Importance of Documents in Incorporation of Company

8/18/2019 Importance of Documents in Incorporation of Company

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JAMIA MILLIA ISLAMIA

Importance of Documents in Incorporation of Company

Submitted to Dr. Qazi Usman

Submitted By: Sa!ir Sabir

Company La" Assi#nment


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Acknowledgement

Firstly, I would like to express my profound sense of gratitude towards the almighty

“ALLAH” for providing me with the authentic circumstances which were mandatory for the

completion of my proect!

"econdly, I am highly inde#ted to $rof! %r! &a'i (sman at Faculty of Law, )amia *illia

Islamia (niversity, +ew %elhi for providing me with constant encouragement and guidance

throughout the preparation of this proect!

hirdly, I thank the Law li#rary staff who liaised with us in searching material relating to the

proect!

*y cardinal thanks are also for my parents, friends and all teachers of law department in our

college who have always #een the source of my inspiration and motivation without which I

would have never #een a#le to una#ridged my proect!

*y father, a lawyer with large access to #ooks of value has #een of great help to me!

-ithout the contri#ution of the a#ove said people I could have never completed this proect!

"hakir "ha#ir

.!A!LL!. /Hons0 1th "emester

2rd 3ear

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Introduction to 4orporate Law

-hat is the common structure of the law of #usiness corporations5or, as it would #e put in

some urisdictions, company law5across different national urisdictions6 Although this

7uestion is rarely asked #y corporate law scholars, it is critically important for the

comparative investigation of corporate law! 8ecent scholarship often emphasi'es the

divergence among 9uropean, American, and )apanese corporations in corporate governance,

share ownership, capital markets, and #usiness culture!: .ut, notwithstanding the very real

differences across urisdictions along these dimensions, the underlying uniformity of the

corporate form is at least as impressive! .usiness corporations have a fundamentally similar

set of legal characteristics5and face a fundamentally similar set of legal pro#lems5in all

urisdictions!

4onsider, in this regard, the #asic legal characteristics of the #usiness corporation! o

anticipate our discussion #elow, there are five of these characteristics, most of which will #e

easily recogni'a#le to anyone familiar with #usiness affairs! hey are; legal personality,

limited lia#ility, transfera#le shares, delegated management under a #oard structure, and

investor ownership! hese characteristics respond5in ways I will try to explore5to the

economic exigencies of the large modern #usiness enterprise! hus, corporate law

everywhere must, of necessity, provide for them! o #e sure, there are other forms of #usiness

enterprise that lack one or more of these characteristics! .ut the remarka#le fact5and the

fact that we wish to stress5is that, in market economies, almost all large


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It follows that a principal function of corporate law is to provide #usiness enterprises with a

legal form that possesses these five core attri#utes! .y making this form widely availa#le and

user devotes to defining the corporate form is

likely to #e only a small part of the statute as a whole! +evertheless, these are the provisions

that comprise the legal core of corporate law that is shared #y every urisdiction!

Brief History of Company Law in India and England

he history and development of 4ompany Law in India is closely linked with that of 9ngland

and for that reason it #ecomes essential to have a #rief account of the history of 9nglish

4ompany law for proper appreciation of our law!

Background of English Company Law

he history of modern company law in 9ngland #egan in :?@@ when the )oint "tock

4ompanies Act was passed! he Act provided for the first time that a company could #e

incorporated #y registration without o#taining a 8oyal 4harter or sanction #y a special Act of

$arliament! he office of the 8egistrar of )oint "tock 4ompanies was also created! .ut the

Act denied to the mem#ers the facility of limited lia#ility! he 9nglish $arliament in :?

passed the Limited Lia#ility Act providing for limited lia#ility to the mem#ers of a registered

company! he Act of :?@@ was superseded #y a comprehensive Act of :?1 which marked

the #eginning of a new era in company law in 9ngland! his Act introduced the modern mode

of creating companies #y means of *emorandum and Articles of Associations!

he first enactment to #ear the title B4ompanies ActB was the 4ompanies Act, :?1>! .y these

Acts some of the modern provisions of a company were clearly laid down! Firstly, twodocuments, namely,

a! the *emorandum of association, and

#! he Articles of association formed the integral part for the formation of a limited

lia#ility company! "econdly, a company could #e formed with lia#ility limited #y

guarantee!

$ >Corporation statute? to re@er to the general law that governs orporations, and

not to a orporation?s individual harter -or >artiles o@ inorporation?, as thatdou3ent is so3eti3es also alled0.

/


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c! hirdly, any alteration in the o#ect clause of the memorandum of association was

prohi#ited! $rovisions for windingD to consolidate the earlier Acts! he 4ompanies Act, :D@? which was the

$rincipal Act in force in 9ngland then was #ased on the report of a 4ommittee under Lord

4ohen! he Act introduced inter alia another new form of company known as exempt private

company!

Another outstanding feature of the :D@? Act was the emphasis on the pu#lic accounta#ility of

the company! enerally recognised principles of accountancy were given statutory force andhad to #e applied in the preparation of the #alance sheet and profit and loss account! Further,

the :D@? legislation extended the protection of the minority /"ection >:E0 and the powers of

the .oard of rade to order an investigation of the companyGs affairs /"ections :1@5:0J

and for the first time the shareholders in general meeting were given power to remove a

director #efore the expiration of his period of office! he independence of auditors vis


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Act, :D?E was a maor measure of company law reform in 9ngland! Insider dealing was made

a criminal offence! he shareholders were given a right of pre


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directors, simpler regime for private companies, increased use of e, em#odying the amendments

which were made in the 4ompany Law in 9ngland up to that time! In :D:2 a consolidating

Act was passed, and maor amendments were made to the consolidated Act in :D21!

In the meantime 9ngland passed a comprehensive 4ompanies Act in :D@?! In :D:, the

Indian overnment promulgated the Indian 4ompanies /Amendment0 =rdinance under

which the 4entral overnment and the 4ourt assumed extensive powers to intervene directly

in the affairs of the company and to take necessary action in the interest of the company! he

ordinance was replaced #y an Amending Act of :D:! he 4ompanies Act, :D1 was enacted

with a view to consolidate and amend the earlier laws relating to companies and certain other

associations! he Act came into force on :st April, :D1! he present 4ompanies Act is #ased

largely on the recommendations of the 4ompany Law 4ommittee / Bhabha Committee0

which su#mitted its report in *arch, :D>! his Act is the longest piece of legislation ever

passed #y our $arliament! Amendments have #een made in this Act periodically! he

4ompanies Act consists of 1? "ections and : "chedules!

Full and fair disclosure of various matters in prospectusJ detailed information of the financial

affairs of company to #e disclosed in its accountJ provision for intervention and investigation

#y the overnment into the affairs of a companyJ restrictions on the powers of managerial

personnelJ enforcement of proper performance of their duties #y company managementJ and

protection of minority shareholders were some of the main features of the 4ompanies Act,


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:D1! he 4ompanies Act, :D1 has undergone changes #y amendments in :D1E, :D1>, :D12,

:D1@, :D1, :D11, :D1, :D1D, :D:, :D, :D?, :D??, :DD1, :DDD, >EEE, >EE>

/Amendment0, >EE> /"econd Amendment0, >EE1 and in >E:2!

Company as a Business "edium # "eaning of a Company

he word company is derived from the Latin word /Com < with or togetherJ panis< #read0,

and it originally referred to an association of persons who took their meals together! In the

leisurely past, merchants took advantage of festive gatherings, to discuss #usiness matters!

+ow a day, the #usiness matters have #ecome more complicated and cannot #e discussed at

length at festive gatherings! herefore, the word company has assumed greater importance! It

denotes a oint stock enterprise in which the capital is contri#uted #y a large num#er of

people! hus, in popular parlance, a company denotes an association of like! limited lia#ility,

2! transfera#le shares,@! centrali'ed management under a #oard structure, and

! "hared ownership #y contri#utors of capital! In virtually all economically important

urisdictions, there is a #asic statute that provides for the formation of firms with all of

these characteristics!

As this pattern suggests, these characteristics have strongly complementary 7ualities for

many firms! ogether, they make the corporation uni7uely attractive for organi'ing

productive activity! .ut these characteristics also generate tensions and tradeoffs that lend a

distinctively corporate character to the agency pro#lems that corporate law must address!


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he incorporated company owes its existence either to a special Act of $arliament or to

company legislation! he pu#lic corporations like Life Insurance Corporation of India and

Damodar Valley Corporation have #een #rought into existence through special Acts of

$arliament, whereas companies like ata Iron and "teel 4o! Ltd!, 8eliance Industries Limited

have #een formed under the 4ompanyGs Legislation i!e! 4ompanies Act, :D1! he trading

partnership which is governed #y $artnership Act is the most apt example of an

unincorporated association! In the legal sense, a company is an association of #oth natural

and artificial persons incorporated under the existing law of a country! In terms of the

Companies Act$ %&'( )Act *o+ % of %&'(, “a company means a company formed and

registered under the Companies Act, 1956 or under the previous laws relating to companiesB

"ection 2/:0/ii0M! In common law, a company is a < “legal person or “legal entity” separate

from, and capa#le of surviving #eyond the lives of its mem#ers! However, an association

formed not for profit ac7uires a corporate life and falls within the meaning of a company #y

reason of a licence under "ection >/:0 of the Act!

.ut a company is not merely a legal institution! It is rather a legal device for the attainment of

any social or economic end! “It is, therefore, a combined political, social, economic and

legal institution !hus, the term company has been described in many ways "It is a means

of cooperation and organisation in the conduct of an enterprise”! “It is "an intricate,centralised, economic and administrative structure run by professional managers who hire

capital from the investor#s$%! Lord -ustice -ames has defined a company as Can

association of many persons who contri#ute money or moneyGs worth to a common stock and

employ it in some trade or #usiness and who share the profit and loss arising therefrom! he

common stock so contri#uted is denoted in money and is the capital of the company! he

persons who form it, or to whom it #elongs, are mem#ers! he proportion of capital to which

each mem#er is entitled is his Cshare! From the foregoing discussion it is clear that a

company has its own corporate and legal personality distinct and separate from that of its

mem#ers! A #rief description of the various attri#utes is given here to explain the nature and

characteristics of the company as a corporate #ody!

+


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*ature and Characteristics of a Company

"ince a corporate #ody /i!e! a company0 is the creation of law, it is not a human #eing, it is an

artificial person /i!e! created #y law0J it is clothed with many rights, o#ligations, powers and

duties prescri#ed #y lawJ it is called a person! .eing the creation of law, it possesses only the

properties conferred upon it #y its *emorandum of Association! -ithin the limits of powers

conferred #y the charter, it can do all acts as a natural person may do!

he most striking characteristics of a company are;

%+ Corporate personality

.y incorporation under the Act, the company is vested with a corporate personality 7uitedistinct from individuals who are its mem#ers! .eing a separate legal entity it #ears its own

name and acts under a corporate name! It has a seal of its own! Its assets are separate and

distinct from those of its mem#ers! It is also a different person from the mem#ers who

compose it! As such it is capa#le of owning property, incurring de#ts, #orrowing money,

having a #ank account, employing people, entering into contracts and suing or #eing sued in

the same manner as an individual! Its mem#ers are its owners #ut they can #e its creditors

simultaneously as it has a separate legal entity! A shareholder cannot #e held lia#le for the

acts of the company even if he holds virtually the entire share capital! he shareholders are

not the agents of the company and so they cannot #ind it #y their acts! he company does not

hold its property as an agent or trustee for its mem#ers and they cannot sue to enforce its

rights, nor can they #e sued in respect of its lia#ilities! hus, ‘incorporation’ is the act of

forming a legal corporation as a uristic person! A uristic person is in law also conferred with

rights and o#ligations and is dealt with in accordance with law! In other words, the entity acts

like a natural person #ut only through a designated person, whose acts are processed within

the am#it of law!2

In case of !alomon v! !alomon and Co" Ltd"# $ he a#ove case has clearly esta#lished the

principle that once a company has #een validly constituted under 4ompanies Act, it #ecomes

a legal person distinct from its mem#ers and for this purpose it is immaterial whether any

/ 2hiro3ani Gurdwara ;raandhak Co33ittee v. 2hri 2a3 *ath 4ass &!R $###

2C) 1/

-1+0 &.C. $$


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mem#er has a large or small proportion of the shares, and whether he holds those shares

#eneficially or as a mere trustee!

In the case, "alomon had, for some years, carried on a prosperous #usiness as leather

merchant and #oot manufacturer! He formed a limited company consisting of himself, his

wife, his daughter and his four sons as the shareholders, all of whom su#scri#ed for : share

each so that the actual cash paid as capital was N ! "alomon sold his #usiness /which was

perfectly solvent at that time0, to the 4ompany for the sum of N 2?,?>! he companyGs

nominal capital was N @E,EEE in N : shares! In part payment of the purchase money for the

#usiness sold to the company, de#entures of the amount of N:E,EEE secured #y a floating

charge on the companyGs assets were issued to "alomon, who also applied for and received an

allotment of >E,EEE N : fully paid shares! he remaining amount of N?,?> was paid to

"alomon in cash! "alomon was the managing director and two of his sons were other

directors!

he company soon ran into difficulties and the de#enture holders appointed a receiver and the

company went into li7uidation! he total assets of the company amounted to N1EE, its

lia#ilities were N:E,EEE secured #y de#entures, N?,EEE owning to unsecured trade creditors,

who claimed the whole of the companyGs assets, vi'!, N1,EE, on the ground that, as the

company was a mere ‘alias’ or agent for "alomon, they were entitled to payment of their

de#ts in priority to de#entures! hey further pleaded that "alomon, as principal #eneficiary,

was ultimately responsi#le for the de#ts incurred #y his agent or trustee on his #ehalf! It was

held that “&hen the memorandum is duly signed and registered, though there be only seven

shares ta'en, the subscribers are a body corporate capable forthwith of e(ercising all the

functions of an incorporated company It is difficult to understand how a body corporate thus

created by statute can lose its individuality by issuing the bul' of its capital to one person

!he company is at law a different person altogether from the subscribers of the

memorandum) and though it may be that after incorporation the business is precisely the

same as before, the same persons are managers, and the same hands receive the profits, the

company is not in law their agent or trustee !he statute enacts nothing as to the e(tent or

degree of interest which may be held by each of the seven or as to the proportion of interest,

or influence possessed by one or ma*ority of the shareholders over others !here is nothing in

the Act re+uiring that the subscribers to the memorandum should be independent or

unconnected, or that they or any of them should ta'e a substantial interest in the

1#


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underta'ings, or that they should have a mind or will of their own, or that there should be

anything li'e a balance of power in the constitution of company%

In case of Lee v! Lee’s %ir &arming Ltd"', he a#ove case illustrates the application of the

principles esta#lished in "alomonGs case /supra0! In this case, a company was formed for the

purpose of aerial top


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In case of ,e .ori/ons Ltd" v! 0nion of India, he experience of a shareholder of a

company can #e regarded as experience of a company! he tender of the company, +ew

Hori'ons Ltd!, for pu#lication of telephone directory was not accepted #y the ender

9valuation 4ommittee on the ground that the company had nothing on record to show that it

had the technical experience re7uired to #e possessed to 7ualify for tender! =n appeal the

reection of tender was upheld #y the %elhi High 4ourt!

he udgement of the %elhi High 4ourt was reversed #y the "upreme 4ourt which o#served

as under;

• =nce it is held that +HL /+ew Hori'ons Ltd!0 is a oint venture, as claimed #y it in the

tender, the experience of its various constituents namely, $I /homson $ress India Ltd!0,

L*I /Living *edia India Ltd!0 and -*L /-orld *edia Ltd!0 as well as II$L /Integrated

Information $vt! Ltd!0 had to #e taken into consideration, if the ender 9valuation

4ommittee had adopted the approach of a prudent #usiness man!

• "eeing through the veil covering the face of +HL, it will #e found that as a result of re<

organisation in :DD> the company is functioning as a oint venture wherein the Indian

group /$I, L*I and -*L0 and *r! Aroon $urie hold 1EO shares and the "ingapore

#ased company /II$L0 hold @EO shares! .oth the groups have contri#uted towards the

resources of the oint venture in the form of machines, e7uipment and expertise in the

field! he company is in the nature of partnership #etween the Indian group of companies

and "ingapore #ased company who has ointly undertaken this commercial enterprise

wherein they will contri#ute to the assets and share the risk! In respect of such a oint

venture company, the experience of the company can only mean the experience of the

constituents of the oint venture i!e! the Indian group of companies /$I, L*I and -*L0

and the "ingapore #ased company /II$L0

?

!

.+ Limited Lia/ility

he privilege of limited lia#ility for #usiness de#ts is one of the principal advantages of doing

#usiness under the corporate form of organisation! he company, #eing a separate person, is

the owner of its assets and #ound #y its lia#ilities! he lia#ility of a mem#er as shareholder

&!R 1, 4elhi 1$

+ *ew 7ori"ons 'td. and another v. Union o@ !ndia -1A0 1 Co3p. 'J 1## 2C

1$


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extends to contri#ution to the assets of the company up to the nominal value of the shares

held and not paid #y him! *em#ers, even as a whole, are neither the owners of the

companyGs undertakings, nor lia#le for its de#ts! In other words, a shareholder is lia#le to pay

the #alance, if any, due on the shares held #y him, when called upon to pay and nothing more,

even if the lia#ilities of the company far exceed its assets! his means that the lia#ility of a

mem#er is limited! For example, if A holds shares of the total nominal value of 8s! :,EEE and

has already paid 8s! EEP< /or EO of the value0 as part payment at the time of allotment, he

cannot #e called upon to pay more than 8s! EEP


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the same entity, despite total change in the mem#ership! A companyGs life is determined #y

the terms of its *emorandum of Association! It may #e perpetual or it may continue for a

specified time to carry on a task or o#ect as laid down in the *emorandum of Association!

$erpetual succession, therefore, means that the mem#ership of a company may keep changing

from time to time, #ut that does not affect its continuity!

he mem#ership of an incorporated company may change either #ecause one shareholder has

transferred his shares to another or his shares devolve on his legal representatives on his

death or he ceases to #e a mem#er under some other provisions of the 4ompanies Act! hus,

perpetual succession denotes the a#ility of a company to maintain its existence #y the

constant succession of new individuals who step into the shoes of those who cease to #e

mem#ers of the company! Professor L+C+B+ 1ower rightly mentions, “ embers may come

and go, but the company can go on forever -uring the war all the members of one private

company, while in general meeting, were 'illed by a bomb, but the company survived . not

even a hydrogen bomb could have destroyed it%

2+ Separate Property

A company #eing a legal person and entirely distinct from its mem#ers, is capa#le of owning,

enoying and disposing of property in its own name! he company is the real person in which

all its property is vested, and #y which it is controlled, managed and disposed of! heir

Lordships of the *adras High 4ourt in ("&" 2erumal v! ." 3ohn Deavin,:E held that “no

member can claim himself to be the owner of the company/s property during its e(istence or

in its winding0up”! A mem#er does not even have an insura#le interest in the property of the

company!

Also in case of 4rs" Bacha &" 1u/dar v! *he Commissioner of Income *a5$ Bombay66, he

"upreme 4ourt in this case held that, though the income of a tea company is entitled to #e

exempted from Income


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the company or its propertyJ he is only given certain rights #y law, e!g!, to receive or to attend

or vote at the meetings of the shareholders! he court refused to identify the shareholders

with the company and reiterated the distinct personality of the company!

'+ 3ransfera/ility of Shares

he capital of a company is divided into parts, called shares! he shares are said to #e

mova#le property and, su#ect to certain conditions, freely transfera#le, so that no

shareholder is permanently or necessarily wedded to a company! -hen the oint stock

companies were esta#lished, the o#ect was that their shares should #e capa#le of #eing easily

transferred,:> "ection ?> of the 4ompanies Act, :D1 enunciates the principle #y providing

that the shares held #y the mem#ers are mova#le property and can #e transferred from one

person to another in the manner provided #y the articles! If the articles do not provide

anything for the transfer of shares and the 8egulations contained in a#le CA in "chedule I

to the 4ompanies Act, :D1, are also expressly excluded, the transfer of shares will #e

governed #y the general law relating to transfer of mova#le property!

A mem#er may sell his shares in the open market and realise the money invested #y him! his

provides li7uidity to a mem#er /as he can freely sell his shares0 and ensures sta#ility to the

company /as the mem#er is not withdrawing his money from the company0! he "tock

9xchanges provide ade7uate facilities for the sale and purchase of shares!

Further, as of now, in most of the listed companies, the shares are also transfera#le through

9lectronic mode i!e! through %epository $articipants instead of physical transfers!

(+ Common Seal

=n incorporation, a company ac7uires legal entity with perpetual succession and a common

seal! "ince the company has no physical existence, it must act through its agents and all such

contracts entered into #y its agents must #e under the seal of the company! he 4ommon "eal

acts as the official signature of a company! he name of the company must #e engraved on its

common seal! A ru##er stamp does not serve the purpose! A document not #earing common

seal of the company is not authentic and has no legal force #ehind it!

1$ D!n Re. Balia and 2an =raniso Rl6., -1+0 '.R. / E.B. A++F

1A


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he person authorised to use the seal should ensure that it is kept under his personal custody

and is used very carefully #ecause any deed, instrument or a document to which seal is

improperly or fraudulently affixed will involve the company in legal action and litigation!

4+ Capacity to Sue and Be Sued

A company #eing a #ody corporate can sue and #e sued in its own name! o sue, means to

institute legal proceedings against /a person0 or to #ring a suit in a court of law! All legal

proceedings against the company are to #e instituted in its own name! "imilarly, the company

may #ring an action against anyone in its own name! A companyGs right to sue arises when

some loss is caused to the company, i!e! to the property of the personality of the company!

Hence, the company is entitled to sue for damages in li#el or slander as the case may #e :2! A

company, as a person separate from its mem#ers, may even sue one of its own mem#ers for

li#el!

A company has a right to seek damages where a defamatory material pu#lished a#out it,

affects its #usiness! -here video cassettes were prepared #y the workmen of a company

showing, their struggle against the companyGs management, it was held to #e not actiona#le

unless shown that the cassette would #e defamatory! he court did not restrain the exhi#ition

of the cassette:@

! he company is not held lia#le for contempt committed #y its officer !:

5+ Contractual 6ights

A company, #eing a separate legal entity different from its mem#ers, can enter into contracts

for the conduct of the #usiness in its own name! A shareholder cannot enforce a contract

made #y his companyJ he is neither a party to the contract nor entitled to the #enefit of it, as a

company is not a trustee for its shareholders!

Likewise, a shareholder cannot #e sued on contracts made #y his company! he distinction

#etween a company and its mem#ers is not confined to the rules of privity, however, it

permeates the whole law of contract! hus, if a director fails to disclose a #reach of his duties

1/ =loating 2ervies 'td. v. M9 2an =ranseo 4ipaloa -$##0 A$ 2C' $ -Gu0

1


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to his company, and in conse7uence a shareholder is induced to enter into a contract with the

director which he would not have entered into had there #een disclosure, the shareholder

cannot rescind the contract! "imilarly, a mem#er of a company cannot sue in respect of torts

committed against the company, nor can he #e sued for torts committed #y the company :1!

herefore, the company as a legal person can take action to enforce its legal rights or #e sued

for #reach of its legal duties! Its rights and duties are distinct from those of its constituent

mem#ers!

&+ Limitation of Action

A company cannot go #eyond the power stated in the *emorandum of Association! he

*emorandum of Association of the company regulates the powers and fixes the o#ects of the

company and provides the edifice upon which the entire structure of the company rests! he

actions and o#ects of the company are limited within the scope of its *emorandum of

Association! In order to ena#le it to carry out its actions without such restrictions and

limitations in most cases, sufficient powers are granted in the *emorandum of Association!

.ut once the powers have #een laid down, it cannot go #eyond these powers unless the

*emorandum of Association is itself altered prior to doing so!

%7+Separate "anagement

As already noted, the mem#ers may derive profits without #eing #urdened with the

management of the company! hey do not have effective and intimate control over its

working and elect their representatives to conduct corporate functioning! In other words, the

company is administered and managed #y its managerial personnel!

%%+8oluntary Association for Profit

A company is a voluntary association for profit! It is formed for the accomplishment of some

pu#lic goals and whatsoever profit is gained is divided among its shareholders or restored for

the future expansion of the company! =nly a "ection > company can #e formed with no

profit motive!

%.+3ermination of E9istence

1 British


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A company, #eing an a#stract and artificial person, does not die a natural death! It is created

#y law, carries on its affairs according to law throughout its life and ultimately is effaced #y

law! enerally, the existence of a company is terminated #y means of winding up! However,

to avoid winding up sometimes companies change their form #y means of re


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d! -hat should #e the capital of the company etc! After deciding a#out the formation of

the company, the desirous persons take necessary steps, and the company is actually

formed!

hereafter, they start their #usiness! hus, there are various stages in the formation of a

company from thinking of starting a #usiness to the actual starting of the #usiness!

In India, company can #e incorporated either as a $rivate Limited or $u#lic Limited! he

incorporation procedure all over India is same! First one has to get the name approval of the

proposed company from 8egistrar of 4ompanies /8=40! After name approval, along with the

application for incorporation, the *emorandum and Articles of Association in addition to

other necessary prescri#ed documents has to #e su#mitted with the 8=4!

he *emorandum of Association stipulates the constitution and o#ects of the company! he

Articles of Association contains the rules and regulations of the company for the management

of its affairs! After examining the documents the 8=4 issues a 4ertificate of Incorporation!

hereafter a private company #ecomes entitled to commence its #usiness and a pu#lic

company after o#taining the certificate of commencement of #usiness from 8=4!

"ince year >EE 8=4 have introduced a new system of e! Apply for the name availa#ility of the proposed company to 8=4! For this one has to fill

Form :A and su#mit online along with re7uisite fee with 8=4!

2! =nce +ame is approved and made availa#le #y the 8=4 it remains valid for 1 months! If

you do not incorporate the proposed company within 1 months you can renew the name

#y paying prescri#ed fee!

@! After getting the name following documents are prepared

a! *emorandum of Association

#! Articles of Association

c! Letter of authority to a person for carrying out corrections

d! %eclaration #y the $romoter %irectors

e! Form 2> for the %irectorsf! Form :? for registered office address

g! %emand %raft in favour of 8egistrar of companies for the prescri#ed amount

towards registration fee!

! *emorandum and Articles of Association are to #e duly stamped #efore filing with 8=4!

1! All the a#ove documents are also filed in original with 8=4,

! =n the receipt of the documents 8=4 will scrutini'e the papers and if any modification is

re7uired he will direct to make such changes accordingly!

?! =nce 8=4 is satisfied and scrutiny is completed he will issue certificate of Incorporation!

he company would come into existence from the date of certificate of incorporation!

Following 4hart would make it clearer

1


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;ropsed

Co3pan6

;uli'i3ited

;rivate'i3ited

For $rivate;

• *inimum "hareholders re7uired R >

• *inimum %irectors re7uired R>

• *inimum $aid up 4apital < I+8 :EE,EEE

For $u#lic

• *inimum "hareholders re7uired R

• *inimum %irectors re7uired R 2

• *inimum $aid up 4apital I+8 EE,EEE

"ome Important things to know a#out companies in India

:! Any person whether Indian or Foreigner can #e the %irector in Indian 4ompany!

>! Any IndividualP4ompany whether Indian or Foreigner can #e the "hareholder in

Indian 4ompany, however foreigner would #e re7uired to comply with foreign

exchange laws in India!

2! *inimum @ meetings of .oard of %irectors are re7uired to #e held in one year! .oard

meeting can #e held anywhere in the world! It is not necessary to hold such meetings

only in India!

@! he registration fee and "tamp %uty depends upon the authori'ed capital of the

proposed 4ompany!

$#


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I*C:6P:6A3I:* :F C:"PA*IES

4ompany is an artificial person created #y following a legal procedure! .efore a company is

formed, a lot of preliminary work is to #e performed! he lengthy process of formation of a

company can #e divided into four distinct stages;

a! $romotionJ

#! Incorporation or 8egistrationJ

c! 4apital su#scriptionJ and

d! 4ommencement of #usiness!

However, a private company can start #usiness as soon as it o#tains the certificate of

incorporation! It needs to go through first two stages only! he reason is that a private

company cannot invite pu#lic to su#scri#e to its share capital! .ut a pu#lic company having a

share capital has to pass through all the four stages mentioned a#ove #efore it can commence

#usiness or exercise any #orrowing powers!

o get incorporated a company has to register with the 4ompanies =rdinance, :D?@

"ecurities and 9xchange 4ommission of $akistan! his task is now done #y the 8egistration

%epartment, 4ompany Law %ivision also known as 4ompany 8egistration =ffices, in the

same day or at least within three days!

.elow is an outline of the most important #asic corporate documents of non


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he formation of a pu#lic company involves preparation and filing of several essential

documents! wo of #asic documents are;

:! *emorandum of Association

>! Articles of Association

he preparation of *emorandum of Association is the first step in the formation of a

company! It is the main document of the company which defines its o#ects and lays down

the fundamental conditions upon which alone the company is allowed to #e formed! It is the

charter of the company! It governs the relationship of the company with the outside world and

defines the scope of its activities! Its purpose is to ena#le shareholders, creditors and those

who deal with the company to know what exactly its permitted range of activities is! It

ena#les these parties to know the purpose, for which their money is going to #e used #y the

company and the nature and extent of risk they are undertaking in making investment!

*emorandum of Association ena#le the parties dealing with the company to know with

certainty as whether the contractual relation to which they intend to enter with the company is

within the o#ects of the company Form of *emorandum!

4ompanies Act has given four forms of *emorandum of Association in "chedule

I! hese are as follows;

a#le . *emorandum of a company limited #y shares

a#le 4 *emorandum of a company limited #y guarantee and not having a share capital

a#le % *emorandum of company limited #y guarantee and having share capital!

a#le 9 *emorandum of an unlimited company

9very company is re7uired to adopt one of these forms or any other form as near there to as

circumstances admit!

Printing and signing of "emorandum!

he memorandum of Association of a company shall #e /a0 printed, /#0 divided into

paragraphs num#ered consecutively, and /c0 signed #y prescri#ed num#er of su#scri#ers / or

more in the case of pu#lic company, two or more in the case of private company

respectively0! 9ach su#scri#er must sign for hisPher name, address, description and

occupation in the presence of at least one witness who shall attest the signature and shall

likewise add his address, description and occupation, if any!

4ontents of *emorandum

:! +ame clause

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$romoters of the company have to make an application to the registrar of 4ompanies for the

availa#ility of name! he company can adopt any name if;

i0 here is no other company registered under the same or under an identical nameJ

ii0 he name should not #e considered undesira#le and prohi#ited #y the 4entral overnment/"ec! >E0! A name which misrepresents the pu#lic is prohi#ited #y the overnment under the

9m#lems S +ames /$revention of Improper use0 Act, :DE for example, Indian +ational

Flag, name pictorial representation of *ahatma andhi and the $rime *inister of India,

name and em#lems of the (!+!=!, and -!H!=!, the official seal and 9m#lems of the 4entral

overnment and "tate overnments!

-here the name of the company closely resem#les the name of the company already

registered, the 4ourt may direct the change of the name of the company!

iii0 =nce the name has #een approved and the company has #een registered, then

a0 the name of the company with registered office shall #e affixed on outside of the #usiness

premisesJ

#0 if the lia#ility of the mem#ers is limited the words “Limited” or “$rivate Limited” as the

case may #e, shall #e added to the name;

=mission of the word GLimited makes the name incorrect! -here the word Limited” forms

part of a companys name, omission of this word shall make the name incorrect! If the

company makes a contract without the use of the word “Limited”, the officers of the

company who make the contract would #e deemed to #e personally lia#le!:

he omission to use the word GLimited as part of the name of a company must have #een

deli#erate and not merely accidental! +ote the following case in this regard;

Dermatine Co" Ltd" v %shorth,:? A #ill of exchange drawn upon a limited company in its

proper name was duly accepted #y > directors of the company! he ru##er stamp #y which

the word of acceptance were impressed on the #ill was longer that the paper of the #ill and

hence the word GLimited was missed! Held, the company was lia#le to pay and the directors

were not personally lia#le!

/c0 the name and address of the registered office shall #e mentioned in all letterheads,

#usiness letters, notices and 4ommon "eal of the 4ompany, etc!

1 D&tkins Co v )ardle, -1++0 1 '< $/F

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In 7sborn v *he Ban8 of 0" %" 9"6:J it was held that the name of a company is the sym#ol of

its personal existence! he name should #e properly and correctly mentioned! he 4entral

overnment may allow a company to drop the word “Limited” from its name!

>! 8egistered =ffice 4lause

*emorandum of Association must state the name of the "tate in which the registered office

of the companmy is to #e situated! It will fix up the domicile of the company! Further, every

company must have a registered office either from the day it #egins to carry on #usiness or

within 2E days of its incorporation, whichever is earlier, to which all communications and

notices may #e addressed! 8egistered =ffice of a company is the place of its residence for the

purpose of delivering or addressing any communication, service of any notice or process of

court of law and for determining 7uestion of urisdiction of courts in any action against the

company! It is also the place for keeping statutory #ooks of the company!

+otice of the situation of the registered office and every change shall #e given to the

8egistrar within 2E days after the date of incorporation of the company or after the date of

change! If default is made in complying with these re7uirements, the company and every

officer of the company who is default shall #e punisha#le with fine which may extend to 8s!

E per during which the default continues!

2! =#ect 4lause

his is the most important clause in the memorandum #ecause it not only shows the o#ect or

o#ects for which the company is formed #ut also determines the extent of the powers which

the comapany can exercise in order to achieve the o#ect or o#ects! "tating the o#ects of thecompany in the *emorandum of Association is not a mere legal technicality #ut it is a

necessity of great practical importance! It is essential that the pu#lic who purchase its shares

should know clearly what are the o#ects for which they are paying!

In the case of companies which were in existence immediately #efore the commencement of

the 4ompanies /Amendment0 Act! :D1, the o#ect clause has simply to state the o#ects of

the company! .ut in the case of a company to #e registered after #e amendment, the o#ects

clause must state separately!

i0 *ain =#ects; his su#


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Cron Ban8" (e,>E A companys o#ects clause ena#led it to act as a #ank and further to

invest in securities land to underwrite issue of securities! he company a#andoned its #anking

#usiness and confined it self to investment and financial speculation! Held, the company was

not entitled to do so! Incidental acts! he powers specified in the *emorandum must not #e

construed strictly! he company may do anything which is fairly incidental to these powers!Anything reasona#le incidental to the attainment or pursuit of any of the express o#ects of

the company will, unless expressly prohi#ited, #e within the implied powers of the company!

-hile drafting the o#ects clause of a company the following points should #e kept in mind!

i0 he o#ects of the company must not #e illegal, e!g! to carry on lottery #usiness!

ii0 he o#ects of the company must not #e against the provisions of the 4ompanies Act such

as #uying its own shares /"ec! 0, declaring dividend out of capital etc!

iii0 he o#ects must not #e against pu#lic, e!g! to carry on trade with an enemy country!

iv0 he o#ects must #e stated clearly and definitely! An am#iguous statement like “4ompany

may take up any work which it deems profita#le” is meaningless!

v0 he o#ects must #e 7uite ela#orate also! +ote only the main o#ects #ut the su#sidiary or

incidental o#ects too should #e stated! he narrower the o#ects expressed in the

memorandum, the less is the su#scri#ers risk, #ut the wider such o#ects the greater is the

security of those who transact #usiness with the company!

@! 4apital 4lause

In case of a company having a share capital unless the company is an unlimited company,

*emorandum shall also state the amount of share capital with which the company is to #e

registered and division thereof into shares of a fixed amount! he capital with which the

company is registered is called the authori'ed or nominal share capital! he nominal capital is

divided into classes of shares and their values are mentioned in the clause! he amount of

nominal or authori'ed capital of the company would #e normally, that which shall #e re7uired

for the attainment of the main o#ects of the company! I+ case of companies limited #y

guarantee, the amount promised #y each mem#er to #e contri#uted #y them in case of the

winding up of the company is to #e mentioned! +o su#scri#er to the memorandum shall take

less than one share! 9ach su#scri#er of the *emorandum shall write against his name the

num#er of shares he takes!

! Lia#ility 4lause

In the case of company limited #y shares or #y guarantee, *emorandum of Association must

have a clause to the effect that the lia#ility of the mem#ers is limited! It implies that a

shareholder cannot #e called upon to pay any time amount more then the unpaid portion on

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the shares held #y him! He will no more #e lia#le if once he has paid the full nominal value of

the share!

he *emorandum of Association of a company limited #y guarantee must further state that

each mem#er undertakes to contri#ute to the assets of the company if wound up, while he is a

mem#er or within one year after he ceased to #e so, towards the de#ts and lia#ilities of the

company as well as the costs and expenses of winding up and for the adustment of the rights

of the contri#utories among themselves not exceeding a specified amount!

Any alteration in the memorandum of association compelling a mem#er to take up more

shares, or which increases his lia#ility, would #e null and void! If a company carries on

#usiness for more than 1 months while the num#er of mem#ers is less than seven in the case

of pu#lic company, and less than two in case of a private company, each mem#er aware of

this fact, is lia#le for all the de#ts contracted #y the company after the period of 1 months has

elapsed!

1! Association or "u#scription 4lause

In this clause, the su#scri#ers declare that they desire to #e formed into a company and agree

to take shares stated against their names! +o su#scri#er will take less than one share! he

memorandum has to #e su#scri#ed to #y at least seven persons in the case of a pu#lic

company and #y at least two persons in the case of a private company! he signature of each

su#scri#er must #e attested #y at least one witness who cannot #e any of the su#scri#ers!

9ach su#scri#er and his witness shall add his address, description and occupation, if any! his

clause generally runs in this form; “we, the several people whose names and addresses are

subscribed, are desirous of being formed into a company in pursuance of the number of

shares in the capital of the company, set opposite of our respective name%

After registration, no su#scri#er to the memorandum can withdraw his su#scription on any

ground!

Alteration of "emorandum of Association

Alteration of *emorandum of association involves compliance with detailed formalities and

prescri#ed procedure! Alternations to the extent necessary for simple and fair working of the

company would #e permitted! Alterations should not #e preudicial to the mem#ers or creditors of the comapany and should not have the effect of increasing the lia#ility of the

mem#ers and the creditors! 4ontents of the *emorandum of association can #e altered as

under;

%+ Change of name

A company may change its name #y special resolution and with the approval of the 4entral

overnment signified in writing! However, no such approval shall #e re7uired where the only

change in the name of the company is the addition there to or the deletion there from, of the

word “$rivate”, conse7uent on the conversion of a pu#lic company into a private company or of a private company into a pu#lic company! .y ordinary resolution! If through inadvertence

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or otherwise, a company is registered #y a name which, in the opinion of the 4entral

overnment, is identical with or too nearly resem#les the name of an existing comapany, it

may change its name #y an ordinary resolution and with the previous approval of the 4entral

overnment signified in writing!

8egistration of change of name! -ithin 2E days passing of the resolution, a copy of the order

of the 4entral overnments approval shall also #e field with the 8egistrar within 2 months

of the order! he 8egistrar shall enter the new name in the 8egister of 4ompanies in place of

the former name and shall issue a fresh certificate of incorporation with the necessary

alterations! he change of name shall #e complete and effective only on the issue of such

certificate! he 8egistrar shall also make the necessary alteration in the companys

memorandum of association! he change of name shall not affect any right or o#ligations of

the company or render defective any legal proceeding #y or against it!

.+ Change of 6egistered :ffice

his may involve;

a0 4hange of registered office from one place to another place in the same city, town or

village! In this case, a notices is to #e give within 2E days after the date of change to the

8egistrar who shall record the same!

#0 4hange of registered office from one town to another town in the same "tate! In this case,

a special resolution is re7uired to #e passed at a general meeting of the shareholders and a

copy of it is to #e filed with the 8egistrar within 2E days! he within 2E days of the removal

of the office! A notice has to #e given to the 8egistrar of the new location of the office!

c0 4hange of 8egistered =ffice from one "tate to another "tate to another "tate!

Special 6esolution

For effecting this change a special resolution must #e passed and a copy there of must #e filed

with the 8egistrar within thirty days! "pecial resolution must #e passed in a duly convened

meeting!

Confirmation /y Central 1o!ernment

he alteration shall not take effect unless the resolution is confirmed #y the 4entral

overnment!

he 4entral overnment #efore confirming or refusing to confirm the change will consider

primarily the interests of the company and its shareholders and also whether the change is

#onafide and not against the pu#lic interest! he 4entral overnment may then issue the

confirmation order on such terms and conditions as it may think fit!

Articles of association

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In order to incorporate a new company, its founders or, depending on the urisdiction and type

of company, the shareholders, directors or may#e ust a registered agent must sign the articles

of association! his is the primary document that defines the name of the new company, its

internal management rules, the possi#ility of increase or reduction of its share capital, as well

as details of esta#lishing the order of general meetings of shareholders or special provisionsfor dissolution or li7uidation of the company! his document usually, such as for example in

the 4ari##ean urisdictions, co


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i! issue of share warrantsJ

! transfer of sharesJ

k! transmission of sharesJ

l! alteration of share capitalJ

m! #orrowing power of the companyJ

n! rules regarding meetingsJo! voting rights of mem#ersJ

p! notice to mem#ersJ

7! dividends and reservesJ

r! accounts and auditJ

s! ar#itration provision, if anyJ

t! directors, their appointment and remunerationJ

u! the appointment and reappointment of the managing director, manager and secretaryJ

v! fixing limits of the num#er of directors

w! payment of interest out of capitalJ

x! common sealJ and

y! -inding up!

"odel form of Articles

%ifferent model forms of memorandum of association and Articles of Association of various

types of companies are specified in "chedule I to the Act! he schedule is divided into

following ta#les! a#le A deals with regulations for management of a company limited #y

shares! a#le . contains a model form of *emorandum of Association of a company limited

#y shares! a#le 4 gives model forms of *emorandum and Articles of Association of a

company limited #y guarantee and not having a share capital!

a#le % gives model forms of *emorandum and Articles of Association of a company

limited #y guarantee and having a share capital! he Articles of such a company contain in

addition to the information a#out the num#er of mem#ers with which the company proposes

to #e registered, all other provisions of a#le A! a#le 9 contains the model forms of

memorandum and Articles of Association of an unlimited company! A $u#lic 4ompany may

have its own Article of Association! If it does not have its own Articles, it may adopt a#le A

given in "chedule I to the Act!

Adoption and application of a#le A /"ection >?0! here are 2 alternative forms in which a

pu#lic company may adopt Articles;

:! It may adopt a#le A in full

>! It may wholly exclude a#le A, and set out its own Articles in full

2! It may frame its own Articles and adopt part of a#le A!

In other words, unless the Articles of a pu#lic company expressly exclude any or all

provisions of a#le A shall automatically apply to it!

Alteration of Articles

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"ection 2: grant power to every company to alter its articles whenever it desires #y passing a

special resolution and filing a copy of altered Articles with the 8egistrar! An alteration is not

invalid simply #ecause it changes the companys constitution! hus in %ndres v 1as 4eter

Co", A company was allowed #y changing articles to issue preference shares when its

memorandum was silent on the point! Alteration of articles is much easier than memorandumas it can #e altered #y special resolution! However, there are various limitations under the

4ompanies Act to the powers of the shareholders to alter the articles!

In case of conversion of a pu#lic company into a private company, alteration in the articles

would only #e effective after approval of the 4entral overnment "ection 2:M! he power is

now vested with the 8egistrar of 4ompanies! Alteration of the articles shall not violate

provisions of the *emorandum! It must #e made #ona


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these urisdictions at any time! In practice such an extract is used as a certificate of

incorporation!

By#laws

Fre7uently, the #y


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issued to shareholders within two months! his is usually yet another task to find time for in

the early months of a newly formed company! However, if you incorporate using Inform

%irect then our system will automatically create share certificates, saving you a separate o#!

It will populate the share certificates with details of each share allotment and you can even

upload your company logo to produce #randed share certificates!

In case of sale or transfer of all or part of the shares to other persons, the owner of the shares

in a nonE:2

2! A ext#ook of 4ompany Law /4orporate Law0, $!$!"!ogna, Dth edition, >E:2

@! http;PPwww!doc


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Importance of Documents in Incorporation of Company

Documents

Transcript of Importance of Documents in Incorporation of Company