NATIONAL LAW UNIVERSITY ODISHA

CORPORATE LAW – I
PROJECT ON
“FORMATION OF PRIVATE COMPANY”

SUBMITTED TO: SUBMITTED BY:

1. Prof. Mayank Tiwari Abhijit Bansal [16ba005]
Asst. Professor of Law Anubha Singh Dhapwal [16ba021]
2. Prof. Kapil Sharma Marvi Khan [16ba060]
Research Associate & Teaching Asst.
 ACKNOWLEDGEMENT

At the onset, the authors would like to express their earnest gratefulness and thank their
mentors, Mr. Mayank Tiwari and Mr. Kapil Sharma for instilling confidence in them and
entrusting the task to carry out a project on this topic. The authors are indeed privileged
having being groomed in a prestigious institution like National Law University Odisha,
Cuttack. They would also like to express their gratitude to their friends for their support and
help. Their gratitude also goes out to the staff and administration of National Law University
Odisha, Cuttack for the library infrastructure and IT lab that was a source of great help for the
completion of this project.

i
 TABLE OF CONTENT

Acknowledgement......................................................................................................................i

Table of Content........................................................................................................................ii

Table of Cases...........................................................................................................................iv

Table of statutes.........................................................................................................................v

Introduction...............................................................................................................................vi

Research methodology.............................................................................................................vii

Facts...........................................................................................................................................1

Promoters...................................................................................................................................2

Procedural aspect & filing of document.....................................................................................4

i. Pre incorporation:............................................................................................................4

ii. Steps for incorporation:...................................................................................................4

Preparation of MOA & AOA.....................................................................................................6

i. Memorandum of association (MOA)..............................................................................6

ii. Doctrine of ultra vires.....................................................................................................6

iii. Article of Association (AOA).....................................................................................8

iv. Doctrine of Indoor Management.................................................................................8

Filing of documents with registrar of companies.....................................................................10

i. Declaration by Professional..........................................................................................10

ii. Affidavit by Subscribers and Directors.........................................................................10

iii. Furnishing verification of Registered Office.............................................................11

iv. Power of Attorney.....................................................................................................11

Incorporation certificate...........................................................................................................12

i. Issue of certificate by registrar......................................................................................12

ii. Conclusive Evidence.....................................................................................................12

Allotment of CIN.....................................................................................................................14

ii
 i. Preservation of documents of incorporation.................................................................14

ii. Penalty for providing forged or wrong information at the time of incorporation.........14

iii. Powers of the Tribunal to decide the case of incorporation of a company by

providing forged or wrong information...............................................................................15

Pre-incorporation contract........................................................................................................16

i. Ratification of pre-incorporation contract.....................................................................16

ii. Personal right and liability of contracting agent...........................................................17

Conclusion................................................................................................................................18

Bibliography.............................................................................................................................19

iii
 TABLE OF CASES

1. Salomon v. Salomon & Co Ltd

2. Ashbury Railway Carriage and Iron Co Ltd v Hector Riche
3. Attorney General v Great Eastern Railway
4. Re. Beauforte (Jon) London Ltd
5. Jahangir R. Modi v Shamji Lodha
6. A. Lakshmana Swami Mudaliar v LIC
7. Royal British Bank v Turquand
8. Lee v Lee’s farming Ltd
9. Pattinson v Bindhya Debi
10. Jubilee Cotton Mills Ltd v Lewis
11. Moosa Goolam Ariff v Ebrahim Goolam Ariff
12. Re. Barned’s Banking Co
13. Oakes v Turquand and Harding
14. TV Krishna v Andhra Prabha (P) Ltd
15. Bowman v Secular Society Ltd
16. Vali Pattabhirama Rao v Sri Ramanuja Ginning and Rice Factory Pvt Ltd
17. Kelner v Baxter
18. New borne v Sensolid (Great Britain) Ltd
19. Phonogram Limited v Lane
20. Seth Subhag Mal Lodha v Edward Mill Co. Ltd

iv
 TABLE OF STATUTES

 The Companies Act, 2013

 Companies (Incorporation) Rules, 2014

v
 INTRODUCTION

The term “Company” has no technical or legal meaning. However, it has been defined under
s.2(20) of the C.A., 2013 as “any company formed and enrolled under the said act or any
other preceding company law”. Practically, as it is an association of people formed for the
motive of doing a trade or a business, and registered under the act. In this project the authors
are mainly concerned with the private companies incorporated within the Companies Act,
2013. It is considered as a distinct legal person or artificial person, it can prosecute and be
prosecuted and having a perpetual succession, which means, death of an associate is not the
end of a company until it is winded up. It can conduct trade or business with all commands to
contract. It is a corporate entity (Salomon v Salomon & Co Ltd1) and is separate from its
members and shareholders. A company can have limited liability both by shares or guarantee.
It can own property, individual from its members and the company’s income is separate from
the income of the members. A company may be Pvt. Company, Public Company, Limited
Company which is limited with shares or by guarantee, unlimited Company, Government
Company, and Foreign Company. The Authors aim to discuss the various steps involved in
the incorporation of a private company, about the various compliance requirements and
applicable rules etc. The author also aims to make research on concepts like pre-incorporation
contracts, alteration of M.O.A. and A.O.A., doctrine of ultra vires.

1
(1897) AC 22.

vi
 RESEARCH METHODOLOGY

The research objectives of our project are as follows:

1. To understand the process of incorporation of a private company
2. To understand laws relating to the incorporation of a private company

Limitations and Scope:

We are limiting our project to the incorporation of a private company only. Due to the
paucity of time, we won’t be dealing with the incorporation of other forms of companies.
However, we have mentioned a few points regarding other forms of companies in the
introduction.

Research Questions:
1. What are the procedural aspects for incorporation of company?
2. Whether the company can prosecute and be prosecuted on the basis of pre-incorporation
contract?
3. Whether the pre-incorporation contract can be imposed by or against the promoter who
acted in behalf of the projected corporation?
4. What is the scope of doctrine of ultra vires and whether the same should be continued in
India?

Hypothesis:
The company cannot sue or be sued on the basis of pre-incorporation contracts. However,
since promoters are the persons acting on behalf of and for the company which is yet to exist,
the contract can be enforced by or against the promoters of that company which is yet to
exist.

Methods and Methodology:

We have applied analytical research method with a qualitative approach. We have referred to
various Indian and foreign case laws in order to understand the scope and practical facets of
incorporation of a private company. The research methodology is basically Doctrinal in
nature. A number of books, journals and cases have been taken help of to arrive at the
aforesaid observation.

vii
 FACTS

A, B, C, D decided to start the business of Trading in Pharmaceutical Products in the state of

Punjab on retail and whole sale basis. They decided to set up a company. For this they
proposed to contribute a capital of Rupees One lakh each and also proposed to get a financial
assistance from bank in the form of cash credit limit. For this purpose they engaged a
qualified company secretary (C.S.), who asked then to furnish certain names for the proposed
company in the order of their priority. He also asked then to furnish the main objects to carry
on by then, along with other connected and ancillary objects, A, B, C, and D also decided to
become the first subscribers to the M.O.A. and A.O.A. and also to become the first directors
of the company. They also finalized a shop in the market area where the proposed business
was to be carried out and the registered office was to be constructed. Further, they directly to
keep the name of the company as Success Pvt. Ltd. Enumerate the process for the
incorporation of the company, various steps involved in its registration procedure, various
compliance requirements, and applicable rules for the proposed company etc.

1
 PROMOTERS

The term promoter is classified under section 2(69) of the CA 2013, according to the section
a promoter is the one:

a) Whose name has been mentioned in the prospectus of the company or in the annual report
i.e. being referred in sec 92; or
b) Whose controls the matters of the company, either directly (as CEO or shareholder) or
indirectly (via other shareholder) or otherwise.
c) In agreement with his advice the board of directors of the company is accustomed to act:

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

The first step of integration of a company is promotion

The private company are not allowed to issue IPO, so to raise their capital they are required
to go through private placements with a cap of 200 people excluding Employee Stock Option
Scheme and Qualified Institutional Buyers. If more than 200 people are said to be issued
shares then it becomes the case of IPO. Earlier the limit was 50 people as per sec. 42, but in
2014, Prospectus and Allotment of Securities Rule was issued, under which the limit wqas
increased to 200 as per rule 14 (2) (b).

The ways in which a private company raises its capital are:

1) RIGHT ISSUE:

Rights shares are issued to existing shareholders who have the privilege to buy a specified
number of new shares from the firm at a specified price within a specified time. A company
can opt for a rights issue to raise capital under secondary market offering.

2) BONUS ISSUE:

Bonus issues are shares issued free of charge to shareholders. When a company accumulates
a large fund from profits, much beyond its needs, the directors may decide to distribute a part
of it among the shareholders in the form of bonus. Once a bonus is issued, the price of the
shares is likely to drop as the value of the company's assets is now spread over a larger

2
number of shares.
3) PRIVATE PLACEMENTS:

A private placement is a capital raising event that involves the sale of securities to a relatively
small number of select investors. Investors involved in private placements can include large
banks, mutual funds, insurance companies and pension funds. A private placement is
different from a public issue in which securities are made available for sale on the open
market to any type of investor.

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 PROCEDURAL ASPECT & FILING OF DOCUMENT

There are three methods under S 3(1)2 in which company (private limited) could be formed:
a. A private Company limited by shares; or
b. A private Company limited by guarantee; or
c. A private unlimited company.3

There are some prerequisites for the incorporation, they are listed below:
I. PRE INCORPORATION:
 “At Least 2 Promoters: Promoters who will promote/ incorporate the company. Promoters
may be individual or body corporate.
 At Least 2 Directors: Directors should be individual only. No Body corporate/ HUF or
Partnership Firm can be appointed as Directors.
 Generally, in most of the cases, Promoters and Directors are the same in Private Limited
Companies.
 Directors must have DIN (Directors Identification Number)- Process Given Below:
 One of such two directors must have DIGITAL SIGNATURE who can apply with any of
DSC Vender i.e. E Mudra/ Siffy/ TCS etc.”4

II. STEPS FOR INCORPORATION:

i. Application for availability of name of company:
As per section 4(4)5, any individual may request the registrar for the reservation of a
name, which they might find suitable, in the format and manner prescribed by the law,
with the prescribed fee. The name may be the name of the future company or the new
name to which they wish to keep.

As per “Rule 9 of Companies (incorporation) Rules 2014”, the request for the reservation of a
name should be made in Form no. INC.1 with the fee as given in the Companies
(Registration offices and fees) Rules, 2014.

2
The Companies Act, 2013.
3
‘Procedure for incorporation of company’< http://www.simpletaxindia.net/2014/08/procedure-for-
incorporation-of-company.html> accessed on 14 February 2018.
4
ibid.
5
The Companies Act, 2013.

4
According to s. 4(2), the name mentioned in the M.O.A. shall not -
 be the same or similar to the name of an existing company registered under this Act or
any prior company law; or
 be in a manner that its use by the company -
1. will constitute an offence under any law for the time being in force; or
2. is undesirable in the opinion of the Central Government.

S. 4(3) provides that without discrimination to the provisions of section 4(2), a company shall
not be registered with a name which contains -
 any phrase or term which might give the intuition to the public at large that the
company is in any way connected with, or having the support of, the Central
Government, any State Government, or any other local authority, corporation or body
constituted by the Central Government or any State Government under any law for
the time being in power; or
 such phrase or term, as may be recommended

Exception: Unless the person has a prior sanction of the Central Government for the use of
any such phrase or term.

As per s. 4(5)(i), the registrar may reserve the name for a duration of 60 days starting from
the date of filing application depending upon the information and documents submitted as per
sub-section (4).

Rule 8 of Companies (Incorporation) Rules, 2014 states that in order to determine whether a
projected name is matching with another, the dissimilarities on account of certain facets may
be overlooked, the particulars of the same thing is stated in the rule.

5
 PREPARATION OF MOA & AOA

I. MEMORANDUM OF ASSOCIATION (MOA)

Every company must have a memorandum of association. It is a record, which consist of the
rules regarding the formation and events of a company. It is the document of the company
and defines the actual reason for the existence of company. MOA is in requisite form as set in
Table A, B, C, D and E of schedule 1 which may be approved. It sets down the area of
process of the company. It controls the outside matters of a company and defines the
relationship between the company and outsiders. It should be authorized by minimum two
subscribers in the case of private limited company (seven in public company). It contains
name clause, registered office clause, object clause, liability clause, and association clause.
The alteration of memorandum of association is much difficult and is strictly regulated;
however any alteration must be notified in the MOA.

II. DOCTRINE OF ULTRA VIRES

The memorandum of a company consist of an object clause the reason for which company is
formed i.e., to know the basic objective of the company. If the object of company is outside
the basic object clause it’ll be considered to be as ultra vires and thus void and it also cannot
be ratified in case every member of the company so wishes to ratify it. This Doctrine was
recognized in a famous case of Ashbury Railway Carriage and Iron Co Ltd v Hector Riche 6.
Several times the term ultra vires is used to outline the condition when the directors of the
company have surpassed the powers allotted to them. Wherever the company surpasses its
powers bestowed on it by the object clause of the memorandum it is not compelled by it as it
lacks the legal capacity to incur responsibility for the action. However this use must be
avoided for it is apt to cause confusion between these two entirely distinct legal principles.
Thus the meaning of ultra vires is restricted to the object clause of the company’s
memorandum. The Doctrine protects the creditors of the company by ensuring them that the
funds of the company to which they must look for payment are not dissipated in unauthorized
activities. Beside the Doctrine prevents directors from departing the object for which the
company has been formed and thus, puts a check over their activities. @
This Doctrine invoked in the case of Ashbury Railway wherein the House of Lords declared
that the contract was ultra vires and the company altogether was void and in addition to it was

6
(1875) LR 7 HL 653.

6
incapable of sanction by the common consensus of all the share holders. In India this
Doctrine was first time used by Bombay High Court in the case of Jahangir R Modi v Shamji
Lodha7. Similarly in A. Lakshmana Swami Mudaliar v LIC8, the Hon’ble SC declared that an
ultra vires contract stays to be ultra vires even if all the shareholders agreed to it.

The ultra vires act is seperate from an illegal act, though both of it are void. An act of a
company which is outside its objects clause is ultra vires and thus void, even if it’s legal.
Likewise an illegal act stays to be void even if it falls inside the object clause but regrettably
this Doctrine many times has been used in connection with illegal and prohibited acts which
should be taken care of. To determine whether the specific act is ultra vires or not it should be
checked on following grounds (i) whether it is falls among the specific purpose or (ii) within
the special control outrightly given by the statute to operate the main purpose or (iii) not with
the specific purpose nor with the special control outrightly given by the statue but related to
or substantial upon the specific purpose and a think rationally done for completing the main
purpose. If the act falls in any of the above condition the act will not be ultra vires the
company.

Overtime, a figure of principle came in existence that prohibited the application of ultra vires
Doctrine. These principles comprised the skill of shareholders to correct an ultra vires deal,
the application of Doctrine of estoppel, which prohibited the defense of ultra vires when the
connections were fully completed by one party and the prohibition in contradiction of
asserting ultra vires when both parties had completed the full the contract. In spite of these
principles the ultra vires doctrine was applied on consistent basis.

Thus to conclude an ultra vires act is void and it can’t be corrected even if every director
wishes to make the required change. The propensity to introduce the self object clause and so
as to eliminate the specific objects the rule of construction is risky as it creates the division
between the object and power unknown. The Doctrine prohibits the directors from passing of
object for which the company was in existence and this puts a control upon the different
activities of all the directors.. Thus in India if the Doctrine is used, where the contract which
is entered by a third party with other company is known to be ultra vires the company, it will

7
(1866-67)4 BOM HCR 185
8
1963 AIR 1185, 1963 SCR Supl (2)887

7
be declared as void and cannot be corrected by the company and in such a case the company
or the party cannot enforce it.

III.ARTICLE OF ASSOCIATION (AOA)

AOA consists rules in relation to matters about the inside matters of the company. AOA must
be published, divided into parts and consecutively numbered. A defines the relationship
between the management and shareholders. AOA is in separate form as given in Table F, G,
H, I and J of schedule 1 as may be approved. It contains division of shares, procedure of
holding and conducting meetings, voting rights of members and rules regarding methods of
voting, matters relating to appointment, powers, duties, qualifications and remuneration of
directors, restricts the right to transfer the shares, methods to increase or decrease capital,
however the change cannot be made to rise the obligation of associates without his/her
written assent, instructions about the common seal of the company, terms of selection, salary
and allocation of authority, guidelines in regard to issue of share capital, declaration of
dividends and rules regarding its payments, Instructions involving to accounts, audit,
charging of depreciation and making of reserves, Means of acquiring loans, and Process of
winding up. AOA can be altered from time to time with special resolution however the
alteration should not violet the provisions of MOA. Further any alteration in AOA must be
notified in the AOA.

IV. DOCTRINE OF INDOOR MANAGEMENT

According to the doctrine of indoor management a person trading with a company is believed
to have the information and requisite knowledge of the memorandum and the article of
association of the company. So, if he comes into a deal with a company, which being ultra
vires of the memorandum or articles, he cannot consider the deal as liable on a company. On
the other hand, if the deal or the transaction seems to be suitable, when linked with the
memorandum and articles, it would be wholly unjust if the company could getaway the
liability under it by displaying that there was certain loophole in the manner of the company’s
matters leading up to the deal, when the other party did not know of the wrongdoing and had
no ways of determining it. Thus the doctrine pursues to save strangers against a company.

The Doctrine was first applied in the leading case of Royal British Bank V Turquand. 9 The
facts of the case are that the articles of the company specified that directors of the company

9
[1856] 6E & B 327.

8
were allowed to appropriate money on behalf of the company, if they are so endorsed by a
declaration delivered by the shareholders in a general meeting. The director’s infact borrowed
the money from Mr. T without procurement of authorization from its shareholders. T had
provided the money to the company thinking that shareholders had permitted the director to
borrow money as per the necessities of the articles. It was held that the using of the money by
director without any sanction from shareholders amounted to wrongdoing and further held
that Mr. T was liable to sue the company on the power of the link as he was permitted to
think that essential resolutions had been passed.
There are certain exceptions to the above-mentioned doctrine, which can be stated as follow:
1. Knowledge of Irregularity: The person who is trading with the company having full
knowledge of the wrongdoing or the irregularity in its management in respect to matters
of his dealings he cannot be entitled to the benefit of the rule in Turquand’s case
2. Negligence: The person is not entitled to the benefit of the rule in the above case in case
he discovers the wrongdoings or certain irregularities by proper investigation.
3. Forgery: The rule cannot be raised in favour of deals involving forgery or which is
otherwise illegal from starting or void as such

Thus to conclude doctrine of indoor management pursues to save strangers as against the act
of the company, whereas the doctrine of constructive notice saves the company against
strangers.

9
 FILING OF DOCUMENTS WITH REGISTRAR OF COMPANIES

Section 7(1) states that there shall be recorded with the Registrar inside whose purview the
enrolled office of an organization is proposed to be situated, the accompanying reports and
data for enlistment, in particular: - (a) Application for Incorporation of Companies: Rule 12
of Companies (Incorporation) Rules 2014 states that an application for incorporation should
be documented with ROC in form INC-2 (in the event of one individual organization or INC-
7 in case of different companies.”10

I. DECLARATION BY PROFESSIONAL
This is an declaration under Section 7(1)(b) read with Rule 14 of the Companies
(Incorporation) Rules 2014 to be presented by the expert which might be an advocate, a C.A,
cost bookkeeper or company secretary in practise, who is occupied with the formation of the
organization, and by a person named in the articles as a director, administrator or secretary of
the company, that all the necessities of this Act and the standards made there under in regard
of enlistment and matters precedent or incidental thereto have been followed.”11

II. AFFIDAVIT BY SUBSCRIBERS AND DIRECTORS

“This is an declaration to be submitted under Section 7(1)(c) read with Rules 15 of the
Companies (Incorporation) Rules, 2014 from every subscriber of the memorandum and from
people named as the first directors, assuming any, in the articles that he isn't convicted of any
offense regarding the promotion, formation or administration of any company, or that he has
not been discovered blameworthy of any misrepresentation or misfeasance or of any break of
obligation to any company under this Act or any past company law amid the previous five
years and that every records documented with the Registrar for enrolment of the organization
contain data that is right and finish and consistent with the best of his insight and
conviction.”12

10
<https://edurev.in/studytube/Incorporation-of-Companies(Procedural-Aspects)-Formation-of-Company,-
Company-Law/ee4ebe33-8e92-4504-995c-a913650f7f4d_t>
11
‘Incorporation of companies’ ( THE INSTITUTE OF COMPANY SECRETARIES OF INDIA August 8 2015)
< https://www.icsi.edu/Webmodules/CompaniesAct2013/Incorporation_of_Companies-8-8-2015.pdf> accessed
on 14 february 2018.
12
ibid.

10
III.FURNISHING VERIFICATION OF REGISTERED OFFICE
Under Section 12, a company should, on and from the 15th day of its incorporation and
constantly from that point, have an enrolled office fit for accepting and recognizing all
correspondences and notification as might be addressed to it. The company can furnish to the
enlistment verification check of enrolled office within 30 days of joining in the way
recommended. According to lead 25(1) of Companies (Incorporation) Rules 2014, the
verification of enrolled office might be documented in Form no INC 22.

Where the area of the enrolled office is finalised before Incorporation of an organization by
the promoters, the promoters can likewise document alongside the Memorandum and
Articles, the confirmation of its enlisted office in Form no INC 22.

IV. POWER OF ATTORNEY

With a view to fulfil the various formalities that are needed for incorporation of a company,
the promoters may appoint an attorney giving him power to carry out the
instructions/requirements stipulated by the Registrar. This requires execution of a Power of
Attorney on a non-judicial stamp paper of a value prescribed in the respective State Stamp
Laws.

11
 INCORPORATION CERTIFICATE

I. ISSUE OF CERTIFICATE BY REGISTRAR

The company comes into existence as a legal person upon receiving the certificate of
incorporation.13 To incorporate a company, the documents and information given under s. 7
(1) of the C.A. 2013 must be complied with. Upon receiving the documents and the
information, the Registrar of the area where the registered office of the company is proposed
must register all the documents and information provided, if he deems it to be fit. He may,
then, issue the certificate of incorporation as prescribed by the laws to the effect that the
proposed company (be it any form of company) is incorporated under the Companies Act,
2013.14

The subscribers in the M.O.A. and all other persons shall be a body corporate from the date
of incorporate by the name provided in the memorandum (Company’s name). They will
become members of the company. The members are free to exercise all the functions of an
incorporated company, have everlasting succession with the powers to purchase, restrain, and
dispose of both movable and immovable, physical and intangible property. They can contract,
sue and be prosecuted by the company’s name. 15 The words “and a common seal” was
removed by s. 3 of the Companies (Amendment) Act, 2015, with effect from 29th May 2015.

Since the company is a separate legal person, the director of the company can, in his
individual capacity, contract with himself for employment. 16 Also, if two companies are
incorporated having same group of shareholders and directors, the will be deemed to be
distinct and separate legal entities.17

The company formed under this act can also work as a trustee, executor or as an
administrator if the M.O.A. of it permits to do the same.

II. CONCLUSIVE EVIDENCE

The Certificate will be deemed as “conclusive evidence that all the requirements of the act
13
Avtar Singh, Company Law (16th edn, Eastern Book Company) 37.
14
s. 7(2), Companies Act, 2013.
15
s. 9, Companies Act, 2013.
16
Lee v Lee’s Farming Ltd, (1960) 3 All ER 420 PC.
17
Patinson v Bindhya Debi, AIR 1933 Pat 196.

12
have been complied with in respect of registration and matters precedent and incidental
thereto, and that the association is a company authorised to be registered and duly registered
under the Companies Act.” The same was illustrated in the cases of Jubilee Cotton Mills Ltd
v Lewis18 and Moosa Goolam Ariff v Ebrahim Goolam Ariff 19. In Jubilee case it was stated
that the company is competent to enter into contracts and has rights and liabilities of a natural
person commencing the date of incorporation as mentioned in the certificate, and in addition
to that, the certificate is conclusive evidence. The Privy Council in Moosa case held that even
though the conditions were not complied with and that the registrar should not to have
granted the certificate but since the registrar had granted the certificate, it will be deemed as
conclusive evidence.

In Barned’s Banking Co, re, Peel case before registration and post signature of the members,
the proposed M.O.A. was altered without the authority of the subscribers. It was objected that
provisions of the Companies Act had not been complied with and that M.O.A. was not signed
by any of the subscribers. It was held that post the issuance of the certificate of incorporation
nothing can be inquired as to the uniformity of the previous proceedings. As per Lord
Chelmsford, the fact that the certificate of incorporation has been issued by the registrar, it
avoids all recurrence to previous matters necessary to registration and that it is a conclusive
evidence.20 Chandra Reddy, C.J. in the case of TV Krishna v Andhra Prabha (P) Ltd 21, made
an observation that the only process of getting the company exhausted is not by lashing out
its incorporation but by winding up the company. However, it was held that the company was
legally incorporate. Nevertheless, even if some of the objects were illegal, the legal
personality could not have been extinguished by revoking the certificate. The certificate is
deemed as conclusive evidence.

The certificate is conclusive evidence but in the case of illegal objects, the company does not
become legal just by the mere issuance of certificate of incorporation. The same can be
referred by s. 12 of the C.A. 2013. Such companies will be struck off. 22 The Kerala HC in
Maluk Mohamed v Capital Stock Exchange Kerala Ltd held that a writ cannot be issued in
order to revoke the registration of the company registered under the C.A. 2013.

18
(1924) AC 958.
19
ILR (1913) 40 Cal 1.
20
Oakes v Turquand and Harding, 36 LJ Ch 949.
21
AIR 1960 AP 123.
22
Bowman v Secular Society Ltd, (1917) AC 406.

13
 ALLOTMENT OF CIN

The date mentioned in the Certificate will be regarded as the date on which the company was
incorporation and from that day onwards, the Corporate Identity Number (CIN) number
allotted by the registrar will become the distinct identity of the company. This CIN number
should also be mentioned in the certificate.23

I. PRESERVATION OF DOCUMENTS OF INCORPORATION

As per s. 7(4) of the Companies Act, 2013 all the companies incorporated under the said act
must maintain and preserve a copy of all the documents and information at its registered
office which was filed under s. 7(1) of the Act and till its dissolution.

II. PENALTY FOR PROVIDING FORGED OR WRONG INFORMATION AT THE

TIME OF INCORPORATION
As per the Act, severe punishments are imposed for providing forged or wrong information in
order to incorporate a company. The following penalties are imposed on the person providing
the forged or wrong information:
1. According to s. 7(5), the person providing any forged or wrong documents or hiding any
material information in relation to the registration of the company will be punished under
s. 447 for fraud.
2. According to s. 7(6), If it is established that the company has been wrongly incorporated
by providing forged or wrong documents or depiction or by hiding any material factum or
information in any of the documents or declaration filed or made in order to incorporate
the company, or by any deceitful action, the promoters, the persons named as the first
directors of the company and the persons making declaration under section 7(1)(b) will be
punishable under s. 447 for fraud.

23
s. 7 (3), Companies Act, 2103.

14
III.POWERS OF THE TRIBUNAL TO DECIDE THE CASE OF INCORPORATION
OF A COMPANY BY PROVIDING FORGED OR WRONG INFORMATION
As per s. 7(7) of the CA, 2013, the Tribunal can take the following steps if a company has
been wrongly incorporated by providing forged or wrong information or depiction or by
hiding any material factum or information in any of the document or declaration during the
registration:
 pass such orders, as it may think right, for ruling of the management of the company
including any changes, if any, in its memorandum and articles, in public interest or in
the interest of the company and its members and creditors; or
 instruct that liability of the members shall be unlimited; or
 instruct removal of the name of the company from the register of companies; or
 pass an order for the winding up of the company; or
 pass such other orders as it may deem fit.24

24
ibid.

15
 PRE-INCORPORATION CONTRACT

Pre-Incorporation contracts are whereby promoters of the company contract on behalf of it

before the company comes into existence. In such contracts there is no obligation on the
company i.e. the Company cannot take legal action nor can it be prosecuted by the other
party. Two agreeable parties are required to contract & as the company is not incorporation
thereby it cannot come into a contract in its own name, therefore if the associates enter into
an agreement by the name of the company prior to its coming into existence, the contract will
be considered as void from the beginning. However, the promoter can enter into agreements
in the welfare of potential company. Under the principle of contract law, only the promoter is
responsible for any kind of breach of contract, as it is the promoter who is the party to
contract and not the company. As per the common law, a company before incorporation
cannot achieve a legal status to get contractual rights or sustain contractual liabilities
obtainable from a pre-incorporation agreement. Thus, under the strict principle of contract
law, the promoters are only answerable for any kind of breach of contract. The rule of privity
helps in keeping away the company from pre-incorporations contracts. But recent expansion
in corporate and contract law holds the company accountable for pre-incorporation contract.
In the case of Re English & Colonial Produce Co 25, it was held that before the company is
incorporated, shares cannot be acquired in the name of it.

I. RATIFICATION OF PRE-INCORPORATION CONTRACT

Under the Specific Relief Act, 1963, ss. 15(h) & 19(e) are the two significant sections for
pre-incorporation contract. Sec. 15 talks about the stranger’s right to sue if he’s entitled to a
benefit or has any interest under the contract although it has certain limitation. Sec. 15(h) is
about the company being stranger to pre-incorporation contract, has the right to sue to the
other contracting party, but the necessary condition is that the contract should be warranted
by the terms of its incorporation. This point clearly denies the common law Doctrine which
also says that the company is not allowed to correct the pre-incorporation contract. Under this
provision the promoter can give their right to take legal action against the company.
In Vali Pattabhirama Roa v Sri Ramanuja Ginning and Rice Factory Pvt Ltd 26, the situation
was acknowledged. whereas, sec. 19(e) states that company can be sued by the other party of

25
(1906) 2 Ch 435.
26
(1986) 60 Comp Cas 568 (AP).

16
pre-incorporation contract, if the terms of incorporation warrant and adopt the contract. This
provision cuts the promoter’s liability of pre-incorporation contract.

II. PERSONAL RIGHT AND LIABILITY OF CONTRACTING AGENT

In Kelner v Baxter27, it was held that the principle cannot be in subsistence prior to
incorporation and also if the company was not in reality then the principal of an agent cannot
be real. It was in addition held that the company will not take the responsibility of pre-
incorporation contract through adoption or ratification, as a stranger cannot correct the
contract and the company was an alien as it was not in force at time of the contract. So it was
held that promoters are individually responsible for the pre-incorporations contract as they
are the agreeing party to contract.

In New borne v Sensolid (Great Britain) Ltd.28, the court of appeal interpreted the findings of
Kelner case in a different way and developed the principle further that if a person
representing him as director of unformed company enters into a contract, then the contract
would be unenforceable. However, in Phonogram Limited v Lane29, it was held that if an
unformed company enters into the contract, then it cannot bind the company, but the legal
effect of contract does not entirely lack. And even in that situation, the promoter or
representor are personally liable for pre-incorporate contracts. These principles were found
applicable in Indian case, where the Raj HC in Seth Subhag Mal Lodha v Edward Mill Co.
Ltd.30 followed the approach of common law regarding liability of pre-incorporation contract.

27
(1866) 2LR 2CP 174(1).
28
(1954) 1QB 45.
29
(1982) QB 938.
30
(1972) cas.

17
 CONCLUSION

According to the research that has been done by the authors of this paper, the steps for
incorporation of the private company is a long process with a lot of technicalities involved.
The authors have already mentioned the steps of incorporation in this paper and thus, the
company “Success” is been duly incorporated in compliance with all the current acting rules
and laws. The promoters of the company, on the other hand, opted the newer method of the
incorporation of company, i.e., via tha SPICe form. The same form has been attached for
reference. The authors have primarily focused on the legal aspects and procedures of the
incorporation; therefore, the paper primarily consists of the rules and laws relating to it.

The promoters had not applied for the name of the company via RUN form, consequently,
they applied for the same in the SPICe form which at a time takes only one name and only 2
chances are given under it for resubmission. Luckily, the promoters of the company were able
to secure the name in the first chance only.

The newer method was, nevertheless, a bit complicated as compared to the older method but
the company duly complied with the new process. The certificate of incorporation was then
given the certificate of incorporation which is regarded as conclusive evidence. Hence, the
objects cannot be raised on the incorporation of the company as it will be deemed to have
been incorporated in compliance with the law.

18
 BIBLIOGRAPHY

Books:
 Company Law by Avtar Singh

Websites:
 Ministry of Corporate Affairs: www.mca.gov.in
 www.edurev.in

Articles:
 Incorporation of companies by The Institute Of Company Secretaries Of India
 Procedure for incorporation of company by www.simpletaxindia.net

19
 FOOTNOTES

 The Companies Act, 2013

 ‘Procedure for incorporation of
company’<http://www.simpletaxindia.net/2014/08/procedure-for-incorporation-of-
company.html> accessed on 14 February 2018.
 Ashbury Railway Carriage and Iron Co Ltd v Hector Riche (1875) LR 7 HL 653.
 Jahangir R Modi v Shamji Lodha (1866-67)4 BOM HCR 185.
 A Lakshmana Swami Mudaliar v LIC, 1963 AIR 1185.
 Royal British Bank v Turquand, [1856] 6E & B 327
 <https://edurev.in/studytube/Incorporation-of-Companies(Procedural-Aspects)-
Formation-of-Company,-Company-Law/ee4ebe33-8e92-4504-995c-a913650f7f4d_t>
 ‘Incorporation of companies’ ( THE INSTITUTE OF COMPANY SECRETARIES OF
INDIA August 8 2015)
<https://www.icsi.edu/Webmodules/CompaniesAct2013/Incorporation_of_Companies-8-
8-2015.pdf> accessed on 14 february 2018.
 Avtar Singh, Company Law (16th edn, Eastern Book Company) 37.
 Lee v Lee’s Farming Ltd, (1960) 3 All ER 420 PC.
 Patinson v Bindhya Debi, AIR 1933 Pat 196.
 Jubilee Cotton Mills Ltd v Lewis, (1924) AC 958.
 Moosa Goolam Ariff v Ebrahim Goolam Ariff, ILR (1913) 40 Cal 1.
 Oakes v Turquand and Harding, 36 LJ Ch 949.
 TV Krishna v Andhra Prabha (P) Ltd, AIR 1960 AP 123.
 Bowman v Secular Society Ltd, (1917) AC 406.
 Re English & Colonial Produce Co, (1906) 2 Ch 435.
 Vali Pattabhirama Roa v Sri Ramanuja Ginning and Rice Factory Pvt. Ltd, (1986) 60
Comp Cas 568 (AP).
 Kelner v Baxter, (1866) 2LR 2CP 174(1).
 New borne v Sensolid (Great Britain) Ltd, (1954) 1QB 45.
 Phonogram Limited v Lane, (1982) QB 938.
 Seth Subhag Mal Lodha v Edward Mill Co Ltd, (1972) cas.

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