4

P T E R

FORMATION OF COMPANY --
mation of a company:
These are two principal stages in the for
♦ Promotion

♦ Inc orp ora tio n

Pr om oti on
idea of forming a company to do
Promotion is the stage of conceiving an son involved in this task is
ess an d wo rki ng on tha t idea. Th e per
a busin up the idea with the help of
pro mo ter . Th e pro mo ter ma y wo rk
termed as
ence or he may, if necessary, take
his own resources, influence or compet
hel p of tec hn ica l an d leg al exp ert s to bring a company into existence.
the

Promoter
idea of starting a business, plans
Pro mo ter is a pe rso n wh o conceives the
tio n of a co mp an y an d act ual ly bri ngs it into existence. He may
the for ma
y wh o sees the prospects of gain in
be said to be "the fat he r of the co mp an
ess wh ich he wi she s to set up , an d believes tha t he can pe rsu ad e
a busin
ter is on e who un de rta ke s to form
others too to thi nk as he does." A pro mo
y wi th ref ere nc e to a giv en ob jec t an d who takes the necessary
a co mp an
er ha s defined company pro mo ter
steps to acc om pli sh tha t pu rpo se. Pa lm
1

wh o ori gin ate s a sch em e for the for ma tio n of the co1:°pany,
as "a pe rso n
Me mo ran du m an d the Ar tic les pre pa red , ex ecu ted an d registered,
has the
of preliminary co ntr act s an d
and finds the first dir ect ors , set tle s the ter ms

1. Twy Cross v. Gra nt (1 877)

 F JON O f co M P
ANY
6 oRAfAT .
0 rn f O r a d e rt is in g a n
ts (if an y ) andlarn ak h a rr a n.g eI" e n ts v • d circ:ulat·lti
cing es p ro ro o te r d is
- •11~~
c a propao.s1.t1. ons,aan d b ri n g s a b ocuo v e rs , fol'h
it T h u
th
prosp~~~ pec tUS
I tee s and a sse m
a:;~r t e
a buslinp%se~t.
t a c o rn:p
.
ah'ly·
i;to existe nce Croitms e
)
fo d ve o
panie s Act, 2 0 1 3 e
h
d fin e s t e te rm p ro m o te r a s a Pers(
o 'f• d b
)\\:
f th h in r is id e n tl
~
Sec. 2(6.9 o e d a ue a prospectm ie y th
Wh o h as be en na m e I srestu f e d to u· :e c ti o n 92; o r
(a) any in th e an n u a rn re e rr . .
a ff h c o m p a n y d ir e c tl y o r m
comp a ir s o ft e herwis , direc:t\-y
~~ a shoalorevheortldheer, diraedcvtoicre o r ot
ntr e; o r
(b) Whoh •: .
whe th e , d ir e c ti o n :~ dr instructions the
(c) In accofrdance w ith wh to act. T h is shal
Board o o I·rectors of t heose compwahny is a c·c u s to ly
o is actm g m e re in a p ro f ession
l,
I to a person a\
however not app
y
capacity. a n a s s o c ia ti o n
. . al a family
A promoter m y be an individu ' , a fi nn, in d iv id u o f persons,
m p a n y or eaven the governmehn t.eIt may cover a n y a l o r company
a co bta I s o r n e g o ti a te s phreh J im in ary contracts.
th a t o ins a director, p ac esris a r . d w it ia l fo rm a ti o n
A promoter n d t necessa ly be associate it t e m·

ee g . ff
f the company; n : who subsequently he1p :oto a r r a n e th e 'f lo a. ti n g o \.egci
ir o
its capital' will .en 11 be regarded as a P m o te r. P e r s o n s d m n g t
f a: s ~P:
of purely ministe ua t \ e or in a professional cap .ty f o r r e m u n e r a ti o n
or fees are not n:m~e~s e.g., solicitors,_ va ~~1 P r o m o te \\1bl(
r d o e s not
include any pe~:pr re a so
P~rcuring the fo
n of his actmg m l~
rmation ~f th e
e rs
a
,p ~ o fe s s
a
io n a l c a p a c it
n A p e r s o
y or
n who
o r tI
'f bD
?P ~ ;~ ~ s v :~ :f:i
o n
is not a prom oter But a pro
w o u ld be con
. .
e y to prom~ter5i
rofmess1ona w
oter.
fo~::!~: ~
c ~ n ;. ~ ~ ~ a r y
J c i e r s to th e c o
expenses
mpany
f\.O'
co.
sidered as p
A person cann b h Id
ot e e ; s a p ro m o te r m e re 1Y b e c a u s e h e h a s s ig n e
the foot of the ~ th a t h e h a s p ro d at
m ent of formatme m o ra n u ~ c v id h
not performe ne
d the fuxnpenses.
;[ signatory to th e M e m o n e y f o r t e p a y -
e d
liable as a prom morandum, w
oter. c ti o n s o f th e p r o m o te ho has
r of a compa not be
l Functions of P
romoter
ny, may

The main functi

ons o f a p ro m
P,
o te r a r e a s foll L:
(z) To conceive ow:
an id e a o f s ta rt b
in g a b u s in e s s
(iz) To u n d e rt a k
e detailed techn and e x p lo r e it s
ical, e c o n o m ic p o s s ib il it ie s . s'
o f th e business a nd c o m m e r c ia l
propositions. H f e a s ib il it y \~
(iiz) To c o n d u c e lp o f e x p e r ts m a y
t b e ta k e n f o r
in te n d e d to pnue g o ti a ti o n s f o r th e p u r c h th a t. l
r c h a s e an e x is a s e o f a b u s in
ti n g b u s in e s s . e s s in c a s e it
2. G. Tiruvengad
achariar v. Velu
MudaJiar (1938)
is
'
(! and c4-c
1scover l!Jit
>out s, fo tJ ... FORMATIO N OF COMPANY
a co~ l'~"'~ 61
1lq ~- (iv) To collect the requisite n b
•ter as a ~} va t e company and 7 in th um er of pe •.sons Le.
• 2m. the case of
a pri-
"' t;c.:. .Pel''<- th e memoran d um and a rt·e case I of a pu bl '
1c company who can sign
.
-n .l.l.ied ~G
bY t~ ~ as t h e first irectors of th ic es of th e~company and also
d' , agree
to act
2; or . e company.
( v) To d~c1de _the f~llowin g: (a) the
• ~
V or111d4- loca t10n of its re~1stered office c t nature of the company (b) the
(d) the underwn ters or brok ( { he amount and form of its capital
eetJJ,
bankers C-1) the auditors (g) t~rsl or capit_al issue, if necessary (e) the
-uctioll.s e egal advisers
( t11) To get th e m emorand um of as . . .
t. This slJ. t~~ drafted and printed. sociation a~d articles of association
•rofess·lohcl1], , ( vii) To enter into prelimina ry
. . ~qJ contracts with v d d .
( viii) Toarrang.
eforthep re . en ors, _u n er-wnters etc.
Jf persotl I an d Issue of capital. paration of prosp ec t us, its . filin' g,
advertise ment
'COllJp¾ S, (ix) To pay prelimin ary expenses .
~ontra Y
cts
)rllJat· ·
(x) To arrange funds required b th
. loll
Y e company .
~ting_ Of{ Legal Position of Promote r
·1 ng acts
teratio11 A promote r can neither be termed as an t
· hh t · . agen
::>es not w IC as no come mto existence . The reason I·snor
h a trustee of a company
th t th . .
· · t f h
or trus t 1n exis ence or w om or for whose be fitath ere was nohpnncipal
city or I I ·· ne e promoter as acted
Thus, t h e ega position of the promote r cannot be · l
•n Who · dl . . .. precise y establish e d..
>enses
!·
Howev~r , Lm ey, L. descnbe d his position in Lydney & Wigpool Iron Ore
Co. v. Bird (1866) which may be termed as that of 'quasi-tru stee'.
1pany
"Although h not an agent
· . . for. the company• nor a trustee for i·t b ef.ore its
· for-
ma t10n, t e old familiar pnnciples of law of agency and of trusteeshi p have
!d at been extended and very prop~rly extended to meet such cases. It is perfectly
Day- well settled that a promoter 1s accounta ble to it for all monies secretlv ob-
tained by him from it, just as the relationsh ip of the principal and ag; nt or
has the trustee and the trust had really existed between him and the company
be when the money was obtained" .
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 c?rpora-
tion altogether. They must make a reasonable use of the powers ~h1ch they
accept from the legislatu re; and consequently they do stand, with reg_ard
to the corpora tion, when formed, in what is commonly called a fiduciary
relation to some extent.n3
3. Lagun us Nitrate Co. v. Lagunus Nitrate Syndicate (lS 99).
 f
62
F O R M A T IO N
O F COMPAN
Duties o f P r Y
o m o te r
The p r o m o te r
the fiduciary res ta n d s in a fiduciary relation
lationship rea shiphwi th the
fiduciary obli• •
g a ti o n f ll y a ri s e s w h e n t e comh c o ~ p ~ n y . Thau~
p r o m o te r o f th o r o m o te r beg ins as s o o n as panytis otrrned, th 1:
e c o m p a nay .p4 T . hi e se s o u to
obligations o n h is f
th e p r o m o te r s id u c ia r y r e1ations p u• n p o s e s th f ll act ¾
(i) N o t to m : e O owii)~
a k e Secret P .
· rofit: P r o m o t s s h o u
profits a t th~ c er ld n o t m a k e
S e c r e t p r o f it s o s t o f th~ companby ·th u t its k n o w any se
p r o m o te r s c a o r undisclosed e n e1f_ w to f a n y ty p d g e a n d conscr
le
e
~l
n 1s O e r e c e iv e d by tht.
c a n p r o c e e d b e r e c o v e r e d f r o m th e m b
ag y th e c o m p a n 5 e
a c c o u n t o f th a in s t th e p r o m o te r s f o r a n y . Com~any
e ir f r a u d o r b y damage ca
shall r e m a in r e a c h o f duty. u
liable in a n a T h e e s ta te o f s e d to It on
c ti o n by a c o
o f tr u s t if a n y
b e n e f it h a s a c m p a n y f o r d e t~ e promoter
( ii ) D is c lo s u c r u e d to th e e c e it o r breach
r e o f M a te r ia s ta te .
fully all m a te l Facts: I t is th
r ia l f a c ts r e la e d u ty o f t~ e p
ti n g to th e f o r r o m o te
d is c lo s u r e o f
all m a te r ia l fa m a ti o n o f th e r s to disclose
p r o f it s e a r n e cts, r e g a r d in g c o m p a n y . Th
d b y th e m f r o c o n tr a c ts m e
b e m a d e to a m th e f o r m a ti a d e a n d the
n in d e p e n d e n o n o f th e c o m
t and compe pa
th e p r o m o te r
s fail to d is c lo te n t B o a r d o ! 3 y , s h o u ld
th e tr a n s a c ti s e c o m p le te fa f D ir e c to r s .
on and recov cts, c o m p a n y If it
il lu s tr a te d : e r th e b e n e f it m a y s e t asid
e a r n e d b y th e t'.
e m . A c a s e is
Erlanger;fJ!.::Ne 2
:W
;om~ ~ f~Jii~9V - .., -Sombrero Phosphate Co. (1878 t
o r £"Sp,000i ; -
~s.!~,,;p u tc h a s
%_e ~ s l~ ~ -w a
ed an is
s,t h e r f s o ld to
la n d c o n ta in
) E r la n g e r t o
in g p h o s p h a
g e t h e r w it h
(3) l
J 0,00R AU:the ti a n e w t e m in e s
ye 'dy;ecto:r:-s o ly f o r m e d c o
1ted_nf:- Brla:11~ei: f th e newly f o ~pany for £
1
0 dir~cto
.h
A t!~e ti
rs,,We~e,.a b r o a me_?£ the purchase ag~e~
r m e d c o m pany were no
m i-
~ p u r c h a s e d~ d , vyhile o u t o ment with Er
ed,_tw o w e r e f th e r e m a 1 n
m
langer,
~e r on,, a p,r o s c o m p le te ly u n g th r e e , who signed
p e c tu s w a s is d e r th e c o n tr
shares o s u e d inviting ol of Erlange
f, th e c o n m a n th e p u b li c to
first m e e tm g
s r e g a r d in g th
y .
o f th e s h a r e h
T h e purchase agr
o ld e e e m e
subscribe
nt was appro
f;;
e tr a n s a c ti o n . r s , b u t th e y w e r e n o t to ld ved at
dation. T h e li A f te r s o m e ti a ll m a t e n
q u id a to r filed m e th e c o m p
t m a d e by him a c a s e a g a in a n y w e n t i a1
on account o s t E r la n g e r t
id e d th e c a s e f s a le o f is la n o recover ~o
o n th e p le a t h d to the comp
o f th e facts. H at any. Erlan
is c o n te n ti o n th e B o a r d o f D ir e c to r s h a e
~nefit to th e li w a s r e je c te d d full kn ,~er
aui ::1nr1
 ·--- FORMATION OF COMPANY
63
- The Court held "If they (promote

th:
1
company,, it_ is incumbent upon thr;~ropose to sell their propert to th
cor!1pany with an executive who shaJb lake care that. they pro~de
which they are asked l_o purchase is th oth be awnre that the ro -
shall be competent and unpartialjud O prornotc1·'s
r':,.Y
property p
or ought not to~ made. They shoj:~owhctherthe purch= wgho
fhr?ugh the mediu~ of a Board of 0 ~ lh~ property to the co:Un t
l an mdependent and mtclligent J'ud
- ctors, who can and do 9 !_ . Y
gment on the transacnon."
. ..... ctse
Liabilities of Promoter
(1) Non-disclosure of Secret Profit· In
disclosure of his dealings and · fi case a promoter fails to make full
pro tsmade ' • the companv
h e can be compelled by the co mpany to hand
m promoting h -•
Th e company can also sue for the re . . over sue secret profit.
by the promoter where the pro schission of the contract of sale
therein. mater as not disclosed his interest
(2) Non-adoption of Preliminary Contract· If a pr t .
contracts on b ehalf of the com b f · th omo er enters mto
incorporated, he may be heldpany e ore e company was actually
those contracts by the companper;i:t:t~ table for non-adoption of
an agent and the non-existencI 0pf th e has purported to act as
the parties. e company was known to both
1 (3) Fraud in the Promotion of the Company:
( t) !fa prom?ter furnishes any false or incorrect particulars of any
information
. .or suppresses any material informat·lOn, 0 f W h'lCh
.h e is a~are mhany of the documents filed with the Registrar
ID re1a~ion tot e registration of a company, he shall be liable
for action under section 44 7.
( it) Wh~re it is f o~d that any fraud has been committed in pro-
motmg or forming a company, the Tribunal may order inves-
tigation 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 thepron1oter
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 di-
rected 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 Compames Act.
In case of omission of facts, the promoter shall become liable to be
 \
64 FORMAT
ION O F C
· OMPANY
.
Pu nished with impnson t for a t e r m
or a fin e fr
o m so oo m
o e n Rs 3 0 0 0 0 which may exten ~ \ '~
(S) Misre Rs. ' t o . 0 o r both
[ d to 3 co f t e i _
pr e p s p
, S ec tion ,rtle P
· untru e sentation_ in the ro ectus: A p r o m 26(9)Ytat,
1. ~
statem ent o t e r is liab
for any sh m th e P r o s p e c tu s to a p e r s h h le f o r vi.e ~ -
ares or de bentures on the fait o n w o as s
a person m e th e p t e r f o
h o f t h e prospe u b sc :ri.bc\~.t\Y
damage su a y_su r omo r c o m p e n s a . f ctus. s ~ Cl
stamed by him (Section 35 tion o r a
ny lossll t\
Remune
ration t o
).
l:lt .t "~fe
,, dl · e1
The promo Promote
r -a ~st<-
a company t e r h a s to .
incur th~ m . . 1 enses in t h e
it p
has, theref besides u n d e r g o ~ g a ia e ldeal of a r d u o r o c e s s o f formati.on
:f e~~{,
-i ~
o g u s task. T t~~:' .;tt.--Ot l
by h i m as re, a ·legitimate ~ g oo . f o
1 r b o t h h e p r o m o
~l
- e
w
expenses s ell as remunerationh t to c: ~ o r k d o n t h e e x p e n s e s incurrter
h
directors o uld b e supported b or t h a n d s h o u b y h i m . T h e claim ed
f
o
y
f e
l
-,
obligation t h e company when vouc ; r ~ wever, d b e p l a c e d b e f o r e fot
o
t h e c o m p a n t h e p a r t of the forme · 0 t h e r e is n o the
h i m for these c o n t r a 1
r e n d e r e d ny h a s expressly company to P ~ e x p e n s e s ctua\
b y h i m . Th agreed t o p i t s f o rmation f unless Oi
The p r o m e s a m e is ay a 7r o r t h
oter may t r u e a b o u t his e services ~
( a) P r o m be remun remunera f ot
oter may e r a t e d in a ion.
sell his o w ny of t h e
or shares n asset t o f ollowing
in t h e com t h e wa~s:
( b) He m p a n y. c o m p a ny at pro ,
a y b e give f i t f o r cas (\ co '
n commis h e\Ten b ) '
taken ove sion o n t h
r b y t h e co e purchas
( c) H e m
ay be gran mpany. e price of tnerobe1
ted a lump the busin
shares or ess "gent\en
d ebentures s u m a s r e
The a m o u munerati uabilit)'~
nt of r~mu . on either
neration p in cash o
to b e disc ayable or r in o t t be o
losed i n t h paid to th
e prospec e promot rnade b
tus issued ers is req
Prelimin b y t h e compan uired when f ,
a r y o r Pr y .
e-inc(?rp sued 0 1
Meaning oration C
ontracts
Prelimina
ry c
of the com ontracts are contra
Liabili 1
pany befo ct
r e its i n c o s e n t e r e d i n t o b y t h 1:ne na
rporation e
Validity with third promoters on beh
parties. alf on \ne
I t is u s u a l
for the pr \)U f \) O \
assets on omoters
behalf of to enter i l flO\\' t
formed. T the comp nto these
hey gener any abou contracts
the comp ally enter
into these
t to be for
med but b
of purch
a s e s of ntha\ \
any, whic c efore it is
legally n o h h as not ye o n t racts as a act \ract ,
t binding t come in gents or
upon the to existen t r u s t ua Case t
company ce. Such Uy
even afte contrac
r it come : s of
s int o ex
ist a re
e nc p
 FORMA TION OF COMPAN Y
65
cornP any can .neithe.r ratify those contrac ts nor su th
b 'fi . d
Thern e
a ft e r its incorpo ration
I th ecause ra.t1 cation r equirese .even ors on
t ence o f th
t.h . . a t the tin1e w 1e n · e contrac t was e nter ed into. ex1s e
pr1nc1pa.-1
-
--- --- ---r==
Cases
----- --=_ :____ __~
N & Co. enter ed ~nto an agre ement with one C, who acted on behalf
(tf~propose d syndica te. Under the agreem ent N & Co w t . h
0 dicate a lease of coal mining 1ights. The syndic ate w~s th!n g~ve t ~ °
synd asked N & Co. to give these rights, which N & Co ref us· d rAegiste~e
an . f, 'fi f · e . n action
bY the syndica te o~ spec~ c per or_mai:ice of the agreem ent or in the·
aitern_ative for 1aµia§ es 1:~ ~s ~10t mamta mable as "a compa ny cannot by
adoption or ratifiGa~on;,o ?ta~ the benefit of a contra ct ~~rpor ting to
bave been mad~ oi:i its b:f half before the compa ny came-i nto existence.~9
, , -. ; ·,,. > :<,, ·x•:;,.;:· ,,
~~,
-:~ ,. ~- ;.'.~ '1;< , , , . , , fi::i,

-
.(it) on_the r~q~:s tof t~e Bf 9m~t~ rs 9f a compa ny, a -~~iqifo; :prep~ ~d
the Memo randum .and:A ~1c!es of Associ ation of a c<f'Mf{~y, paid·the
registra tion {e~~:~ &~ot · :e f o~pan y registe red.,Th e c:orii~ilp.y was.no t
held bound ,!o ~a~ :fqr t · sery1ces and expens es of the'·sol ieifor. "The
compa ny cq~lq~~" . . . ·. · a~ ;ufor..thb~e expens ef inasfuuch as it
.wa~~n9t.JIJ f , · , , · · · :e:,t ~pense s.wer:i ·\ : , ·"- '. ed ancl
" ·uii f on\was ,· ·. ..
J;:'.fl,t"' . C~"} ,'·"'·'·''-·•'t" ,, .c'T ¾,,,.,.:P0 "'" ;: · · ,, ·
~ =- -.:::::.;_i_~
t for cash A company canno t adopt contra cts entere d into before its incorporation
;

even by passing a special resolution or with the unanimous consent of its

business ' members. Thus, preliminary contra cts will either have to be left as mere
"gentlemen's agreements" or the promo ters will have to undert ake personal
liability; which of these course s will be adopte d depe~ds largely on deman ds
tsh orin of the other party. 8 'Since the pre-incorporation contra cts purpo rted to be
made by a compa ny which does not exist is a nullity, neithe r the company
when forme d nor the promo ter whose signat ure is added can sue or be
sued on contra ct.'9

Liability of the Promoter

The nature of the liability of the promo ter on prelim inary contra cts depen ds
on the tenor of such contra cts. He can be held personally liable if he has
ehalf purpo rted to act as an agent and the non-ex istenc e of the compa ny was
known to both the partie s. This is becau se where a contr~ ct is made on
behalf of a princi pal know n to both the partie s to be non-existent, the con-
tract is deem ed to have been entere d into person ally by the actual maker .
, of Case of Kelner v. Baxter (J866) provid es an illustr ation:
illy
of 6. Natal Land and Colonisation Co. Ltd. v. Pauline Colliery & Development Syndicate Ltd. (1904)
re 7. Re. English and Colonial Produce Co. Ltd. (1906)
8. Gower L.C.B., "The Principles of Modem Compan y Law", Third Ed., P· 2BO.
·e.
9. New Borne v. Sensolid (GB) Ltd. (1954).
 '
66 FORMATIO
N O F COMP
ANY
Baxter, a p ro m t •ve
entered into o te r and a p~ospe~~er doirne c to r of a c o m p a n y to b ~
signed the co a contract. w it ~ Kwords behalf of th e companye forru 1
. Ba~d,
On a suit by Kntract adding t ef a n
"for a n d o n b
c e of th e e h a lf o f X Y Co. Lt~~ C
Baxter w a s li elner for thedper ~r:
able a s h e h a Cted o n b e h ac o n tr a c t, it w a s held th · 1
not exist. con r lf o f a princip
al who d~ l
But, if the c o . rt e d to b e m 1\.1 t
n tr
. a•c t theppurrp~ a d e by t he c
15
person so actm omoter, c a n n o t b e h e ld p e rs o m p a n y itself' th t ·
shall be taken g t e., . o
to have simp 1 a u th e n ti c a te d th e c o n tr n a ll y lihable, for h
shall b~ take
n to have enth d . to th e c o n tr a c t a n da c t a n d t e companyt
Y ·al Je e
non- e xiste nt er~ b : o m e n th e c o m p a n y ,,e rt
L td v. S e n s o th e c o n tr a c ts a ullity. C a s e o 1t11r .< it l e,a c c
li d (GB) Ltd. . f N e w b o r n e (L being ficW~ v f a~
(1954) may b ondon)
LN e cited: ,,.e & s u b -
f~r~;::{e~ o te r a n d a "' A\~u·o tl T1t ~in
iv
; ~ ~ N e w b o m prospective d ir e c to r o f , iv ccer
o f c e r ta in go e a
ods by th e c o (London) Ltd." A ~ o n tr c o m p a n y to b e of i 'JflY• a
signed th u s " m
Leopold New p a n y (n o t f o r m e d till th e t f o r th e ~upply
ac ,010£
w ri tt e n u n d e b n
r n e a th . I n a n orne (London) Ltd." a n d ) to S e n s o li d was o r a ti
Sensolid, it w a c ti o n fo r b r e
ac
th e n a m e L.N.
10 ,orP .
o f th e c o m p a s h e ld th a t th e c o n tr a c t w h o f c o n tr a c t b y L.N. a ~ a s
a
or
ny as
c o m p a n y w a a n d L.N. a d d e d his n a m e ,o s ig n e d in th ~ p r o ~ o s e ?
gamst 1r1corP a tio-:
sn n ly to a u th ~ n na r
th e r e w a s n o o t a t all in existence a t .t t~ c a te it. S in m e ~s pe s e c , -
he ti m e o f s c
In c a s e o f p
c o n tr a c t a t a
ll. H~nce, S e 1~~~ th e c o e th e (a) 5e v e i:
erso n s o li q h a d n n tr a c t,
th e c o m p a n y n a l liability, th e p r o m o te o li a b il it y . p u b lic
a d o p ts th e c o r s will c o n ti
m o te r s u s u a n tr a c ts . In o r n u e to b e li
ll y in s e r t ~ c d e r to a v o id a b le u n ti l (b) tW ? 0
th e c o n tr a c t la u s e in th e th e ir li a b il it
is n o t a d o p te o ri g in a l c o n y , th e p r o - pnvat
a li m it e d ti m d b y th e c o m tr a c t to th e
e , b o th th e p p a n y a f te r it e f f e c t th a t if
f r o m liability r o m o te r s a n s in c o r p o r a (c) o n e P
. S o m e o f th d th e th ir d p ti o n w it h in
b e e n te r e d in e p r o m o te r s a r ty will b e Com r-
to b y th e v e s im p ly a g r e e e x o n e r a te d
n d o r a n d th e to th e d r a f t
company af c o n tr a c t to bysubscrib
Adoption o te r in c o r p o r
f Prelimina a ti o n .
ry Contract with th e r e <
A company
may adopt p
r e li m in a r y c
(z) T h e c o m p
any may ado
o n tr a c ts b y
e it h e r o f th e Pre\imina r,
tracts ~ ~ th th p t th e s e c o n tw o w a y s : .
e th ir d p a r ti tr a c ts b y en The pr o m o
th e o n g m a l e s o n th e s a tering in to n
c o n tr a c t. S u m e te r m s a s e w con-
b e e x p r e s s ly ch a new ag were embo
d ie d i n
aµp\ yin g {u
made but m reement of
a y b e im p li e d b a d o p ti on may n
(it) T h e c o m y th e a c ts o t \.
pany may a A_', \
Act, 1963. S e
c ti o n s lS(h)
d o p t th e s e c o
n tr a c ts u n d
e r
f th
th e Specific
e c o mpan °
y. wh, c
e n te r e d in to a n d 19(e) o f Rez· f
b y th e p r o m th e A c t p r o v
in c o r p o r a ti o te r s o n b e id e t h a t a c o Cov "-
on can be e h a lf o f th e c n tr ~ e t
f 9 ll o w in g tw o n f o r ced by or a o m p a n y b e f o r e i~ nc a r \
c o n d it io n s a g a in s t th e c
r e s a ti s f ie d : o m p a n y , if t
hs O r ci t
e
\ torn .
,.,
 NY
FO RM ATI ON OF COM PA 67

- The co ntr a c t is e nt ere d int rbl' 1 e /JLi'!'us es o( th e com p~n

y
and s u ~h ~on t1·a c t is war rn~ ~f~( y th c term s or. 1nc orpu1·a t1on.
The (Cl 111 fut· th e pur po scs .. ,
O th e cun 1 pun y • ·imp lies th a t th e
h d b e fo,· th . ·k·
con trn c t s oul C Wo t 111 g pur p 0f I
ept s the con t ~s~ t 1c c om pan y .
- The co mp an y acc rac t afte r tl s inc orp ora ti on a nd
co1111111111ica 1es suc h acc
e 1 y lo th e con -
p anc e lo e othth er par t
tr·a c l.

Ca se
e .
Mfg. Co. v. Ma nch ers haw _ Thct p~o mo ters of an ice ma nu-
1,,,p eda l Ice o a con tra
foc tw· ing com pan y ent ere d int th M for the pur cha se of
tui -in g ma chi ner y for the Wl
jce 111 anu fac ian ~. Th e com pan y on its for -
tion sub seq uen tly ado pte d the con ~om t the com mu nic atio n
1113 the con tra c tan ssenfor .the purposes of t h e
of acc ept anc e to Mr . M. He ld' rac wa
com pan y, an d wa sth ere fore,
enf orc eab l e b Y or agamst the company.

Inc orp ora tio n

.
Inc orp ora tio n bri ngs a com pan y
int o exi ste nce a s a sep ara te cor por ate entity .
As per Sec . 3(1 ) a com pan y ma
y be for me d for a ny 1awf u1 pur pos e by:
b f d· b
( a) sev en or mo re y; per son s, wh ere the com pan y to e orm e 1s to ea
pu bli c com pan
~ lll)tE b
:! pr, t~o or mo re per son s, wh ere the com pan y to be for me d is to e a
0, ( b)
L
'.lqt if pn va te co mp an y; or
rso n
an y to be for me d is to be On e Pe
itliiJi (c) on e pe rso n, w~ ere the co mp
te com pan y,
ated Co mp an y tha t 1s to say , a pri va
ply ing
~t to 1:a me to a me mo ran du m an d com
b~ sub scr ibi n? the ir na me s ?r his
m res pe ct of reg ist rat ion .
with the req urr em en ts of thi s Ac t

Preliminary Steps
the following preliminary steps be fore
The pro mo ter s ha ve to go thr ou gh
mpany:
po sed co
applying fo r inc orp ora tio n of the pro
nn ot be registered with a name
l-
1. As pe r Sec. 4(2) a co mp an y ca
1
ab le in the opinion of the Central
which is co ns ide red to be un de sir
en t. Th e na me sh ou ld no t be ide ntical with or resemble too
Go ve rnm
an y or registered un de r this Act
nearly to the na me of an existing co mp
iou s co mp an y law . Th ere for e the pro mo ter s are advised
or any pr ev
ma ke an ap pli ca tio n in the Fo rm ·1 A to asc ert ain the av ailability
to
de r of the ir pre f ere nee.
of maxim um six na me s in the or
of Rs . 50 0 ha s to be pa id alo ngside an d the digital signature of
2. A fee
the applicant proposing the comp any ha s to be att ac he d in the form.
 68 FORMAT
ION O F C
OMPAN Y
I f pr •o p o s c cI n~<>• m e is n o t ava1.1a b lc th e u s
n a m e o n t h s n m e a p p h.c a · ' e r h a s to
c ~ uon. a p p ly f o r
J . A ft e r· th a frt l
e n a m t. :, a p p r o v a 1 th p p li c a n t c s,,
th e n e w c b fi li n g e a a n a p p ly f .
ompany o th e o r reg
32) w it h in l n a m e a p r e q u ir e d fo r m s ( L· e F o r misstr1a ti o n ( ) [
p r o . 1
4 Befon:
60 days v a l. , 8 anci
p
. to a p p o inromoters
t c h a r te r e
. va1ious d
b;g in
~ ntants la
accou
th e
w
in
y
c
o r p o r a ti o
n of a com
ers etc., to h p a n y , the~ h a v t
panng ocume n ,
ts elp th e m m Pre.
5. A1~rang
e t ~ . o.f the m
ciation by so ~ draftmg_
fo r emorandum .
li c ito rs , v f th e sa a n d a rti
dp e ttmg m e by Registra cles o f assa.
an rinting of the same. o r of Compan
ies
The Memoran .
_dum and A t b e
(2 in case
of pnvate co rticlesoi;:u~ si ned by at lea
.
if any, m . th re m p an y ) al
th ad~ress, d st 7 sub_scrib
se
also dearly e p . nche of at least ogf - e scription, occ ers
ment10n t e o T
n 11ness. he subscribe u p a tio n,
Applying num ber and nateuw r e o f s . r s s h o u ld
hares s u b s c
A ft e r havin
to t h e Reg
istrar o f C
o n b e d by t he
m pan rn.
make an appg done the preliminary ie s
istered offic lication to the Registra work, the pr'?mot~rs .
e will be sit r o f t~ e S ta a r e r e q u n:
uated, acco
and informa
tion for reg mpamed byte m which ~ompany sed to
istration [Se t h e followm re
(a) the me
morandum c. 7(1)]: g d o c u m e ng-
the subscrib and articles ts
ers to the m o f the
prescribed; e m o r a n d u m ~ompany d u l y s i g n e
m such ma db
( b) a decla n n e r a s m y all
ration ay be
accountant, in the prescribed f o r
co m
is engaged in st a c c o u n t a n t o r c o m by a n advoc~te, a c
the formati pany secre ~artered
in the artic o n o f t h e company t a r y m p ra
that all the
les as a dir
ector, m a n , and by a p ctice, who
ager or sec ers
in respect o
requiremen
t s o f this A retary of t on named
f re ct a n d t h e he compan
have b e e n c g i s t r a t i o n a n d m a t t e r rules made
t h e
y,
omplied wit s precedent reunder
( c) a n affid h; or incident
avit f r o m e al thereto
from perso a c h of the subs
ns n a m e d a cribers to
h e is n o t c o s t h e first d the memo Toe~,
nvicted o f i r e c t o r s , if randum a
formation any offenc a n y , in t h e a n d
or manage e in c o n n e c
tion with t
rticles tha
t
reps\t
f o u n d guil ment of an he promot
ty o f a n y f y company ion, r ~ \,
to a n y c o m r a u d or misfe , o r t h at he has n
?an~ unde asance or ot been
the preced
m g five y e
r t h i s Act o
r any prev
of any bre
ach of du ~\t\l \
ars and th ious comp ty
~egistrar f a t a ll t h e d o c a n y la w during 1ore ,.
or registra u m e n t s fil
1s c o r r e c t tion of the e d with t h , -
and compl company fJOldit
belief; ete and tr
ue to the
contain in
fo r m a t i o n
b e s t o f hi , t h!...l-~ -- ~t
\
 • • ••
•
•
•
.
"
FORMATION O F CO MPA NY
69

( d) the add '.·ess for c_o rresp~ t1<le nce till its regis tered o ffice is establishe d;

~
(t:' ) ihe part1c ularsof nam
. e d,mclud ingsurn a m. co1· f am1'\y nam e rcs1de
. ntta\
.
•• . L
add ress, n a llo n a 11ty a n s u c. h oth er parti I . f · .
c u a rs o t::very s ubscribe r to
•
L

the 111 emo1·an d u m a long w ith proof o f identit a b .

a nd in the case o f a s ubscribe r being a bod Y~ ; m ~y e prescnb~d,
0
··as mav•
u Ia1:s
be prescribed·• Y poi ate, such part1c-

• (/) the. par·ticulars

. f h of the persons. mentioned 1·n th e ar t·1cles as t h e c:ttrst
• ••
·
dll'ecto1
. so t
- h o· e company, their
d .. . • names includ·
mg surnames or am- f
ilv
· nam
· Iies, t ed irector
h hI entihcation
. Numbe r, res1'd entla
· l a dd ress,
nauona ty an sue ot er par ticulars including f Of 1
"d ·
• •• •
.
ay be prescribed; and proo entity as
111

..
•
- (g) t!1e particul~s of ~e interests of the persons mentioned in the ar-
- • • ucles as the fir st ~irecto:s of the company in other firms or bodies
~orporate along with their consent to act as directors of the company
m such form and manner as may be prescribed.
The Registrar on the basis of the required documents and information filed
shall register ~ the docui:rie~ts and information in the register and issue
a certificate of mcorporat10n m 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
ned by a.ll Registrar shall allot to the company a corporate identity number, which
s .may be shall be a distinct identity for the company and which shall also be included
in the certificate.
1:artered
ice, Who
tnamed
mpany,
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 com-
pany, he shall be liable for action under section 447 of the Companies Act.
-
eunder
hereto ONLINE REGISTRATION OF A NEW COMPANY

The MCA 21 Project of the Ministry of Corporate Affairs enables online

n and registration of a company on the portal of the MCA. The steps for online
s that I registration of a company are as fallows:
>tion, 1 Step 1: Application for DIN
Jeen / To register a company, first Director Identification Num~er (DIN) is to be
i uty obtained. One needs to file eForm DIN-1 in order to obtam DIN.
··ing
the Step 2: Acquire/Register DSC
1at All filings done by the companies under MCA 21 e-Governance programme
nd are required to be filed with the use of Digital Signatures by the person
au thorised to sign the documents .
 70
FO RM AT IO N OF CO
M PA NY
Acquire D SC - A lic ensed Certifying
~~~ Authority (CA) issues
R eg ist er D S C - Ro
th e MCA application.le check for Indian companies is to be impl
St ep 3: N ew U se r R
the .

ernen '
'
eg is tr at io n l t(\i1,
To file an e-Form or
required to be regist to avail any paid rv
ered as a user in thesere ice on MCA portal,
registered and busine levant us er category,it is fi
ss user. suchtl.\
St ep 4: In co rp or at i\,
e a C om pa ny
- Select, in or de r of pref
im um of six names, inerence, at least one suit3:ble na m e up to a ma
dicative of the main ob x,
- E ns ur e th at the na Jects of th e company,
m
re ad y registered come does no t resemble th e na m e of any othe
pa r
of Emblems an d Nam ny an d also does no t violate th e provisiona\,
availing th e services es (Prevention of Improl?~r Use) Ac t, 19 s
of checking na m e av 50
- Apply to th e co nc ailability on th e porta b1
er ne l.
by filing Fo rm INC-1 d R O C to ascertain th e availability of na
fo me
ha s to be pa id alongs r th e sa m e in to th e portal. A fe e of Rs. .
id 5GG
pr op os in g th e co m pa e an d th e digital si gn at ur e of th e applic
ny ha s to be at ta ch ed ant
na m e is no t available, in
th e us er ha s to apply th e fo rm . If proposed
sa m e application. fo r a fr es h na m e on
the
A ft er th e na m e appr
oval, th e ap pl ic an t ca
th e ne w co m pa ny by n apply fo r re gi st ra ti
filing th e re qu ir ed fo on of
INC: Fo rm INC-7 fo rm s F or m INC-7 or
r Application fo r in Form
(O th er th an OPC) or co rp or at io n of a co
Fo rm INC-2 fo r App m pa ny
of OPC w it hi n 60 da lication fo r In co rp or (2) lt_ gr 2
ys of na m e ap pr ov al at io n
,I . s1on
A rr an ge fo r st am pi
ng of th e M em or an
ap pr op ri at e st am p du m an d A rt ic le s w
du ty . It ca n be pa id it h th e (3) 't h e
po rt al . el ec tr on ic al ly on th
e MCA as n
G et th e M em or an du
m an d th e A rt ic le s a b1
sc ri be rs (7 in ca se si gn ed by at le as t tw ap
of pu bl ic co m pa ny o su b-
he r fa th er 's na m e, ) in hi s/ he r ow n ha nd th (
oc cu pa ti on , ad dr es , hi s/
su bs cr ib ed fo r an d s an d th e nu m be r
w it ne ss ed by at le as
t on e pe rs on .
of sh ar es sh :
E ns ur e th at th e M (4) t \
em or an du m an d A
th e da te of st am pi ng rt ic le is da te d on a
L og in to th e po rt al
. da te af te r tn
an d fill th e fa ll ow in Cl
da to ry do cu m en ts g fo rm s an d at ta ch
li st ed in th ee -F or m th e m a _
" :
♦ F or m INC-22: N n 'Ja\idit
ot ic e of si tu at io n
registered of fi ce ba se or ch an ge o f situat
d on th e op ti on ch os io f
en in F or m IN : ° C:en,h
. -7. tio n a t
\lf<) \i
 I
FORMATION OF COMPANY

• Form DIR- I 2: Particulars of a . 71

key managerial personnel dPP<>tntrncnt or ct·
an the ch ircctors and th
♦ Declaration of compliance angcs among thcrn. e
Aft e r processing of the Form is ,
. C ert1·r·1catc of In
- generated , o bt run comp. 1Cle a n d Corporat , Id . .
cor Pora lion Fr 0 R c entity is
rn oC
certificate of Incorporation ·
,..-tificate of incorporation is a legal do
C""
company w h ic · h
. ms th e name by cument
co nfir relaf tng to. formation oE a
which the
un der the .
Comparues Act and date of m·
.
~ompany is rem"tered
.ficate of incorpor corporatio Th
Compames issues .cert1
t:>""'
t· . n. e Registrar oE
. f
the basis of su bm1ss1on o the required d a IOn m the
prescn.bed form on
down by the Companies Act. ocuments and information laid
From the date of incorporation mentioned· th .
such subscribers to the memorandum an:all ec~rtificateofincorporation
time to time, become members of the companot ~r h~sons, as may, fro~
by the name contained in the memorandum Y, s bal ea body corporate
• f · , capa e of exercis·
fu.nctwns o an mcorporated company under thi A t d h . mg a11the
succession and a common seal with power to acsqu~ anh ldavmdgdp_erpetual
·
property, b o th mova bl e an d Immovable rre, t o •bl
tangible and· an 1spose of
and to sue and be sued, by the said na~e. m ang1 e, to contract
-ation of Thus, the consequences of certificate of incorporation are:
)r Fo
•rnpany
rm (1) The certificate of ~corpo~ation brings the company into existence
from the date mentioned In the certificate.
)ration

~h the
MCA
(2) It grants legal personality, corporate existence and perpetual succes-
sion 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
sub- a perpetual succession with a common seal and with the liability of
~is/ the members limited to the amount for the time being unpaid on the
res 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
er company and by each member.

Validity of Certificate of Incorporation

. . .d ·th regard to the registra-
Certificate of incorporatwn 15 a legal e~I e~~e ; the Companies Act, 2013
lion and formation of a com~any. ~ecti~ llorporation of a company, it
provides that where at any time a ter t
.
'

72
FORM A T IO N O
is proved th F COMPA
NY
false o r in a t th e c o m p a n y ha
material fa c o r rec t informatio s bee n got incorpora
ct o r infor n te
o r m a d e fo • mation in o r r e p r e s e n ta fion o rbdybys ufu rn is h in g ,, e r V · p ,a ~ te
r
p r o m o te r s m c o r p o r a tm • a n y of th e doc ppre · 1-'e\:!l
h u m " lly • .... d
persons m th e persons n a g s u e company, 0 r by a n y e n ft s o rddelclarassti_ing a.ri r,l~ 1 t ,a p a n
ta u n
m e d as r au u ent a o n
4 4 7 o f th
~ i n g d e c la
r a ti o n sha th e first d ir e c to r s O f h ctionfill''"\\'., • p a u eLC o
V•
e Compan ll e a c h be t , th ~ p d ·c a t e t d·
Sect.J·on 7 (7 f ies Act. liable f o r e_ c o m p ~ n y and th ~ SY l · a \ I
a c ti o n u n pe ce M
p o r a te d by ) o th e Act provid · e r Sectio~ • 1fil bf" l

o r d e c la r a
f
r e s s in g a n
ti o n filed
e
o r by s u p p urnishing a n y falses th a t w he r e a c o m p a n y h
o
y m a te r ia l r in c o r r e c t in f o r m a .
f a c t o r in f
a s b e e n go
ti o n o r rep
t in
car.
• fi;) o r n e ( Le
L td .
f r a u d u le n o r made for o r m r e s e 's
p e el c a s e
t action, th in c o r p o r a a ti o n in a n y o f t he d ntation ♦
e T r ib u n a 10 ti n g s u c h o saGoola
( z) p a s s s
u c h order l may- c o m p a n y cuments •N \O O .a n
s , as it o r b y any ~ f" ll .L:•
m e n t o f th
e c o m p a n m a y th in k fit, f o r Jubilee C
y in c lu d in
a n d article
s, in p u b li g c h a n g e s regula~io? o f t h e m • ottm
c in te r e s t , if a
its m e m b e
r s a n d cre o r in th e in any, m it s m e m o r a nage.
(iz) d ir e c d it o r s ; o r te r est of the ndum
t th a t liab company
( ii i) d ir e c ility o f th e and
t removal members
o f th e n a s h a ll b e u n li m
c o m p a n ie m e o f th e it e d ; o r ,,' ' ....·."\ ·.. •C o n n n e
s; or c o m p nt:
I ( iv) p a s s a ny from ·
an order f the regis (a) W h e t
' i
I
o r th e w in d in g t e r of
( v) p a s s up of the
such othe company; (b) Whe
r orders a _o r t
s it m a y d
Commen e e m fit. (c) Whe
cement o t
f Busines
s
P r o v is io n
s r e la ti n g 2. W h a t is t
he
la id d o w n to comme
the Comp
b y s e c ti o n
11
ncement
o f b u s in e 3. Discuss th
e
a n ie s ( A m o f t he Compa ss by a pu in fraudu
n ie s Act, 20 b li c
e n d m e n t)
Act, 2015. 13 h a v e b c o m p a n y a s \e
Provision een delet 4. C a n a
e d by pro
Discuss w ~
al C o n t r a
ct
P r o v is io n t
between
al contra
the date
cts are th
e contrac
s. Whataret
s t a r t b u s in of incorp t entered
e s s . Com o ration an into by p 6. T h e M
t o th e s e c panies Ac d the dat
e o
ublic com
panies e m(
ontracts t, 2013 ?as n w hich the delivered
commenc b ecause th d r o p p e d th c o mpani
ement of e reqmre ~ provisi istration.
business ment to o n s relatii; (
has been obtam th
dispense
d away w
e certific
at lncorpora
it h . f
e
0 o n t h a t ve
I MPORTAN
♦ Lydne T CASE shares.1 h
y& W ig p o o l
♦ Enlarg
Iron Ore
C o . v. B i r
m a d e bcf
e r v. N e w d H o , v wo u
Co. Sombrer
o Phosph
ate '1. Acomp
10. Not ye an
t enforced
obtained '
L _ _ :ga
l\ y fo
 l I-
FORMATION OF
COMpANy
.... , Baxter
jJJeJ V• 73
1 J(e
1 Land and Colonisation C
Liabw· ty of p
I ~i~uJine Colliery & Develo o. Ltd. Preli . rornoters
,,. di ate Ltd. Prnent rninary Contracts
5yI1 C
. erial Ice Mfg. Co. v. Man h
J1I1P c ersha
I wborne (London) Ltd. v S w Prelirn·Inary Contracts
{;;a)
I Ltd. . ensolid P relirn·
Inary Contracts
peel's Case
1 Cerffi
Moosa Goolam Arif v. Ebrahim G I cateoflncorporation
, ,a oolam Cerffi
;\Dll · I cateoflncorporation
ubilee Cotton Mills Ltd v L .
, J · · ew1s
CertifIcate of Incorporation

REVIEW QUESTIONS
(1,Comment:
(a) Whether promoter is th
e agent of the Co ?
( b) Whether promoter is th mpany.
e trustee of the Compan ?
( c) Whether promoter is th dir Y·
. e ector of the Compan ?
2. What 1s the legal position of a promo ter.:> Y·
3. Discuss the liabilities of promoter in h . f d .
· f d 1 · •. case e 1s oun to be mvolved
m rau u ent act1v1ties relating to formati· on of th e company.
. h l make profit out of formation of the company.·/
. a promoter
4. Can
D1scuss wit re evant case laws.
5. What are the documents to be filed for registration of a Company?
6. The Memorandum and Articles of Association a company were.
delivered to the Registrar of Companies on 6th January for reg-
istration. On 8th January, the Registrar issued the Certificate of
Incorporation, but by mistake dated it as 6th January. Incidentally,
on that very day (6th January), the company made allotment of its
shares. The said allotment was challenged on the ground that it was
made before the actual issue of the Certificate of Incorporation.
How would you decide and why?
" .
7. .'1companvwas .fonnedon the basisof theCertificateoflnco.rporation
. db- h terun· gtheReg1straro. fC . · I th
ompan1es. s ecompany
obtain e y t rea
legally [or~1ed?