Unit II

Formation and Incorporation of a Company

Stages of formation of a company
1. Promotion
2. Incorporation
3. Capital Subscription
4. Commencement of Business
 Stage 1 Promotion
Promoter- Sec 2(69) of Companies Act, 2013
Promoter means a person –
(a) Whose name has been mentioned in the prospectus or in annual returns
or
(b) Who has a control over the affairs of the company, directly or indirectly, as
a shareholder, director, or otherwise or
(c) In accordance with whose advise, directions or instructions, the BOD of the
company is accustomed to act.
 Legal Position of a
Promoter
• Promoter is neither an agent nor a trustee of the proposed company.
• He is in the peculiar position of a quasi trustee.
• He stands in a fiduciary position towards the company and original
allottee of the shares.
• By virtue of fiduciary position, he has a duty of making full disclosure
of all the relevant facts.
 Duties and Obligations of a
Promoter
1. A promoter must not make any secret profits.
2. It is the duty of a promoter to full disclose all relevant facts.
3. It is the duty of the promoter not to make any unfair use of the position to the co.
Disclosure can be made in any of the following ways:
(a) To an independent BOD or
(b) To the whole body of people who are invited to become shareholders of a company or
(c) In the prospectus of the company or
(d) In the AOA of the company.
 Promoter’s Liability
1. Personally liable for preliminary contracts not subsequently adopted by company after its incorporation.
2. Liability in case of Fraud in formation the company:
(i) furnishing false information or suppressing material information in any of its documents - promoters can be held liable
for fraud under sec 447.
(ii) The Tribunal may order investigation against the promoters or any other officers involved.
(iii) If promoter wrongfully withholds property of the company and use it for purposes other than that given in its MOA or
Co Act, he shall be liable for penalty ranging from Rs 1 lakh to Rs 5 Lakh and imprisonment which may extend to 2 years.
3. Misleading Prospectus:
Sec 34- criminal liability,
Sec 35- Personal liability,
Sec 447
 Preliminary or Pre-
Incorporation Contracts
• Meaning- Promoters usually enter into contracts to acquire some property or
rights for the company which is yet to be incorporated. Such contracts are
called as preliminary or pre-incorporation contracts.
• Status:
(i) Before 1963:
1. Null and Void (company can neither sue nor be sued on these contracts).
2. Company can’t obtain the benefit of these contracts by ratification or
adoption.
3. Promoter remains personally liable on pre-incorporation contracts.
4. These contacts were binding on the company if the co entered into a new
contact on the basis of same terms.
Preliminary or Pre-Incorporation Contracts Contd……….
(ii) Status after 1963:
Specific Relief Act, 1963 enacted to give relief to the promoters.
According to this Act, ratification of pre incorporation contact by company is possible
provided following two conditions are fulfilled:
1. Sec 15 (h): these contracts are made for the purpose of the company and
warranted by terms of its incorporation and
2. Sec 19 (e): the company has adopted these contracts after its incorporation and
communication of the same has been made to other party to contract.
These contacts are binding on the company if the co entered into a new contact on the
basis of same terms.
 Stage 2 Incorporation
Preliminary Steps:
1. Checking the availability of the name for the company.
• application for Reservation of name through web service available at www.mca.gov.in by using Part A of
web based form SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) which can be
approved or rejected.
• The registrar reserve the name for a period of 20 days from the date of approval which can be extended to
60 days on payment of additional fees.
• Furnishing incorrect information with respect to name :
a) before incorporation: the reserved name shall be cancelled and applicant shall be fined up to Rs 1 Lakh.
b) after incorporation: (i) the registrar may direct the company to change its name by passing ordinary
resolution within 3 months or
(ii) Strike off the name of the company or
(iii) Make a petition for winding up of a company.
2. Acquiring Digital Signature Certificate: Licensed Certifying Authority
issues the digital signature certificate.
3. Applying for Director Identification Number (DIN): Part B of SPICe+
(Maximum 3 directors can apply for DIN)
4. Preparation of MOA and AOA through e forms INC-33 and INC-34
respectively.
Digital Sign of every subscriber, applicant/promoter along with their
details in the presence of atleast 1 witness (who shall likewise digitally
sign and add all details).
5. Particulars of First directors of the company (Part B of SPICe+) and
their consent to act as a director also needs to be attached separately
 Steps for online
Registration/Incorporation of a company
1. Reserving the name for a company using Part A of web based form SPICe+ .
2. Acquiring Digital Signature Certificate.
3. Generation of DIN (Max 3 directors can apply)- using Part B of web based form
SPICe+ .
4. Prepare e-MOA and e-AOA using Form-INC 33 and Form-INC 34 respectively.
5. Digital signature of applicant/promoter and every subscriber along with witness.
6. Providing details of first director of a company (using Part B of web based form
SPICe+) along with a copy of consent of a director.
7. As per amendment happened in the year 2021 in Company (incorporation) Rules, 2014: Application for
incorporation of a company to be attached with web form AGILE-PRO-S (linked with SPICe + form) containing
Application for :
GSTIN, ESIC, PLUS EPFO Profession tax Registration, Opening of bank account and Shops and
Establishment Registration.
8. Declaration by professionals (practicing CA, CS, ICWA) and director, manager, secretary of the company in
Form No-INC 8, that all the requirements in relation to incorporation have been complied with.
9. Declaration by every subscriber and first director in Form No-INC 9 .
10. The address for correspondence till its registered office is established must be filed with ROC. Every
company is required to file verification of registered office in Form No-INC 22 within 30 days of its
incorporation. In case of default, deregistration process will start and registrar may remove the name of the
company from its register.
11. E-payment of all the requisite filing fee and registration fees through e-portal provided by MCA website.
a) If approved: registrar will generate certificate of incorporation containing CIN, PAN, TAN of the company.
b) If Defective/incomplete: (i) 15 days will be given to the applicant for resubmission.
(ii) if still defective then 15 days will be given to the applicant for resubmission.
(iii) if still defective SPICe+ form shall be rejected.
 Stage 3: Capital
Subscription
• Private company: Private Placement
• Public Company: Issue Prospectus. If minimum subscription money
not received with 30 days from the date of issue of prospectus then
application money is required to be returned otherwise every officer
in default shall be liable to pay penalty of Rs 1000 per day of default
max upto Rs 1lakh.
 Stage 4: Commencement of
Business (Sec 10A)
• As per Co (Amend.) Act, 2019, every company incorporated after 2019 with share capital (whether public
or private) is not allowed to commence its business nor exercise its borrowing powers unless following
conditions [sec 10A( 1)] are fulfilled:
1. Directors of a co. made a declaration within 180 days of incorporation in Form –INC 20A supported by
bank statement verified by practising CA, CS, Cost accountant that every subscriber to MOA has paid the
value of shares agreed to be taken by him and
2. Verification of registered office has been filed with the registrar in Form –INC 22.
• Default [sec 10A( 2)]: every company and officer in default shall be liable to pay penalty of Rs 1000 per day
of default max upto Rs 1 lakh.
• In case of Non –filing of declaration by directors within 180 days from the incorporation, as per [sec
10A( 3)] if registrar has a reason to believe that company has not been doing any business then he may
strike off the name of a company from its register.