FORMATION OF A COMPANY

There are certain procedures and formalities that have to be followed before a company can be
formed under the Companies Ordinance, 2016. Section 14 (1) (a) and (b) of the Companies
Ordinance, 2016 states as follows:

Section 14: Mode of forming a company: --

(1) Any-
a. Three or more persons associated for any lawful purpose may, by subscribing their
names to a memorandum of association and complying with the requirements of this
Ordinance in respect of registration, form a public company; or
b. Two or more persons so associated may in the like manner form a private company.

To obtain the registration of a company, an application has to be filed with the Registrar. 1 The
documents for registration have to be supported by a declaration stating that all the requirements
of the Ordinance and rules made thereunder pertaining to registration and matters precedent or
incidental thereto have been complied with. The declaration has to be given by an advocate or a
chartered accountant or cost and management accountant or by a person named in the articles of
association as a director of the company. The documents required to be filed along with the
company include the memorandum of association, the articles of association and an address for
correspondence until the company’s registered office is established and notified.

Once the requisite documents are presented to the Registrar for registration of a company, the
Registrar will scrutinize them under the provisions of the Companies Ordinance, 2016. If the
Registrar finds that the documents or any information filed with him in respect of incorporation
of the company contains any matter contrary to law or fails to adhere to the requirements of law
or suffers from any defect or error or is improperly authenticated, he may direct the applicant to
file a revised document or remove the defects or deficiencies within the time stipulated. 2 Failure
on part of the applicant to comply with the directions of the Registrar will result in refusal of
registration of the company.3 If the Registrar is satisfied that all the requirements have been

1
Section 16 (1).
2
Section 16 (2).
3
Section 16 (3).

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complied with, he will register the memorandum and other documents delivered to him and then
issue a certificate of incorporation to the interested parties.4

CERTIFICATE OF INCORPORATION
Section 16 (6) says:

(6) The certificate of incorporation shall state –

a. The name and registration number of the company;

b. The date of its incorporation;
c. Whether it is a private or public company;
d. Whether it is a limited or unlimited company;
e. If it is limited, whether it is limited by shares or limited by guarantee.

The certificate of incorporation brings the company into existence as a legal person. Upon its
issue the company is born. The company’s life commences from the date mentioned in the
certificate of incorporation and the date appearing on it is conclusive. The certificate of
incorporation signifies that all requirements of the Ordinance have been obeyed. Section 16 (8)
of the Ordinance provides that the certificate under sub – section (5) shall be conclusive evidence
that the requirements of the Ordinance as to registration have been complied with and that the
company is duly registered under this Ordinance. In other words, the validity of the certificate
cannot be disputed on any grounds whatsoever. In Moosa Goolam Ariff v. Ebrahim Goolam
Ariff, the memorandum of association of a company was signed by two adult persons and by a
guardian of the other five members, who were minors at the time, the guardian making a separate
signature for each of the minors. The Registrar, however, registered the company and issued
under his hand a certificate of incorporation. The plaintiff claimed that the certificate of
incorporation be declared void. Lord Macnaghten said:

“Their Lordships will assume that the conditions of registration prescribed by the Indian
Companies Act were not duly complied with; that there were no seven subscribers to the
memorandum and that the Registrar ought not to have granted the certificate. But the certificate
is conclusive for all purposes.”

4
Section 16 (4) and (5).

2
Referring to a case adjudicated before an English court, he said:

“In England the question whether the Registrar’s certificate is conclusive was decided so
far back as 1867 by Lord Cairns… In Peel’s case, after signature and before registration a
proposed memorandum of association had been altered without the authority of the subscribers
so materially that the “alteration entirely neutralized and annihilated the original execution and
signature of the document”. The company, however, was registered and the Registrar gave his
certificate of incorporation. It was objected that the memorandum of association had not been
signed by seven or indeed by any subscribers and that the provisions of the Act had not been
complied with. To that proposition, Lord Cairns assented. But the “certificate of incorporation”,
he said, “is not merely a prima facie answer, but a conclusive answer to such objection… When
once the certificate of incorporation is given nothing is to be inquired as to the regularity of the
prior proceedings”. The observations of Lord Chelmsford in Oakes v. Turquand are to the same
effect. “I think”, said his Lordship, “the certificate prevents all recurrence to prior matters
essential to registration… and that it is conclusive… that all previous requisites have been
complied with.”

“Thus the position is firmly established that if a company is born, the only method to get it
extinguished is not by assailing its incorporation, but by resorting to the provisions of
enactments, which provide for the winding up of the companies”.”

In the Indian case of T. V. Krishna v Andhra Prabha (P) Ltd., the Express Newspapers (P) Ltd
were the leading publishers of newspapers and weeklies. The Government adopted certain
recommendations of the Wage Board for improvement in the terms of service and salaries of the
working journalists. Thereupon the Express Newspapers sold its undertaking to a new company
known as Andhra Prabha Private Ltd. It was alleged that the new company was formed for the
illegal purpose of evading the new responsibility imposed by the Wage Board and, therefore, the
registration of the company should be declared void.

The Court, however, did not assent to the proposition that the purpose for which the company
was formed was in any way unlawful or opposed to public policy and, therefore, held that the
company was validly incorporated. But even if some of the objects were illegal, the legal persona
of the company could not have been extinguished by cancelling the certificate. Even in such a

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case the certificate is conclusive and the remedy would be to wind up the company. The illegal
objects, however, do not become legal by the issue of the certificate. Section 14 of the
Companies Ordinance, 2016 clearly states that the purpose for which a company is formed
should be a lawful purpose.

Furthermore, Section 18 (a) and (b), which provides the effects of registration, says that from the
date of incorporation, the subscribers to the memorandum, together with such other persons as
may from time to time become members of the company, are a body corporate by the name
stated in the certificate of incorporation. The body corporate is capable of exercising all the
functions of an incorporated company, having perpetual succession and a common seal. In other
words, the certificate of incorporation lays down the foundation of the company once it has been
conferred.

PRE – INCORPORATION CONTRACTS

Sometimes contracts are formed on behalf of a company even before it is duly incorporated. But
no contract can bind a company before it becomes capable of contracting by incorporation.

“Two consenting parties are necessary to a contract, whereas the company, before
incorporation, is a non – entity.”

A company has no status prior to incorporation. It can have no income before incorporation for
tax purposes. Shares cannot be acquired in the name of a company before its incorporation. A
transfer form is liable to be rejected where the name of a proposed company is entered in the
column of transferee. Thus, for example, in English & Colonial Produce Co, Re, a solicitor, on
the instructions of certain gentlemen, prepared the necessary documents and obtained the
registration of a company and paid the registration fee and incurred the incidental expenses of
registration. But the company was held not bound to pay for those services and expenses. It was
observed:

“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.”

“It is not desirable to saddle the corporation with burdens imposed upon it in advance by
overly optimistic promoters.”

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Similarly, a company is also not entitled to sue on pre – incorporated contracts. In Natal Land &
Colonisation Co v Pauline Colliery Syndicate, 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 proposed
syndicate a lease of coal mining rights if it discovered coal. The proposed syndicate was then
registered and struck a seam of coal and claimed a lease which N Co refused. An action was
brought against N Co for specific performance of the contract or in the alternative for damages
but it was found to be not maintainable as the syndicate was not in existence when the contract
was signed. As observed:

“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.”

However, Section 23 (h) and 27 (e) of the Specific Relief Act, 1877 state as follows:

23. Who may obtain specific performance: Except as otherwise provided by this Chapter, the
specific performance of a contract may be obtained by:-

(h) When the promoters of a public company have before its incorporation, entered into a
contract for the purposes of the company, and such a contract is warranted by the terms of
incorporation, the company.

27. Relief against parties and persons claiming under them by subsequent title: Except as
otherwise provided by this chapter, specific performance of a contract may be enforced against:-

(e) When the promoters of a public company have before its incorporation, entered into a
contract, the company: provided that the company has ratified and adopted the contract and the
contract is warranted by the terms of the incorporation.

Thus, a company may adopt and sue upon a contract if it is “warranted by the terms of the
incorporation” and may as well be sued by the other party if the company has adopted it after
incorporation. “Warranted by the terms of the incorporation” means within the scope of the
company’s objects as stated in the memorandum.5 For example, in Imperial Tea Mfg Co. v.
Munchershaw, it was held that a contract to allot shares after the company is incorporated is not
for the purposes of the company so such a contract is deemed unenforceable.
5
What would be the case where the contract, for example, is not ratified by the company or it is not
warranted by the terms of the incorporation? (05 marks assignment)

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 COMMENCEMENT OF BUSINESS
A private company can commence business right from the date of its incorporation. However, in
the case of the public company, further prerequisites have to be followed before the public
company can commence its business which are mentioned in Section 19 of the Companies
Ordinance, 2016. Briefly, these conditions are: Firstly, shares payable in cash must have been
allotted up to the amount of the minimum subscription; 6 Secondly, directors must have paid in
cash full amount on each of the shares taken or contracted to be taken by him and for which he is
liable to pay in cash; Thirdly, no money is or may become liable to be refundable to applicants
for reason of failure to apply for or to obtain permission for shares to be dealt in on any
recognised stock exchange; Fourthly, a declaration duly signed by the chief executive or by any
one of the directors of the company and the secretary has been filed with the Registrar; Lastly,
where a company has not issued a prospectus inviting public to buy its shares, 7 there has been
filed with the Registrar a statement in lieu of prospectus.

The Registrar, on compliance of the above mentioned conditions, will satisfy himself as to
whether the requirements of the Companies Ordinance, 2016, have been properly adhered to, and
will then grant registration signifying that the company is entitled to commence business. 8 The
acceptance and registration of documents shall be conclusive evidence that the company is
entitled to start its business.9

Section 20 of the Ordinance discusses the consequences where Section 19 has not been complied
with. It states that where a business has been commenced by a public company in violation of
Section 19, the officers and every person responsible for such contravention will be liable to
certain penalties. Furtheremore, any contract made before the date of at which the company is
entitled to commence business shall be provisional only and shall not be binding on the company
until the registration is granted.
6
Minimum Subscription: It means the amount, if any, fixed by the memorandum or articles of association as
minimum subscription upon which the directors may proceed to allotment or if no amount is so fixed and specified,
the whole amount of the share capital other than that issued or agreed to be issued as paid up otherwise than in cash.
7
Prospectus as defined in the Securities Act, 2015: Prospectus means any document described or issued as a
prospectus and includes any document, notice, circular, material, advertisement, offer for sale document, publication
or other invitation offering to the public (or any section of the public) or inviting offers from the public for the
subscription or purchase of any securities of a company, body corporate or entity, other than deposits invited by a
bank and certificate and investments and certificate of deposits issued by non – banking finance companies.
8
Section 19 (2).
9
Section 19 (3).

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 PROMOTERS
Section 2 (50) provides the definition of a promoter. It states:

Promoter means a person:

a. Who is named as a subscriber to the memorandum of association of a company; or

b. Who has been named as such in the prospectus; or
c. Who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
d. In accordance with whose advice, directions or instructions the board of the company is
accustomed to act:

Provided that:

i. Nothing in sub – clause (d) shall apply to a person who is acting merely in a
professional capacity; and
ii. Nothing contained in sub – clause (d) shall apply to the Commission, registrar
or any authorised officer by virtue of enforcement or regulation of the
provisions of this Ordinance or any rules, regulations, instructions, directions,
orders, thereof;

In many company matters and laws relating to companies, the term “promoter” is of frequent
occurrence. Judges consistently have held that the term “promoter” is not a term of art, nor a
term of law, but of business. The emphasis upon its business implication is quite apparent from
the statement of Bowen LJ that the term is used to sum up “in a single word a number of
business operations, familiar to the commercial world , by which a company is generally
brought into existence”. Most of the definitions, e.g. the definition provided above, are in terms
of categories of work that promoters usually perform. “A promoter is a person who brings about
the incorporation and organisation of a corporation. He brings together the persons who
become interested in the enterprise, aids in procuring subscriptions, and sets in notion the
machinery which leads to the formation itself”. In Twycross v Grant, regarding promoters, the
court said:

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 “The defendants were the promoters of the company from the very beginning can admit
of no doubt. They framed the scheme, they not only provisionally formed the company, but were,
in fact, to the end its creators, they found the directors, and qualified them, they prepared the
prospectus, they paid for printing and advertising, and the expenses incidental to bringing the
undertaking before the world”.

The court also added that the functions of the promoters come to an end as soon as they hand
over the company to a governing body, like a board of directors.

A person who acts in a professional capacity is not a promoter. Thus, a solicitor, who prepares on
behalf of the promoters the primary documents of the proposed company, is not a promoter.
Similarly, a valuer who helps the promotion in his professional capacity is not a promoter. But
any such person may become a promoter if he helps the formation of the company by doing an
act outside the scope of his professional duty. A person may, for example, help in getting a
purchaser for the company’s patent, or of shares, or in getting personnel for the company. Any
such role may make him the promoter.

Fiduciary duty of promoters: The position of promoters in relation to the company was
explained by Lord Cairns in Erlanger v New Sombrero Phosphate Co in the following words:

“They stand, in my opinion, undoubtedly in a fiduciary position.10 They have in their

hands the creation and moulding of the company. They have the power of defining how and
when, in what shape and under what supervision the company shall start into existence and
begin to act as a trading corporation.”

The business of promotion thus gives a very advantageous position to the promoter in relation to
the proposed company. The courts have, therefore, fixed him with the responsibility of a
fiduciary agent. “The promoter is in the situation akin to that of a trustee of the company, and
his dealings with it must be open and fair”. Thus the first and the foremost duty of a promoter is
that if he starts a company for the purpose of buying his property and wants to draw his payment
from the money obtained from shareholders, he must faithfully disclose all facts relating to the
10
A fiduciary duty is the highest standard of care. The person who has a fiduciary duty is called the fiduciary, and
the person to whom he owes the duty, is typically referred to as the principal or the beneficiary. If an individual
breaches the fiduciary duties, he or she would need to account for the ill-gotten profit. A fiduciary is someone who
has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a
relationship of trust and confidence.

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property. If he conceals any fact in relation to the character or value of the property, or his
personal interest in the proposed sale, the company will be entitled to set aside the transaction or
recover compensation for its loss. He may be guilty of breach of trust if he accepts a commission
or bonus from a person who sells property to the company. In short, the chief duty of the
promoter as a fiduciary agent is to disclose to the company his position, his profit and his interest
in the property which is the subject of purchase or sale by the company. The duty continues even
after incorporation until the profts are fully disclosed and fully accounted for.