Formation and Incorporation of

Company
Mrs. Shruti Reddy,
CoLS, UPES
 Formation of co.- 4 stages

Commence
Promotion Registration Floatation ment of
Business
 Promotion
• Preliminary step for regn. and floatation of co.
• Promoters: who assume task of promotion- individual,
syndicate, partner, co.
• S. 2 (69) Companies Act, 2013:
(a) who has been named as such in a prospectus or is identified
by the company in the annual return; 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.
Contd.
• R. 405 (a), US Securities Exchange Commission
Rules: person who, acting alone, or in conjunction
with other persons directly or indirectly, takes the
initiative in founding or organizing the business
enterprise.
• Assn. need not be from initial formation of co.,
subsequent help for arranging floatation of capital
equally regarded as promoter (Lagunas Nitrate Co.
v. Lagunas Syndicate, [1899] 2 Ch. 392 C.A.)
• Persons assisting promoters in official capacity- not
promoters
Contd.
• Promoter/s are those persons who, in forming
the co., secure for themselves the management
of the co. being formed or are persons who
convert their own pvt. business into a ltd. co.,
pub. or pvt. and secure for themselves more or
less a controlling interest into the co.’s
management (A Ramaiya, Guide to Co.s Act)
 Beginning & End of Promotion
• Fiduciary relationship between promoter and co.
starts from the date of floating a co. and
continues till directors take into their hands
responsibility of the remaining acts of forming
the co. (Twycross v. Grant, 1877 2 C.P.D. 469
C.A.)
• Status of promoters terminates on formation of
BoD
• After handing over- fiduciary relationship ceases
 Legal position of a Promoter
• Neither an agent, nor a trustee
• Fiduciary position
• Lord Cairns in Erlanger v. New Sombrero
Phosphate Co. (39 LT 269):
“the promoters of a co. stand undoubtedly in a
fiduciary position. They have in their hands the
creation and moulding of the company.”
 Duties of a Promoter
Duty to Duty to
disclose secret disclose
profits interest

Interest of the
Gluckstein v.
promoter in
Barnes [1900] AC
transaction
240
entered into by co.

Disclosure to
whom?
Independent and
competent BoD
 Duties of a Promoter
• Termination of promoters’ duties:
- not on incorporation nor on constitution of BoD
- Till co. acquires property/business for which it is
formed and till it raises its initial capital
(Lagunas Nitrate Co. v. Lagunas Syndicate,
[1899] 2 Ch. 392 C.A.)
- Till BoD takes over the management of co.’s
affairs from promoters (Twycross v. Grant, 1877
2 C.P.D. 469 C.A.)
 Remedies for breach of duty
• Rescission of contract
• Recovery of secret profits
a. Promoter not in fiduciary position while acquisition of property but only while
selling it- no claim for recovery of profits
b. Promoter in fiduciary position while acquisition of property & while selling it
to co.
- Property bought with intention to sell it to co. which promoter intends to
promote
- Property purchased after promotional activities and resold to co. at
increased price
- Where the person is a promoter for acquiring the property for co. in
capacity of agent
Remedy
- Rescission of contract, profit on ancillary transaction also recovered
- Retention of property, not paying more resulting in deprivation of profit
- Above remedies inappropriate- co. may sue for misfeasance (breach of duty
to disclose)
 Liability of promoters
1. S. 26: liability for non compliance of the
provisions of the section wrt matters to be
stated in prospectus
2. Ss. 34 & 35: liability for untrue statement in
prospectus to an investor
Remedies:
a. rescission of contract to purchase shares
b. suit for damages
c. prosecution- imprisonment from 06
months to 10 yrs/ fine not less than amnt
involved in the fraud or 03 times of it.
 Remuneration of promoters
• Unless there is a valid contract to that effect,
promoter not entitled for remuneration (including
preliminary expenses)
• AoA authorizes directors to pay for preliminary
expenses incurred by promoters
• Co. may decide to pay remuneration later in
following manner, which should be disclosed in
prospectus:
a. May sell his own property for cash or against fully
paid up shares
b. May take commission on shares sold
c. May be paid lump sum by co.
 Pre-incorporation contracts
• Validity of contracts made before incorporation
of co.?
• “Two consenting parties are necessary to a
contract, whereas the co. before incorporation is
a non-entity” (Kelner v Baxter [1866] 15 LT 213)
Position before
1963
Legal position of
pre incorporated
contracts
Position since
1963
 Position before 1963
• Pre incorporation contract not binding- co.
before incorporation has no existence
• Co. cannot ratify pre-incorporation contract-
ostensible owner not in existence at the time of
making contract
• Co. not entitled to sue on a pre incorporation
contract
 Position after 1963
• S. 15 (h), Specific Relief Act, 1963: if promoters
of a co. make pre incorporation contract for co.,
and the same is warranted by terms of
incorporation, co. may enforce it
• S. 19, Specific Relief Act, 1963: third parties
allowed to enforce contract under following
circumstances;
a. Co. adopts the same after incorporation
b. Contract is warranted by terms of
incorporation
 Pre-incorporation contracts
• Liability of promoters when co. does not execute
fresh contract and the contracts is not warranted
for incorporation?
Promoters personally liable for damages as well
a suit for specific performance like any other
party to a contract
 Procedure for registration/incorporation of
Co.- steps to be taken by promoters
Type of co.: pub./pvt.res or /OPC- Section 3
Co. ltd by guarantee/ shares or unlimited co.

Application for availability of name: S. 4 (undesirable

in opinion of CG);
Mandatory use of “limited”- exception Section 8 co.s
Availability to be enquired with RoC- appln for
reservn of name of proposed co./ proposal for change
of name
06 names to be proposed
On approval by RoC name reserved for 60 days
Name reserved by giving false info:
a. If co. is incorporated
b. If co. is not incorporated
Preparation of MoA & AoA: objects, capital,
nature of liability, name of state of regd. off.,
rules & reglns. reg. internal management of
co.
(Ss. 4 & 5)

Vetting of MoA and AoA, Printing,

Stamping and Signing of same: RoC
expected to advise whenever reqd. (S.7)
Signature of every subscriber, along
with address, description and
occupation, if any, criber to mention
no. & nature of shares subscribed by
them directly; person duly authrised
may sign on behalf of subscriber,
consent (of nominee in OPC)
Stamp fee as per Stamp Act
 Other documents

Power of attorney

Affidavit from each subscriber & first directors

reg proper conduct (S.7), punishment for false
particulars (S. 447)

Particulars of directors, etc: details of those

persons whose names are mentioned as director,
manager, secretary etc in AoA, consent,
punishment for false particulars (S. 447)
Notice of regd. address (S. 12): regd.
office within 15 days and info reg. the
same to RoC within 30 days of
incorporation, address for
communication

Statutory declaration [S.7]:

Statutory declaration of
compliance along with MoA &
AoA by Advocate, or CS , or CA
practicing in India and engaged in
formation of co., or director,
manager, or secretary whose
name is mentioned in AoA
Declaration that all formalities
stipulated by Act is observed
 Filing of documents for regn: to
RoC of state where co. is proposed
to be incorporated along with
prescribed regn. and filing fee
 Certificate of Incorporation
• RoC enters the name of co. in the Register of Co.’s after
scrutiny of docs. and observance of formalities
• RoC certifies that the co. is incorporated- cert. referred
to as certificate of incorporation
• Effect of certificate of incorporation (S. 9): date of
incorporation, subscribers to MoA as members of co.,
shall be body corporate by name contained in MoA,
capable of exercising as an incorporated co. with a
perpetual succession & a common seal with liability on
members as mentioned in MoA
• Allotment of Corporate Identity Number (CIN)- S. 7 (3)
Contd.
• Conclusiveness of certificate of incorporation (S.
9): conclusive evidence that all formalities are
observed [Jubilee Cotton Mills Ltd. v. Lewis
[1924] A.C. 1958; Moosa Goolam Arif v.
Ebrahim Goolam Arif ILR (1913 ) 40 Cal 1].
• Provisional contracts: after cert. of incorp. but
before cert. of commencement of business
 Floatation
• Pub. Co. after regn.-ready for floatation (raising
capital sufficient to commence business
satisfactorily)
• Public offer and pvt placement (Ss.23 and 42)
• Mode of inviting subscription:
a. Issue prospectus: or
b. Pvt placement offer letter
• Allotment can be made only if min. subscription is
subscribed and money received on closure of issue
• Min. subscription if not reached then application
money is to be returned
 Commencement of Business
• S. 11 to be abided by all companies for cert of
commencement of business
• To commence business or exercise borrowing
powers following conditions are reqd to be fulfilled;
a.the subscribers to the memorandum have paid in
their subscription monies and a declaration to that
effect has been filed with the Registrar and the
paid up share capital of the company on the date
of declaration is at least Rs.1 lakh for a private
company and Rs.5 lakhs for a public company, and
b.the company has filed with the Registrar a
verification of its Registered office.
Contd.
• If declaration is not filed within 180 days of date
of incorporation and the Registrar has reason to
believe that the company is not carrying on its
business or operations- reason to initiate action
for removal of the company name from the
registrar of companies.
• S.11- omitted by the Companies (Amendment)
Act, 2015