Chapter No 3 Formation of Company

Introduction

It may be noted that before a company is actually formed, certain persons, who wish to form a company, come together with a view to carry on some business. Such persons have to decide various questions, a) which business they should start, b) They should form a company, c) Which type of company they required, d) What should be the capital of company. There are various stages in formation of company.

Stages in formation of a company

1. Promotion of a Company: The promotion of a company refers to all those steps which are taken from the time of having an idea of starting a company to the time of actual starting of the company business. Who is a promoter? People who think of forming a company and take necessary steps in its formation are known as Promoters or Company Promoters. The person who conceives such an idea is called Company Promoter
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Functions of promoters:

To discover an idea for establishing a company To make detailed investigations about the demand for the product, availability of power, labor, raw material To investigate the idea and know whether the formation of the company is possible and profitable To find out suitable persons who are willing to act as first directors of the company. To settle the name of company.

To select bank, legal advisor, auditor, Conti underwriter for the company. To submit all the documents required for incorporation with the registrar. To meet all the preliminary expenses for floating of a company. To make contracts with vendors, underwriters, and managing directors of the company. To arrange for the loan etc. from various financial resources. To make proper arrangement for the office of the company.

Duties and Obligation of Promoters

The promoters must disclose fully all the material facts regarding the formation of a company. The promoters must faithfully disclose all the facts relating to the property which they want to sell to the company. The promoters must not make an unfair use their position.

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To disclose the liability and pay the secret profits if promoters have earned. The prospectus of the company should contain the true statements. Liability on statutory mistakes or frauds in the property.

Remuneration of Promoters:

He may be paid a certain lump sum. He may be given shares of the company. He may be given commission of the shares sold by the company. He may be given an option to buy the shares of the company at par when their market price is higher. He may sell his own property to the company at higher price and earn profit.

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Memorandum Of Association And Its Alteration

2. Registration and Incorporation of a Company:

The second stage for establishment of a company is to get the company incorporated or registered. The promoters have to prepare and file a number of documents with the registrar.
1-The memorandum of association signed by at least seven persons 2-The articles of association signed by at least seven persons

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3-Promoters have to file a prospectus or statement in lieu of prospectus with the registrar. 4-A list of directors and their willingness to act, duly signed by each of them. 5-Notice of address at which the registered office of the company will be situated.

All the director whose names are in the list have to submit a declaration certificate that they have taken up qualifying shares and have paid up the money.
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Memorandum of Association

Memorandum of association is the basic document of a joint stock company. It is known as the charter of the company. It sets out limits outside which the company cannot go. To enable the shareholders, creditors and all those who deal with the company.

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CLAUSES (CONTENTS) OF MEMORANDUM OF ASSOCIATION

1.
2. 3.

4.
5. 6.

Name Clause. Registered Office clause. Objective Clause. Liability Clause. Capital Clause. Association Clause.

Name of the Company: Conti A company adopts any name but it should not be identical to the name of the existing company. The name should not be prohibited one. The name of the company must end with the word limited so all the persons dealing with the company must know that their liability is limited up to the extent of their of shares. In the case of private limited company the word private limited to be used as the last word of the name.
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Situation:
The company is required to state

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the name of the province in which the office is situated. To give the exact address and name of the company where the company is located. A person can know through this the jurisdiction of the court under which the company operates. It also indicates the place for holding annual meeting of the company. The creditors, customers, government, know the whereabouts of the company. All correspondence is done at the office of the company.
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Object of the Company:

Conti It is the essence of memorandum. it clearly defines the sphere of the company activities. It indicates a series of objects for which the company is established.
Liability of Members:
The liability of the members is limited to the extent of the value of shares purchased by them. In a case If a shareholder has to pay the unpaid amount on the share investment, he can be compelled to pay to the extent of unpaid amount on the shares, nothing more.

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5- Capital:

A company having a share capital shall state the total maximum amount of share capital with which it is registered.

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6- Association

and Subscription:

Contains a declaration by the subscribers seven in public company and two in private company that they are desirous of forming a company and agree to have number of shares written against their respective names.

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- Requirement as to memorandum: The

memorandum of every company must be: Printed Divided into paragraphs numbered consecutively Signed by subscribers and witnessed Dated
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Signing of Memorandum: The memorandum

must be

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Be signed by each member Who shall add his name and surname in full, any former name or surname in full; His occupation; and Fathers name; or In the case of a married woman or widow, her husbands name, in full His nationality of origin; and His usual residential address in full

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ALTERATION OF MEMORANDUM

1. Alteration of Name Clause: A company can change its name at any time by

adopting the following procedure: By passing a special resolution: Company name can be changed only if two thirds (70%) of shareholders vote for it. By obtaining the approval of Central Government in writing: A name which is identical with the name of an existing company:By passing an ordinary resolution: government urges the company to change its name because of some lawful reasons, in this case only 51% votes of shareholders are needed to change its name. By obtaining the previous approval of Central Government
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2. Alteration of Registered Office Clause: Conti

of registered office from one place to another within the same city: Pass ordinary resolution Change of registered office from one city to another within the same state: pass special resolution Change of registered office from one State to another: by passing special resolution (find about special and ordinary resolutions in previous page please)
Change
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3. Alteration of Objects Clause: The company may change its objects by adopting the following procedure By passing a special resolution By filing the special resolution with the Registrar of Companies within one month from the date of such resolution

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4. Alteration of Capital Clause: Following types of alterations can be made simply by passing an ordinary resolution:

Increase of share capital by issue of new shares. Consolidation or sub-division of existing shares into shares of larger or smaller amount. Cancellation of unissued shares.

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Doctrine of Ultra-Vires

The term ultra means beyond and the term vires means powers An act ultra-vires the directors: It is an act which is beyond the powers of the directors. An act ultra-vires the memorandum of association: It is an act which is beyond the powers given by the memorandum of association.

An act ultra-vires the articles of association: It is an act which is beyond the

powers given by the articles of association.

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Articles Of Association And Its Alteration

Articles of Association

After memorandum of association, Articles of Association is the most important document to prepare and present to registrar for incorporation or registration. Article of Association explains about the rules and regulation of a company, it discusses the internal points and boundaries that the company cant go beyond that.

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Articles of association is a legal document second in importance to memorandum. The articles of association are regulations which governs the internal organization and conduct of the company. The articles of association describe powers of the directors, other officers and shareholders as to voting etc. It also describes the mode and form in which changes in the internal regulations of the company may from time to time be made. The articles are subordinate to the memorandum and they cannot go beyond the scope of the companies act and memorandum of association.

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CONTENTS OF ARTICLES OF ASSOCIATION

1. Amount of share capital: company calculates the face value of shares and mentions in the Article of Association. For example: value of shares (face value) in a company is $10, if company sells share for $25, 10 is the face value and 15 is earning, its also called premium. But if you sell below face value of $10, its called discount. 2. Transmission: it means transfer according to law, example: shareholder mentions in Article of Association that if he/she dies, his shares should be transferred to son/daughter etc. OR: in case of bankruptcy, if shareholder loses everything, the court will decide to sell his/her shares pay creditors.

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3- Rights of share holders regarding vote, dividend, return of capital. 4- Rules regarding the issue of shares and debentures. (Debenture is a certificate that is issued by a company when it is in need of money, so investors buy it for a specific period of time and get interest after maturity date). 5- Procedure as well as regulations in respect of making calls on shares. (Making calls: A company issues 1000 shares for 10$ per share, so people write applications in order to buy some share & pay an amount of $2 for application, then company call on those people who applied to buy shares and ask them to come and pay & get the shares, that is called Making Calls. Sometimes companies receive more application comparing to the number shares issued for market, company selects that number of applications to sell the specific number of shares issued for sell, and rejects the rest, rejected applicants will get their $2 application fee back).
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6- Manner of transfer of shares. (means different method/ways to issue different shares) 7- Rules regarding appointment of directors, managing directors, agents, secretaries. 8- Number, qualification, remuneration, powers and liabilities of directors. (Number of directors differs in public and private companies. Qualification: Eligibility of person like age, capability to work, experience, education, should be free of criminal charges etc. Remuneration: it is the amount of money paid to directors since directors are not employees of company so that is why dont receive salaries but instead receive a specific percentage amount from the income of a company, for example 5% of income) 9- Declaration of dividends. (It should be clearly defined in Article of Association that how dividends should be distributed among share holders.)

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10-Convening and conduct of meetings with reference to notice, quorum, poll, proxy, resolutions. (CONVENING: it clarifies how participants should be informed for meetings etc. it is reference to notice for meeting. QUORUM: it mentions the minimum number of participants in meetings as some important decisions taken during meetings so most of members of a company should be present in a meeting. POLL: Rules and regulation of voting, vote casting, polling station etc. PROXY: If a participant cant attend a meeting, he/she writes a formal letter introducing someone else to attend meeting on his/her behave, its called proxy. RESOLUTION: Any decision which is taken in a meeting.)

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11-Forfeiture of shares. 12-Matters relating to account and audit, (Clarifies how audit should take place or control accounts) 13-Rules for winding up of the company.

Alteration of Articles of Association A company may alter its articles of association by passing a special resolution.

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Comparison between Memorandum and Articles of Association

Memorandum of Association It contains conditions upon which the company is granted registration. It contains objects and powers of the company It can not be easily altered. The company has to follow strict procedure for the alteration. It regulates the relationship of the company with the outsiders, as the objects and powers of the company are made known to the outsiders Article of Association

These are internal regulations of the company It provides the regulation by which those objects and powers are to be carried into effect. It can be easily altered as compared to memorandum of association. It regulates the internal management of the company, as the rules and regulations contained in it describe the internal procedure to be followed by the company

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Prospectus

Definition: A prospectus means any document described or issued as prospectus and includes any notice or circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of a body corporate.

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Contents of Prospectus
1. 2.

3.
4. 5.

6. 7.

Name and registered address of the company. The main objects of the company. Information regarding listing of shares on a recognized stock exchange. Particulars pertaining to different classes of shares and extent of interest of holders. The number of shares (if any) fixed by the articles as the qualification of a director and the remuneration of directors. The date of opening and closing of the issue. The names and addresses of auditors and lead managers.

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8. Amount payable on application and allotment of shares. 10. Details regarding debenture. 11. Amount of premium or discounts on shares. 12. Details regarding property purchased or acquired against issue of shares. 13. Preliminary expenses. 14. The promoters and their background. 15. Benefit paid to any promoters or officer and consideration thereof. 16. Details regarding contract or appointment of Chief Executive, Managing Agent, Secretary and every other material contract.

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17. Name and address of legal advisors. 18. Full particulars of nature and extent of the interest of every director or promoter. 19. Voting rights and rights in respect of capital and dividend. 20. The authorized, issued, subscribed and paid up capital of the company. 21. The size of present issue. Out of this, the shares reserved for preferential allotment to promoters and other should also be stated. 22. Restrictions imposed upon the members of the company. 23. Quorum of general meeting. 24. The location of the plant. 25. Information about projects, plant and its machinery raw material.

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3.Comencement Of Business

1.
2. 3.

A certificate of incorporation is one which certifies that the company is incorporated. It is issued by the registrar of companies. It contains :Name of company. Date of its issue. Signature of registrar with seal.