CORPORATE LAW

TOPIC- FORMATION OF COMPANY

BY:-
MUSKAN
MALHOTRA (2006051)
FORMATION OF COMPANY

PROMOTION COMMENCEMENT
INCORPORATION
OF BUSINESS
 PROMOTION
It is the stage of conceiving an idea of forming a
company to do a business and working on that
idea.
🞆Person involved in this task is called promoter.
🞆The promoter works up the idea with the help
of his own resources, influence or competence
or he may, if necessary, take the help of
technical and legal experts to bring a company
into existence.
 PROMOTER
🞆 Promoter is the 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 think as he does.”
🞆 Section 2(69) of Companies Act, 2013 defines promoter as a person
a) Who has been as such in a prospectus or is identifies 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
 FUNCTIONS OF A
PROMOTER
I. To conceive an idea of starting a business and explore its possibilities.
II. To undertake detailed technical, economical and commercial feasibility of the business
propositions. Help of experts can 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 private company and 7 in the
case of public company, who can sign the memorandum and articles of the company and also
agree to act as the first directors of the company.
V. To get the memorandum of association and articles of association drafted and printed.
VI. To pay preliminary expenses.
 FUNCTIONS OF A
PROMOTER Cont…
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 banks
(f) the auditors
(g) the legal advisors.
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 arrange funds required by the company.
 LEGAL POSITION OF
PROMOTER
❑ The legal position of the promoter cannot be precisely established as a promoter
can neither be termed as an agent nor a trustee of a company which has not come
into existence because there was no principal in existence for whom or for whose
benefit the promoter has acted.
❑ 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 those whom they induce to become shareholders in it, as that of a
fiduciary relationship. This fiduciary relationship is based on utmost confidence
and faith.
 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. This fiduciary relationship imposes the following obligations on the
promoters:
1. Not to make secret profit – Promoters should not make any secret profit 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. Company can proceed against the promoters for any damage caused to it
on the account of their fraud or breach of duty.
2. Disclosure of material facts – It is the duty of promoters to disclose fully all
material facts relating to the formation of the company. The disclosure of all
material facts, regarding contracts made and profit earned by them from the
formation of the company, should be made to an independent and competent board
of directors.
LIABILITIES OF PROMOTER
🞆 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 recission of the contract of sale by the promoter where the promoter has not
disclosed his interest therein.
🞆 NON-ADOPTION OF PRELIMINARY CONTRACT - If a promoter enters into contract on the behalf of company before
the it was 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.
🞆 FRAUD IN THE PROMOTION OF THE COMPANY:

I. Under section 447, a promoter shall be liable if he furnishes any fraud 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 .
II. Under section 282, the Tribunal may order investigation against the promoters any otherdirector or
officer of the company if found that any fraud has been committed in promoting or forming a company.
III. A company may proceed against the promoter where he has wrongfully obtained 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 authorized by the Act.
🞆 OMISSION IN THE PROSPECTUS - Prospectus issued by the company must have the contents as laid
down by Section 26 of the Companies Act. In case of omission of facts, the promoter shall become
liable to be punished with imprisonment or a term which may extend to 3 years or a fine from RS,
50,000 to Rs. 300000 or both.
🞆 MISREPRESENTATION IN THE PROSPECTUS - Under section 35, a promoter can be sued for any
loss if he 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.
 REMUNERATION TO
PROMOTER
The promoter has to incur the initial expenses in the process of formation of
a company. Therefore, he has a legitimate right to claim for both the
expenses incurred by him as well as remuneration for the work done by him.
The claim should be supported by vouchers and should be placed before the
directors of the company. However, there is no contractual obligation on the
part of company to pay these expenses unless the company has agreed to
pay. The amount for this should be disclosed in the prospectus.
WAYS OF REMUNERATION
🞆 Promoter may sell his own asset to company at profit for cash or shares.
🞆 He may be given commission on the purchase price.
🞆 He may be granted a lump sum amount as remuneration.
 PRE-INCORPORATION
CONTRACTS
❖ MEANING – Pre-incorporation contracts are entered into by the promoters
on behalf of the company before its incorporation with the third parties.
❖ VALIDITY – It is usual of 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. The
company can neither ratify these 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. 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
agreement” or the promoters will have to undertake personal liability; which of
these course will be adopted depends largely on the demands of the other party.
THANK YOU