Formation & REGISTRATIONOf a Company

CONTENTS: Introduction What is a company? Characteristics of a company Formation of a company Promotion Meaning of promoter Steps in promotion Incorporation of a company Documents used in the formation of a company Steps of incorporation Effect of Certificate of Incorporation Conclusiveness of incorporation Difference between Pre-incorporation & Provisional contracts Certificate of Commencement of Business Case studies

INTRODUCTION:Company is a separate legal entity which is registered under the companies act. Every country has a different procedure of registration. In India companies are registered under Companies act 1956. Formation of company is not at all an easy task. Company registration in India requires certain procedure to be followed. New company registration is always advisable as it will legally benefit an organization. Incorporation of a Company is yet another important area of concern. The Companies Act of 1956 sets down rules for the establishment of both public and private companies. The most commonly used corporate form is the limited company, unlimited companies being relatively uncommon. A company is formed by registering the Memorandum and Articles of Association with the State Registrar of Companies of the state in which the main office is to be located.

WHAT IS A COMPANY?Company is a voluntary association of persons formed for the purpose of doing business having a distinct name and limited liability. It is a juristic person having a separate legal entity distinct from the members who constitute it, capable of rights and duties of its own and endowed with the potential of perpetual succession. The Companies Act, 1956,Sec 3 (1) (i), states that 'company' includes company formed and registered under the Act or an existing company i.e. a company formed or registered under any of the previous company laws. Company is separate legal entity distinct from its shareholders. The major constituents of a company are its members, who are the ultimate owners and its directors. It is an important feature of the company form of business, that there is a gap between the ownership and control over the affairs of the company. In real sense the members are the owners of a company, but it is being managed by the directors who are elected representatives of its members, because it is absolutely necessary for it to have a human agency called as the Company's board of directors.

CHARACTERISTICS OF A COMPANY:1. Separate legal entity2. Incorporated body 3. Artificial legal person4. Perpetual succession5. Limited liability6. Common seal7. Right to own property8. Right to sue9. Right to enter in to contracts10. Flexibility of investment11. Separation of control from ownership.

FORMATION OF A COMPANY:Formation of a company is a complete process involving several legal formalities and procedural decisions. Formation of a company involves the following stages: Promotion Incorporation Flotation or capital subscription Commencement of businessA private company has to complete only the first two stages while a public company must undergo all four stages. MEANING OF PROMOTION:The term promotion refers to the sum total of activities by which a business enterprise is brought in to existence. It is the process of planning and organising the finances and other resources of a business enterprise in the corporate form.

WHAT IS A PROMOTER? [Sec 43(5)]:Persons who perform the task of promotion are known as promoters or entrepreneurs. A promoter conceives the idea of a business enterprise, analyses its prospects, works out a tentative scheme of organisation, brings together the necessary resources of money, material, machinery, men and managerial ability, and floats an enterprise.A joint stock company may be promoted in any of the following two ways: By converting an existing partnership or proprietorship firm into a joint stock company; By setting up a new company all together to take up a new line of business.

STAGES IN PROMOTION:

1. DISCOVERY OF BUSINESS IDEA:The process of business promotion begins with the conception of an idea or a business opportunity. The idea may relate to the starting of a new business or the taking over of an existing undertaking. At this stage a preliminary analysis is also made to ensure that the idea deserves the time and cost of detailed investigation.

2. DETAILED INVESTIGATION:Once the idea has been conceived, a thorough investigation is made to establish the soundness of the proposition in terms of technical feasibility and commercial viability. Detailed investigation involves the study of market demand, availability and costs of raw material, machinery and other factors of production. Such investigation may be conducted by expert engineers, financial analysts, valuers etc.

3. ASSEMBLING:Once the promoter is convinced of the feasibility and profitability of the proposition, he takes steps to give the idea a practical shape. Assembling also involves making contracts for the purchase of materials, buildings, machinery, tools, capital, etc. Decisions have to be made regarding the size, layout, etc. of the enterprise. Plans are prepared for the procurement of required workers and executives.

4. FINANCING OF PROPOSITION:a. At this stage, financial plans are prepared with respect to capitalisation, capital structure, time and method of capital issue etc.b. The financial requirements are estimated and the sources from which the money will come are decided.

INCORPORATION OF A COMPANY (Sec 35):Incorporation implies the registration of the company as a body corporate with the registrar of companies it is the legal process through which an enterprise obtains recognition as a separate legal entity. A company is said to be incorporated when it receives the certificate of incorporation. Incorporation involves three major steps:(a) Preparation and filing of necessary documents (b) Payment of necessary fees (c) Obtaining the certificate of incorporation

DOCUMENTS USED IN THE FORMATION OF A COMPANY:1. Memorandum of Association2. Articles of Association3. Prospectus4. Statement in Lieu of Prospectus These documents are explained below:1. MEMORANDUM OF ASSOCIATION [Sec 2(28)]:The memorandum of Association is the most important document of a company. It defines the objects and powers of a company and the companys relationship with the outside world. The memorandum of Association sets out the constitution of the company. It is, so to speak, the charter of the company and provides the foundation on which the structure of the company is built. It enables persons who deal with the company to know its permitted range of activities.

Contents: I. Name Clause (Sec 20)II. The Situation (Domicile) ClauseIII. The Objects Clause (Sec 13 & 149)IV. The Liability Clause (Sec 13)V. The Capital Clause ( Sec 13)VI. The Subscription or Association Clause. (Sec 14 & 15)

2. ARTICLES OF ASSOCIATION [Sec 2(2) & 26 to 29]:The Articles of Association of a company contain the rules and regulations relating to the management of its internal affairs. They define the rights, powers and duties of the management, the mode and form in which the business of the company is to be carried on. Articles lay down the relations between the company and its members and among the members. Articles of Association must not contain anything against the Memorandum of Association or against the Companies Act 1956 or public policy.

3. PROSPECTUS:The term prospectus has been defined under section 2(36) of the Companies Act as any document described or issued as a prospectus and includes a notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any shares in, or debentures of a body corporate or for inviting deposits from the public. It should be duly signed by the directors of the company.

4. STATEMENT IN LIEU OF PROSPECTUS:A public company having share capital need not file and publish a prospectus if it wants to raise its capital privately without public notice. In such a case, it must file a statement in lieu of prospectus , with the Registrar of Companies at least three days before the allotment of shares. It must be duly signed by all the directors. It should be dated and should indicate when it was delivered to the Registrar. The statement must not contain any untrue or mis-statements.

STEPS OF INCORPORATION:

1. APPROVAL OF NAME (Sec 20):Before the registration of a company, it is essential to obtain the approval of the registrar of companies regarding the proposed name of the company. For this purpose an application is made to the registrar.An application in Form No. 1A needs to be filed with the Registrar of Companies (ROC) of the state in which the Registered Office of the proposed Company is to be situated. The application is required to be signed by one of the promoters. The details to be state in the said application are as follows:I. Four alternative names for the proposed company. (The name can be coined names from the objects of the proposed company or the names of the directors, etc. but should definitely be indicative of the main object of the company. Justification for the name needs to be specified along with the application)II. Names and addresses of the promoters (Minimum 7 for a public company while 2 for private company).III. Authorized Capital of the proposed company.IV. Main objects of the proposed company.V. Names of other group companies. On submitting the application, the ROC scrutinizes the same and sends the approval / objections in about 10 days to the applicant. On fulfilling of the objections a formal letter of name approval is issued.

2. FILING OF DOCUMENTS:An application for registration of the company is made to the registrar of companies, the application should be in the prescribed form and the following documents should be submitted with the application:i. Memorandum of association duly signed and stamped. It must be signed by at least seven persons in case of a public company and by at least two persons in case of a private company. ii. Articles of association duly signed by the signatories of the memorandum and properly stamped. A private company must file its own articles of association but a public company may not prepare and file its own articles of association. If it does not file its articles, the model articles as set in table of the companies act will be applicable.iii. A list of directors with their full names, addresses, ages and occupations. In case such a list is not filed subscribers to the memorandum will be deemed to be the directors.(Form no.32)iv. A copy of the letter from the registrar in which the name of the company was approved.v. Notice of address of the registered office of the company has to be submitted as per section 146. However, this notice may be filed within 30 days of incorporation.(Form no. 18)vi. As per section 266, in the case of a public limited company, a written consent of the persons who have agreed to act as first directors of the company, along with a written undertaking to take and pay for the qualification shares, prescribed in the articles, have to be submitted. A company without share capital and a private company need not file this document.(form no. 29)vii. The agreement, if any, which the company proposes to enter into with any individual for appointment as its managing or whole time director or manager.viii. Statutory Declaration stating that all the requirements of law necessary for registration have been duly complied with has to be submitted as per section 33(2). This declaration may be signed by an advocate of the supreme court or a high court or an attorney, pleader entitled to appear before a high court, or a chartered accountant practising in India and engage in the formation of the company, or by any person who is named as a director, managing director, manager or secretary of the company in its articles of association.ix. Power of attorney with a view to fulfilling various formalities that are required for incorporation of a company, the promoters may execute a power of attorney in favour of one of them or an advocate or some other professional like the chartered accountant or the company secretary. The Power of Attorney must be prepared on a non-judicial stamp of the value prescribed by the Stamp Act of the concerned state.

3. PAYMENT OF FEES:Along with the above documents, the company must pay the prescribed filing fees, stamp duty and registration fees. The amount of registration fees varies according to the amount of authorised capital of the company.

4. REGISTRATION:The registrar of companies will carefully scrutinise the documents filed by the company. If he is satisfied that all the requirements regarding registration have been duly complied with, he will enter the name of the company in the register.

5. CERTIFICATE OF INCORPORATION:After registration, the Registrar will issue a certificate to the company. This certificate is called the Certificate of Incorporation. It is dated and signed by the Registrar. The company becomes a distinct legal entity with perpetual succession and common seal from the date mentioned in this certificate. The Certificate of Incorporation is a conclusive proof of the fact that the company was duly incorporated. The company comes into existence from the date of the certificate and its existence cannot be challenged even if a defect is found in the Certificate of Incorporation.

Sec 35 states that the certificate, once issued, is conclusive evidence that the company has been duly registered i.e., all the requirements in respect of registration and of matters precedent and incidental thereto have been complied with.

EFFECT OF CERTIFICATE OF INCORPORATION:From the date of incorporation mentioned in the certificate of incorporation, such of the subscribers of the memorandum and other persons, as may from time to time be members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company and having perpetual succession and a common seal but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is mentioned in the Act. (Sec. 34)

CONCLUSIVENESS OF THE CERTIFICATE OF INCORPORATION:According to section 35 of the Act, the certificate of incorporation given by the registrar in respect of any association shall be conclusive evidence that all the requirements of the Act have been complied with in respect of registration and matters precedent and incidental thereto, and that the association is a company authorised to be registered and duly registered under the Act. Accordingly, if memorandum is found to be materially altered after signature but before registration, or is signed by only one person for all the seven subscribers or the signatories be all infants, the certificate would be nevertheless conclusive and would not affect the status and existence of the company as a legal person although such irregularities might give rise to claims between the subscribers.

DIFFERENCE BETWEEN PRE-INCORPORATION & PROVISIONAL CONTRACTS:Contracts entered into by a company after incorporation but before it becomes entitled to commence business are called provisional contracts. They are called provisional because they are subject to the company receiving the certificate to commence business. Since a public company has to comply with certain statutory requirements before it may be allowed to commence business, unlike a private company, it cannot commence business merely on receipt of certificate of incorporation. Provisional contracts automatically become valid, if the public company receives the certificate to commence business; otherwise, they become void. Pre-incorporation contracts on the other hand, are contracts made before the company is granted the certificate of incorporation. Such contracts cannot be enforced by or against the company after its incorporation unless these contracts were absolutely necessary for incorporation of the company and the company has adopted the same. Pre-incorporation contracts are relevant to both private as well as public companies. (Sec 149)

CERTIFICATE OF COMMENCEMENT OF BUSINESS:A certificate of commencement of business is a certificate which authorises a public company to commence its business from the stated. This certificate is issued by the Registrar of Companies when the company fulfils the prescribed formalities. This certificate is a conclusive proof that the company has complied with all the legal formalities and that it is legally entitled to commence business. A Private company can commence business immediately after getting the certificate of incorporation, but a public limited company having a share capital and issuing a prospectus cannot start its business immediately after incorporation. It must obtain the Certificate of Commencement of Business. In order to obtain this certificate, the company must file with the Registrar of Companies the following documents:1. A declaration that shares payable in cash have been allotted equal to an amount not less than the minimum subscription and that such cash has actually been received from shares allotted for cash.2. A declaration that the directors have taken up their qualification shares and that they have paid in cash the application and allotment money on the shares held by them in the same proportion as others.3. A declaration that no money is liable to become refundable to the applicants by reason of failure to apply for or to obtain permission for shares or debentures to be dealt in on any recognised stock exchange.4. A statutory declaration in the prescribed form duly verified by a director or the secretary of the company stating that the requirements relating to the commencement of business have been duly complied with.The Registrar of Companies will scrutinise these documents and if he is satisfied that they are in order, he shall issue a Certificate of Commencement of Business. The company becomes entitled to start its business with effect from the date mentioned in this certificate.

Case studies

Case study:1. moosa goolam ariff vs. ebrahim gulam ariff:The memorandum was signed by two adult persons and by a guardian of the other five members, who were minors. The Registrar, however, registered the company and issued a certificate of incorporation. The court held the certificate to be conclusive for all purposes.

Hadjee Goolam Ariff, a wealthy Mahomedan merchant residing at Rangoon, being dissatisfied with the conduct of his two elder sons was minded to dispose of the bulk of his property for the benefit of his two junior wives and his five younger children, who were all minors at the time. With this object he applied for and obtained five separate orders under the Act of 1890 for the appointment of one and the same person as guardian of each of his minor children in order that the children by their guardian might accept the benefits which he intended to confer upon them. Being also desirous that his property should remain in one mass, intact and undistributed, he procured the registration of a Limited Company called the Goolam Ariff Estate Company, Limited. To this Company in return for shares there was transferred so much of his property as was retained by him together with the undivided shares in his estate which he had conveyed to his junior wives and his minor children.Hadjee Goolam Ariff died on the 15th of May 1902, having made his will on the 19th of the previous month. It was proved by his eldest son, Ebrahim Goolam Ariff, one of the executors therein named, on the 23rd of June 1902. From that time to the present there has been continuous and persistent litigation in which Ebrahim Goolam Ariff has endeavoured to set aside the disposition which his father made. In all these attempts Ebrahim Goolam Ariff failed except in his appeal in the present suit to the Chief Court of Lower Burma. On that appeal the order was made from which the present appeal to His Majesty has been brought.The object of the present suit was to have it declared that the Goolam Ariff Estate Company Limited was not duly incorporated and that the property conveyed to the Company should be transferred to the persons entitled to the same." The validity of the conveyances to the testator's junior wives and his minor children had been established in a suit, No. 146 of 1902, which ultimately came before this Board. But the validity of the incorporation of the Company had not been expressly determined.5. The main grounds of defence to the present suit were: -(1) That the certificate of incorporation of the Company was conclusive; and (2) That the question raised by the suit was "rest judicata."In dealing with the first question their Lordships will assume that the conditions of registration prescribed by the Indian Companies Act were not duly complied with, that there were not seven subscribers to the Memorandum of Association, and that the Registrar of Companies ought not to have granted a certificate of incorporation. As a matter of fact a certificate of incorporation was granted. In their Lordships' opinion the certificate of incorporation is conclusive for all purposes.The provisions of the Indian Companies Act of 1956 as regards the incorporation of Companies are the same as those contained in the Imperial Act of 1862, except that it is specially provided in Section 40 of the Indian Act that it is not the duty of the Registrar to require evidence as to whether the subscribers to the Memorandum are competent to contract. Probably this provision was introduced because, according to the Indian law, the contract of an infant is not voidable but void,And it would lead to endless confusion and expense if the Registrar were to take upon himself the duty of ascertaining whether the signatories to the Memorandum were or were not of full age.Memorandum of Association must be signed by at least seven persons, this view is sufficient to determine the case in favour of the appellants, but, in as much as the question of rest judicata was very fully argued. It was admitted by the learned Counsel for the respondents that the alleged invalidity of the incorporation of the Goolam Ariff Estate Company. Limited, might have been made a ground of attack in the suit, No. 146 of 1902, in which the validity of the dispositions made by Hadjee Goolam Ariff was attacked.Their Lordships, therefore, think that the question raised in the present suit is res judicata, and on that ground as well as on the ground that the certificate of incorporation is conclusive, their Lordships think that the suit fails and ought to be dismissed.

2. Subhash Medical Stores vs. Commissioner of Income-Tax on 17/2/1984:

Ramesh Chandra Moondra, in his individual capacity, was running a business known as Subhash Medical Stores, Bhilwara, since November, 1955. He executed a sale deed on July 1, 1959, for a consideration of Rs.4,500. For the goodwill, in the name of his wife, Smt. Chandra Kanta Moondra, and his brother's wife, Smt. Shanta N. Maheshwari. On the same date the two ladies entered into a partnership by executing a partnership deed and the partnership business came to be known as M/s. Subhash Medical Stores, Bhilwara. The firm got registered with the Registrar of Firms and a bank account was also opened in the name of the firm mentioning the two ladies as its partners. However, the business continued to be carried on by Ramesh Chandra Moondra, as an employee of the registered firm on a remuneration of Rs.250 p.m. It was he who operated the bank account on behalf of the partners. The information regarding the individual business converted into partnership firm was sent to the Sales Tax Department also. The prayer was rejected by the Income-tax Officer on the ground that the two ladies had no knowledge about the business and Ramesh Chandra Moondra was really in control of the business. In the opinion of the Income-tax Officer the firm in the partnership of the two ladies was not genuine and was rather a device to evade tax. An appeal against the order of the Income-tax Officer rejecting the application for registration was filed before the AAC of Income-tax, but with the same result. The Appellate Tribunal also rejected the appeal filed by M/s. Subhash Medical Stores, Bhilwara, in grievance to the refusal of registration of the firm under the Indian Companies Act.The applications were, therefore filed for making reference to the High Court regarding the question as to whether the partnership created by the partnership deed dated July 1, 1959, was genuine or not and whether the income-tax authorities were justified in rejecting the prayer of the partners to register the firm. The Tribunal was of the opinion that the transaction between Ramesh Chandra Moondra and the alleged partners of the firm, viz., Smt. Chandra Kanta Moondra and Smt. Shanta N. Maheshwari, was a benami transaction and did not involve any liability.The question emerging in the matter is as to whether the execution of sale deed by Ramesh Chandra Moondra in favour of his wife and sister-in-law for a petty amount of Rs. 4,500 and the creation of the partnership can be said to be genuine or it was a scam transaction to avoid tax liability, in the individual capacity.The income-tax authorities, including the Tribunal, were influenced by the facts that:i. A flourishing business was sold for a petty amount of Rs.4,500,ii. The business of the firm was operated by Ramesh Chandra Moondra for a petty remuneration of Rs. 250 p.m. ,iii. The two ladies were close relatives of Ramesh Chandra Moondra ,iv. The two ladies had no knowledge whatsoever of the working of the business,v. The two ladies had limited education.

The distinguishing feature is that here the sole proprietor of the business, Subhash Medical Stores, viz., Ramesh Chandra Moondra, has stepped out of the business and the partnership constituted of two ladies who happened to be his close relations. The criticism is also levelled against the document of sale of the business to the two ladies on the ground of inadequate consideration. The quantum of amount Ramesh Chandra Moondra had for the sale is not of much importance for the reason that it is the amount only for the goodwill of the business. His amount in the business remained in his name and interest was calculated for that amount. The statements of the two ladies were that they had extra money whereas Ramesh Chandra Moondra did not appear to have any at that time and, therefore, they formed the company.The Tribunal attached much importance to the fact that the two ladies had limited education and they had little or no knowledge about the business carried on by the firm. These factors should not come in the way of the partners claiming registration, because there is nothing illegal in getting the business conducted through some person employed by the partners or by someone authorised by them. The income-tax authorities should not have misconstrued the provisions of the partnership deed upon irrelevant considerations. It is correct that mere registration of a firm under the Partnership Act will not entitle the firm, as of right, to be registered under Companies Act 1956, because the question of tax is involved The income-tax authorities are of course expected to take into consideration the facts and circumstances of a given case to find out whether in the garb of a scam transaction, the assesse was avoiding liability to tax. However, if from the circumstances taken as a whole, it can be deduced that it is not an unlawful attempt to avoid payment of tax and at the most, it may be a legal device to reduce tax liability, there is no justification for rejecting the request for registration under the Companies Act 1956.In view of the facts and circumstances of the case discussed above and the law applicable on the point, we are of the opinion that the income-tax authorities were in error in refusing the registration of the assesse firm. There was no satisfactory material before the Tribunal to come to the conclusion that the firm constituted by the deed dated July I, 1959, was not genuine.Therefore the question was answered under reference in the negative, i.e., in favour of the assesse (Ramesh Chandra Moondra) and against the Commissioner of Income-tax.

3. Jubilee cotton mills ltd. Vs. mr. Lewis :

In this case jubilee cotton mills filed the documents for the incorporation of the company on the 6th of January with the Registrar of companies. After scrutinizing all the documents the Registrar of companies issued the Certificate of Incorporation two days later on the 8th of January, but the Certificate of Incorporation was dated 6th January instead of 8th January. During the process of incorporation of the company, the company allotted shares to Mr. Lewis on the 7th of January. The question arose whether the allotment of shares to Mr. Lewis is valid or otherwise.

Held that the allotment was not void on the ground that it was made before the company was incorporated. But if a company has been incorporated with illegal objects, the illegal objects would not become legal by the issue of the certificate.

Certificate of incorporation constitutes the companys birth certificate and the company becomes a body corporate with perpetual succession and a common seal.Sec. 35 states that the certificate, once issued, is conclusive evidence that the company has been duly registered i.e., all the requirements in respect of registration and of matters precedent and incidental thereto have been complied with.From the date of incorporation mentioned in the certificate of incorporation, such of subscribers of the memorandum and other persons, as may from time to time be members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company and having perpetual succession and a common seal but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as in mentioned in the Companies Act 1956.

Hence since the Certificate of Incorporation is considered to be conclusive evidence relating to registration. The company had been registered during the allotment of shares. Hence, the allotment of shares to Mr. Lewis was valid. As the certificate was dated 6th of January and the shares were allotted on the 7th of January, the certificate is conclusive. The company had commenced business after receiving the certificate technically as per the dates therefore; the allotment of shares is valid.

BIBLIOGRAPHY: Business law by K.R.Bulchandani Legal aspects of business by Akhileshwar Pathak All India Report www.wikipedia.com www.google.co.in www.indiankanoon.org www.managementforum.com www.lexvidhi.com

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