIES & LIABILITIES.

Legal status of promoter is concerned it is undefined. So, legal status of promoter

has not been determined and specified by the statute. His position is incapable of being
defined. He cannot considered as an agent, an employee and trustee of the companies. The
status of the promoter is generally terminated when the board of directors has been formed
and the board starts governing the company. Chronologically, the first persons who control or
influence the company, and it they who take the necessary steps to incorporate it, to provide it
with share and loan capital and acquire the business or property which it, to provide it with
share and loan capital and acquire the business or property which it is to manage. When these

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things are done, they handover the control of the company to its directors, who are often
themselves under a different name.

                  Duties:

The early companies Acts contained no provisions regarding the liabilities or duties of
promoters, and even today legislation is largely silent on the subject, merely imposing
liability for untrue statement in listing particulars or prospectuses to which they are parties.

There are some duties or liabilities with respect to Promoter has been also provides by the
statute: The promoters have certain basic duties towards the company formed :-

 As we know that Promoters have been described to be in a fiduciary relationship (i.e.,

relationship of trust and confidence) with the company. This relationship of trust and
confidence requires the promoter to make a full disclosure of all material facts
relating to the formation of the company.He must not make any secret profit out of the
promotion of the company. Secret profit is made by entering into a transaction on his
own behalf and then sell to concerned property to the company at a profit without
making disclosure of the profit to the company or its members. The promoter can
make profits in his dealings with the company provided he discloses these profits to
the company and its members. What is not permitted is making secret profits i.e.
making profits without disclosing them to the company and its members.

 He must make full disclosure to the company of all relevant facts including to any
profit made by him in transaction with the company.

                  Liabilities of promoter:

A promoter can be compelled by the company to hand over any secret profit which he has
made without full disclosure to the company. The company can also sue for the rescission of
the contract of sale by the promoter where the promoter has not disclosed his interest therein.

A promoter is subject to the following liabilities under the various provisions of

the Companies Act:

 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.

 Under 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.
Such a person may sue the promoter for compensation for any loss or damage
sustained by him.

 Besides civil liability, the promoters are criminally liable under Section 63 for the
issue of prospectus containing untrue statements. Section 68 imposes severe penalty
on promoters who make untrue and deceptive statements in a prospectus with a view
to obtaining capital.

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 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.

 A company may proceed against a promoter on action for deceit or breach of duty
under Section 543, 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.

So, promoter is liable to the original allottee of shares for mis-statements contained in the
prospectus. It is clear that his liability does not extend to subsequent alloottees. He may also
be imprisonment for a term which may extent to 2 years or may be punished with fine up to
Rs. 50,000 for such untrue statements in the prospectus

POSITION OF PROMOTER IN INDIA IN RELATION TO COMPANY.

Position of the promoter is fiduciary concerning the company which being the promotes his
position is quasi legal. A promoter is neither a trustee nor an agent of the company which he
promotes because there is no trust or principal in existence at the time of his efforts. But
certain fiduciary duties, like an agent, have been imposed on him under the Companies Act.
As such he is said to be in & fiduciary position (a position full of trust and confidence)
towards the company and the original allottee of shares. Consequently, a promoter must make
full disclosure of the relevant facts, including any profit made.

He must not make any secret profits out of the transactions he makes on behalf of the
company. It is to be observed that it is not the profit made by the promoter which the law
forbids, but the non-disclosure of it. If full disclosure is made to an independent Board of
Directors or to the shareholders as a body (and not to a selected few), the profit is
permissible. A promoter vendor cannot evade his liability of disclosure of profits by
disclosing to a Board of Directors who is mere nominees of his own, or in his pay.

A good illustration on the point is to be found in Gluckstein   vs.   Barnes.In this case, a
syndicate of persons was formed to purchase the Olympia Company and to promote and
register a company to which the Olympia property was to be resold. At that time the Olympia
Company was in a bad shape. The syndicate first bought the debentures of the Olympia
Company at a discount. Then they brought the Company for £ 1,40,000. Out of this money,
provided by them, the debentures were repaid in full and a profit of £ 20,000 was made
thereon. They promoted a new company and sold Olympia to it for £ 1,80,000.

The profit of 40,000 was revealed in the, prospectus, but not the profit of £ 20,000. It was
held that the profit of £ 20,000 was a secret profit made by the syndicate as promoters of the
company, and they were bound to pay it to the company which was at that time in liquidation.
On behalf of the syndicate it was argued that they had in fact made a proper disclosure, but it
was turned down on the plea that disclosure made by them in the capacity of vendors to
themselves in the capacity of directors of the purchasing company was not sufficient. The
disclosure ought to be to an independent Board or to all shareholders by means of a
prospectus.

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                  . Prior to incorporation of the company:

Sometimes, contracts are made on behalf of a company even before it is duly incorporated.
But no contract can be bind a company even before it becomes capable of contracting by
incorporations. So, a pre-incorporation contract is a contract entered into by a company
before it is incorporated, which is obviously not possible. Ratification of a pre-incorporation
contract is not possible since ratification acts retrospectively. A person cannot entered into a
contract on behalf of a company before the company incorporated or born or came into
existence. However, it may be necessary to bind an outsider with a contract before the
company is incorporated. Hence, the need for pre-incorporation contract.

The true legal position in respect of pre-incorporation contracts may be discussed under the
following two heads:-

 Position before 1963 (i.e., before passing of Specific Relief Act, 1963), and

 Position since 1963.

Position before 1963:

1. A pre-incorporation contract never binds a company since a person (legal or juristic

cannot contract before his or its existence and a company before incorporation has no
legal existence. Another reason is that promoters are proverbially profuse in their
promises and if the corporation were to be bound by them, it would be subject to
many unknown, unjust and heavy obligations).

2. Even where there is a request purported to enforce such a contract, the company
cannot be found because ratification is not possible as the ostensible principal did not
exist at the time the contract was made. In re   English   and   colonial   Produce
Company case a solicitor was engaged to prepare the necessary documents and obtain
the registration of a company. He paid the registration fee and incurred the certain
expenses incidental to registration. It was held in this case that the company was not
liable or bound to pay for his services and expenses.

 The company is also not entitled to sue on a pre-incorporation contract. As it was held
in the case of Natal   land   and   Colonisation   Company   v.   Pauline   Colliery
Syndicate that the syndicate was not entitled to its claim as it was not in existence
when the contract was made and a company cannot obtain the benefit of a pre-
incorporation contract in the suit of specific performance. So, fact of this case was
that the a ‘N’ company contracted with ‘A’, the nominee of the syndicate company
which was not even incorporated, to grant a lease of certain coal mining rights for
three years. After the syndicate was registered, it claimed the contracted lease which
the company ‘N’ refused.

Position since 1963 (i.e., after passing of the specific relief Act, 1963):

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Until the passing of the Specific Relief Act, 1963, in India the promoters found it very
difficult to carry out the work of incorporation. Since contracts prior to incorporation were
void and also could not be ratified, people hesitated to either supply any goods or services for
the cause of incorporation. Promoter also felt shy of accepting personal responsibility.
The Specific Relief Act, 1963 came as a relief to the promoters.

The specific relief Act provides under the following sections:

Section 15(h) and 19(e) of the Specific Relief Act provides as follows:

1. The contract should have been entered into by the promoter for the purpose of the
company.

2. The terms of incorporation should warrant should warrant such contract.

3. The company should accept the contract after incorporation.

4. Such acceptance should be communicated to the other party to the contract.

So, preliminary contract enforced by the promoter at the prior to incorporation of the
company will be treated as contract between two individuals who are in existence. Thus, the
company do have no inherent right concerning ratification of those contract unless company
acquiring the power as to the ratification by its memorandum as the subject-matter of contract
is not contrary to the object of the company. Hence, the third party cannot sue the company,
if any breach of contract has been taken place where such contract entered prior to the
incorporation even they for the benefit of the company.

So, question is here that the what is the position of the promoter in relation to preliminary
contracts? Or in other words we can say that if the company does not execute a fresh contract
incorporation and the contract is not one warranted for the purposes of incorporation of the
company, what will be the legal position of the promoter who brings about such a contract? It
was observed in the case of Phonogram  Limited   v. Lane, that although a contract made
before a company’s incorporation cannot bind the company, it is not wholly devoid of legal
effect, even if all the persons who negotiated the contract are attempting to incorporate a Pop
group had obtained financial assistance from a recording company. He was held personally
liable to refund the amount on his project failing to materialize.

So, Promoters shall be liable to pay damages for failure to perform the promises made in the
name of company and this shall be so, even where the contract expressly provides that only
the company’s paid up capital shall be answerable for performance as it was also held in the
case of Scot. v. Lord Ebury.

                   After incorporation of the company:

After company came into existence, a company can ratify or adopt the contract, and this
would bound the company and not the promoter. under the Specific Relief Act 1963, section
15(h) and 19(e) promoter can shift his right and responsibility to the company, if it is
warranted by the terms of incorporation. If we look on the point of remuneration for promoter

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concerns, then it is clear that generally the promoter is not entitled for any kind of
remuneration, salary and in any manner. However, once the company is incorporated &
members of the company is improved then he may be compensated in terms of lump-sum
amount. Nothing is entitled to obtained as a legal right he only be compensate on the ground
of equity. If the allotment of share is taken place for promoter then automatically promoter
becomes a member of the company.

 Comparison between Indian and other country’s laws regarding promoter’s liability
for pre-incorporation contract:

Although under the English Common Law, the American law and the Indian Law recognize
the rule that promoter is personally liable for pre-incorporation contract, American Laws and
Indian laws are much more innovative and effective to solve the problem of Pre-
incorporation Contract. Whereas the English Courts still follow the principle of Kelner v.
Baxter. Although in UK, Contracts (Rights of Third Parties) Act 1999 brought some
relief, but it is not as broad as the American and Indian Laws are.

Under English Common Law, the ratification or adoption, after the incorporation, did not
release the promoter from liability of pre-incorporation contract. Whereas in American Court
recognize that if the after the incorporation company can ratify or adopt the contract, and this
would bound the company and not the promoter. Indian Law the rule of Kelner v. Baxter is
applicable but under the Specific Relief Act 1963, section 15(h) and 19(e) promoter can shift
his right and responsibility to the company, if it is warranted by the terms of incorporation.
The principle of novation of pre-incorporation contract is applicable in above three counties,
the reason behind is that, the novation replace the old contract with the new contract, so there
is not problem of non-existence of company. Now after the Contracts (Rights of Third
Parties) Act 1999, English laws may also allow company to become the part of pre-
incorporation contract, when it acquire its legal existence.[

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