Formation of Company

Dr. Mohit Sharma

Symbiosis Law School, NOIDA
 Meaning of Promotion
The term promotion of a company, therefore,
means to help bringing a company into
existence.

Steps of Promotion

Commercial Legal
 Commercial

Discovery of an Idea
Investigation
Planning
Financing
• Legal Formalities
Application with fees
Preparation of certain documents
Signing of documents
Filling of documents
• Memorandum & Articles
• Declaration
• Affidavit
• Address of correspondence
• Particulars
Certificate of incorporation, Corporate identity
number
 Promoters
• It begins with a person or a group of persons having
thought of or conceived a possible future business
opportunity and then taking an initiative to give it a
practical shape by way of forming a company. Such a
person or a group of persons who proceed to form a
company are known as promoters of the company.

• Promoters not only conceive a business opportunity but

also analyze its prospects and bring together the men, 
materials, machinery, managerial abilities and financial
 resources that are necessary for the formation and
existence of the company.
 Functions of a Promoter 

Identification of Business Opportunity

Feasibility Studies (Technical, Financial,
Economical 
Name Approval
Fixing up Signatories to the Memorandum of
Association
Appointment of Professionals
Preparation of Necessary Documents
• Bower, L.J. - “It is not a term of law but of business operations
familiar to the commercial world by which a company
generally brought into existence”.
• Haney - “Promoter is a person who conceives the idea, studies
the prospects of the business critically, chalks out an
attentative scheme of organisation, brings together the
requisite men, materials, machinery, money and managerial
ability and float the enterprise”.
• Justice C. Cockburn - “Promoter is one who undertakes to
form a company with reference to a given object and to set it
going, and who takes the necessary steps to accomplish that
purpose.”
• Guthmann and Dougall - “Promoter is the person who
assembles the men, the money and the materials into a going
concern.”
• “promoter” means a person— Section 2(69)

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

Agent Employee
Trustee

The promoter is neither a trustee nor an agent of

the company because there is no company yet in
existence. The correct way to describe his legal
position is that he stands in a fiduciary position
towards the company about to be formed.
• Rights
To receive the legitimate preliminary expenses
To receive the remuneration
• Duties of Promoter
To disclose the secret profit
To disclose all the material facts
The promoter must make good to the company what
he has obtained as a trustee
• Liabilities
To account in profit
Mis-statement in the prospectus
Personal liability
 Pre - Incorporation Contract

Position before 1963 Position since 1963

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

follows:
• The contract should have been entered into by the promoter
for the purpose of the company.
• The terms of incorporation should warrant such contract.
• The company should accept the contract after incorporation.
• Such acceptance should be communicated to the other party to
the contract.
Memorandum of Association
2(56) ―memorandum means the memorandum of
association of a company as originally framed or as
altered from time to time in pursuance of any
previous company law or of this Act;

Memorandum of Association is a legal document

which describes the purpose for which the company
is formed. It defines the powers of the company and
the conditions under which it operates. It is a
document that contains all the rules and regulations
that govern a company’s relations with the outside
world. 
 Memorandum of Association

Name
Registered office
Objects
Liability
Capital
in the case of One Person Company, the name of
the person who, in the event of death of the
subscriber, shall become the member of the
company.
• Format
• Table A – It is applicable to a company limited
by shares.
• Table B – It is applicable to a company limited
by guarantee and not having a share capital.
• Table C – It is applicable to a company limited
by guarantee and having a share capital.
• Table D – It is applicable to an unlimited
company not having a share capital.
• Table E – It is applicable to an unlimited
company having a share capital. 
• Doctrine of Ultra Vires
• The object clause of the memorandum of the
company contains the object for which the
company is formed. An act of the company must
not be beyond the object clause otherwise it will be
ultra vires and therefore, void and cannot be
ratified even if all the member wish to ratify. This is
called the doctrine of ultra vires. The expression
“ultra vires” consists of two words: ‘ultra’ and
‘vires’. ‘Ultra’ means beyond and ‘Vires’ means
powers. Thus, the expression ultra vires means an
act beyond the powers.
• Ashbury Railway Carriage and Iron Company Ltd v.
Riche, (1875) L.R. 7 H.L. 653.
• Consequences of Ultra Vires

• Liability of Directors: The directors of the company have a duty to

ensure that company’s capital is used for the right purpose only.
If the capital is diverted for another purpose not stated in the
memorandum, then the directors will be held personally liable. 
• Ultra Vires Borrowing by the Company: If a bank lends to the
company for the purpose not stated in the object clause, then the
borrowing would be Ultra Vires and the bank will not be able to
recover the amount. 
• Ultra Vires Lending by the Company: If the company lends money
for an ultra vires purpose, then the lending would be ultra vires. 
• Void ab initio – Ultra Vires acts of the company are considered
void from the beginning. 
• Injunction – Any member of the company can use the remedy of
injunction to prevent the company from doing ultra vires acts. 
• Articles of Association
• 2(5) ‘articles’ means the articles of association of a
company as originally framed or as altered from time
to time or applied in pursuance of any previous
company law or of this Act.

• The articles of association of a company are its bye-

laws or rules and regulations that govern the
management of its internal affairs and the conduct of
its business. The articles play a very important role in
the affairs of a company. It deals with the rights.
• Format
• Table F – It is applicable to a company limited
by shares.
• Table G – It is applicable to a company limited
by guarantee and having a share capital.
• Table H – It is applicable to a company limited
by guarantee and not having a share capital.
• Table I – It is applicable to an unlimited
company and having a share capital.
• Table J – It is applicable to an unlimited
company and not having a share capital. 
• CONTENTS OF ARTICLES

• Share capital and variation of rights: 

• Lien of shares: Calls on shares: Transfer of shares: 
• Transmission of shares: 
• Forfeiture of shares: 
• Alteration of capital:
• Conversion of shares in stock: 
• Capitalisation of Profits: 
• Buy-back of Shares: 
• General meetings and proceedings:
• Voting rights and Proxy:
• Board of Directors, Meetings and Proceedings: 
• Key Managerial Personnel: Dividends and reserves: 
• Accounts and Audits:
• Borrowing Powers:
• Winding Up: 
• Constructive Notice

• It provides that the memorandum and articles when

registered with Registrar of Companies becomes public
document and then they can be inspected by anyone on
payment of a nominal fee. Therefore, any person who
contemplates entering into a contract with the company
has the means of ascertaining and is thus presumed to
know the powers of the company has the means of
ascertaining and is thus presumed to know the powers of
the company and the extent to which they have been
delegated to the directors. In other words, every person
dealing with the company is presumed to have read these
documents and understood them in their true perspective.
This is known as doctrine of constructive notice.
• DOCTRINE OF INDOOR MANAGEMENT

• While the doctrine of ‘constructive notice” seeks to protect the

company against the outsiders, the principal of indoor management
operates to protect the outsiders against the company.

• Royal British Bank v. Turquand, (1856) 119 E.R. 886

while persons contracting with a company are presumed to know the

provisions of the contents of the memorandum and articles, they are
entitled to assume that the provisions of the articles have been
observed by the officers of the company. It is no part of the duty of an
outsider to see that the company carries out its own internal
regulations.
• EXCEPTIONS TO THE DOCTRINE OF INDOOR
MANAGEMENT

• Where the outsider had knowledge of

irregularity
• No knowledge of memorandum and articles
• Forgery
• Negligence