COMPANY LAW U2 CH1 FORMATION OF THE COMPANY, PROMOTERS, AND ONLINE REGISTRATION OF A COMPANY

 

UNIVERSITY OF DELHI / SCHOOL OF OPEN LEARNING 

B. Com. (Program) / B. Com. (Hons.)

COMPANY  LAW 

N.O.T.E.S 

UNIT - 2

LESSON 1: FORMATION OF THE COMPANY, PROMOTERS, AND ONLINE REGISTRATION OF A COMPANY

INTRODUCTION :

- Formation of a company requires completing formalities and following regulations outlined in the Companies Act 2013.

- Registration of the company is mandatory before commencing its operations.

- The process of forming a company involves several stages.

- The first step is deciding the type of company to start, such as a public company, private company, or acquiring an existing concern.

- Promoters are individuals responsible for making decisions and conducting preliminary work for company formation.

- In the case of a public company, additional stages include a promotion, incorporation, capital subscription, and obtaining a certificate of commencement.

- For a private company, only two stages are required: promotion and incorporation.

FORMATION OF COMPANY (SEC-3)

1. Certificate of Incorporation:

- When all necessary documents are filed with the Registrar, and statutory requirements are met, the Registrar registers the Memorandum of Association (MOA), Articles of Association (AOA), and other documents and issues a "certificate of incorporation."

- A certificate of incorporation is a legal document or license issued by the Registrar of Companies, confirming the formation and registration of a company.

2. Conclusiveness of Certificate of Incorporation:

- A certificate of incorporation is conclusive evidence that all requirements of the Companies Act have been complied with and that the association is authorized and duly registered as a company.

- Several court cases have established the conclusiveness of a certificate of incorporation regarding registration, compliance, and the company's existence.

3. Effects of Registration (Section 9):

- From the date mentioned in the certificate of incorporation, the subscribers to the memorandum and future members of the company become a separate legal entity, capable of exercising all functions of an incorporated company.

- The company has perpetual succession, meaning it continues to exist even if its members change.

- The company's property is distinct from the property of its shareholders, and the company can enter contracts, sue, and be sued in its own name.

4. Implications for Private and Public Companies:

- A private limited company can commence business immediately after incorporation.

- A public company needs to obtain a separate certificate to commence business before it can start its operations.

Note: It is worth mentioning that the conclusive nature of the certificate of incorporation has been impacted by changes in the law, specifically the deletion of Sections 34 and 35 of the Companies Act, 1956.

PROMOTER 2(69)

1. Definition of Promoter:

- According to Section 2(69) of the Companies Act 2013, a promoter is a person who is:

   a. Named as such in a prospectus or identified by the company in the annual return.

   b. In control of the company's affairs, directly or indirectly, as a shareholder, director, or otherwise.

   c. Accorded with whose advice, directions, or instructions the Board of Directors of the company is accustomed to act.

2. Palmer's Definition:

- Palmer defines a promoter as someone who originates the scheme for forming the company prepares and registers the Memorandum and Articles, finds the first directors, settles preliminary contracts, prepares the prospectus, and arranges for its advertisement and circulation, as well as raises capital.

3. Meaning of Promoter:

- A promoter is an individual, firm, company, association, or government entity that performs all the necessary preliminary work to bring a company into existence.

- They conceive the idea, develop it, bring together subscribers to the memorandum, prepare and register the memorandum and articles, find bankers and legal advisors, find the first directors, and arrange for the prospectus' advertisement and circulation.

4. Functions of Promoter:

- Discovering Business Opportunities and Generating Ideas: Promoters generate business ideas and explore opportunities for company formation.

- Detailed Investigation: Promoters conduct a thorough investigation into the prospects of the business, including technical, economic, and commercial feasibility.

- Verification: Promoters verify the credibility and impartiality of expert advice or reports.

- Negotiation: Promoters conduct negotiations for the purchase of an existing business if necessary.

- Requisite Number of Persons: Promoters gather the required number of individuals (2 for a private company, 7 for a public company) who can sign the MOA and AOA and act as the first directors.

- Decision Making: Promoters make decisions regarding the nature of the company, location of the registered office, capital amount and form, underwriters or brokers, bankers, and legal advisors.

- Preparation of Documents: Promoters oversee the drafting, printing, filing, and advertisement of the MOA, AOA, and prospectus.

- Preliminary Contracts: Promoters enter into preliminary contracts with vendors, underwriters, etc.

- Preliminary Expenses: Promoters manage and incur preliminary expenses related to company formation.

5. Legal Position of Promoter: -

1. Legal Status:

- A promoter is accountable to the company for any money obtained secretly from it as if the relationship of principal and agent or trustee and trust had existed.

- A promoter is considered a quasi-trustee, with certain fiduciary duties imposed on them.

2. Fiduciary Position:

- Promoters have a fiduciary relationship with the company and its shareholders.

- They must not make any profit at the company's expense and must disclose all relevant facts, including any personal interest or profit, in transactions with the company.

- Promoters must not make unfair use of their position or engage in undue influence or fraud.

3. Remuneration:

- A promoter is not entitled to compensation unless there is a specific contract for remuneration.

- Promoters may receive remuneration through the sale of their own property to the company, options to purchase company shares, commissions on shares sold, or lump-sum payments as per the contract.

4. Liabilities:

- Promoters can be held liable for non-disclosure of secret profits, failure to adopt preliminary contracts, fraud in company promotion, omission in the prospectus, and misrepresentation in the prospectus.

- Relevant legal sections about these liabilities include Sections 447, 282, 452, 26, 34, and 35.

PRELIMINARY OR PRE INCORPORATION CONTRACT

1. Meaning of Pre-incorporation Contracts:

- Pre-incorporation contracts are made before a company is incorporated.

- Promoters act as agents and enter into these contracts on behalf of the company, which is a non-entity before incorporation.

2. Adoption of Preliminary Contracts:

- A company can adopt preliminary contracts in two ways:

   a. By entering into new contracts with third parties on the same terms as the original contract. Adoption can be implied through the company's actions.

   b. Under the Specific Relief Act 1963, the company can enforce or be bound by pre-incorporation contracts if: 

      - The contract is for the company's purposes and within the terms of incorporation.

      - The company accepts the contract after incorporation and communicates this acceptance to the other party.

3. Position of Promoters:

- A company is not bound by pre-incorporation contracts because it does not legally exist before incorporation.

- The company cannot enforce pre-incorporation contracts made on its behalf after incorporation.

- Promoters remain personally liable for pre-incorporation contracts as they are deemed to have entered into these contracts on their own behalf.

Provisional contracts

1. Meaning of Provisional Contracts :

- Provisional contracts are entered into by a public company after its incorporation but before obtaining the certificate to commence business.

- These contracts are not binding on the company until the date it is entitled to commence business, and on that date, they become binding.

2. Effect of Certificate to Commence Business :

- If a company fails to obtain a certificate to commence business, the provisional contracts automatically lapse.

- Once the company obtains the certificate, the provisional contracts become binding on the company.

3. Binding Nature of Provisional Contracts:

- The phrase "shall become binding" does not mean that the company is obligated to recognize all contracts made between incorporation and commencement of business.

- If a provisional contract is oppressive, fraudulent, or voidable for any reason, the company may choose not to accept it and take appropriate legal action.

4. Difference from Preliminary Contracts :

- Preliminary contracts are made before the formation of the company, while provisional contracts are made after incorporation but before obtaining the certificate to commence business.

- Preliminary contracts are not enforceable by or against the company, whereas provisional contracts can only be enforced after receiving the certificate of commencement of business.

IN-TEXT QUESTIONS

1. When a public company is said to be registered: -

a. When it files the memorandum of association with the registrar of companies.

b. When it gets the certificate of incorporation.

c. When it starts its business.

d. None of the above.

2. Contracts that are entered into by agents or trustees on behalf of a prospective company before it has come into existence are called: -

1. Provisional contracts

2. Pre-incorporation contracts

3. Both provisional and pre-incorporation contracts.

4. None of the above.

3. Every company shall have its registered office within _______ of its incorporation.

1. 15 days                                     2. 30 days

3. 45 days                                    4. 60 days.

4. A change in the name of a company requires: -

a. An ordinary resolution and approval of the Central government.

b. A special resolution and approval of the Central government.

c. A special resolution and approval of the tribunal.

d. An ordinary resolution and approval of the tribunal.

5. INC -33 is filed for: -

1. MOA                          2. AOA

3. Prospectus                  4. None of the above.

ANSWERS 

1. When it gets the certificate of incorporation.

2.  Pre-incorporation contracts

3.  30 days

4. A special resolution and approval of the tribunal.

5. MOA

ONLINE REGISTRATION OF A COMPANY

MCA 21 project:

- Enables online registration of companies.

- Two processes: Integrated Process and Non-Integrated Process.

RUN - Reserve a Unique name:

- Web service for reserving a name for a new company or changing an existing name.

- Verifies name uniqueness.

Central Registration Centre (CRC):

- Reserves the name for a specific period:

  - 20 days for a new company.

  - 60 days for a name change of an existing company.

SPICE (Simplified Process for Incorporating Company Electronically):

- Introduced to ease the process of incorporating a company.

- Steps involved:

  - File application in form INC-32 for name reservation, the appointment of directors, etc.

  - Only one name is allowed in e-form No. INC-32.

  - MOA filed in form INC-33, AOA filed in form INC-34.

  - A maximum of three directors' details can be provided if they don't have a Director Identification number.

  - Promoter signs and digitally witnesses the MOA and AOA and attaches them to form INC-32.

  - Verification of registered office in form INC-22 if the correspondence address is different.

  - Registrar processes DIN allotment and INC-32, notifies deficiencies if any.

  - Registrar can reject the application if deficiencies are not resolved

On-Line Incorporation of the company: Non-integrated process.

1. Digital Signature Certificate (DSC):

- Obtain DSC for all proposed Directors for MCA 21 E-governance.

- Issued by a licensed Certifying Authority (CA).

2. Directors' Identification Number (DIN):

- Apply for DIN in the proper format, digitally signed by CA/CS/Cost Accountant.

- Uploaded on the MCA portal after electronic payment of fees.

3. Validate the signature:

- Implement role check in the MCA application to validate the signature of Directors and certified professionals.

- Upload the e-form only after successful validation.

4. Name selection:

- Choose at least one and up to six names in order of preference, consistent with the company's main objects.

- Ensure the name is not similar to any existing registered company and complies with the Emblems and Names (Prevention of Improper) Act, 1950.

5. Name approval and incorporation application:

- After name approval, file the required documents for incorporating a company within 60 days.

- Attach signed MOA and AOA, declarations by professionals and directors, and affidavits stating no past convictions or fraudulent activities.

6. Verification of registered office:

- Furnish verification of the registered office within 30 days of incorporation, accompanied by prescribed documents.

7. Appointment of directors:

- File particulars of director and key managerial personnel appointments with the Registrar within 30 days of appointment.

8. E-payment:

- Make a payment of filing and registration fees electronically through the MCA-21 portal.

9. Incorporation certificate:

- Upon approval, receive an email and an incorporation certificate (INC-11) from the Registrar.

- The certificate includes the Corporate Identity Number (CIN), PAN (Permanent Account Number), and TAN (Tax Deduction Account Number).

- No hard copy of the certificate is issued; only a digital certificate is provided.

HERE IS AN EASY WAY OF REMEMBERING THE ABOVE STEPS :

1. Get special signatures: Some important people called directors need to have special signatures called Digital Signature Certificates. It's like having a secret code to do important things online.

2. Special numbers: The directors also need special numbers called Directors' Identification Numbers. It's like having a special ID card to show who they are.

3. Check the signatures: Before doing anything, we need to check if the special signatures of the directors are real. It's like making sure their special codes are right.

4. Choose a name: We need to pick a special name for our company, but it has to be a unique name that no one else is using. It's like choosing a special name for our new toy or pet.

5. Ask for approval: We need to ask the government if they approve of our special name and if it follows the rules. It's like asking a teacher if they like the name we picked for our project.

6. Fill out forms: We have to fill out some special papers with important information about our company, like its purpose and rules. It's like writing down the important things we need to remember for our new game.

7. Show where we live: We have to show the government where our company will have its office. We need to provide some papers to prove it. It's like showing our address to someone who needs to send us a letter.

8. Appoint important people: We need to tell the government who the important people in our company will be, like the directors. It's like introducing the main characters in a story.

9. Pay money: We need to pay some money to the government for the things we are doing. It's like giving some coins to buy a ticket for a fun ride.

10. Get a special certificate: If the government likes everything we did, they will send us a special certificate. It's like getting a gold star for doing a great job.

Remember, these are simplified explanations, but they can help you understand and remember the steps involved in online incorporation in a fun and easy way.

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