Incorporation and

formation of company
 Formation of a company

Commen
Incorporatio
Raising of cement
Promotion n or
Capital of
registration
Business
 Promoter
{Section 2(69)}

Person who issue

advice,
named in a directions or
prospectus or is instructions to
identified by the Board of
company in the Director.
annual return
u/s.92.
control over the
affairs of the
company as
shareholder,
director or
otherwise.
According to SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009, “promoter”
includes:
 the person or persons who are in control of the
issuer;
 the person or persons who are instrumental in the
formulation of a plan or programme pursuant to
which specified securities are offered to public;
 the person or persons named in the offer
document as promoters.

Ques - Is a director/officer/employee of the issuer a

promoter?
A promoter may be an individual, a firm, an
association of persons or even a company.

 Only one who has a desire that a company be

formed and is prepared to take some steps to
implement it , is a promoter.

 Sec 2(69) makes it clear that persons assisting the

promoter by acting in a professional capacity e.g.,
counsels, solicitors, accountants and others experts
are not promoters.
Twycross v. Grant, (1877) 2. C.P.D. 469
 it was held that promoter is "one who undertakes to
form a company with reference to a given project
and to set it going, and who takes the necessary
steps to accomplish that purpose".

Whaley Bridge Calico Printing Co. v. Green (1880) 5

Q.B.D. 109,
 Bowen, L.J. held that the term "promoter" is a term
not of law but of business usually summing up in a
single word a number of business operations
familiar to the commercial world by which a
company is generally brought into existence".
A promoter is neither a trustee nor an agent of the
company which he promotes.
 He must not make any secret profits out of the
transactions he makes on behalf of the company.

Erlanger v. New Sombrero Phosphate Co. (39 LT

269)
 he occupies a fiduciary position in relation to the
company and therefore requires to make full
disclosure of the relevant facts, including any profit
made by him.
 Meaning of Promoter’s contract?
In Kelner v. Baxter LR (1886) 2 CP 174
 It was held that the company could not ratify
contract made by a promoter before its
incorporation.
 Section 15 & 19 of The Specific Relief Act, 1963
deals with pre-incorporation contracts.
 Section 15 – specific performance may be enforced by
company for the contracts entered by Promoters for the
objects of company provided contract should be ratify by
company.
 Section 19 – others person can also enforce contract
against company if co. had adopted the same after
incorporation.
 Promoter’s Liability
If any profit made out of a transaction to which the
company is a party is not disclosed by a promoter,
the company can follow one of the following two
courses-
i. It may sue the promoter for an account of profit
not disclosed by him and recover the same with
interest; [Section 102 (5) – 50,000/- or five
times of benefit]
ii. It may set aside the transaction or contract with
the promoter, i.e., it may restore the property to
him and recover its money.
 Incorporation of company by furnishing false
information:- shall be liable for fraud under
section 447.
 Section 26 - matters to be stated and reports to
be set out in the prospectus. The promoter(s) may
be held liable for the non-compliance of the
provisions of this Section.
 section 26(1)(a)(xiv) - prescribed disclosures
about sources of promoter’s contribution has to be
made in prospectus.
 Civil Liability for misstatements in
prospectus:- Sec 35(1) A promoter is liable for
any misleading statement in the prospectus to a
person who has subscribed for any securities of
the company on the faith of the prospectus.
 No promoter shall be liable under this section, if he proves
that the prospectus was issued without his knowledge or
consent, and that on becoming aware of its issue, he
forthwith gave a reasonable public notice that it was issued
without his knowledge or consent.
 Section 36 - Punishment for fraudulently inducing
persons to invest money:- As any person who,
either knowingly or recklessly makes any
statement, promise or forecast which is false,
deceptive or misleading, or deliberately conceals
any material facts, to induce another person to
enter into, or to offer to enter into, agreement
shall be liable for punishment for fraud under
section 447.
 As per section 284 (2) - Failure to cooperate with
Company Liquidator during winding up. (upto 6
months or fine may extend upto 50,000/- or
both)
 Section 42 (10) - Contravention of provisions
relating to private placement. penalty may extend
to the amount involved in the offer or invitation or
two crore rupees, whichever is higher, and the
company shall also refund all monies to subscribers
within a period of thirty days of the order imposing
the penalty.
 Criminal Liability for misstatement in prospectus
u/Sec.34 – shall not less than 6 month but may
extend upto 10 years and fine shall not be less than
amount involved in the fraud, but which may
extend to three times the amount involved in the
fraud.
 Rights of Promoters

1) Right to receive preliminary expenses

 to receive all the expenses from Board of Directors.

 AOA shall contain the provisions regarding expanses.

 The Articles may have provision regarding payment

of fixed sum to the promoters.
2) Right to recover proportionate amount from the
Co-promoters
 The promoters are held jointly and severally liable
for the secret profits made by them in the
formation of a company.
 Liability for misstatement in prospectus.
 B. Incorporation or Registration

After promotional work, process of registration

starts -

Section 3 – type of Company.

Availability of name (Section 4) – Approval of

proposed name from Registrar, CRC as per INC-1
Section 4 (2) – Conditions for approval of name
(A) Shall not be identical or resemble to another
company.
(B) Shall not constitute any offence under any law or
Undesirable in the opinion
Section4(3)containing of Govt.
any word which shows
connection, patronage with Central, State Govt,
local authority or Corporation.
Such words or expressions as prescribed.
 B. Incorporation or Registration

Section 4 (5 ) – Registrar may reserve the name for

period of 60 days from the date of application.

Section 4 (4) - the name of the proposed company;

or the name to which the company proposes to
change its name.
 PREPARATION OF MOA & AOA [Section 7 (1)(a)]

Section 4(1) states that the memorandum of a company shall

state—

• the name of the company ( Limited or Pvt. Ltd)

• registered office of the company;
• Objects;
• Liability of members.
• Share Capital
• In OPC, name of nominee.

Section 5(1) states that the articles of a company shall contain

the regulations for management of the company.
 PREPARATION OF OTHER DOCUMENTS

Power of Attorney

Consent of Directors

Particulars of Managers.

Affidavits by subscribers to Memorandum and First

Directors. [Section 7 (1)(c)]
 PREPARATION OF OTHER DOCUMENTS

Address for communication and notice of registered

office. [Section 7 (1)(d)]

Statutory declaration [Section 7 (1)(b)]

Particulars of Managers.
 FILING OF DOCUMENTS FOR REGISTRATION

Section 7 (1) – application to be filed in the office of

Registrar.

Rule 12 of Companies (Incorporation) Rules 2014 –

shall be filed with ROC in INC-2 or INC-7

Section 7(1)(a) the filing of the memorandum and

articles of the company duly signed by all subscribers
to memorandum
Issue of Certificate of Incorporation by Registrar

Section 7(2) states that the Registrar on the basis of

documents and information filed under sub-section
(1) of section 7, shall register all the documents and
information referred to in that sub- section in the
register and issue a certificate of incorporation in
the prescribed form to the effect that the proposed
company is incorporated under this Act.

Section 9 – from date of incorporation, company

becomes body corporate.
 Conclusive Evidence

Certificate of Incorporation given by the Registrar in

respect of any association shall be conclusive
evidence except in fraud cases.

Section 9 – from date of incorporation, company

becomes body corporate.

Certificate is conclusive proof only for incorporation.

Allotment of Corporate identity number

Section 7(3) – Registrar shall issue CIN to company.

Section 7 (4) - Documents of incorporation

to be preserved

Commencement of Business immediately after

certificate of incorporation. (Section 11)
Punishment for furnishing false or incorrect
information at the time of incorporation

 Section 7 (5) - If any person furnishes any false or

incorrect particulars of any information or
suppresses any material information, of which he is
aware in any of the documents filed with the
Registrar in relation to the registration of a
company, he shall be punishable for fraud under
section 447.
 Section 7 (6) – the promoters, first Directors and
the person making declaration under S.7 (1)(b)
shall be liable for action under Section 447.
Section 7 (7) – the tribunal may -
(a) pass such orders, as it may think fit, for
regulation of the management of the company
including changes, if any, in its memorandum and
articles, in public interest or in the interest of the
company and its members and creditors; or
(b) direct that liability of the members shall be
unlimited; or
(c) direct removal of the name of the company from
the register of companies; or
(d) pass an order for the winding up of the company;
or
(e) pass such other orders as it may deem fit:
 Provided that before making any order under
this sub-section,—
(i) the company shall be given a reasonable
opportunity of being heard in the matter; and
(ii) the Tribunal shall take into consideration the
transactions entered into by the company, including
the obligations, if any, contracted or payment of any
liability.
 The Memorandum of Association is a constitution of
a company.
 the foundation on which the structure of the
company is built.
 According to Section 2(56) of the Companies Act,
2013 “memorandum” means the memorandum of
association of a company as originally framed and
altered from time to time in pursuance of any
previous company law or this Act.
Form of MOA
 Section 4(6) of the Companies Act, 2013 provides that
the memorandum of association should be in any one
of the Forms specified in Tables A, B, C, D or E of
Schedule I to the Act.
I. The Form in Table A is applicable in the case of
companies limited by shares;
II. the Form in Table B is applicable to companies
limited by guarantee not having a share capital;
III. the Form in Table C is applicable to the companies
limited by guarantee having a share capital;
IV. the Form in Table D is applicable to unlimited
companies not having a share capital;
V. the Form in Table E is applicable to unlimited
companies having a share capital.
As per Section 4(1), the memorandum of a limited
company must state the following:

 The name clause [Section 4 (1)(a)]

 The registered office clause [Section 4 (1)(b)]
 The objects clause [Section 4 (1)(c)]
 The liability clause [Section 4 (1)(d)]
 The capital clause and subscription clause [Section
4 (1)(e)]
 OPC [Section 4 (1)(f)]
 The registered office clause [Section 4 (1)(b)]

 States the name of State in which the registered

office of company will be situated.

 According to Section 12, exact address is to be

informed to ROC within 15 days of incorporation.

 Verification of address has to be done within 30

days of incorporation. (INC-22)
 The objects clause [Section 4 (1)(c)]

 It states affirmatively the ambit and extent of

powers of the company and, stated negatively, that
nothing should be done beyond that ambit and that
no attempt shall be made to use the company for
any other purpose than that which is specified.
 To enable the persons dealing with the company to
know its permitted range of activities. The acts
beyond this ambit are ultra vires and hence void.
Even the entire body of shareholders cannot ratify
such acts.
Effects of ultra vires Transactions
 Void ab initio.
 Injunction : The members can get an injunction to
restrain a company wherein ultra vires act has been
or is about to be undertaken.
 Personal liability of Directors.
 Where a company’s money has been used ultra vires
to acquire some property, the company’s right over
such property is held secure and the company will
be the right party to protect the property.
 Ultra vires borrowing does not create the
relationship of creditor and debtor [In Re. Madras
Native Permanent Fund Ltd., (1931) 1 Com Cases
256 (Mad.)]
 LIABILITY CLAUSE [Section 4 (1)(d)]
 Section 4 1(d) of the Companies Act, states that the
liability of members of the company, whether
limited or unlimited.
The capital clause [Section 4 (1)(e)]
 It must state the amount of the capital with which
the company is registered. The capital is variously
described as “nominal”, “authorised” or
“registered”.
 The shares into which the capital is divided must be
of fixed value, which is commonly known as the
nominal value of the share.
 A company is not authorised to issue capital beyond
its authorised/nominal/registered capital. If it
receives applications for shares beyond the shares
covered by the authorised capital, the amount
received on excess number of shares should be
returned.
The association or subscription clause [Section 4
(1)(e)]
 Subscribers agree to subscribe the prescribed no. of
shares stated against their name in the
memorandum .The statutory requirements
regarding subscription of memorandum are that:
 Each subscriber must take at least 1 share. Each
subscriber must write opposite his name the no. of
shares which he agreed to take.
 There must be at least seven signatories in case of
Public company, at least two in case of private
company and one in case of one person company.
 According to Section 2(5) of the Companies Act,
2013, ‘articles’ means the articles of association of
a company as originally framed or as altered from
time to time or applied in pursuance of any
previous company law or of this Act.
 In terms of Section 5(1), the articles of a company
shall contain the regulations for management of
the company.
 The articles of association of a company are its
bye-laws or rules and regulations that govern the
management of its internal affairs and the conduct
of its business.
 The articles play a very important role in the
affairs of a company.
 The articles of a company are subordinate to and
subject to the memorandum of association and any
clause in the Articles going beyond the
memorandum will be ultra vires.
 The articles are only internal regulations, over
which the members of the company have full
control and may alter them according to what they
think fit.
 Articles that go beyond the company’s sphere of
action are inoperative, and anything done under the
authority of such article is void and incapable of
ratification.
 Section 7(1) - the memorandum and articles of the
company duly signed by all the subscribers to the
memorandum in the prescribed manner shall be
filled with ROC.
 Every type of company whether public or private and
whether limited by shares or limited by guarantee
having a share capital or not having a share capital
or an unlimited liability company must register their
articles of association.
 Section 5 (2) - the articles shall also contain such
matters, as may be prescribed.
 Section 5(6) - The articles of a company shall be in
respective forms specified in Tables, F, G, H, I and J
in Schedule I as may be applicable to such company.
The articles set out the rules and regulations framed by
the company for its own working. The articles should
contain generally the following matters:
1. Exclusion wholly or in part of Table F.
2. Adoption of preliminary contracts.
3. Number and value of shares.
4. Issue of preference shares.
5. Allotment of shares.
6. Calls on shares.
7. Lien on shares.
8. Transfer and transmission of shares.
9. Nomination.
10. Forfeiture of shares.
11. Alteration of capital.
12. Buy back.
13. Share certificates.
14. Dematerialisation. (e certification)
15. Conversion of shares into stock.
16. Voting rights and proxies.
17. Meetings and rules regarding committees.
18.Directors, their appointment and delegations of
powers.
19. Nominee directors.
20. Issue of Debentures and stocks.
21. Audit committee.
22. Managing director, Whole-time director, Manager,
Secretary.
23. Additional directors.
24. Seal.
25. Remuneration of directors.
26. General meetings.
27. Directors meetings.
28. Borrowing powers.
29. Dividends and reserves.
30. Accounts and audit.
31. Winding up.
32. Indemnity.
33. Capitalisation of reserves.
 The memorandum and articles, when registered,
become public documents and can be inspected by
anyone on payment of nominal fee.
 Therefore, every person who contemplates entering
into a contract with a company has the means of
ascertaining and
 is consequently presumed to know, not only the exact
powers of the company but also the extent to which
these powers have been delegated to the directors,
 and of any limitations placed upon the exercise of these
powers.
 This is called the constructive notice of memorandum
and articles or the doctrine of constructive notice.
 In fact, he is regarded not only as having read those
documents but also as having understood them
according to their proper meaning.
 For example, if the articles provide that a bill of
exchange to be effective must be signed by two
directors, a person dealing with the company must see
that it is so signed; otherwise he cannot claim under it.
 The legal effect of this doctrine is that if a person deals
with a company in a manner which is consistent with
the provisions contained in its memorandum or articles,
he must be deemed to have dealt with the company at
his own risk and cost and shall have to bear the
consequences thereof.
 While the doctrine of ‘constructive notice” seeks to
protect the company against the outsiders, the principal
of indoor management operates to protect the outsiders
against the company.

 According to this doctrine, as laid down in Royal British

Bank v. Turquand, (1856) 119 E.R. 886, persons
dealing with a company having satisfied themselves that
the proposed transaction is not in its nature
inconsistent with the memorandum and articles, are not
bound to inquire the regularity of any internal
proceedings.
 In other words, while persons contracting with a
company are presumed to know the provisions of the
contents of the memorandum and articles,
 they are entitled to assume that the provisions of the
articles have been observed by the officers of the
company.
 It is no part of the duty of an outsider to see that the
company carries out its own internal regulations.
 Knowledge of irregularity: A person who has actual or
constructive notice of the internal irregularity cannot
obviously claim the protection of this rule.
 Negligence on the part of the outsiders: If the
circumstances are so suspicious as to invite further
enquiry and the outsider had not made proper enquiries
which would have revealed the irregularities, he would
not be entitled to the protection of the doctrine of
indoor management.
 Forgery: The rule is of no avail where the
outsider is found to have relied upon a
document which is a forged one, for a
forgery is a nullity.
 The next stage is to raise funds.
 A public company cannot commence business
unless minimum subscription as stated in the
prospectus has been subscribed.
 Raise the required funds from the public by
means of issue of shares and debentures.
 For doing the same, it has to issue a prospectus
which is an invitation to the public to subscribe to
the capital of the company and undergo various
other formalities.
 SEBI Approval
 Filling of Prospectus
 Appointment of Bankers, Brokers, and
Underwriters
 Minimum Subscription
 Application to Stock Exchange
 Allotment of Shares
 Private Company: Certificate of Incorporation
 Public Company: Certificate of Commencement
 Following documents are required:
 A declaration that a prospectus or a statement
in lieu of prospectus has been filed with the ROC
 A declaration that shares payable in cash
equivalent to minimum subscription have been
allotted
 A declaration that every director has paid in
cash, the application and allotment money on
his shares in the same proportion as others
 A statement 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
 The secretary of the company or a director files
a statutory declaration that the requirements
relating to the commencement of business have
been duly complied with.
 Private Company: Certificate of Incorporation