The Formation of a Company

The stages in the formation of a company

• Promotion

• Incorporation or Registration

• Capital Subscription

• Commencement of Business

Promotion

• 1 st stage in the formation of a company

• Promotion is defined as the discovery of business opportunities and the subsequent organization of funds , property and managerial ability into a business concern for making profits from there from.

• Where does promotion start from?

• Who is a promoter

Definition of promoter

• No statutory definition provided• Section 62,69,76,78 use this term expressly.• One who undertakes to form a company with reference to

a given project and sets it going, one who takes necessary steps to accomplish a purpose.

• A promoter ,with the help of his team brings a company into existence.

• He selects the signatories to AOA, MOA,appoints solicitors to prepare documents, finds funds.

• Locates the office, factory etc.• A person assisting a promoter are not promoters (section

62(6)).

Legal Position of Promoter

• Neither trustee nor an agent of the company.• There is trust or principal in existence at the time of his efforts.• Certain fiduciary (a position of trust and confidence)duties towrads

the company and the original allotee of shares are imposed on him by companies act.

• Must make full disclosure of relvant facts , including profits.• Must not make secret profits out of transactions he makes on

behalf of the company.• Making of profits is not forbidden, not disclosing the same is.• Must be made to full board or share holders body.• Board of directors should not be his own nominees.

Promoters Liability

• If profit made out of a transaction to which company is a party, is not disclosed by a promoter, two options are available.

• 1. May sue promoter and recover the same.• 2. It may set aside the transaction or contract

with the promoterOther liabilities:May be made liable to the original allotteeIn the course of winding up an application, thepromoter may be made liable for breach of trust.

Promter’s Remunertaion

• May be paid in cash or in shares and debentures.

• But in absence of an agreement a promoter cannot recover his remuneration and initial expenses.

• A public company having a share capital is not liable even for contracts entered into after incorporation because they are treated as provisional contracts in the eyes of law, till it gets the certificate of commencement of business.

• Thus inspite of a contract after incorporation a public company is legally bound to pay remuneration only after getting certificate to commence business.

Pre in corporation contracts

• Pre incorportaion contracts are not legally binding and called preliminary contracts.

• Company can neither be sued nor sue.----WHY?• The promoter will continue to be personally liable for

pre incorporation contracts unless new contacts embodying the terms of the old one is made afresh by company after its incorporation.

• The contracts cannot even adopt the pre incorporation contracts by ratification., because it requires the presence of principal competent to contract.

• Section 15 (h) and 19 E of the specific relief act, 1963.-Acceptance and communication necessary.

Incorporation and registration

• Steps:

• To find if name is available

• To get letter of intent under IDRA, if business within purview of act.

• To fix up underwriter, brokers, bankers, auditors, solicitors

• To get MOA, AOA prepared.

Documents with application

• MOA

• AOA

• The agreement

• A written consent of directors

• A notice of address of registered office

• A statutory declaration

• Applicable fees (schedule x of companies act)

• Registrar issues certificate of incorporation.

• CIN – Corporate Identity number given by the ROC as per instruction of Department Company affairs

Capital Subscription

• To follow guidelines of SEBI

• File a copy of prospectus

• Application of shares received

• If minimum subscription achieved – 90 % of capital issue.

• Directors pass resolution to allot shares.

• If minimum subscription not obtained – to return money within 60 days to all investors.

• Statement in lieu of prospectus can also be filed.

Commencement of business

• A public co., issuing prospectus will have to file some docs, with registrar to secure commencement of business.

• Docs: Shares payable in cash have been allotted

• Every director has paid cash for the allotment

• No money is liable to become refundable

• Declaration by director the secretary has been appointed