CHAPTER- 8 REGISTRATION & INCORPORATION

After reading this lesson, you will be conversant with:

8.1 Promoters Of The Company

8.2 Procedure Of Incorporation

8.3 Memorandum Of Association8.4 Articles Of Association

A company, association or a partnership consisting of more than 20 members (ten in case of banking) will be termed as an illegal association unless it is registered as a company under the Companies Act or is formed in pursuance of some other Indian Law. This provision will not be applicable to a Joint Hindu Family carrying on business. However, where two or more joint families carry on a business, this provision will be applicable and registration would be mandatory in order to prevent being termed as an illegal association. While arriving at the required number of 20, minors will have to be excluded.

In Ruia V. V. vs. Dalmia, it was held that four basic conditions need to be satisfied to come within the restrictions contained under Section 11(2). They are:

a. There must be a company with more than 20 persons;

b. Such a company is not registered under the Companies Act or any other Indian Law;

c. The objective of the company is to carry on business other than banking; and

d. For the purpose of acquisition of gain.

An association of more than 20 persons, unregistered at the time of its inception is invalid and cannot be validated later by reducing the number of members to less than 20.

Similarly, a contract entered into by an illegal association before registration is void and cannot be made valid on its subsequent registration.

However, illegality in constitution of an association will have no effect on its tax liability or its chargeability.

A company is incorporated by promoters. The functions and legal position of promoters is mentioned in the following paragraphs.

8.1 PROMOTERS OF THE COMPANY

The expression promoter has not been defined under the Companies Act but defined under SEBI Act 1992. A Promoter is a person who conceives an idea to start a company and gathers relatives and other members of Hindu Undivided Family for bringing the subscription to the company or can be a body corporate. The definition given by Companies Act is restricted to and meant for the purpose of prospectus alone: A promoter is the person who originates the scheme for the formation of the company, has the Memorandum of Association prepared, executed and registered, and finds the first directors, settles the terms of preliminary contracts and prospectus and makes an arrangement for advertising and circulating the prospectus and placing the capital.

Promoter is the person who possesses the intention to promote a company and who takes the required steps for incorporation of the intended company. The promoter need not participate in the formation of the company. Any person who agrees with the intentions and objects of the company and who brings in capital into the company will be regarded as a promoter. In India, promoters generally secure the management of the company formed or are the persons who convert their own private business into a limited company, public or private and secure for themselves more or less controlling interest into the companies management.However, a person who merely acts in a professional capacity on behalf of the promoter, such as a solicitor who drafts up the agreement or articles, an accountant or valuer who values the assets of a business on behalf of a promoter, and who is paid for his services is not a promoter.

Legal Position of a PromoterIt has to be noted that the promoter is neither an agent nor a trustee of the proposed company. The promoter stands only in a fiduciary position towards such company. While in a fiduciary position, the promoter has two principal duties:

i. Not to make either directly or indirectly any secret profits at the expense of the company which he is promoting without the knowledge and consent of the company. In case of any violation of this rule, the company can compel the promoter to account for it.

ii. Not to sell his property to the company at a profit unless all material facts have been disclosed to an independent Board of Directors or to the shareholders of the company and also in the prospectus. This disclosure relates to the payments made in the last two years or to be made to the promoters. If a promoter contracts to sell his own property to the company without making a full disclosure, the company may either repudiate the sale or affirm the contract and recover the profits earned by the promoters.

Remuneration of PromotersThe inability of the company to enter into contractual obligations, makes it impossible for its promoters to obtain contractual rights to remuneration for their services rendered before incorporation. Nor can the promoters enforce a contract based on the clause in the Articles of Association directing that promoters shall be remunerated for their services. However, as they (or their nominees) will usually be the first directors of the company, there is little risk of power being not exercised in their favor. In practice, a promoter is remunerated in any of the following ways:

i. He may sell his own property to the company for cash or against fully paid shares in the company at an overvaluation after making full disclosure to an independent Board of Directors or to the intended shareholders.

ii. He may take commission on the shares sold.

iii. He may be paid a lump sum by the company.

iv. He may be given an option to buy further shares in the company at par.

Any remuneration or benefit received by the promoters should be disclosed in the prospectus if it is paid within two years preceding the date of the prospectus.

8.2 PROCEDURE OF INCORPORATION

For incorporation of a company, the promoters have to inter alia decide the following aspects:

Type of a company.

Name of the company.

Filing of the documents with the Registrar: (i) Memorandum of Association, (ii) Articles of Association, (iii) List of Directors, (iv) Declaration stating that all requirements of the Companies Act have been complied with, and (v) Preparation of other Documents.

Payment of the required Fees.

Obtaining the Certificate of Incorporation.

Obtaining the Certificate of Commencement of Business.

Each of the above aspects are dealt in detail in the following paragraphs.

Type of a CompanyThe promoters have a choice of deciding the type of company to be incorporated viz., public company and private company. Also, the company may be limited by shares or guarantee or may be unlimited.

Name of the Company

The promoters have to first obtain the availability of name from the Registrar of Companies (ROC) of the state in which the company is proposed to be incorporated.

Though a company may be incorporated with any name as desired by the promoter, the company cannot be registered by a name, which in the opinion of the Central Government, is undesirable. Section 20 lays down the following rules that have to be followed while choosing the name.

i. Every company, except a Section 25 Company, should suffix to its name the word Ltd./Pvt. Ltd.

ii. The intended name should not be identical, or resemble the name of the company in existence and which has been previously registered. This restriction also covers names of those companies under dissolution or which have been dissolved and two years has not lapsed since such dissolution.

A name is said to resemble an already existing companies name if: The proposed name differs from the name of an existing company merely with an addition or subtraction of word like New, Modern, etc.

The proposed name denotes a popular or abbreviated description or names of important companies. For example, TISCO, ICI, etc.

The proposed name has a close phonetic resemblance to the name of a company in existence. For example, Jay Kay Industries resembling J.K. Industries.

The proposed name is different from the name of the existing company only to the extent of having the name of place within brackets before the word limited.

iii. The name should not mean any government participation or patronage unless justified.

iv. The name should not imply association or connection with, or patronage of a national hero or any person held in high esteem.

v. The name should not include the word like bank, banking, insurance, investment trust unless the circumstances of a particular case justify the inclusion of such a word.

vi. The name is not a general one and is not very common, like Cotton Textile Mills Limited.

vii. The intended name should not produce a misleading impression regarding the scope of its activities which would be beyond the resources at its disposal.The Department of Company Affairs in its circular dated 7-3-1989, has clarified that if a company uses any of the following keywords in its name under Sections 20 and 21, it must have a minimum authorized capital mentioned against the keywords:

Keywords Required Authorized Capital (Rs.)

1. Corporation 5 crore

2. International, Globe, Universal, Continental, Inter Continental, Asiatic, Asia, being the first word of the name 1 crore

3. If any of the words at (2) above is used within the name (with or without brackets) 50 lakh

4. Hindustan, India, Bharat, being the first word of the name 50 lakh

5. If any of the words at (4) above is used within the name (with or without brackets) 5 lakh

6. Industries/Udyog 1 crore

7. Enterprises, Products, Business, Manufacturing 10 lakh

Filing of Documents with the Registrar

As mentioned above, preparation and filing of Memorandum and Articles of Association constitutes one of the important tasks in formation and incorporation of the company.

Memorandum of Association, inter alia, defines the area within which the company can act and states the objects for which the company is being formed. It also states the capital which it shall be allowed to raise, the nature of liability of its members, the name of the state where the registered office of the company shall be located, etc. Section 13 specifies the requirements with respect to Memorandum of association.

Another important document that has to be filed with the Registrar is the Articles of Association which contains the rules and regulations relating to the internal management of the company that is being incorporated. The articles define the powers of its officers and establishes a contract between the company and the members and also between the members inter se.

Apart from the above documents the following documents also need to be filed with the Registrar, wherever applicable:

i. A power of attorney that may be required for fulfilling various formalities for incorporation of a company should also be filed. The promoters may execute a power of attorney in favor of any one of them or in favor of an Advocate or some other professional like Chartered Accountant or Company Secretary. The power of attorney should be prepared on a non-judicial stamp of the value prescribed by the State Stamp Laws.

ii. Consent of the directors vide Form 29 is required only for a public limited company. Form 32 intimating the appointment of first directors, manager or secretary can be filed either at the time of incorporation or within thirty days of incorporation.

iii. The particulars of such directors whose names are given in the articles of association as first directors.

iv. A notice of the address of the registered office should be filed with the Registrar. This however, can be filed within thirty days of incorporation (Form-18). v. A statutory declaration of compliance should be made in Form No.1 by any of the persons specified for the purposes stating that all the rules and requirements of the Companies Act have been complied with in respect of registration and matters precedent and incidental thereto. The specified person may be an advocate of Supreme Court or a High Court, or an Attorney or a pleader entitled to appear before a High Court, or a Company Secretary or a Chartered Accountant practicing in India and engaged in the formation of the company or by a person named in the articles as a Director, Manager, or Secretary of the company.

vi. Any agreement which the company proposes to enter for appointment of an individual as Managing Director/Whole Time Director/ Manager.

Payment of Fees

The requisite registration and filing fee in accordance with Schedule X is required to be paid at the time of filing the above mentioned documents.

Fees can be paid to the Registrar of Companies either by cash, or by postal order if the amount does not exceed Rs.50, or by money order/demand draft/chque or any other method specified for that purpose.

Obtaining the Certificate of IncorporationUnder Section 33(3) the Registrar after scrutinizing the documents that are filed and on being satisfied that they are in order and also satisfied that other legal requirements are duly complied with, will enter the name of the company in the Register of Companies. This will in effect bring the company into existence. The certificate so issued by the Registrar is called the Certificate of Incorporation.

In case of Moosa Goolam Arif vs. Ebrahim Goolam Arif (1913), after the company was issued a certificate of incorporation it was found that out of the seven persons who signed the memorandum only two were adults, one of them signing as a guardian of the other five members who were all minors at that time. It was held that the question whether the formation of the company is null and void will not arise, in view of the conclusiveness of the certificate of incorporation once it is issued. The certificate is evidence of compliance of all the requirements as required by the Companies Act. Therefore, the position is firmly established that if a company is born, the only method to get it extinguished is not by assailing its incorporation, but by resorting to the provisions of enactments, which provide for the winding up of companies.Section 35 only prevents the reopening of the matters prior and contemporaneous to the registration and incidental thereto, and places beyond doubt the existence of the company as a legal person. This section does not insulate the company incorporated with illegal objects. Such company may be forbidden to carry on any business in furtherance of its illegal objects.

Certificate of Commencement of BusinessA private company or a company not having share capital may commence business and exercise its various powers immediately after it is incorporated. However, a public company will have to obtain one more certificate i.e., certificate of commencement of business.

Section 149 lays down some restrictions on the commencement of business by a public company having a share capital depending on whether the company has issued a prospectus or not.

a. Where the company has issued a prospectus: Section 149(1) provides that if a company having share capital has issued a prospectus, it shall not commence its business or exercise its borrowing powers unless:

i. (a) Minimum subscription amount mentioned in the prospectus has been received in cash, (b) Shares have been allotted, and (c) Where the shares are to be listed, listing approval has been obtained from the exchange,

ii. Every director has paid the amount due on the shares he has taken or contracted to be taken by him. The director is liable to pay the same proportion payable by the public on application and allotment of the shares,

iii. No money is liable to be refunded either due to inadequate number of applications or due to failure in obtaining permission of the stock exchange for dealing in those shares U/S 73 of the Companies Act, 1956 and

iv. A duly verified declaration by any one of the directors of the company has been filed with the Registrar stating that all the conditions in (i), (ii), and (iii) above have been fulfilled.

b. Where the company has not issued a prospectus: Section 149(2) provides that if a company does not issue a prospectus, it shall not commence any business or exercise any borrowing powers, unless:

i. A statement in lieu of the prospectus has been filed with the Registrar,

ii. Every director has paid the amount due on the shares taken or contracted to be taken by him, and

iii. A duly verified certificate by one of the directors declaring compliance of (i) and (ii) above has been filed with the Registrar, Upon completion of the above formalities to the satisfaction of the Registrar, the Registrar issues a certificate of commencement of business.If any public company exercises borrowing powers or commences business without complying with the above provisions, every person at fault is liable to pay a fine of Rs.5,000 for each day of contravention.

8.3 Memorandum of AssociationThe Memorandum of Association is a document of great importance in relation to a company. As per Section 2(28) of the Act: Memorandum means Memorandum of Association of a company as originally framed or altered from time to time in pursuance of any provisions of Company Law or of this Act. It is often described as the charter of the company defining as well as confining the powers of the company. Any act done beyond the scope of the memorandum is ultra vires the company and hence null and void.

The Memorandum of Association should follow the conditions given below:

a. Every memorandum should be printed electronically or otherwise as may be prescribed,

b. Divided into paragraphs and numbered consequently, and

c. Signed by each subscriber in the presence of at least one witness who shall attest the signature and shall likewise add his address, description and occupation.Section 13 of the Act prescribes that the memorandum of association of a limited company should essentially have the following six clauses:

Name ClauseThe memorandum of association should contain the name of a company, whether it is a private or public company. Companies covered by Section 25 are exempted from the use of word(s) Ltd./Private Ltd.The name of the company has to appear in full and in a legible manner on all documents and official publications, letter papers, etc. Default in affixing or printing the correct name on official documents can make the directors personally liable.Registered Office Clause

This clause should state the name of the State in which the registered office of the company will be situated. Under Section 146, a company shall, as from the date of which it begins its business, or as from the 30th day after the date of its incorporation, whichever is earlier, have a registered office; and a notice of the exact place of the registered office must be given to Registrar within 30 days after the date of incorporation.

Utmost care must be taken by the proposed company while opting this clause. The location of Registered Office is crucial in the governance of the company since it is the place where all the registers and documents are kept and Annual General Meetings are held.

Change of registered office within a State (Section 17A)No company shall change the place of its registered office from one place to another within a state unless such change is confirmed by the Regional Director. To get confirmation, the company shall make an application in the prescribed form to the Regional Director. The Regional Director shall communicate the confirmation to the company within four weeks from the date of receipt of the application. Then, the company shall file, with the Registrar a certified copy of the confirmation by the Regional Director for change of its registered office under this section, within two months from the date of confirmation, along with a printed copy of the memorandum as altered and the Registrar shall register the same and certify the registration under his hand within one month from the date of filing of such document. The certificate shall be the conclusive evidence that all the requirements of the Act with respect to the alteration and confirmation have been complies with and henceforth the memorandum as altered shall be the memorandum of the company.Objects and Powers ClauseThe objects clause defines the objects of the company and indicates the sphere of activities. The objects must be divided into three sub-clauses, namely:

Main Objects:i. This clause has to state the main objects to be pursued by the company on its incorporation.

ii. Objects incidental or ancilliary to the attainment of main objects.

iii. Other objects: This sub-clause must state other objects which are not included in the above clauses.

Doctrine of Ultra Vires

Ultra Vires means beyond the scope or in excess of legal authority or power.

Scope of the company: The objects clause of the MOA fixes the boundary within which the company has to act. If the company crosses this limit, it amounts to Ultra Vires. All Ultra Vires acts are void even when such acts are ratified by all the members of the Company

The powers exercisable by a company are to be confined to the objects specified in the memorandum. While the objects are to be specified, the powers exercisable in respect of them may be express or implied and need not be specified. However, it is prudent to include the following powers expressly in the objects clause:

i. To acquire any business similar to companies own business,

ii. To enter into agreements with other persons or companies for carrying on business in partnership or for sharing profits, joint venture or other arrangements,

iii. To take shares in other companies having similar objects,

iv. To promote other companies and help them financially,

v. To use funds for political purpose, and

vi. To give gifts and make donations or contributions for charities not relating to the objects stated in the memorandum.

Caselet

In Ashbury Rly Carriage Co. vs. Riche (1878), a company had been formed with the object of carrying on business as Mechanical Engineers and General Contractors. The company entered into an agreement for financing the construction of a railway line in Belgium. Later the company repudiated the contract since it was an ultra vires one

Consequences of Ultra Vires Transactions

i. Injunction may be obtained by any shareholder to restrain the company from carrying out an ultra vires act.

ii. Directors are personally liable for any diversion of the funds for purposes other than what is specified in the companys memorandum. A shareholder can bring about an action against the directors for restoration of company funds used for ultra vires objects. They can also be held personally liable for breach of warranty of authority.

iii. In case the companys money has been spent ultra vires in purchasing some property, the companys right over that property must be held secure as it represents the companys funds. Hence, any property legally and by formal transfer or conveyance transferred to a corporation, is in law, duly vested in such corporation, even though the corporation was not empowered to acquire such property.

iv. The rule of ultra vires was devised for the protection of the companies interest and it is not capable of being used against the companies interest. Therefore, others cannot sue on the ground of ultra vires the claim of a company which has matured. We will clarify this point with the help of a decided case. A company purchased and operated a rice mill beyond its powers. The rice was consigned to certain persons who had paid the price. The consignees had to sell the rice, owing to its inferior quality, at a considerable loss. The company gave them drafts promising to pay for the loss. The company went into liquidation and the question about the enforceability of the drafts arose. The court held that trading in rice was a transaction ultra vires to the company, the directors, therefore, could not bind the company, and the consignees could not recover.

Liability ClauseThe fourth clause states the nature of liability that the members incur. If the company is incorporated with limited liability, the clause must state that the liability of the members shall be limited by shares. This means that no member can be called upon to pay anything more than the nominal value of the shares held by him. If the company is limited by guarantee, this clause shall state the amount which every member undertakes to contribute to the assets of the company in the event of its winding up.

8.4ARTICLES OF ASSOCIATION

The articles usually contain the provisions relating to the following matters:

i. Share capital including sub-division thereof, rights of various shareholders, the relationship of these rights, payment of commission, share certificates.

ii. Lien on shares.

iii. Calls on shares.

iv. Transfer of shares.

v. Transmission of shares.

vi. Forfeiture of shares.

vii. Surrender of shares.

viii. Conversion of shares into stock.

ix. Buy-back of Securities.

x. Share warrants.

xi. Alteration of share capital.

xii. General meetings and proceedings.

xiii. Voting rights of members.

xiv. Directors, including first directors or directors for life, their appointment, remuneration, qualification, powers and proceedings of board of directors meetings.

xv. Dividends and reserves.

xvi. Account and audit.

xvii. Borrowing powers.

xviii. Winding up.

xix. Adoption of Preliminary Contracts.

Procedure of Alteration of the Articles

Any alteration in the Articles of Association can be effected by passing a special resolution in a general meeting. A copy of the resolution so passed has to be filed with the Registrar within one month from the date of the meeting along with Form 23.The alteration should however not contravene any provision of the Act and be subject to the conditions stated in the memorandum.

Limitations on Alterations of Articles u/s 31

Where the articles of association has the effect of converting a public company into a private company, the company should be approved by the Central Government and copy of the approval has to be filed with the Registrar within one month of its receipt. Stock Exchanges need to be intimated in case the company is a listed company.