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FORMATION AND INCORPORATION
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FORMATION
4 STAGES
1. PROMOTION
2. INCORPARATION / REG.3. SUBSCRIPTION
4. COMMENCEMENT
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I. PROMOTION
DISCOVERY OF BUSSINESS OPPURTUNITIES
PROMOTERINDIVIDUAL, FIRM,
ASSOCIATION OF PERSONSTHE IDEATO START A BUSINESS
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To start
1. a new businessaltogether, or
2. To acquire an alreadyrunning business, if it is available at
considerable attractive terms and conditions. Some time it doeshappen that some people may start a business without having
sufficient knowledge or sufficient experience or sufficient funds and
later on they decide to dispose of that business to avoid huge
losses. In such a case it may be better to acquire a running business
with favorable terms and conditions and it may prove to be a good
decision.
The other important matters be decided before the formation of the
company could be the decision regarding the product to be
produced, the size of the company, the capital involved in the
project, the sources of the capital and whether it shall be a Private
Companyor a Public Company.Any of the above decisions i.e., to start a new business altogether or
to acquire an already running business, along with the other matters
shall have to be taken by some person or persons who are at the
helm of the affairs. They are called PROMOTERS.
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FUNCTIONS
collect the no. of persons for pub. or pvt. to subscribe
& sign MOA, AOA arranges minimum subscription
prepares for prospectus, filing & advt.
arranges for registration to obtain the certificates
negotiation in case of purchase of existing business
Remuneration to the promoterit also must bedisclosed in the prospectus
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DUTIES
MAKE GOOD TO THE COMPANY
NO SECRET PROFITS
IF MADE THEN DISCLOSE
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II. INCORPORATION & REG Promoter must decide types of companyPUB & PVT
Propose nameSec.20corporate identity no. forcompanies registered on or after nov 1. 2000.
Preparation of MOA & AOA
defines area, states the objects, the capital , liability, registeredoffice
AOArules & regulations
vetting of MOA & AOA, the printing, stamping & signing of thesame
by every subsciber or his agent
Preparation of other documents likepower of attorney
particulars of directors
notice of registered address etc
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Filing of documents for registration
Certificate of Incorporation:
Gets scrutinised, registers the company
Can you conclude in the following example that the
company does not exist?
The MOA of a company was signed by two adults and by a
guardian of five members, who were minors. The registrar
registered the company and issued a certificate.
pvt co
commences once registered.
public co must obtain certificate of commencement
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It is assumed that:
There are no 7 subscribersshouldnt have
grantedbut is conclusive for all purposes
cannot say the company does not exist.
Though a company is a person:
Company not a citizen-In State Trading
Corporat ion of Ind ia v. CTO, the SC held
that a company is not a citizen neither
under the provisions of the Constitution
nor under the Citizenship Act.
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EFFECTS OF REGISTRATION
When a company is registered and a Certificate of Incorporation is
issued by the Registrar, it shall have the following effects:
The company shall become Separate Legal Entityfrom the datementioned on the Certificate of Incorporation, which is considered as date ofbirth of the company.
The Company acquires Perpetual Succession. The members may come,members may go, but it goes for ever.
The company becomes the owner of its property and the Promoters ofShareholders have the right to share in the profits of the company.
The company can sue and can be sued in its own name.
Will have a Common Seal
Limited Liability
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Disadvantages of Incorporation
I. Formality and expense-Incorporation is a very expensive affair. Itrequires a number of formalities to be complied with both as to theformation and administration of affairs.
II. Lif t ing o f corp orate vei l (vei l does not exist)-though for allpurposes of law a company is regarded as a separate entity it is
sometimes necessary to look at the persons behind the corporateveil.
a) Determ inat ion of character
b) For benefi t of revenue
c) Fraud or imp roper conduct
d) Agency or Trust or Government companye) Under statutory prov is ions
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CORPORATE VEIL
also known as
"disregarding the corporate entity"
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corporate veil definition
Legal concept that separates the personality of a corporation fromthe personalities of its stockholders (shareholders),
and protects them from being personally liable for the firm's debtsand other obligations.
However
This protection, is not ironclad or impenetrable.
Where a court determines that a firm's business was not conductedin accordance with the provisions of corporate-legislation
(or that it was just a faade/front for illegal activities)
it may hold the stockholders personally liable for the firm's obligationsunder the legal concept of 'lifting (or piercing) the corporate veil.
That means no separate personality for liability
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When can Corpo rate Vei l of a Company
be Li f ted?
The separate entity of the company is
disregarded and the schemes and
intentions of the persons behind areexposed to full view which is known as
lifting or piercing the corporate veil.
This is usually done in the following cases
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1. Determ ination o f charac ter
a company was incorporated in England for the
purpose of selling tyres manufactured in Germany by aGerman company.
The German company held the bulk of the shares in
the English company and all the directors of thecompany were Germans, resident in Germany.
During the First World War the English companycommenced an action to recover a trade debt.
And the question was whether the company hadbecome an enemy company and should therefore bebarred from maintaining the action.
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The House of Lords held that though thecompany was registered in England it is
not a natural person with a mind or
conscience. It is neither loyal nor disloyal;neither friend nor enemy. But it would
assume an enemy character if the persons
in de facto control of the company are
residents of an enemy country.
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2. Fo r benefit of revenue
The separate existence of a company may bedisregarded when the only purpose for which itappears to have been formed is the evasion oftaxes.
In Bacha F Guzdar v. CIT, Bombay, amember of a tea company, who claimed thatthe dividend held by her in respect of her
shares should be treated as agriculturalincome(as it was exempted from tax) and notincome from manufacture and sale of tea.Suggestions?
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3. Fraud or improper conduct
In Gilford Motor Co v. Horne,
Horne was appointed as the MD of the company
on the condition that he shall not solicit for
anything at any point of time the customers ofthe company.
He formed a new company which undertook
solicitation of plaintiffs customers.
The company was restrained (bringing to a control)by the Court.
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4. Agency or Trust or Government
company
The separate existence of a companymay be ignored when it is being used as
an agent or trustee.
In State o f UP v. Renusagar Power Co,
it was held that a power generating unit
created by a company for its exclusivesupply was not regarded as a separate
entity for the purpose of excise.
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5. To avo id welfare legis lat ion
where the sole purpose of formation of
new company was to use it as a device
to reduce the amount to be paid by way
of bonus to workmen, the SC pierced itscorporate veil.
The Workmen Employed in
Assoc iated Rubber Indus tr ies L td. v.
The Assoc iated Rubber Indus tr ies L td
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6. Under statutory p rov is ions-
The Act sometimes imposes personal liability onpersons behind the veil in some instances like,
where
1. business is carried on beyond six months
after the knowledge that the membership of
company has gone below statutory minimum
2. when contract is made by mis describing the
name of the company - HENDON vs. ADIEMAN
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III. CAPITAL SUBSCRIPTION/FLOATATION
Go ahead with raising sufficient capitalPvt co has to approach friends relatives and arrange
privately
Pub co:
- issue prospectus if public is to be invited to raise
cap. the very 1sttime to subscribe to its capital.
- deliver a statement in lieu of prospectus
- the min. subscription as mentioned in prospectus
is not received (90% of entire issue according to
SEBI) then refund to the applicants
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IV. COMMENCEMENT OF BUSSINESS
PRIVATE CONO SHARE CAPITAL MAYCOMMENCE BUSSINESS.
PUBLIC COHAVING SHARE CAPITALMUST
OBTAIN CERTIFICATE TO COMMENCE BUSINESS
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RESTRICTION ON COMMENCEMENT OF
BUSINESS
CO HAS ISSUED PROSPECTUS
SEC.149 (1) APPLICABLE
CANNOT COMMENCE UNLESS
SHARES UPTO THE AMT OF MIN. SUBSCRIPTION
HAVE BEEN ALLOTTED BY CO
FILE WITH REGISTRAR DULY VERIFIED
DECLARATION BY ONE OF THE DIRECTORS OR THE
SECRETARY OR, WHERE THE COMPANY HAS NOT
APPOINTED A SECRETARY AS WHOLETIME
PRACTICE
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HAVING SHARE CAPITAL & HAS NOTISSUED PROSPECTUS
- THEN 149 (2) APPLIES- CANNOT COMMENCE UNLESS
FILE A STATEMENT IN LIEU OF PROSPECTUS
FILE WITH REGISTRAR DULY VERIFIEDDECLARATION BY ONE OF THE DIRECTORSOR THE SECRETARY,
OR WHERE THE COMPANY HAS NOTAPPOINTED A SECRETARY AS WHOLETIMEPRACTICE
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PENALTY
PUBLIC CO IF COMMENCESRS.5000/- FINED EVERY DAY OF
DEFAULT
PUBLIC CO PVT CO
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PUBLIC CO PVT CO SEC. 3(1)(iv)A CO.
WHICH IS NOT PVT.
HAS A MIN. PAID UPCAPITAL OF 5 LKS.
NO MAX. LIMIT FOR
MEMBERS
MIN. LIMIT IS 7
NO RESTRICTION ON
TRANSFER OF SHARES
CAN INVITE PUBLIC FOR
SUBSCRIPTION OF ITSSHARES & DEB.
SEC 3(1)(iii)BY ITS
ARTICLES
- MIN. CAP. 1 LKH.
- MAX LIMIT IS 50
- MIN IS 2
- NO FREE TRANSFER OF
SHARES. 1ST
PREFERENCE TO ITS
MEM.
- JOINT SHARES
CONSIDERED AS ONE.
- PVT LTD LAST WORDS
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CANNOT INVITE PUB TOSUBSCRIBE FOR ITSSHARES OR DEB.
ONCE A YEAR MUST FILEWITH THE REGISTRAR
ANNUAL RETURN & ASTATEMENT WITH FACTS
---. CERTIFICATE SAYING NOINVI. TO PUBLIC
. NOT MORE THAN 50 MEM.
. CORPORATESHAREHOLDING LESSTHAN 25% SHARE CAP.
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