Formation of Company

Lecture 10
 OBJECTS AND PURPOSES OF COMPANY

LEGISLATION

The Company is a form of business organization in which the

funds of a large number of investors are managed by a few
persons for the purpose of earning profits which are shared by all
the investors. The main objects and purposes of statutes relating
to companies are as follows:

1. Encourage investments in companies by providing certain

facilities.
2. Ensure due and proper administration of the funds and assets
of companies in the interest of the investing public.

3. Present malpractices by directors and managers.

4. Arrange for investigation into the affairs of companies and

provide for effective audit in dealing with cases of dishonesty
and fraud in the corporate section.
 The term Company is used to describe an association a number
of persons, formed for some common purpose and registered
according to the law relating to companies. “a company formed
and registered under this Act or an existing company.”

”By a company is meant an association of many persons who

contribute money or money’s worth to a common stock and
employ it for a common purpose. The common stock so
contributed is denoted in money and is the capital of the
company.
One-man Company or Family Company

Even when a single person holds most of the shares of a

company, the company has a legal personality separate and
distinct from the owner of the majority of the shares. A person
can form a company by getting a few nominees or dummies, get
registration and commence business.
Statutory Company

A company or corporation, formed by an Act of the

legislature, is called Statutory Corporation. The contribution and
functions of such companies are laid down by the Act of
Parliament or any state Legislature of a country. Statutory
companies are created and organized for specific undertakings.
Registered Company

A company must be registered under the Companies Act.

After registration, the Registrar of the companies issues a
Certificate of Incorporation. After that the company becomes a
Registered Company.
 ESSENTIAL FEATURES OF A COMPANY

1. Registration: A company comes into existence only after

registration under the Companies Act. But a Statutory Corporation
is formed and commence business as notified or stated in the Act
and as passed in the Legislature. In case of partnership, registration
is not compulsory.

2. Voluntary Association: A company is an association of many

persons on a voluntary basis. Therefore a company is formed by
the choice and consent of the members.
3. Legal personality: a company is regarded by law as a single
person. It has legal personality.

4. Management: A company is managed by the Board of

Directors, whole time Directors. Managing Director or
Manager. These persons are selected in the manner provided
by the Act and the Articles of Association of the company. A
shareholder, as such, cannot participate in the management.
5. Permanent existence: The Company has perpetual Succession.
The death or insolvency of a shareholder does not affect its
existence. A company comes into end only when it is
liquidated according to provisions of the Companies Act.

6. Registered Office: A company must have registered office.

7. Common Seal: A company must have Common Seal.

8. Transferability: the shareholder of a company can transfer its
share and ordinarily the transferee becomes a member of the
company.

9. Statutory Obligations: A company is required to company with

various statutory obligations regarding management. E.g…
filing balance sheets, maintaining proper account books and
registers etc.

10. Residence: A company has a residence (for taxation and other

purpose). A company does not possess any fundamental rights.
 COMPANY AND PARTNERSHIP

1. Registration: A company comes into existence only after

registration under the Companies Act. In the case of a
partnership registration in not company.

2. Minimum number of members: The minimum number of

person required to form a company if 2 in the case of private
companies and 7 in case of public companies. The minimum
number of persons required to form a partnership is 2.
3. Maximum number of members: A public company may have any
number on members. A partnership carrying on banking business
cannot have more than 10 members and partnership carrying on
the types of business cannot have more than 20 members.

4. Authority of members: The property of a partnership is the joint

property of the partners. Each partner has authority to bind the
firm by his acts. The property of the company belongs to the
company. A shareholder in his individual capacity cannot bind the
company in any way.
5. Contractual capacity: the shareholder of a company can enter
into contracts with the company and can be an employee of
the company. Partners can contractual with other partners but
not with the firm as a whole.

6. Management: A partnership firm is managed by the partners

themselves. The work of management can be distributed
among them in any manager they like.

7. Liability of members: The liability of the members of a

partnership for the debts of the firm is unlimited. The liability
of the members of a company is limited.
 THE FORMATION OF A COMPANY

ESSENTIAL STEPS
Before a company can be formed the following steps must be taken:

1. The Memo and the Articles must be prepared. These two

documents must be filed when application is made for the
registration and incorporation of the company.

2. If it is proposed to have a paid up capital or more than Rs.3

Corers, sanction of the Central Government must be obtained
under the Capital issues.
3. If the company to be formed intends to participate in an
industry which is included in the Schedule annexed to the
industries a licensee must be obtained under that Act.

4. The company must be registered in accordance with the

provisions of the constitution of a country. In the case of a
public company, the following further steps are required to
taken before it can commence business.
5. The prospectus or the Statement in lieu of Prospectus must be
issued and registered with the Registrar.

6. The minimum subscription must be raised and thereafter the

allotment of shares must be made.

7. The Certificate for the Commencement of Business must be

obtained from the Registrar.
 PROMOTERS
Definition
The term is not defined in the Act. Promoter is a word which is used
to describe the persons who initially plan the formation of a
company and bring it into existence

A person, who originates a scheme for the formation of the

company, has the Memo and the Articles prepared. Executed and
registered and finds the first directors, settle the terms of the
preliminary contracts and prospectus (if any) and makes
arrangements for advertising and circulating the prospectus and
placing the capital is a Promoter.”--- Palmer, “Company
Precedents”.
Function of the promoter:

1. The promoter decides the company’s name and assets that it will
be accepted by the Registrar of companies.

2. He decides the details of the company’s Memorandum and

Articles, the nomination of directors, solicitors, auditors,
bankers and the registered office of the company.

3. He makes arrangements for printing the Memorandum and

Articles, the registration of the company and the issue of
prospectus.

4. He is responsible to bring the company into existence.

The Duties and Liabilities of Promoters

1. A promoter stands in a fiduciary position to the company.

2. A promoter cannot make secret profits. If any secret profit or

undisclosed financial benefits is made by the promoter, the
company can recover it from him.
3. A promoter has got certain duties in connection with the
prospectus, if any issued or the statement in lieu of prospectus.
These duties are: (i) he must see that the documents contain
the particulars which according to Schedule II to the Act. They
must contain; and (ii) he must see the documents do not
contain any untrue statement.
4. For failure to perform these duties the prompter, (i) is liable to
pay compensation to any person who buys shares on the basis
of the erroneous prospectus or statement in lieu of prospectus
and suffers damage; and (ii) he may be prosecuted in the
criminal courts according to the provisions of the Companied
Act.
PROMOTERS AND PREINCORPORATION CONTRACTS

1. A company is not bound by any pre-incorporation contract

before its incorporation even where it enjoys the benefit of the
pre-incorporation contract entered into on its behalf.
2. The other party to the contract is not bound by the pre-
incorporation contract.
PROSPECTUS

The prospectus is the basis on which the investors at large get

an idea about the prospectus of the company.

Definition
A prospectus has been defined in the Act as, “any document
described or issued as a prospectus and includes any notice,
circular, advertisement, or other document inviting deposits from
the public or share in, or debentures of a body corporate.”
Characteristics

1. It is a document described or issued as a prospectus.

2. It includes any notice, circular, advertisement inviting deposits

from the public or other document.

3. If is an invitation to the members of the public.

4. The public is invited to subscribe the shares or debenture of the
company.

5. Prospectus is the document through which the company

secures the capital needed for carrying on its business. Any
document having this objects, comes within the definition of
prospectus. But an advertisement for securing business or
trade is not a prospectus.
THE LEGAL REQUIREMENTS OF PROSPECTUS

1. Time
A prospectus is to be issued after the incorporation of the
company.

2. Particulars
The prospectus must contain all the particulars listed in
Schedule II to the Companies Act.

3. Date
The prospectus must be dated and this date will be
considered to be the date of publication unless otherwise
proved.
4. Signature
The prospectus must be signed by every person mentioned
therein as director or proposed director or his agent.

5. Copy of prospectus
Every application from for shares, issued by the company, must
be accompanied by a copy of the prospectus except (i)
application forms issued in connection with a bona fide invitation
to a person to enter into an under writing agreement and (ii)
application forms issued to existing members and debenture-
holders.
6. Statement by expert
A statement, relating to the company, by an expert, can be
included in the prospectus only if the expert connected Is not
engaged or interested in the formation, promotion, or the
management of the company.

7. Deposits
Deposits are not to be invited without issuing an
advertisement. the Central Government may, in consultation
with the Reserve Bank of a country prescribe the limits, the
manner and the conditions subject to which deposits may be
invited or accepted by a company either from the public or the
members.
8. Registration
Before a prospectus is issued, it must be registered with
the Registrar of Companies. Copies of relevant document
documents (e.g.. consent of director and experts to the issue
of the prospectus and copies of contracts) have to be filed
when application is made for registration.
9. Terms of Contracts
The terms of any contract, mentioned it the prospectus,
cannot be varied after registration of the prospectus except
with the approval of the members in a general meeting.

10. Prospectus by a Foreign Company

A prospectus issued by a foreign company, with a view to
selling share in a country, must include certain additional
meeting.
11. Penalty for Non-compliance

If the aforesaid rules, relating to the matters to to be included in

the prospectus, are not complied with, any person who is
knowingly a party to the issue thereof shall be punishable
with a fine which may extend to Rs.50000.
12. Defense

A person charged with non-compliance of the aforesaid rules

will be excused in the following cases:

(a)As regards any matter not disclosed, if he proves that he had

no knowledge thereof; or

(b)If he proves that the non-compliance or contravention arose

from an honest mistake of fact on his part.
ALLOTMENT OF SHARES

Definition

Allotment means the appropriation to an applicant by a resolution

of the directors of certain number of shares in response to an
application. Shares so allotted are not, in general specific shares
identified by number ring is left till later.
Rules regarding allotment

The rules regarding allotment are summarized below:

1. Application Form

The prospectus is an invitation to the public to purchases

shares. Person intending to purchase shares have to apply in a
form prescribed in the prospectus for the purpose and called the
“application form”. “The prospectus also fixes the time when
the applications will be opened and the allotment of shares to
the applications will be made.
2. Result of the contract
Membership of a company by purchase of shares is the result
of a contract. The application by the intending shareholder is the
“offer” for the purchase of shares.

3. Conditional offers and acceptance of shares

Conditions are usually printed on the application form. One
very common condition is that in case of over-subscription, the
number of share allotted to each subscriber will be
proportionately less than the number of shares applied for.
4. By the authority

The allotment of shares is to be done by the board of directors of

the company. Allotment can be delegated to some persons or a
Committee, provided there is a provision in the Articles of the
company. Allotment made by any other than the proper
authority is void.
5. Within a reasonable time

The allotment must be made within a reasonable time; otherwise

the application is not bound to take shares. The offer to buy
the shares is deemed to be revoked if there is an unreasonable
delay in accepting the offer.
6. Application in a fictitious name

Any person who (a) makes in a fictitious name an application to a

company for acquiring, or subscribing for, any shares therein,
or (b) otherwise induces a company to allot, or register any
transfer of shares therein to him or any other person in a
fictitious name shall be punishable by imprisonment up to 5
years.
Restrictions

1. Opening of subscription

No allotment can be made until the beginning of the 5 th day after the
publication of the prospectus or such later time as may be
prescribed for the purpose in the prospectus.

2. Revocation of the application

An application for shares cannot be revoked until after the expiration

of the 5th day after the time of opening of the subscription lists,
except in one case.
3. Punishment

An allotment of shares prior to the time prescribed under this rule

is not void. But the directors making such allotment are liable
to punishment.

4. Minimum subscription

No allotment can be made until the amount fixed as the minimum

subscription has been received.
5. Application money

The amount payable on each share, with the application form,

shall not be less than 5 percent of the nominal value of the
share.

6. Deposit in a Scheduled Bank

All moneys received from the applicants must be kept in deposit

in a scheduled bank until the certificate to commence business
has been obtained, or, (where such certificate has already been
obtained) until the entire amount payable applications for
shares in respect of the minimum subscription has been
received by the company.
7. Return of Money

If the minimum subscription is not raised or if, for any other

reason, allotment could not be made within 120 days from the
date of publication of the prospectus, the directors must
forthwith return the money received from the application.
8. Statement in lieu of Prospectus

A public company which has not issued any prospectus must, at

least 3 days before the first allotment of shares, deliver to the
Registrar for registration, a Statement in lieu of Prospectus,
signed by every director or proposed director or his agent in
the from prescribed.
9. Stock Exchange recognition

Where the prospectus states that application has been made or

will be made for the shares (or debentures) being dealt with in
a stock exchange, the application necessary for securing
permission of the authorities of the stock exchange must be
made before the 10th day after the first issue of the prospectus.
10. Effects of an irregular allotment

1. Option: the allotment becomes voidable at the option of the

shareholder. The option, to avoid the contract, must be
exercised within 2 months of the holder of the statutory
meeting or, where no statutory meeting is required to be held
or where the allotment is made after the holding of the
statutory meeting.
2. Compensation: any director knowingly or willfully contravening
the rules or authorizing the contravention shall be liable to pay
compensation to the shareholders concerned foe any loss or
damage suffered.

3. Fine: the validity of an allotment shall not be affected by any

contravention of the foregoing provisions of this section; but in
the event of any such contravention the company and every
officer of the company who is in default, shall be punishable
with fine which may extend to fifty thousand rupees.”

4. Void: any allotment made in violation of constitution rules is

void.