Presented By

Aishwarya Shetty (14B103)

Stages in formation

Promotion stage

Promoter

Fiduciary position

Duties of promoter

Liabilities of Promoter

Promoters Remuneration

Pre-incorporation contracts

Legal position of pre-incorporation contracts

Ratification under Specific Relief Act

Provisional Contracts

Pre-incorporation contracts Vs Provisional Contracts

Incorporation or Registration Stage

Issue of Certificate of Incorporation

Capital Subscription Stage

Commencement of Business Stage

The Promotion Stage

The Incorporation Stage

The Capital Subscription Stage

The Commencement of Business Stage

Discovery of an idea

Preliminary investigation of the feasibility of the idea

Assembling of business elements

Provision of necessary funds

A person who undertakes to form a company with reference to a

given project and takes necessary steps to accomplish that purpose.

A promoter may be an individual, a partnership firm or even a

company

A promoter directs the solicitors to prepare the memorandum & other

necessary documents for filing with the Registrar, chooses a name for

the company, raises necessary funds, decides about the location of

registered office, selects the persons who would be directors and so

on

Neither a trustee nor an agent

In law, promoter occupies a fiduciary position towards the company

to be formed

A fiduciary position signifies a position of trust and confidence and

imposes the following duties on promoter:

Not to make secret profit

To disclose the facts:

To Board of Directors

To The whole body of persons who have been invited to become shareholders

through a prospectus

In the articles of the company

No unfair use of position

To disclose all private arrangements

Secret Profits:

Company may rescind the contract and recover the price paid

Company may recover profits without claiming rescission

Company may sue for damages for breach of fiduciary duty

Liability for mis-statements in the prospectus

Liability for misfeasance or breach of trust [ Section 543]

Liability to public examination [Section 478]

Expect in case of express contract to that effect, promoter has no right to claim remuneration

Paid a lumpsum either in cash or in form of shares or debentures of the company

Given commission on the purchase price of business taken over by the company

Inducted to the Board of Directors

Sell his own property to the company at an inflated price provided full disclosure is made thereof

Given an option to buy shares of company at par value when market price is higher

When remuneration paid to promoter, it must be disclosed in the prospectus if paid within 2 years preceding the date of the prospectus [ Clause 15, Part I of Schedule II]

Contract made by promoter on behalf of the company before its

incorporation.

These agreements made as agents or trustees of the company

Before incorporation, company is a non-entity and lacks contractual

capacity

Company is not liable for the acts of promoters done before its

incoporation

In Natal Land and Colonisation Co. vs Pauline Colliery Syndicate 1904

AC 120, a company made an agreement with B who acted on behalf

of a syndicate to give the syndicate a lease of coal mining rights.

Subsequently the syndicate was registered as a company. It claimed

performance from the company, which was refused. Held, the

syndicate cannot enforce the contract against the company as it was

not in existence at the time the contract was made.

Not binding on the company

Not binding on other party

No ratification

Personal liability of promoters

In Kelner vs Baxter (1886) L.R. 2 CP 174, a promoter who

represented himself as an agent of a company in relation to

pre-incorporation contracts was held to be personally

liable on such contracts

Under Section 15(h) and Section 19(e) of the Specific Relief Act, a pre-incorporation contract can be specifically performed by or against the company provided:

The contract is made for and on behalf of the company

Such a contract is warranted by the terms of the incorporation

The company has accepted the contract and communicated its acceptance to the other party

Private Company becomes legally bound the moment it makes a fresh contract or ratifies a contract immediately after its incorporation.

A public Company becomes legally bound only after getting the certificate for commencement of business

These are contracts made by a company after its incorporation but before

becoming entitled to commence business

According to Section 149, any contract made by a company before the date

on which it is entitled to commence business shall be provisional only and

hence, shall not be binding on the company until that date.

This leads to following consequences

If company does not get the certificate to commence business, the

provisional contract shall lapse

If company obtains the certificate to commence business, the provisional

contract shall become binding on the company. There is no need for

ratification of such a contract

Pre-incorporation Contracts Provisional Contracts

These are made before the company

comes into existence

These are made after the company has

come into existence

Not binding on the company Become binding after the company has

received the certificate of

commencement of business

These may become binding after

ratification by the company under the

Specific Relief Act

These become binding automatically on

the company after obtaining the

certificate of commencement of business

Promoters are personally liable if such

contracts are not adopted by the

company

Those signing the provisional contracts,

on behalf of the company, are not

personally liable thereon

These are made both in the case of a

public and a private company

These arise only in case of a public

company

Preliminary Steps:

Ascertain the availability of proposed name from the Registrar of Companies by

submitting 3 proposed names in order of priority

Prepare and get printed the Memorandum & Articles of Association and a

draft copy of the prospectus

Appoint the underwriters, bankers, solicitors, auditors and assemble the

requisite number of signatories to the Memorandum

Get the Memorandum subscribed by the requisite number of persons ( 7 & 2 in

the case of public company and private company respectively)

Filing of Documents: The following documents, duly stamped and signed b the subscribers, shall be filed with the Registrar of Companies of the State in which the registered office of the company is to be situated: The Memorandum of Association duly signed by the subscribers [Section

33(1)(a)]

The Articles of Association, if any, duly signed by the subscribers to the memorandum [Section 33(1)(a)]

The agreement which the company proposes to make with an individual for appointment as its managing or whole-time director [Section 33(1)(c)]

The written consent of the directors to act as such and to take up qualification shares

A statutory declaration that all the requirements of the Act in respect of registration have been compiled with. It shall be signed by

An advocate of the Supreme or High Court

An attorney or pleader entitled to appear before a High Court

A Company Secretary or a Chartered Accountant in whole time practice and engaged in the formation of the company

A person named in the Articles as director, manager or secretary of the company [Section 33(2)]

The Address of the Registered Office within 30 days of incorporation

Scrutiny of documents: The Registrar scrutinizes the documents filed with him. If

they are found to be in order, he registers the company and issues a certificate of

incorporation.

Conclusiveness of certificate of incorporation: depends on following:

That the company is duly registered and it has fulfilled all the requirements

relating to registration

That the date borne on the certificate is the date of birth of the company

The certificate is conclusive even if it was legally impossible that the company

could have been properly registered such as when all the signatories to the

memorandum are minors. But the certificate would not validate the objects

which are illegal.

Effect of Registration:

The company becomes a distinct legal entity from the date mentioned in the

certificate

Acquires perpetual succession

The Memorandum and Articles become binding on the members

The liability of members of a limited company becomes limited

A public company having share capital has to fulfil following formatilities:

Where a prospectus is issued [Section 149(1)]: A public company issuing

prospectus must file the following with the registrar:

A copy of the prospectus

A statutory declaration verified by a director or secretary of the company to the effect

that:

The directors have taken up and paid for the qualification shares in cash an amount

equal to the amount payable by other subscribers on application and allotment

The shares payable in cash have been allotted up to the amount

of minimum subscription, and

That no money has become liable to refund by reason of the

failure of the company to apply for or obtain permission of the

stock exchange to deal in its shares or debentures

Where a prospectus is not issued: Such a company should file

following documents with the Registrar:

A statement-in-lieu of prospectus, and

A statutory declaration verified by one of the directors or secretary of the

company that every director has taken up and paid for the shares an amount

equal to what is payable on application and allotment by other subscibers

Following additional conditions must be fulfilled:

Where the company is an existing company and wants to take up an

object other than that included in its objects clause, it must pass a

special resolution in the general meeting

A special resolution is also needed when it wants to start a business

included in the other objects clause

On compliance with all the above formalities, the Registrar issues a certificate that

the company is entitled to commence business

Certificate is conclusive evidence that company is so entitled [Section 149(3)]

If company does not commence business within a year of its incorporation, it may

be wound up by the Tribunal [Section 433 (e)]

The company may also commence business by passing an ordinary resolution if

the approval of the Central Government has been obtained for the same