CHAPTER

FORMATION OF COMPANY
4

 Promotion
 Incorporation
 Commencement
Promoter is a person who conceives the idea of starting a business, plans the
formation of a company and actually brings it into existence. He may be said
to be “the father of the company who sees the prospects of gain in a business
which he wishes to set up, and believes that he can persuade others too to

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think as he does.” A promoter is one who undertakes to form a company with
reference to a given object and who takes the necessary steps to accomplish that
purpose.1 Palmer has defined company promoter as “a person who originates a
scheme for the formation of the company, has the Memorandum and the Articles
prepared, executed and registered, and finds the first directors, settles the
terms of preliminary contracts and prospects (if any) and makes arrangements
for advertising and circulating the prospectus and placing the capital.” Thus, a
promoter discovers, formulates and assembles a business proposition and brings
about a company into existence for its development.
Sec. 2(69) of the Companies Act, 2013 defines the term promoter as a person:
(a) Who has been named as such in a 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
(c) In accordance with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act. This shall, however not
apply to a person who is acting merely in a professional capacity.
A promoter may be an individual, a family, a firm, an association of persons, a
company or even the government. It may cover any individual or company that

1. Twycross v. Grant (1877).

57
 58 FORMATION OF COMPANY

obtains a director, places shares or negotiates preliminary contracts. A promoter

need not necessarily be associated with the initial formation of the company; one
who subsequently helps to arrange the ‘floating off of its capital’ will equally be
regarded as a promoter. Persons doing acts of purely ministerial nature or in a
professional capacity for remuneration or fees are not promoters e.g., solicitors,
valuers, etc. Promoter does not include any person by reason of his acting in
a professional capacity or persons engaged in procuring the formation of the
company. A person who only advances money to promoters for meeting out
preliminary expenses is not a promoter. But a professional who brings financiers
to the company would be considered as promoter.
A person cannot be held as a promoter merely because he has signed at the
foot of the Memorandum or that he has provided money for the payment of
formation expenses.2 A signatory to the Memorandum, who has not performed
the functions of the promoter of a company, may not be liable as a promoter.

Functions of Promoter
The main functions of a promoter are as follow:
(i) To conceive an idea of starting a business and explore its possibilities.
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(ii) To undertake detailed technical, economic and commercial feasibility of

the business propositions. Help of experts may be taken for that.
(iii) To conduct negotiations for the purchase of a business in case it is
intended to purchase an existing business.
(iv) To collect the requisite number of persons i.e. 2 in the case of a private
company and 7 in the case of a public company, who can sign the mem-
orandum and articles of the company and also agree to act as the first
directors of the company.
(v) To decide the following: (a) the nature of the company (b) the location
of its registered office (c) the amount and form of its capital (d) the
underwriters or brokers for capital issue, if necessary (e) the bankers (f)
the auditors (g) the legal advisers.
(vi) To get the memorandum of association and articles of association drafted
and printed.
(vii) To enter into preliminary contracts with vendors, under-writers etc.
(viii) To arrange for the preparation of prospectus, its filing, advertisement and
issue of capital.
(ix) To pay preliminary expenses.
(x) To arrange funds required by the company.

2. G. Tiruvengadachariar v. Velu Mudaliar (1938).

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Legal Position of Promoter

A promoter can neither be termed as an agent nor a trustee of a company which
has not come into existence. The reason is that there was no principal or trust
in existence for whom or for whose benefit the promoter has acted. Thus, the
legal position of the promoter cannot be precisely established. However, Lindley,
L. J. described his position in Lydney & Wigpool Iron Ore Co. v. Bird (1866) which
may be termed as that of ‘quasi-trustee’.
“Although not an agent for the company, nor a trustee for it before its formation,
the old familiar principles of law of agency and of trusteeship have been extended
and very properly extended to meet such cases. It is perfectly well settled that
a promoter is accountable to it for all monies secretly obtained by him from it,
just as the relationship of the principal and agent or the trustee and the trust
had really existed between him and the company when the money was obtained”.
Promoters have wide powers relating to the formation of the company. Law
has put the relationship of the promoters with the company they bring into
existence as well as with those whom they induce to become shareholders in
it, as that of a fiduciary nature. This fiduciary relationship is based on utmost
faith and confidence. “Those who accept and use such extensive powers are
not entitled to disregard the interests of the corporation altogether. They must

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make a reasonable use of the powers which they accept from the legislature;
and consequently they do stand, with regard to the corporation, when formed,
in what is commonly called a fiduciary relation to some extent.”3

Duties of Promoter
The promoter stands in a fiduciary relationship with the company. Though the
fiduciary relationship really arises when the company is formed, the fiduciary
obligation of a promoter begins as soon as he sets out to act as promoter of
the company.4 This fiduciary relationship imposes the following obligations on
the promoters:
(i) Not to make Secret Profit: Promoters should not make any secret profits
at the cost of the company without its knowledge and consent. Secret
profits or undisclosed benefits of any type received by the promoters can
be recovered from them by the company.5 Company can proceed against
the promoters for any damage caused to it on account of their fraud or
breach of duty. The estate of the promoter shall remain liable in an action
by a company for deceit or breach of trust if any benefit has accrued to
the estate.

3. Lagunas Nitrate Co. v. Lagunas Nitrate Syndicate (1899).

4. S.M. Shah, “Lectures on Company Law”.
5. Cavendish Bentinck v. Fenn (1887).
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(ii) Disclosure of Material Facts: It is the duty of the promoters to disclose

fully all material facts relating to the formation of the company. The
disclosure of all material facts, regarding contracts made and the profits
earned by them from the formation of the company, should be made to
an independent and competent Board of Directors. If the promoters fail
to disclose complete facts, company may set aside the transaction and
recover the benefit earned by them.
Case Law: Erlanger v. New Sombrero Phosphate Co. (1878)
Facts of the Case
Erlanger together with some of his friends, purchased an island containing phosphate
mines for £ 55,000. The island was then sold to a newly formed company for £ 1,10,000.
All the five directors of the newly formed company were nominated by Erlanger. At the
time of the purchase agreement with Erlanger, two directors were abroad, while out
of the remaining three, who signed the purchase deed, two were completely under the
control of Erlanger. Later on, a prospectus was issued inviting the public to subscribe for
the shares of the company. The purchase agreement was approved at the first meeting
of the shareholders, but they were not told all material facts regarding the transaction.
After some time the company went into liquidation. The liquidator filed a case against
Erlanger to recover the profit made by him on account of sale of island to the company.
Erlanger defended the case on the plea that the Board of Directors had full know-ledge
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of the facts.
Decision
The Court held “If they (promoters) propose to sell their property to the company, it is
incumbent upon them to take care that they provide the company with an executive who
shall both be aware that the property which they are asked to purchase is the promoter’s
property, and who shall be competent and impartial judges as to whether the purchase
ought or ought not to be made. They should sell the property to the company through the
medium of a Board of Directors, who can and do exercise an independent and intelligent
judgment on the transaction.” His contention was rejected and he was asked to return
the benefit to the liquidator.

Liabilities of Promoter
(1) Non-disclosure of Secret Profit: In case a promoter fails to make full
disclosure of his dealings and profits made in promoting the company,
he can be compelled by the company to hand over such secret profit.
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.
(2) Non-adoption of Preliminary Contract: If a promoter enters into
contracts on behalf of the company before the company was actually
incorporated, he may be held personally liable for non-adoption of those
contracts by the company provided he has purported to act as an agent
and the non-existence of the company was known to both the parties.
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(3) Fraud in the Promotion of the Company:

(i) If a promoter furnishes any false or incorrect particulars of any
information or suppresses any material information, of which he is
aware in any of the documents filed with the Registrar in relation
to the registration of a company, he shall be liable for action under
section 447.
(ii) Where it is found that any fraud has been committed in promoting
or forming a company, the Tribunal may order investigation against
the promoters any other director or officer of the company involved
in such fraudulent activities (Section 282).
(iii) A company may proceed against a promoter where the promoter
has wrongfully obtains possession of any property, including cash
of the company or wrongfully withholds it or knowingly applies
it for the purposes other than those expressed or directed in the
articles and authorised by the Act (Section 452).
(4) Omission in the Prospectus: Prospectus issued by a company must have
the contents as laid down by Section 26 of the Companies Act. In case of
omission of facts, the promoters may be held liable under section 35 to
compensate the investors for the losses suffered by them.

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(5) Misrepresentation in the Prospectus: 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 (Section 35).

Remuneration to Promoter
The promoter has to incur the initial expenses in the process of formation of
a company besides undergoing a good deal of arduous task. The promoter has,
therefore, a legitimate right to claim for both the expenses incurred by him as
well as remuneration for the work done by him. The claim for expenses should
be supported by vouchers and should be placed before the directors of the
company when formed. However, there is no contractual obligation on the part
of the company to pay him for these expenses unless the company has expressly
agreed to pay after its formation for the services rendered by him. The same is
true about his remuneration.
The promoter may be remunerated in any of the following ways:
(a) Promoter may sell his own asset to the company at profit for cash or
shares in the company.
(b) He may be given commission on the purchase price of the business taken
over by the company.
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(c) He may be granted a lump sum as remuneration either in cash or in

shares or debentures.
The amount of remuneration payable or paid to the promoters is required to
be disclosed in the prospectus issued by the company.

Preliminary or Pre-incorporation Contracts

Meaning
Preliminary contracts are contracts entered into by the promoters on behalf of
the company before its incorporation with third parties.
Validity
It is usual for the promoters to enter into these contracts of purchases of assets
on behalf of the company about to be formed but before it is actually formed.
They generally enter into these contracts as agents or trustees of the company,
which has not yet come into existence. Such contracts are legally not binding
upon the company even after it comes into existence. The company can neither
ratify those contracts nor sue the vendors on them after its incorporation
because ratification requires existence of the principal at the time when the
contract was entered into.
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Case Law : Natal Land and Colonisation Co. Ltd. v. Pauline Colliery & Development
Syndicate Ltd. (1904)
Facts of the Case
N & Co. entered into an agreement with one C, who acted on behalf of a proposed
syndicate. Under the agreement N & Co. was to give the syndicate a lease of coal mining
rights. The syndicate was then registered and asked N & Co. to give these rights, which
N & Co. refused. An action was initiated by the syndicate for specific performance of the
agreement or in the alternative for the damages.
Decision
The suit was dismissed by the court on the ground that “a company cannot by adoption
or ratification obtain the benefit of a contract purporting to have been made on its behalf
before the company came into existence.”
Re. English and Colonial Produce Co. Ltd. (1906)
Facts of the Case
On the request of the promoters of a company, a solicitor prepared the Memorandum
and Articles of Association of a company, paid the registration fees and got the company
registered.
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Decision
The company was not held bound to pay for the services and expenses of the solicitor.
“The company could not be sued in law for those expenses inasmuch as it was not in
existence at the time when the expenses were incurred and ratification was impossible.”
A company cannot adopt contracts entered into before its incorporation even
by passing a special resolution or with the unanimous consent of its members.
Thus, preliminary contracts will either have to be left as mere “gentlemen’s
agreements” or the promoters will have to undertake personal liability; which of
these courses will be adopted depends largely on demands of the other party.6
‘Since the pre-incorporation contracts purported to be made by a company which
does not exist is a nullity, neither the company when formed nor the promoter
whose signature is added can sue or be sued on contract.’7
Liability of the Promoter
The nature of the liability of the promoter on preliminary contracts depends on
the tenor of such contracts. He can be held personally liable if he has purported
to act as an agent and the non-existence of the company was known to both
the parties. This is because where a contract is made on behalf of a principal
known to both the parties to be non-existent, the contract is deemed to have
been entered into personally by the actual maker. Case of provides an illustration:

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Case Law: Kelner v. Baxter (1866)
Facts of the Case
Baxter, a promoter and a prospective director of a company to be formed, entered into
a contract with Kelner on behalf of the company. Baxter signed the contract adding the
words “for and on behalf of XY Co. Ltd.”
On a suit by Kelner for the performance of the contract, it was held that Baxter was liable
as he had contracted on behalf of a principal who did not exist.
But, if the contract is purported to be made by the company itself, the person so
acting i.e., the promoter, cannot be held personally liable, for he shall be taken
to have simply authenticated the contract and the company shall be taken to
have entered into the contract and the company being non-existent the contract
shall become nullity. Case of New borne (London) Ltd. v. Sensolid (GB) Ltd. (1954)
may be cited:
L.N. was a promoter and a prospective director of a company to be formed
“Leopold New borne (London) Ltd.” A contract for the supply of certain goods
by the company (not formed till then) to Sensolid was signed thus “Leopold
New borne (London) Ltd.” and the name L.N. was written underneath. In an

6. Gower L.C.B., “The Principles of Modern Company Law”, Third Ed., p. 280.
7. New Borne v. Sensolid (GB) Ltd. (1954).
 64 FORMATION OF COMPANY

action for breach of contract by L.N. against Sensolid, it was held that the
contract was signed in the proposed name of the company and L.N. added his
name only to authenticate it. Since the company was not at all in existence at
the time of signing the contract, there was no contract at all. Hence, Sensolid
had no liability.
In case of personal liability, the promoters will continue to be liable until the
company adopts the contracts. In order to avoid their liability, the promoters
usually insert a clause in the original contract to the effect that if the contract
is not adopted by the company after its incorporation within a limited time,
both the promoters and the third party will be exonerated from liability. Some
of the promoters simply agree to the draft contract to be entered into by the
vendor and the company after incorporation.

Adoption of Preliminary Contract

A company may adopt preliminary contracts by either of the two ways:
(i) The company may adopt these contracts by entering into new contracts
with the third parties on the same terms as were embodied in the original
contract. Such a new agreement of adoption may not be expressly made
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but may be implied by the acts of the company.

(ii) The company may adopt these contracts under the Specific Relief Act, 1963.
Sections 15(h) and 19(e) of the Act provide that a contract entered into
by the promoters on behalf of the company before its incorporation can
be enforced by or against the company, if the following two conditions
are satisfied:
– The contract is entered into, for the purposes of the company and
such contract is warranted by the terms of incorporation. The term
“for the purposes of the company” implies that the contract should
be for the working purpose of the company.
– The company accepts the contract after its incorporation and com-
municates such acceptance to the other party to the contract.
Case
Imperial Ice Mfg. Co. v. Manchershaw - The promoters of an ice manufacturing company
entered into a contract with M for the purchase of ice manufacturing machinery for the
company. The company on its formation subsequently adopted the contract and sent the
communication of acceptance to Mr. M. Held, the contract was for the purposes of the
company, and was therefore, enforceable by or against the company.

Incorporation
Incorporation brings a company into existence as a separate corporate entity.
As per Sec. 3(1) a company may be formed for any lawful purpose by:
 FORMATION OF COMPANY 65

(a) seven or more persons, where the company to be formed is to be a public

company;
(b) two or more persons, where the company to be formed is to be a private
company; or
(c) one person, where the company to be formed is to be One Person Company
that is to say, a private company, by subscribing their names or his name
to a memorandum and complying with the requirements of this Act in
respect of registration.

Preliminary Steps
The promoters have to go through the following preliminary steps before applying
for incorporation of the proposed company:
1. As per Sec. 4(2) a company cannot be registered with a name which is
considered to be undesirable in the opinion of the Central Government.
The name should not be identical with or resemble too nearly to the
name of an existing company or registered under this Act or any previous
company law. Therefore the promoters are advised to make an application
in the Form 1 A to ascertain the availability of maximum six names in

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the order of their preference.
2. A fee of ` 500 has to be paid alongside and the digital signature of the
applicant proposing the company has to be attached in the form. If pro-
posed name is not available, the user has to apply for a fresh name on
the same application.
3. The name approved will be reserved by the Registrar for a period of 20
days from name approval. Within this period, the applicant can apply for
registration of the new company by filing the required forms (i.e. Forms
1, 18 and 32).
4. Before promoters begin the incorporation of a company, they have to
appoint chartered accountants, lawyers etc., to help them in preparing
various documents.
5. Arrange for the drafting of the memorandum and articles of association
by solicitors, vetting of the same by Registrar of Companies and printing
of the same.
The Memorandum and Articles must be signed by at least 7 subscribers
(2 in case of private company) along with address, description, occupation, if any,
in the presence of at least of one witness. The subscribers should also clearly
mention the number and nature of shares subscribed by them.
Applying to the Registrar of Companies
After having done the preliminary work, the promoters are required to make
an application to the Registrar of the State in which company’s registered office
 66 FORMATION OF COMPANY

will be situated, accompanied by the following documents and information for

registration [Sec. 7(1)]:
(a) the memorandum and articles of the company duly signed by all the
subscribers to the memorandum in such manner as may be prescribed;
(b) a declaration in the prescribed form by an advocate, a chartered accoun-
tant, cost accountant or company secretary in practice, who is engaged in
the formation of the company, and by a person named in the articles as a
director, manager or secretary of the company, that all the requirements
of this Act and the rules made there under in respect of registration and
matters precedent or incidental thereto have been complied with;
(c) a declaration 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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(d) the address for correspondence till its registered office is established;
(e) the particulars of name, including surname or family name, residential
address, nationality and such other particulars of every subscriber to the
memorandum along with proof of identity, as may be prescribed, and in
the case of a subscriber being a body corporate, such particulars as may
be prescribed;
(f) the particulars of the persons mentioned in the articles as the first direc-
tors of the company, their names, including surnames or family names,
the Director Identification Number, residential address, nationality and
such other particulars including proof of identity as may be prescribed;
and
(g) the particulars of the interests of the persons mentioned in the articles
as the first directors of the company in other firms or bodies corporate
along with their consent to act as directors of the company in such form
and manner as may be prescribed.
The Registrar on the basis of the required documents and information filed shall
register all the documents and information in the register and issue a certificate
of incorporation in the prescribed form to the effect that the proposed company
is incorporated under this Act.
On and from the date mentioned in the certificate of incorporation, the Registrar
shall allot to the company a corporate identity number, which shall be a distinct
identity for the company and which shall also be included in the certificate.
 FORMATION OF COMPANY 67

If any person furnishes any false or incorrect particulars of any information

or suppresses any material information, of which he is aware in any of the
documents filed with the Registrar in relation to the registration of a company,
he shall be liable for action under section 447 of the Companies Act.

ONLINE REGISTRATION OF A NEW COMPANY

The Ministry of Corporate Affairs enables online registration of a company on the

portal of the MCA. The steps for online registration of a company are as follows:
Step 1: Acquire Director Identification Number (DIN)
Each proposed director of the company to be formed are required to obtain
DIN by filing an e-form DIN-1.
Step 2: Acquire/Register Digital Signature Certificate (DSC)
All filings done by the companies under MCA 21 e-Governance programme are
required to be filed with the use of Digital Signatures by the person authorised
to sign the documents.
Acquire DSC — A licensed Certifying Authority (CA) issues the digital signature.
Register DSC — After acquiring the DSC it is important to do the Role check to

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verify whether the Digital Signature affected on the e-form are of the Director,
Manager, or Secretary and whether the Digital Signature is registered on the
MCA Portal.
Step 3: New User Registration
To file an e-Form or to avail any paid service on MCA portal, it is first required
to be registered as a user in the relevant user category, such as registered and
business user.
Step 4: Incorporate a Company
— Select, in order of preference, at least one suitable name up to a maximum
of six names, indicative of the main objects of the company.
— Ensure that the name does not resemble the name of any other already
registered company and also does not violate the provisions of Emblems
and Names (Prevention of Improper Use) Act, 1950 by availing the ser-
vices of checking name availability on the portal.
— Apply to the concerned ROC to ascertain the availability of name by filing
Form INC-1 for the same in to the portal. A fee of ` 500 has to be paid
alongside and the digital signature of the applicant proposing the com-
pany has to be attached in the form. If proposed name is not available,
the user has to apply for a fresh name on the same application.
— After the name approval, the applicant can apply for registration of the
new company by filing the required forms Form INC-7 or Form INC: Form
 68 FORMATION OF COMPANY

INC-7 for Application for incorporation of a company (Other than OPC)

or Form INC-2 for Application for Incorporation of OPC within 60 days
of name approval.
— Arrange for stamping of the Memorandum and Articles with the appro-
priate stamp duty. It can be paid electronically on the MCA portal.
— Get the Memorandum and the Articles signed by at least two subscrib-
ers (7 in case of public company) in his/her own hand, his/her father’s
name, occupation, address and the number of shares subscribed for and
witnessed by at least one person.
— Ensure that the Memorandum and Article is dated on a date after the
date of stamping.
— Login to the portal and fill the following forms and attach the mandatory
documents listed in the e-Form:
u Form INC-22: Notice of situation or change of situation of registered
office based on the option chosen in Form INC-7.
u Form DIR-12: Particulars of appointment of directors and the key
managerial personnel and the changes among them.
Declaration of compliance
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— After processing of the Form is complete and Corporate Identity is gen-

erated, obtain Certificate of Incorporation From RoC.

Documents Required for Company Registration

The following are the documents required to be while applying for registration
with the Registrar of Companies on the MCA website:
1. PAN card and Aadhaar card of each of the proposed directors.
2. Address proof of the proposed directors like Aadhaar cards, utility bills,
Voter-ID cards, ration cards, driver’s licenses, passports.
3. Contact details of the proposed directors along with their Email IDs.
4. Passport-sized photographs of each of the proposed directors.
5. Proof of ownership of the office space, for the proposed company. If the
office space is on rented premises, then the lease deed/rent agreement
of the office space along with ‘No Objection Certificate’ from the landlord.
6. Address proof of the office space, like utility bills.
7. Email ID of the proposed company.
8. Draft Memorandum of Association (MOA), and draft Articles of Association
(AOA) of the proposed company.
 FORMATION OF COMPANY 69

9. Document showing the proposed activities of the company, expected

income of the company and the expenditure for the next three years with
the source of income and the purpose of the spending.
10. Declaration under Form INC-9 stating that the shareholders and the
directors have committed no offence or malfeasance.
11. The articles of association and the memorandum of association signed by
the subscribers as provided under the Companies (Incorporation) Rules,
2014.

Forms to be filed for Incorporating a Company

The MCA website facilitates the online registration of companies by filing
applications and uploading requisite documents on the website. Following are
some of the important forms which are required to be filed for the incorporation:
SPICe+ Form: This Form is segregated into two parts. SPICe+ Form Part-A is
filed to reserve a unique name for the company. The applicants must provide
alternative names in the Form for the registrar to choose the names in order of
preference. The applicants may use the RUN or Reserve Unique Name feature
available on the MCA website to check for the existence of similar or identical

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names.
SPICe + Form Part B is used to apply for incorporation of the company, Details
pertaining to the capital structure of the company, and director details. Add
details of subscribers, address of the office space, and information as to the
jurisdiction for obtaining the TAN and PAN for the company.
Steps to register a Company in India
Digital Director Registration
Uploading of Payment of Certificate of
Signature Identification on MCA
Documents Fees Incorporation
Certificate Number portal

Certificate of Incorporation
Certificate of incorporation is a legal document relating to formation of a
company which confirms the name by which the company is registered under
the Companies Act and date of incorporation. The Registrar of Companies issues
certificate of incorporation in the prescribed form on the basis of submission
of the required documents and information laid down by the Companies Act.
From the date of incorporation mentioned in the certificate of incorporation,
such subscribers to the memorandum and all other persons, as may, from time
to time, become members of the company, shall be a body corporate by the
name contained in the memorandum, capable of exercising all the functions
of an incorporated company under this Act and having perpetual succession
and a common seal with power to acquire, hold and dispose of property, both
 70 FORMATION OF COMPANY

movable and immovable, tangible and intangible, to contract and to sue and be
sued, by the said name.
Thus, the consequences of certificate of incorporation are:
(1) The certificate of incorporation brings the company into existence from
the date mentioned in the certificate.
(2) It grants legal personality, corporate existence and perpetual succession
to the company.
(3) The subscribers to the Memorandum together with such other persons, as
may from time to time become members of the company, become a body
corporate with a distinct entity from such members having a perpetual
succession with a common seal and with the liability of the members
limited to the amount for the time being unpaid on the shares held by
them.
(4) The Memorandum and Articles of Association become binding upon the
members and the company as if they have been signed by the company
and by each member.

Validity of Certificate of Incorporation

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Certificate of incorporation is a legal evidence with regard to the registration

and formation of a company. Section 7(6) of the Companies Act, 2013 provides
that where at any time after the incorporation of a company, it is proved that
the company has been got incorporated by furnishing any false or incorrect
information or representation or by suppressing any material fact or information
in any of the documents or declaration filed or made for incorporating such
company, or by any fraudulent action, the promoters, the persons named as the
first directors of the company and the persons making declaration shall each
be liable for action under section 447 of the Companies Act.
Section 7(7) of the Act provides that where a company has been got incorporated
by furnishing any false or incorrect information or representation or by
suppressing any material fact or information in any of the documents or
declaration filed or made for incorporating such company or by any fraudulent
action, the Tribunal may—
(i) 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 of the company and its members and
creditors; or
(ii) direct that liability of the members shall be unlimited; or
(iii) direct removal of the name of the company from the register of compa-
nies; or
(iv) pass an order for the winding up of the company; or
(v) pass such other orders as it may deem fit.
 FORMATION OF COMPANY 71

Commencement of Business [Section 10A]

A company incorporated after November 1, 2018 [i.e. after the commencement
of Companies (Amendment) Act, 2019] and having a share capital shall have to
fulfil the following procedural requirement before commencing any business or
exercising any borrowing powers:
(a) Filing of declaration to the Registrar of Companies : A declaration by a
director within 180 days of incorporation of the company in the pre-
scribed form to the Registrar of Companies must be filed stating that
every subscriber to the memorandum has paid the value of shares agreed
upon by them at the time of making such declaration; and
(b) Verification of the registered office : The company is required to file with
the Registrar of Companies a verification of its registered office as per
section 12(2) of the Companies Act.

Default
In case of default by a company in complying with the requirement of this
provision on commencement of business, the company shall be liable to a penalty
of ` 50,000 and every officer in default with a penalty of ` 1000 for each day

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during which such default continues which may go up to ` 1 lakh.
Further, the Registrar of Companies may initiate action for the removal of the
name of the company from the register of companies when the Registrar has
reasonable cause to believe that the company is not carrying on any business.

Provisional Contract
Provisional contracts are the contract entered into by a company having share
capital between the date of incorporation and the date on which the company
has fulfilled the requirement of section 10A on commencement of business.
These are valid contracts if company meets the requirements and would be
non-operative in case the company fails to do so.

IMPORTANT CASE

u Lydney & Wigpool Iron Ore Co. v. Bird Liability of Promoters

u Enlarger v. New Sombrero Phosphate Co. Liability of Promoters
u Kelner v. Baxter Liability of Promoters
u Natal Land and Colonisation Co. Ltd. v. Pauline Preliminary Contracts
Colliery & Development Syndicate Ltd.
u Imperial Ice Mfg. Co. v. Manchershaw Preliminary Contracts
u Newborne (London) Ltd. v. Sensolid (GB) Ltd. Preliminary Contracts
 72 FORMATION OF COMPANY

u Peel’s Case Certificate of Incorporation

u Moosa Goolam Arif v. Ebrahim Goolam Ariff. Certificate of Incorporation
u Jubilee Cotton Mills Ltd. v. Lewis Certificate of Incorporation

REVIEW QUESTIONS
1. Comment:
(a) Whether promoter is the agent of the Company?
(b) Whether promoter is the trustee of the Company?
(c) Whether promoter is the director of the Company?
2. What is the legal position of a promoter?
3. Discuss the liabilities of promoter in case he is found to be involved in
fraudulent activities relating to formation of the company.
4. Can a promoter make profit out of formation of the company? Discuss
with relevant case laws.
5. What are the documents to be filed for registration of a Company?
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6. The Memorandum and Articles of Association a company were deliv-

ered to the Registrar of Companies on 6th January for registration. On
8th January, the Registrar issued the Certificate of Incorporation, but by
mistake dated it as 6th January. Incidentally, on that very day (6th
January), the company made allotment of its shares. The said allotment
was challenged on the ground that it was made before the actual issue
of the Certificate of Incorporation. How would you decide and why?
7. A company was formed on the basis of the Certificate of Incorporation
obtained by threatening the Registrar of Companies. Is the company legally
formed?
8. “Preliminary contracts are nullify.” Comment on the statement, bringing
out clearly the position of the promoters with regard to these contracts.
9. “A promoter stands in a fiduciary relation towards the company he pro-
motes.” Explain.
10. “The validity of a certificate of incorporation cannot be disputed on any
grounds whatsoever.” Comment.
11. Discuss the legal effects of pre-incorporation contracts.
12. “The Companies Act is not against the profits made by a promoter but
it’s non-disclosure.” Examine this statement with regard to the duties and
obligations of promoters of a company.
 FORMATION OF COMPANY 73

CASE PROBLEMS
1. Few friends purchased a property. Later, they promoted a company and
sold this property to the company at a huge profit. Can the company
recover this profit from the promoters?
Ans. [Yes, the company can recover this profit from the promoters as this
is not disclosed by them.]
2. A company was formed on the basis of a certificate of incorporation
obtained by threatening the Registrar of companies. Is the company
legally formed?
Ans. [The promoters, the persons named as the first directors of the
company and the persons making declaration shall each be liable for
action under section 447].
3. All the seven signatures on a Memorandum of Association were forged
by a person and certificate of incorporation was duly obtained. Is the
certificate of incorporation valid? Explain.
Ans. [The promoters, the persons named as the first directors of the
company and the persons making declaration shall each be liable for

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action under section 447]