FORMATION OF COMPANY

These Are Two Principal Stages In The Formation Of A

Company:

1.

1. Promotion Of A Company

2. Incorporation Of A Company

2. 1. Promotion Of A Company

3. Promotion Is The Stage Of Conceiving An Idea Of Forming A Company To

Do A Business And Working On That Idea. The Person Involved In This Task

Is Termed As Promoter. The Promoter May Work 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.

4. 1.1 Promoter Of A Company

5. 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 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.

6. Sec. 2(69) Of The Companies Act, 2013 Defines The Term Promoter As A

Person:

7. (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

8. (B) Who Has Control Over The Affairs Of The Company, Directly Or

Indirectly Whether As A Shareholder, Director Or Otherwise; Or

9. (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.

10.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 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.

11.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.

12. 1.2 Functions Of Promoter

13.The Main Functions Of A Promoter Are As Follow:

14.(I) To Conceive An Idea Of Starting A Business And Explore Its Possibilities.

15.(Ii) To Undertake Detailed Technical, Economic And Commercial Feasibility

Of The Business Propositions. Help Of Experts May Be Taken For That.

16.(Iii) To Conduct Negotiations For The Purchase Of A Business In Case It Is

Intended To Purchase An Existing Business.

17.(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 Memorandum And Articles Of The Company And Also Agree To Act As

The First Directors Of The Company.

18.(V) To Decide The Following:

19.(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.

20.(Vi) To Get The Memorandum Of Association And Articles Of Association

Drafted And Printed.

21.(Vii) To Enter Into Preliminary Contracts With Vendors, Under-Writers Etc.

22.(Viii) To Arrange For The Preparation Of Prospectus, Its Filing, Advertisement

And Issue Of Capital.

23.(Ix) To Pay Preliminary Expenses.

24.(X) To Arrange Funds Required By The Company.

25. 1.3 Legal Position Of Promoter

26.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’.

27.“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”.

28.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 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

29. 1.4 Duties Of Promoter

30.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:

31.(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.

32.(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. A Case Is Illustrated:

33.

34.Erlanger V. New Sombrero Phosphate Co. (1878) 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 Of The Facts. His Contention Was Rejected And He Was Asked To

Return The Benefit To The Liquidator.

35. The Court Held

36. “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.”

1.5 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.

(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 Promoter Shall Become Liable To Be

Punished With Imprisonment For A Term Which May Extend To 3 Years Or A

Fine From Rs. 50,000 To Rs. 300,000 Or Both [Section 26(9)].

(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).

1.6 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.

(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.

1.7 Pre-Incorporation Contracts

1.7.1 Meaning

Preliminary Contracts Are Contracts Entered Into By The Promoters On Behalf

Of The Company Before Its Incorporation With Third Parties.

1.7.2 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.
 Cases
(I) 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 By The Syndicate For Specific Performance Of

The Agreement Or In The Alternative For Damages Was Not

Maintainable As

“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.” 6

(Ii) 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. 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.” 7

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.8 ‘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.’9

1.7.3 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 Kelner V. Baxter (1866) Provides An Illustration:

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 Newborne (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 Newborne (London) Ltd.” A Contract For The Supply

Of Certain Goods By The Company (Not Formed Till Then) To Sensolid

Was Signed Thus “Leopold Newborne (London) Ltd.” And The Name

L.N. Was Written Underneath. In An 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.

1.8 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 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 Communicates 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.

2. Incorporation Of A Company

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:

(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.

2.1 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

The Order Of Their Preference.

2. A Fee Of Rs. 500 Has To Be Paid Alongside And The Digital Signature Of

The Applicant Proposing The Company 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.

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.

2.2 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 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

Accountant, 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 Thereunder 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;

(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

Directors 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.

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 Mca 21 Project Of 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: Application For Din

To Register A Company, First Director Identification Number (Din) Is To Be

Obtained. One Needs To File Eform Din-1 In Order To Obtain Din.

Step 2: Acquire/Register 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 — Role Check For Indian Companies Is To Be Implemented In

The Mca Application.

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 Services 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 Rs. 500 Has To Be

Paid Alongside And The Digital Signature Of The Applicant Proposing The

Company 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 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

Appropriate Stamp Duty. It Can Be Paid Electronically On The Mca Portal.

— Get The Memorandum And The Articles Signed By At Least Two

Subscribers (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:

 Form Inc-22: Notice Of Situation Or Change Of Situation Of Registered Office

Based On The Option Chosen In Form Inc-7.

 Form Dir-12: Particulars Of Appointment Of Directors And The Key

Managerial Personnel And The Changes Among Them.

 Declaration Of Compliance

— After Processing Of The Form Is Complete And Corporate Identity Is

Generated, Obtain Certificate Of Incorporation From Roc.

2.3 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 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.

2.4 Validity Of Certificate Of Incorporation

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

Companies; Or

(Iv) Pass An Order For The Winding Up Of The Company; Or

(V) Pass Such Other Orders As It May Deem Fit.

2.5 Commencement Of Business [Section 10a]

A Company Incorporated 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 Prescribed 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.

2.6 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 Rs. 50,000 And Every Officer In Default With A Penalty Of

Rs. 1000 For Each Day During Which Such Default Continues Which May Go

Up To Rs. 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.

2.7 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


Liability Of Promoters
 Lydney & Wigpool Iron Ore Co. V. Bird
 

 Enlarger V. New Sombrero Phosphate Co.


Liability Of Promoters
 Kelner V. Baxter

1.

1. Twy Cross V. Grant (1877)

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

3. Lagunus Nitrate Co. V. Lagunus Nitrate Syndicate (1899).

4. S.M. Shah, “Lectures On Company Law”

5. Cavendish Bentick V. Fenn (1887)

6. Natal Land And Colonisation Co. Ltd. V. Pauline Colliery & Development

Syndicate Ltd. (1904)

7. Re. English And Colonial Produce Co. Ltd. (1906)

8. Gower L.C.B., “The Principles Of Modern Company Law”, Third Ed., P. 280.

9. New Borne V. Sensolid (Gb) Ltd. (1954).