PROMOTION AND INCORPORATION

OF COMPANIES

Slide 13
DEFINITION OF THE WORD
PROMOTER
• Section 2(69) of the Companies Act, 2013
• “Promoter” means a person—
1. 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
2. who has control over the affairs of the company, directly or indirectly whether as a shareholder, director
or otherwise; or
3. In accordance with whose advice, directions or instructions the Board of Directors of the company is
accustomed to act.
Is a director/officer/employee of the
issuer a promoter?
• A director/officer/employee who has control over the affairs of
the company, considered as a promoter
• As per section 2(27), “control” shall include the right to
appoint majority of the directors or to control the
management or policy decisions
PROMOTERS' CONTRACT — RATIFICATION
THEREOF
• As regards ratification of promoters’ contracts, the view taken
in Kelner v. Baxter LR (1886) 2 CP 174 was that the company
could not ratify contract made by a promoter before its
incorporation
• Section 19 of the Specific Relief Act provides that the other
party can also enforce the contract if the company has
adopted it after incorporation and the contract is within the
terms of incorporation.
LEGAL POSITION OF A PROMOTER
• A promoter is neither an agent of, nor a trustee for, the
company because it is not in existence.
• But he occupies a fiduciary position in relation to the
company and therefore requires to make full disclosure of the
relevant facts
DUTIES OF A PROMOTER
• The Companies Act 2013, contains some provisions regarding the duties of promoters.
a. Section 102(4), where as a result of the non-disclosure or insufficient disclosure in any explanatory statement annexed to the
notice of a general meeting
b. A promoter is not allowed to derive a profit from the sale of his own property to the company unless all material facts are
disclosed.
c. As per section 13(8), a company, which has raised money from public through prospectus and still has any unutilised amount out of the
money so raised, shall not change its objects for which it raised the money
d. As per section 27(2), the dissenting shareholders being those shareholders who have not agreed to the proposal to vary the terms of contracts
or objects referred to in the prospectus
e. As per section 167(3), where all the directors of a company vacate their offices under any of thedisqualifications specified in
sub-section (1)
f. As per section 168(3), where all the directors of a company resign from their offices, or vacate their offices under section 167, the promoter
or, in his absence, the Central Government shall appoint the required number of directors
g. As per section 284(1), the promoters, directors, officers and employees, who are or have been in employment of the company or acting or
associated with the company shall extend full cooperation to the Company Liquidator in discharge of his functions and duties during winding
up by the Tribunal.
REMEDIES AVAILABLE TO THE
COMPANY AGAINST THE PROMOTER
• Divided into two possible situations:
1. Where the promoter was not in a fiduciary position when he acquired
the property which he is selling to the company, but only when he sold
it to the company.
2. Where the promoter was in fiduciary position when he acquired the
property and when he sold it to the company.
3. Where, the promoter bought the property with a view to sell it to the
company he promotes
LIABILITIES OF PROMOTERS
• Incorporation of company by furnishing false information
• Section 26 of the Act lays down matters to be stated and reports to be set out in the prospectus.
• Civil Liability for misstatements in prospectus
• Punishment for fraudulently inducing persons to invest money
• Contravention of provisions relating to private placement
• Failure to cooperate with Company Liquidator during winding up
• A promoter may be liable to public examination like any other director or officer of the company if
the Tribunal so directs on a Company Liquidator’s
• A company may proceed against a promoter on action for deceit or breach of duty under Section
340
• Criminal Liability for misstatement in prospectus
RIGHTS OF PROMOTERS
• Right to receive Preliminary Expenses
• Right to recover proportionate amount from the Co-
promoters
FORMATION OF COMPANIES
• Section 3(1) states that a company may be formed for any lawful
purpose by—
1. Seven or more persons, where the company to be formed is to be a
public company;
2. Two or more persons, where the company to be formed is to be a
private company; or
3. 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.
INCORPORATION OF COMPANIES -
PROCEDURAL ASPECTS
• (a) Application for Availability of Name of company
• b) Preparation of Memorandum and Articles of Association
• (c) Declaration from professional
• (d) Affidavit from the Subscribers to the Memorandum
• (e) Furnishing verification of Registered Office
• f) Particulars of Subscribers
• (g) Particulars of first directors along with their consent to act as directors
• (h) Power of Attorney
Issue of Certificate of Incorporation by
Registrar
• Section 7(2) states that the Registrar on the basis of
documents and information filed under sub-section (1) of
section 7, shall register all the documents and information
referred to in that sub- section in the register and issue a
certificate of incorporation in the prescribed form to the effect
that the proposed company is incorporated
Conclusive Evidence
• A Certificate of Incorporation given by the Registrar in respect of any
association shall be conclusive evidence that all the requirements of the
Act have been complied with in respect of registration and matters
precedent and incidental thereto, and that the association is a company
authorised to be registered and duly registered under the Act
Allotment of Corporate identity number
• Section 7(3) states that on and from the date mentioned in
the certificate of incorporation issued under subsection (2),
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.
Documents of incorporation to be
preserved
• Section 7(4) states that the company shall maintain and preserve at its
registered office copies of all documents and information as originally.
• As per Section 12(c) every company shall get its name, address of its
registered office and the Corporate Identity Number along with
telephone number, fax number, if any, e-mail and website addresses, if
any, printed in all its business letters, billheads, letter papers and in all
its notices and other official publications.
Punishment for furnishing false or incorrect information at
the time of incorporation
• If any person furnishes any false or incorrect particulars of any
information or suppresses any material information
• Without prejudice to the above liability, 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
Powers of the Tribunal in case of incorporation of a company by furnishing false
or incorrect information

• Section 7(7), where a company has been got incorporated by furnishing any false or incorrect
information
• Tribunal may, on an application made to it, on being satisfied that the situation so warrants:-
1. 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
2. Direct that liability of the members shall be unlimited; or
3. Direct removal of the name of the company from the register of companies; or
4. Pass an order for the winding up of the company; or
PROVISIONS SPECIFICALLY RELATING TO
INCORPORATION OF ONE PERSON COMPANY

• According to the first proviso to section 3(1), the memorandum of One Person Company shall
indicate the name of the other person, with his prior written consent in the prescribed form (INC-
3)
• Rule 4(2) of Companies (Incorporation) Rules, 2014 states that subscriber of memorandum of one person
company shall nominate such person in form INC-32 alongwith the nominee’s consent obtained in INC-3.
• Such other person may withdraw his consent in such manner as may be prescribed [Second
proviso to section 3(1)]
• As per second proviso to section 12(3) relating to painting, affixing of details of name,
Registered office etc. out side every office or place of business, states that the words ‘‘One
Person Company’’ shall be mentioned in brackets below the name of such company, wherever
its name is printed, affixed or engraved.
INCORPORATION OF COMPANIES WITH CHARITABLE OBJECTS
UNDER SECTION 8

• Rule 19. License under section 8 for new companies with charitable
objects
• Rule 20 -License for existing companies.
• The Registrar may require the applicant to furnish the approval or
concurrence of any appropriate authority, regulatory body, department
or Ministry of the Central Government or the State Government