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I.
Promotion :
Refers to the
entire process by which a company is brought into existence. It starts
with the conceptualisation of the birth a a company and determination of
the purpose for which it is to be formed. The persons who conceive the
company and invest the initial funds are known as the promoters of the
company. The promoters enter into preliminary contracts with vendors and
make arrangements for the preparation, advertisement and the circulation
of prospectus and placement of capital. However, a person who merely acts
in his professional capacity on behalf of the promoter (eg lawyer, CA,
etc) for drawing up the agreement or other documents or prepares the
figures on behalf of the promoter and who is paid by the promoter is not a
promoter.
The promoters have
certain basic duties towards the company formed :-
- He must not make any secret
profit out of the promotion of the company. Secret profit is made by
entering into a transaction on his own behalf and then sell to
concerned property to the company at a profit without making
disclosure of the profit to the company or its members. The promoter
can make profits in his dealings with the company provided he
discloses these profits to the company and its members. What is not
permitted is making secret profits i.e. making profits without
disclosing them to the company and its members.
- He must make full disclosure to
the company of all relevant facts including to any profit made by him
in transaction with the company.
In case of default
on the part of the promoter in fulfilling the above duties, the company
may :-
- Rescind or cancel the contract
made and if he has made profit on any related transaction, that profit
also may be recovered
- Retain the property paying no
more for it then what the promoter has paid for it depriving him of
the secret profit.
- If these are not appropriate (eg
cases where the property has altered in such a manner that it is not
possible to cancel the contract or where the promoter has already
received his secret profit), the company can sue him to for breach of
trust. Damages upto the difference between the market value of the
property and the contract price can be recovered from him.
A promoter may be
rewarded by the company for efforts undertaken by him in forming the
company in several ways. The more common ones are :-
- The company may to pay some
remuneration for the services rendered.
- The promoter may make profits on
transactions entered by him with the company after making full
disclosure to the company and its members.
- The promoter may sell his
property for fully paid shares in the company after making full
disclosures.
- The promoter may be given an
option to buy further shares in the company.
- The promoter may be given
commission on shares sold.
- The articles of the Company may
provide for fixed sum to be paid by the company to him. However, such
provision has no legal effect and the promoter cannot sue to enforce
it but if the company makes such payment, it cannot recover it back.
If the promoter
fails to disclose the profit made by him in course of promotion or
knowingly makes a false statement in the prospectus whereby the person
relying on that statement makes a loss, he will be liable to make good the
loss suffered by that other person. The promoter is liable for untrue
statements made in the prospectus. A person who subscribes for any shares
or debenture in the company on the faith of the untrue statement contained
in the prospectus can sue the promoter for the loss or damages sustained
by him as the result of such untrue statement.
II.Incorporation
by Registration :
The promoters must
make a decision regarding the type of company i.e a pulic company or a
private company or an unlimited company, etc and accordingly prepare the
documents for incorporation of the company. In this connection the
Memorandum and Articles of Association (MA & AA) are crucial documents
to be prepared.
Memorandum
of Association of a company :
Is the constitution
or charter of the company and contains the powers of the company. No
company can be registered under the Companies Act, 1956 without the
memorandum of association. Under Section 2(28) of the Companies Act, 1956
the memorandum means the memorandum of association of the company as
originally framed or as altered from time to time in pursuance with any of
the previous companies law or the Companies Act, 1956.
The memorandum of
association should be in any of the one form specified in the tables B,C,D
and E of Schedule 1 to the Companies Act, 1956. Form in Table B is
applicable in case of companies limited by the shares , form in Table C is
applicable to the companies limited by guarantee and not having share
capital, form in Table D is applicable to company limited by guarantee and
having a share capital whereas form in table E is applicable to unlimited
companies.
Contents
of Memorandum :
The memorandum of
association of every company must contain the following clauses :-
Name
clause
The name of the
company is mentioned in the name clause. A public limited company must end
with the word 'Limited' and a private limited company must end with the
words 'Private Limited'. The company cannot have a name which in the
opinion of the Central Government is undesirable. A name which is
identical with or the nearly resembles the name of another company in
existence will not be allowed. A company cannot use a name which is
prohibited under the Names and Emblems (Prevntion of Misuse Act, 1950 or
use a name suggestive of connection to government or State patronage.
Domicile
clause
The state in which
the registered office of company is to be situated is mentioned in this
clause. If it is not possible to state the exact location of the
registered office, the company must state it provide the exact address
either on the day on which commences to carry on its business or within 30
days from the date of incorporation of the company, whichever is earlier.
Notice in form no 18 must be given to the Registrar of Comapnies within 30
days of the date of incorporation of the company. Similarly, any change in
the registered office must also be intimated in form no 18 to the
Registrar of Companies within 30 days. The registered office of the
company is the official address of the company where the statutory books
and records must be normally be kept. Every company must affix or paint
its name and address of its registered office on the outside of the every
office or place at which its activities are carried on in. The name must
be written in one of the local languages and in English.
Objects
clause
This clause is the
most important clause of the company. It specifies the activities which a
company can carry on and which activities it cannot carry on. The company
cannot carry on any activity which is not authorised by its MA. This
clause must specify :-
- Main objects of the company to
be pursued by the company on its incorporation
- Objects incidental or ancillary
to the attainment of the main objects
- Other objects of the company not
included in (i) and (ii) above.
In case of the
companies other than trading corporations whose objects are not confined
to one state, the states to whose territories the objects of the company
extend must be specified.
Doctrine of the
ultra-vires
Any
transaction which is outside the scope of the powers specified in the
objects clause of the MA and are not reasonable incidentally or necessary
to the attainment of objects is ultra-vires the company and therefore
void. No rights and liabilities on the part of the company arise out of
such transactions and it is a nullity even if every member agrees to it.
Consequences of an
ultravires transaction :-
- The company cannot sue any
person for enforcement of any of its rights.
- No person can sue the company
for enforcement of its rights.
- The directors of the company may
be held personally liable to outsiders for an ultra vires
However, the
doctrine of ultra-vires does not apply in the following cases :-
- If an act is ultra-vires of
powers the directors but intra-vires of company, the company is
liable.
- If an act is ultra-vires the
articles of the company but it is intra-vires of the memorandum, the
articles can be altered to rectify the error.
- If an act is within the powers
of the company but is irregualarly done, consent of the shareholders
will validate it.
- Where there is ultra-vires
borrowing by the company or it obtains deliver of the property under
an ultra-vires contract, then the third party has no claim against the
company on the basis of the loan but he has right to follow his money
or property if it exist as it is and obtain an injunction from the
Court restraining the company from parting with it provided that he
intervenes before is money spent on or the identity of the property is
lost.
- The lender of the money to a
company under the ultra-vires contract has a right to make director
personally liable.
Liability clause
A declaration that the liability of the members is limited in case of the
company limited by the shares or guarantee must be given. The MA of a
company limited by guarantee must also state that each member undertakes
to contribute to the assets of the company such amount not exceeding
specified amounts as may be required in the event of the liquidation of
the company. A declaration that the liability of the members is unlimited
in case of the unlimted companies must be given. The effect of this clause
is that in a company limited by shares, no member can be called upon to
pay more than the uncalled amount on his shares. If his shares are already
fully paid up, he has no liabilty towards the company.
The following are
exceptions to the rule of limited liability of members :-
- If a member agrees in writing to
be bound by the alteration of MA / AA requiring him to take more
shares or increasing his liability, he shall be liable upto the amount
agreed to by him.
- If every member agrees in
writing to re-register the company as an unlimited company and the
company is re-registered as such, such members will have unlimited
liability.
- If to the knowledge of a member,
the number of shareholders has fallen below the legal minimum, (seven
in the case of a public limited company and two in case of a private
limited company ) and the company has carried on business for more
than 6 months, while the number is so reduced, the members for the
time being constituting the company would be personally liable for the
debts of the company contracted during that time.
Capital clause
The amount of share capital with which the company is to be registered
divided into shares must be specified giving details of the number of
shares and types of shares. A company cannot issue share capital greater
than the maximum amount of share capital mentioned in this clause without
altering the memorandum.
Association clause A
declaration by the persons for subscribing to the Memorandum that they
desire to form into a company and agree to take the shares place against
their respective name must be given by the promoters.
Articles
of Association
The Articles of
Association (AA) contain the rules and regulations of the internal
management of the company. The AA is nothing but a contract between the
company and its members and also between the members themselves that they
shall abide by the rules and regulations of internal management of the
company specified in the AA. It specifies the rights and duties of the
members and directors.
The provisions of
the AA must not be in conflict with the provisions of the MA. In case such
a conflict arises, the MA will prevail.
Normally, every
company has its own AA. However, if a company does not have its own AA,
the model AA specified in Schedule I - Table A will apply. A company may
adopt any of the model forms of AA, with or without modifications. The
articles of association should be in any of the one form specified in the
tables B,C,D and E of Schedule 1 to the Companies Act, 1956. Form in Table
B is applicable in case of companies limited by the shares , form in Table
C is applicable to the companies limited by guarantee and not having share
capital, form in Table D is applicable to company limited by guarantee and
having a share capital whereas form in table E is applicable to unlimited
companies. However, a private company must have its own AA.
The important items
covered by the AA include :-
- Powers, duties, rights and
liabilities of Directors
- Powers, duties, rights and
liabilities of members
- Rules for Meetings of the
Company
- Dividends
- Borrowing powers of the company
- Calls on shares
- Transfer & transmission of
shares
- Forfeiture of shares
- Voting powers of members, etc
Alteration of
articles of association : A
company can alter any of the provisions of its AA, subject to provisions
of the Companies Act and subject to the conditions contained in the
Memorandum of association of the company. A company, by special resolution
at a general meeting of members, alter its articles provided that such
alteration does not have the effect of converting a public limited company
into a private company unless it has been approved by the Central
Government.
The articles must
be printed, divided into paragraphs and numbered consequently and must be
signed by each subscriber to the Memorandum of Association who shall add
his address, description and occupation in presence of at least one
witness who must attest the signature and likewise add his address,
description and occupation. The articles of association of the company
when registered bind the company and the members thereof to the same
extent as if it was signed by the company and by each member.
III. Registration
of the Company
Once the documents
have been prepared, vetted, stamped and signed, they must be filed with
the Registrar of Companies for incorporating the Company. The following
documents must be filed in this connection :-
- The MA & AA
- An agreement, if any, which the
company proposes to enter into with any individual for appointment as
its managing director or whole-time director or manager.
- A statutory declaration in Form
1 by an advocate, attorney or pleader entitled to appear before the
High Courty or a company secretary or Chartered Accountant in whole -
time practice in India who is engaged in the formation of the company
or by a person who is named as a director or manager or secretary of
the company that the requirements of the Companies Act have been
complied with in respect of the registration of the company and
matters precedent and incidental thereto.
- In addition to the above, in
case of a public company, the following documents must also be filed
:-
- Written consent of directors
in Form 29 to agree to act as directors
- The complete address of the
registered office of the company in Form 18
- Details of the directors,
managing director and manager of the company in Form 32.
Certificate
of Incorporation
Once all the above
documents have been filed and they are found to be in order, the Registrar
of Companies will issue Certificate of Incorporation of the Company. This
document is the birth certificate of the company and is proof of the
existence of the company. Once, this certificate is issued, the company
cannot cease its existence unless it is dissolved by order of the Court.
IV. Commencement
of Business
A private company
or a company having no share capital can commence its business immediately
after it has been incorporated. However, other companies can commence
their activities only after they have obtained Certificate of Commencement
of Business. For this purpose, the following additional formalities have
to be complied with :-
1. If a company has
share capital and has issued a prospectus, then :-
- Shares upto the amount of
minimum subcription must be alloted
- Every director has paid to the
company on each of the shares which he has taken the same amount as
the public have paid on such shares
- No money is or may become
payable to the applicants of shares or debentures for failure to
apply for or to obtain permission to deal in those shares or
debentures in any recognised stock exchange.
- A statutory declaration in
Form 19 signed by one director or the employee - company secretary
or a Company secretary in whole time practice that the above
provisions have been complied with must be filed
2. If a company has share capital
but has not issued a prospectus, then :-
- It must file a statement in
lieu of prospectus with the Registrar of Companies
- Every director has paid to the
company on each of the shares which he has taken the same amount as
the other members have paid on such shares
- A statutory declaration in
Form 20 signed by one director or the employee - company secretary
or a Company secretary in whole time practice that the above
provisions have been complied with must be filed
Once the above
provisions have been complied with, the Registrar of Companies grants
"Certificate of Commencement of Business" after which the
company can commence its activities.
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Promotion
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