CHAPTER

OF compmw

Promotion
Incorporation
Commencement
promoter is a person who conceives the idea of starting a business, plans the
formation of a company and actually brings it into existence. He may be said
to be "the father of the company who sees the prospects of gain in a business
which he wishes to set up, and believesthat he can persuade others too to
think as he does." A promoter is one who undertakes to form a company with
referenceto a given object and who takes the necessary steps to accomplish that
purpose.l Palmer has defined company promoter as "a person who originates a z
scheme for the formation of the company, has the Memorandum and the Articles
prepared,executed and registered, and finds the first directors, settles the
terms of preliminary contracts and prospects (if any) and makes arrangements
for advertising and circulating the prospectus and placing the capital."Thus, a
promoter discovers, formulates and assembles a business proposition and brings
about a company into existence for its development.
Sec.2(69) of the Companies Act, 2013 defines the term promoter as a person:

company in the annual return referred to in section 92; or

(b) Who the affairs of the company,directly or indirectly
whether as a shareholder director or otherwise; or
(c) In accordance with whose advice, directions or instructions of
Directorsof_the company is accustomed-go—act. This shall, however not
In a professional capacity.
Apromoter may be am-individual,a family,a firm, an association of persons, a
company or even the government._lt may cover any individual or company that
1. Twycrossv.Grant (1877).

57
 58 FORMATION OF COMPANY

preliminary contracts• A P!0moter

obtains a director, places shares or negotiates
need not necessarily be associated with the initial will uall be
its ca ital' e
'floating off of
who subsequently héiißåo arrange the ministerial nature or in a
of purely
regarded as a promoter. Persons doing acts not promoters e•g•, solicitors
or fees are
professional capacity for remuneration by reason Of his acting in
any person
valuers, etc. Promoterdoes not include procuring the formation of the
engaged in
a professional capacityor persons to promoters for meeting out
company.A person who only advances money
promoter. But a professional who brings financiers
preliminary expenses is not a
promoter.
to the company would be considered as
a promoter merely because he has signed at the
A person cannot be held as
or that he has provided money for the payment of
foot of the Memorandum Memorandum, who has not performed
formation expenses.2 A signatory to the
of the promoter of a company, may not be liable as a promoter.
the functions

Functions of Promoter
The main functions of a promoter are as follow:
(1) Toconceive starting a business and explore ifs possibilities.

zz (h) To undertakedetailed technical, economic and commercial easl 11 oi

the usmess propositions. Help of experts may be taken for that.
the purchase of a business in case it i;
intended to purchase an existing business.
(iv) To collectthe requisitenumber of persons-i.e. 2 in the
case of a privat
companyand 7 in the case of a public company, who
can sign the me
orandumand articles of the company and also
agree to act as the fir
directors of the company.
(v) Todecidethe following:(a) the
nature.of the company (b) the locati
of its registered office (c) the
amount and form of its capital (d) t
underwritersor brokersfor capital
the auditors (g) issue, i necessayy (e) the bankers
Legal advisers.
(VI) To get the
memorandum
of association and
and printed. MOA articles of association draft
(vil) To enterinto
preliminary contracts
rviil) Toarrange with vendors, under-writers etc.
for the preparation o
rospectus, its filing, advertisementa
(ix) To pay
preliminary
expenses.QC
(x) To
funds required
by the company.
G.
Tiruvengadachariarv.
velu Mudaliar
(1938).
 FORMATION OF COMPANY
59
of Promoter
Legal Position
either be termed s an a ent nor a trustee of a com
A promoterca any which
into existence. The reason is that there was no principal or trust
has not corne
whom or for whose benefit the promoter has acted. Thus, the
in existence for
of the promoter cannot be precisely established. However,Lindley,
legalposition position in Lydney & Wigpool Iron
his Ore Co. v. Bird (1866) which
L. J. described
as that
maybe termed
"Althoughnot an agent for the company, nor a trustee for it beforeits formation,
law of agency and of trusteeship have been extended
the old familiar principles Of
to meet such cases. It is perfectlywell settledthat
and very properly extended
accountable to i r all mo ies secretl obtai •t,
a promoter is principal and agent or
just as e relationship of the the trustee and the trust
between him and the company when the money was obtained".
had really existed
relating to the formation of the company. Law
promotershave wide powers
promoters with the company they bring into
hasput the relationship of the
existence as well as with those whom they induce to becomeshareholdersin
nature. This fiduciary relationship is based on utmost
it, as that of a fiduciary who accept and use such extensive powers are
faithand confidence. "Those
interests of the corporation altogether. They must
not entitledto disregard the
which they accept from the legislature;
makea reasonable use of the powers
regard to the corporation, when formed,
andconsequentlythey do stand, with
relation to some extent."3
in whatis commonly called a fiduciary

Dutiesof Promoter
Thepromoterstands in a fidug)gcy relationship with the compagy.Though the
relationshipreally arises when the company is formed, the fiduciary
fiduciary
of a promoter begins as soon as he sets out to act as promoter of
obligation
4 This fiduciary relationship imposes the following obligations on
the company.
the promoters:
(i) Notto make Secret Profit: Promoters should not make any secret profits
at the cost o O withou ecre
profits(jr undisclosed benefits of any type received by the promoters can
be recov from them by the company.5 Company can proceed against
t e promoters for any damage caused to it on account of their fraud or
breach of duty. The estate of the promoter shall remain liable in an action
by a companyfor deceit or breach of trust if any benefit has accrued to
the estate.
too
u re
3. LagunasNitrate
Co.v. Lagunas Nitrate Syndicate (1899).
4, S.M.Shah,
"Lectures on Company Law'.'
5. Cavendish
Bentinckv. Fenn (1887).
 FORMATION OF COMPANY

duty of the romoter se

(ii) Disclosure of Material Facts: It is the
the o the The
relating to
fully all material facts
regarding contracts made and the profits
ISCosure of all material acts,
earned by them from the of Directors. If the promoters fail
an independent apd_competeneBoard
company may set aside the transaction and
to disclose completefacts, em.
recover th
Sombrero Phosphate Co.(1878)
Case Law: Erlanger v. New
Facts of the Case an island containing phosphate
of his friends, purchased
Erlanger together with some then sold to a newly formed
company for E
island was
mines for E 55,000. The formed company were nominated by Erlanger. At the
newly
All the five directors of the with Erlanger, two directors were abroad, while out
time of the purchase agreement completely under the
three, who signed the purchase deed, two were
of the remaining prospectus was issued inviting the public to subscribe for
Later on, a
control ofErlanger. purchase agreement was approved at the first meeting
of the company. The
the shares told all material facts regarding the transaction.
but they were not
of the shareholders,
some time the company went into liquidation. The liquidator filed a case against
After
made by him on account of sale of island to the company.
Erlanger to recover the profit that the Board of Directors had full know-ledge
Erlanger defended the case on the plea
of the facts.
Decision
sell their property to the company, it is
The Court held "If they (promoters) propose Co
company with an executive who
incumbent upon them to take care that they provide the
asked to purchase is the promoter's
shall both be aware that the property which they are
property, and who shall be competent and impartial judges as to whether the purchase
ought or ought not to be made. They should sell the property to the company through the
medium of a Board of Directors, who can and do exercise an independent and intelligent
judgmenton the transaction."His contention was rejected and he was asked to return
the benefit to the liquidator.

Liabilities of Promoter
(1) Non-disclosureof Secret Profit: In case a promoter fails to makefull
disclosure of his dealings and profits made in promoting the company,
he can be secret profit.
The companycan also sue for the rescission ofthe contract of sale by
the promoter w ere the promoter has not disclosed his interest therein.
(2) Non-adoption of Preliminary Contract: If a romoter enters into
contracts on behalftf the company before the company was actuay
cor orated, he may be held personally liable for non-adoption of those
contracts y the company provided_he has purported to act as an agentt
and the non-existence of the company was known to both the parties.
 FORMATION OF
COMPANY
(3) Fraud in the Promotion of the 61
Company:
(i) If a promoter furnishes any
information or suppresses
false or incorrect
particularsof any
aware in any of the documents of
filed with the Re istrarwhich he is
to the in relation
he shall be liable for action
under
(ii) Where it is found that any fraud has
been committed in promoting
or forming a company, the Tribunal may order
the promoters any other director or officer investigationagainst
of the company involved
•n such fraudulent activities (Section 282).
(iii) A compan. may a promoter where the promoter
has wrongfully includingcash
of the company or wrongfully withholds it or knowinglyapplies
it for the purposes other than those expressed or directed in the
articles and authorised by the Act (Section452).
(4 the Prospectus: Prospectus issued by a company.must_haye
t e contents as laid down by Section 26 of the CompaniesAct.In caseof
omission of facts, the promoters may be held liable under section 35 to
com ensate the investors for the 10
(5) Misrepresentation in the Prospectus: A promoter is liable for any >
untrue statement in the prospectus to a person who has subscribedfor
any shares or debentures on the faith of the prospectus. Sucha person
may sue the promoter for compensation for any loss or damagesustained
by him(Section 35).

Remunerationto Promoter
Thepromoterhas to incur the initial expenses in the process of formationof
has,
a companybesides undergoing a good deal of arduous task. The promoter as
by him
therefore,a legitimate-right to claim for both the expenses incurred should
wellas remuneration for the wor one y_ 1m. e claim for expenses of thg
be supported by_vouchers and should be placed before the directors part
on the
obligation
COmpany when formed. However, there is no contractual expressly
Ofthe companyto pay him for these expenses unless the company has
The same is
agreedto pay after its formation for the services rendered by him.
trueabouthis remuneration.
Thepromoter may be remunerated in any of the following ways:
(a Pr at rofit for cash or
n asse to the com an
sharesin the company.
taken
the business
(b) He may be give commission n the purchase price of
over by the company.
 2
FORMATIONOF COMPANY

(c) He may be granted a (jypppstilnps remunerationeither in cash or in

shares or debentures.
The amount of remuneration payable or paid to the promoters is required to
be disclosed in the prospectus issued by the company.

Preliminary or Pre-incorporationContracts
Mganinq
are contracts entered into by the promoters on behalf of
Preliminary contracts
parties.
the company before its incorporationwith third
Validity
promoters to enter into these contracts of purchases of assets
It is usual for the
company about to be formed but before it is actually formed.
on behalf of the
Theygenerally the company,
which has not yet come into existence. The company can neither
com an even after it comes into existence.
upon the
those contracts nor sue the vendors on them after its incorporation
rati at t e time w en t e
ecause ratification requ•
contract was enteredinto.
Pauline Colliery & Development
Case Law : Natal Land and Colonisation Co.Ltd. v.
Syndicate Ltd. (1904)
Facts of the Case
N & Co. enteredinto an agreementwith one C, who acted on behalf of a proposed
syndicate. Under the agreement N & Co. was to give the syndicate a lease of coal mining
rights. The syndicate was then registered and asked N & Co. to give these rights, which
N & Co.refused. An action was initiated by the syndicate for specific performance of the
agreement or in the alternative for the damages.
Decision
The suit was dismissed by the court on the ground that "a company cannot by adoption
or ratification obtain the benefit ofa contract purporting to have been made on its behalf
beforethe company came into existence."
Re. English and Colonial Produce Co. Ltd. (1906)
Facts of the Case
On the request of the promoters of a company, a solicitor prepared the Memorandum
and Articles of Association of a company, paid the registration
fees and got the company
registered.
 FORMATION OF COMPANY
63

Decision
The company was not held bound to pay for the services and expenses of the solicitor
"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."
contracts entered into before its incorporationeven
A companycannot adopt
resolution or with the unanimous
by passing a special 't
contracts will either have to be left as mere ggL_em.ea's
ts" or the promoters will have to undertake personal liability; which of
argely on demands of the other party.6
thesecourses will be a opte depends
contracts purported to be made by a company which
'Sincethe pre-incorporation
the company when formed nor the promoter
doesnot exist is a nullity, neither
sue or be sued on contract.'7
whosesignatureis added can
Liabilityof the Promoter
promoter on preliminary contracts depends on
The nature of the liability of the
He can be held personally liable if he has purported
thetenor of such contracts.
nöiiZéiiStäi€öFfTié¯éöifiPåÜTas known to both
toact as an agent and the is made on behalf of a principal
thg_parties.This is because where a contract is deemed to have
non-existent, the contract
knownto both the parties to be CåéööfFFöViaeg-äiFiITü-stfätiöiilü
actual maker.
been entered into personally by the
CaseLaw: Kelner v. Baxter (1866)
Factsof the Case
of a company to be formed, entered into
Baxter,a promoter and a prospective director
Baxter signed the contract adding the
a contractwith Kelner on behalf of the company.
words "for and on behalf of XY Co. Ltd."
it was held that Baxter was liable
Ona suit by Kelner for the performance of the contract,
exist.
as he had contracted on behalf of a principal who did not
But,if the contract is purported to be made by the company itself, the person so
actingi.e.,the promoter, cannot be held personally liable, for he shall be taken
to havesimplyauthenticatedthe contract and the company shall be taken to
haveenteredinto the co the comppny being non-existent the contract
sha ecomenullity. Case of New borne (London) Ltd. v. Sensolid (GB) Ltd. (1954)
may be cite .
LN. was a promoterand a prospectivedirector of a company to be formed
"LeopoldNew borne (London) Ltd," A contract _forthe supply of certain goods
by the company(not formed till then) to Sensolid was signed thus "Leopold
Newborne(London) Ltd." and the name L.N. was written underneath, In an

6. GowerL.C.B.,"The Principles
of Modern Company Law", Third Ed., p. 280.
7. NewBorne v.
Sensolid (GB) Ltd. (1954).
64 FORMATION OF COMPANY

it was held that the

action fov breach of contract by I,.N.against Sensolid,
and L.N.added his
contract was signed in the proposed name of the company
not at all in existence at
name only to authenticate it. Since the company was
contract, there was no contract at all. Hence, Sensolid
the time of signing the
had no liability.
to be liable until the
In case of personal liability, the promoters will continue promoters
companyado ts the contracts.In order to avoid their liability,the contract
the
usua y insert a clause m e original contract to the effect that if
time,
is not adopted by the companyafter its incorporationwithin a limited
both the promoters and the third party will be exonerated from liability. Some
of the promoters simply agree to the draft contract to be entered into by the
vendor and the company after incorporation.

Adoption of Preliminary Contract

A company may adopt preliminary contracts by either of the two ways:
The company may adopt these contracts by entering into new contracts
with t rties on the same terms as
ntract. Such a new agreement o a option may not be expressly ma e
but ma be implied by the acts of the company.
The com an ma ado t these contracts unde the Specific ReliefAct, 1963.
Sections 15(h) and 19(e) of the Act provide that a contract entered into
by the promoters on behalf of the company before its incorporation can
be enforced by or against the company,if the following two conditions
are satisfied:
- The contract is entered into, for the purposes of the company and
such contract is warranted by the terms of incorporation. The term
"for the purpose?ÄüÖmpany" implies that the contract should
be for the working purpose of the company.
— The company accepts the contract after its incorporation and com-
municatessuch acceptanceto the other party to the contract.
Case
Imperial Ice Mfg. Co.v. Manchershaw - The promoters of an ice manufacturing company
entered into a contract with M for the purchase of ice manufacturing machinery for the
company. The company on its formation subsequently adopted the contract and sent the
communication of acceptance to Mr. M. Held, the contract was for the purposes of the
company, and was therefore, enforceable by or against the company.

Incorporation
Incorporation brings a company into existence as a separate corporateentity
As per Sec. 3(1) a company may be formed for any lawful purpose bæ:
 65
c
01 11101 sons. where the company to be formed is to be a public

more persons. where the company to be formed is to be a private

company, or
onc percon, where the company to be formed is to be One Person Company
to say, a private company, by subscribing their names or his name
to a memorandumand complying with the requirementsof this Act in
respۥdof registration.

preliminarySteps
Thepromoters have to go through the following preliminary steps before applying
fot incoToration of the proposed company:
1. As per Sec. 4(2) a company cannot be registered with a name which is
consideredto be undesirable in the opinion of the Central Government.d
The name shouldnot bé identical with.or resemble too neartyu-thé
nameof an existing company or registered under this Act or any previous
company law Therefore the promoters are advised to make an application
Form in the ascertain the availability of maximum six names in
INC -1
Q- their preference. n

2. A fee of e 500 has to be paid alongside and the digitaLsignature of the

applicant proposing-the-companyhas to-be_attached in _the_form. If pro-
posednameis not available,the user has to apply for a fresh name on
the same application.
3. Thename approved will be rese d of 20
Jays from nåme approval. It in this period, the applicant can apply for
registrationof the new company by filing the required forms (i.e. Forms
IABand
4. Before promoters begin
appointcharteredacco nts la ers etc., to help them in preparing
various documents. S
5. Arrangefor the_Ärafting athe memorandunvand articles oi association
by solicitors,vetting of the same by Registrar of Companies and printing
of the sarne.
TheMemorandum
and Articles must be signed by at least 7 subscribers
(2 case of privgtg companyblong with address, description, occupation, if any,
thepresenceof at least of one
Witness:The Sub'&ibers should-also clearly
the nun)ber and nature of shares subscribed by them.
Applying to the Registrar of Companies
havingdone the preliminarywork,
an application the promoters are required to make
to the R
registered office
66 FORMATION OF COMPANY

will be situated, accompanied by the following documents and informator

registration (See 7(1)):
(0) the memorandumand articles of the company duly sicned
subscribers to the memorgndumin such manner as_may
(b) a declaratien in the prescribed form by an advocate, a chartered
secretary in practice
the formation of the company,and by a person named in the articles

of this Act and the_rulesmade there under in respect of registration

matters precedent or incidental thereto have beemcomplied
(c) a the memorandum a.
persons named as the first directors, if agy, in the articles that he is
convicted of anv offence 111connection with the promotion, formation 7.
of any company, or that he has not been found guilty
frauäümisfeasance or of any breach of duty to any company under
Act or any previous company law during the-preceding five vears aids
all the documents filed with the Registrar for registration of the compe
contain information that is correct and complete and frue to the best
his knowledgeand belief;
(a) the address for correspondencetill its registered office is
(e) the particulars of name, including surname or family name,resident?
address, nationality and such other particulars of every
memorandum along with proof of identity, as may be prescribed,and
the case of a subscriber being a body corporate, such particularsas
be prescribed;
particulars of the persons mentioned in the articles as the first
tors of the company,their names, including surnames or famW-fmes
WL_'OåheDirector Identification Number, residential address, nationali?y
such other particulars including proof of identity as may be prescribed
and
the particulars of the interests of the persons mentioned in the aride
as the first directors iffiäompany in other firms or bodies corporat
; ( j) along to act as directors of the company in such
and manner as may be prescribed.
The Registrar on the basis of the required documents and informationfiledSE
register all the documents and information in the register and issue
of incorporation in the prescribed form to the effect that the proposedcompg
is incorporated under this Act.
On and from the date mentioned in the certificate of incorporation, the Regisr;•
shall allot to the company a corporate identity number, which shall be a
identity for the company and which shall also be included in the certifiüte
 FORMATION OF COMPANY

67
any false or incorrect particulars
If person furnishes of any
suppressesany Inaterial inforlnation, of which he is aware ininformation
filedwith the Registrar in relation to the registration any of the
of a company,
be liable for action under section 447 of the
heshall Companies Act.

ONLINE REGISTRATION OF A NEW COMPANY

TheMinistryof Corporate Affairs enables online registration of a company on the

ofthe MCA.
p Oltal
The steps for online re@ßfFåfi6iiÄöéÖFFäny are as
follows:
Step1: Acquire Director Identification Number (DIN)
Eachproposeddirector of the company to be formed are required to obtain
DINby filingan e-form DIN-I.
step2:Acquire/Register Digital .SignatureCertificate(DSC)
Allfilingsdone by the companies under MCA21 e-Governance programme are
to be filed with the use of Digital Signatures by the person authorised
required
tosign the documents.
AcquireDSC— A licensed Certifying Authority (CA) issues the digital signature.
RegisterDSC— After acquiring the DSCit is important to do-theRole-check to
affectedon the e,fornvare of the Director,
Manager,
or Secretary and whether the Digital Signature is registered on the
MCAPortal.
—Z'
Step3: NewUser Registration Lon h cae-oLkh-6cu(--d
Tofilean e-Form or to avail any paid service on MCAportal, itisefirst required
tobe registered as a such as registered and
usiness user.
Step4: Incorporate a Company
— Select,in order of preference, at least onesuitable name up to a maximum
of six names indicative of the main objects of the company.
Ensurethat the name does not resemble the name of any other already
registeredcompany and also does not violate the provisions of Emblems
and Names (Prevention of Improper Use) Act, 1950 by availingthe ser-
vices of checking name availability on the portal.
filing
Applyto the concerned ROCto ascertain the availability of name by
to be paid
or t e same In o the portal. A fee of e 500 has the com-
the digital signature of the applicant proposingavailable,
Panyhas to be attached in the form. If proposed name is not —2
the user has to apply for a fresh name on the same application.
the
After the name for registration of
INC:Form
new company by filing the required forms Form INC-7 or Form
68 FORMATION OF COMPANY

INC-7 for Application for incorporation of a company (Other than

or Form INC-2for Application-f oration of OPCwithi 60
days
of name approval.
Arrange for stamping of the Memorand ticles with the
appro.
priate stamp duty. It can be paid electronicallyon the MCA porta
— Get the Memorandunv_anWtheArticlessigned-bvatIeasttwo subscrib.
ers (7 in case of in his/her own hand, his/her fathers
nåhhéßccupation, address subscribed for and
witnessed by at least one person.
— Ensure that the Memorandumand Article_is dated on a d er the
date of stamping.
— Login to the portal and fill the following forms and attach the mandatory
documentslisted in the e-Form:
• Form ange of situation of registered
oÄ8TäGTon the option chosen in Form INC-7.
Form DIR-12: Particulars of appointmentof directors and thekey
managerial _personnel
Declara
— After processing of the Form is complete and Corporate Identity is gen.
erated, obtain Certificate of Incorporation From ROC.

Documents Required for Company Registration

The followingare the documents required to be while applying for registration
with the Registrar of Companies on the MCA website:
1. PANcard and Aadhaar card of each of the proposed directors.
2. Addressproof-of the proposed directors like Aadhaar cards, utilitybills,
Voter-ID cards, ration cards, driver's licenses, passports.
3. Contact details of the proposed directors along with their EmailIDs.
ach of the proposed directors.
the
5. Proof-ocownership-of-the-office_spgce, for the proposed company. If
office space is on rented premises, then the lease deed/rent agreement
of the office space along with 'No Objection Certificate' from the landlord'
6. Address roof of the office space, like utility bills.
Email-ID-of-the-proposedcompany.
8. Draft Memorandum of Association (MOA), and draft Articles of Associati0fl
(AOA)of the proposed company.
 FORMATION OF COMPANY
69
showing the proposed activities of
9 Documen! the company,
of the cotnpany and the expenditure ort e next expected
three years With
t sourceof inconw and the purpose of the spending.
under Form INC-9 stating that the
10.Declaration shareholders and the
directorshave committed no offence or malfeasance.
Tbe@Lticlesofassociationand theanemorandunvof-association
Il. signedby
the subscribers as provided under the Companies (Incorporation)
Rules,
2014.

to be filed for Incorporating a Company

Forms
TheMCA website facilitates the online registration of companies by filing
and uploading requisite documents on the website. Followingare
applications
someoftheimportant forms which are required to be filed for the incorporation:
SPICe+ Form: This Form is segregated into two parts. Ce+ Form Part-A is
filedtoreservea unique name for the company. The applicants must provi e
namesin the Form ort e registrar to c oose the names in order of
alternative
The applicants may use the RUN or Reserve Unique Name feature
preference.
on the MCAwebsite to check for the existence of simi ar or i entical
available
names.

SPICe+ FormPart B is used to apply for incorporation of the company, Details

pertaininto the ca ital structure of the company, and director details. Add
ubscribersr.addresswofthe,.officespace, and information as to the
jurisdiction
for obtaining the TAN and PAN for the company.
Stepsto register a Company in India
Digital Director Registration
Signature Identification Uploading of Payment of Certificate of
on MCA
Certificate Number Documents Fees
portal

Certificate
of Incorporation
Certificate
of incorporationis a legal
companywhich
document relating to formation of a
confirms.the.nanwby.whiclvthe,company isregistered under
and date of incorporation. The Registrar of Companies
Certificate
of incorporation in issues
oftherequired the prescribed form on the basis of submission
documentsand information laid down by
Fromthedate the Companies Act.
of
suchsubscribersincorporation mentioned in the certificate of incorporation,
totime,becometo the memorandum and all other persons, as may, from time
name members of the company,
ofan contained in the memorandum, shall be a body corporate by the
incorporated capable of exercising all the functions
anda common comp
seal Withpower
to acquire, hold and dispose of property, both
 FORMATION OF COMPANY

intangible, to contract and to sue andb

movable and immovable, tangible and
sued, by the said name.
incorporation are:
Thus, the consequences of certificate of
rin s the com any into existencefrom
(1) The certificate of incorporation
the date mentione&imtlwcertificate.
existenceand perpetual succession
(2) It
together with such other persons,as
(3) The subscribers to the Memorandum
company, become a body
may from time to time become members of the
corporate with a distinct entity from such members having a perpe
successionwith a commonseal and with the liability of the members
limited to the amount or e time being unpaid on the shares heldby
em.
(4) The Memorandum and Articles of Association become binding uponthe
members and the companyas if they have been signed by the company
and by each member.

Validity of Certificate of Incorporation

Certificateof incorporationis a legal evidencewith regard to the registration
and formation of a company. Section 7 (6) of the Companies Act, 2013
provides
provedthat
that where at any time after the incorporation of a company, it is incorrect
the companyhas been got incorporated by furnishing any false or
or information
information or representation or by suppressing any material fact
incorporatingsuc h
in any of the documents or declaration filed or made for named asthe
company, or by any fraudulent action, the promoters, the persons shalleach
first directors of the company and the persons making declaration
be liable for action under section 447 of the Companies Act.
provides that where a company has been got incorporated
Section 7(7) of the Act or
representation
by furnishing any false or incorrect information or documents
suppressingany material fact or information in any of the any fraudulent
by
declaration filed or made for incorporating such company or
action, the Tribunal may—
the
(0 pass such orders, as it may think fit, for regulation of
the company including c es if any, in its _member$
in publj interes
creditors; or
or
(i0 direct that liability of the members shall he unlimited: ister of
re
(ii0 direct removalofthe me ft ec m an from the
nies; or
or
(iv) pass an order for the winding up of the company;
(v) pass such other orders as it may deem fit.
 FORMATION OF COMPANY
71
Commencementof Business [Section IOAJ
A company incorporated after November 1, 2018 [i.e. after the commencement
of Companies(Amendment) Act, 2019] and having a share capital shall have to
fulfil the following procedural requirement before commencing any business or
exercisingany borrowing powers:
(a) Filing of declarationto the.Registrat QLCompanies: A declarationby a
director within 180 da s of incor oration of the com an in the pre-
scribed form to the Registrar_of Companies must be filed stating t at
every subscriber to the memorandum has_paid the value of shares agreed
upon by them at the time of making_such declaration; and
(b) Verificationof the registered office : The company is required to file with
the Registrar of Companies a
section 12(2) of the Companies Act.

Default
In case of default by a company in complyingwith the requirement of this
provision on commencement of business, the company shall be liable to a penalty
oft 50,000 and every officer in default with a penalty of e 1000 for each day
during which such default continues which may go up to 1 lakh.
Further,the Registrar of Companies may initiate action for the removal of the
name of the company from the register of companies when the Registrar has
reasonablecause to believe that the company is not carrying on any business.

rovisional Contract
Provisionalcontracts are the contract entered into bya.ompanyhavingshare
capitalbetween the date of incorporation and the date on which the company
has fulfilled the requirement of section IOA on commencement of business.
These are valWcontracts if compåny_meetsthe requirements and would be
non-operatiüein case the company fails to do so.

IMPORTANT CASE

Lydney & Wigpool Iron Ore Co. v. Bird Liabilityof Promoters

• Enlarger v. New Sombrero Phosphate Co. Liabilityof Promoters
Kelner v. Baxter
Liabilityof Promoters
Natal LandandColonisation Co.Ltd. v.Pauline
Colliery &
Preliminary Contracts
Development Syndicate Ltd.
Imperial Ice Mfg. Co. v. Manchershaw
Preliminary Contracts
Newborne (London) Ltd. v.
Sensolid (GB) Ltd. Preliminary Contracts
 FORMATION OF COMPANY

Peel's Case
Moosa Gooiam
Arifv. Ebrahim GooiamArifj: Certificate
• Jubilee oflncorporation
Cotton MillsLtd.
v.Lewis Certificate of
Incorporation
REVIEW QUESTIONS
I. Comment:
(a) Whether promoter is the agent of the Company?
(b) Whether promoter is the trustee of the Company?
(c) Whether promoter is the director of the Company?
2. What is the legal position of a promoter?
3. Discuss the liabilities of promoterin case he is found to be involved
in
fraudulent activities relating to formation of the company.
4. Can a promoter make profit out of formationof the company? Discuss
with relevant case laws.
5. What are the documentsto be filed for registration of a Company?
6. The Memorandumand Articles of Association a company were deliv.
ered to the Registrarof Companieson 6th January for registration. On
8th January, the Registrar issued the Certificate of Incorporation, but by
mistake dated it as 6th January. Incidentally, on that very day (6th
January), the company made allotment of its shares. The said allotment
was challengedon the ground that it was made before the actual issue
of the Certificateof Incorporation.How would you decide and why?
7. A companywas formed on the basis of the Certificate of Incorporation
obtained by threatening the Registrar ofCompanies. Is the company legally
formed?
8. "Preliminarycontractsare nullify."Commenton the statement, bringing
out clearly the position of the promoters with regard to these contracts,
9. "Apromoter stands in a fiduciary relation towards the company he
motes." Explain.
10. "The validity of a certificate of incorporation cannot be disputed on any
grounds whatsoever." Comment.
Il. Discuss the legal effects of pre-incorporation contracts.
12. "TheCompaniesAct is not against the profits made by a promoter bilt
it's non-disclosure."Examinethis and
statement with regard to the duties
obligations of promoters of a company.
 FORMATION OF COMPANY
73

CASEPROBLEMS
t. friends purchased a property. Later, they promoted a company
and
soldthis property to the company at a huge profit. Can the company
recoverthis profit from the promoters?
Ans.(Yes,the company can recover this profit from the promoters as this
them.]
is not disclosed by
2. Acompanywas formed on the basis of a certificate of incorporation
obtainedby threatening the Registrar of companies. Is the company
legallyformed?
Ans.[The promoters,the persons named as the first directors of the
companyand the persons making declaration shall each be liable for
actionunder section 447].
3. All the seven signatures on a Memorandum of Association were forged
by a personand certificate of incorporation was duly obtained.Is the
certificateof incorporation valid? Explain.
Ans. [The promoters,the persons named as the first directors of the
companyand the persons making declaration shall each be liable for
actionunder section 447]
z