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1 promotion & incorporation of a company

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1 promotion & incorporation of a company

  1. 1.  PROMOTION refers to the entire process throughwhich a company is brought into existence The persons who conceive the company and invest theinitial funds are called the promoters of the company The promoters decide whether they want to form apublic company or a private company and prepare thedocuments accordingly. These documents consist ofMoa and AoA. In case of public company, a prospectusis also required.
  2. 2. Memorandum of Association(MoA) The MoA of a company is the constitution or charter ofthe company. It provides the following:- Name of the company Address of the registered company Activities which the company wishes to carry on The amount of share capital and its units
  3. 3. Articles of Association The Articles of Association set out the regulations forthe internal management of the company According to Section 2 (2) of the Companies Act, 1956,‘articles’ means the articles of association of acompany as originally framed or as altered from timeto time in pursuance of any previous companies law orof this Act These are the rules and regulations of a companyframed for the purpose of internal management of itsaffairs The AoA are subordinate to and controlled by the MoA
  4. 4.  A promoter is a person who does the necessarypreliminary work incidental to the formation of acompany It can be remunerated for its services, but it has toenter into a contract before the incorporation ofthe company They will usually act as nominees or as the firstdirectors of the company They enter into contracts after the incorporationand before the commencement of business. But they need not compulsorily participate in theformation of the company.
  5. 5.  Sometimes, a few persons may only act asprofessionals who help the promoters on behalf ofthe company like the solicitor, charteredaccountant etc. and get paid for their services. In India promoters generally secure themanagement of the company that is formed andhave a controlling interest in the company’smanagement
  6. 6. The requirements are as follows Application for availability of name Preparation of MOA and AOA Selection and finalization of MOA and AOA- Itsprinting, stamping and signing Preparation of other necessary documents Filling of the required documents for Registrationto obtain certificate of incorporation andCertificate of commencement of business
  7. 7. Functions of a promoter Decides the name of a company and ascertains that itis accepted by the Registrar Settles the details of the Company’s MoA and AoA,nomination of directors, bankers, auditors andregistered office of the company Arranges for the printing of the MoA and AoA
  8. 8. Promoters have the following liabilitiesunder the Companies Act, 1956 They can be liable for non compliance of the provisions ofthe Act Severe penalty may be imposed The court may suspend the promoter from taking part inthe management of the company Liable for any untrue statement in the prospectus to theperson who has subscribed for any shares or debentures onthe faith of the prospectusThe liabilities are ….a) to set aside the allotment of shares,b) sued for damages,c) sued for compensationd) criminal proceedings
  9. 9. Fiduciary position of a promoter The fiduciary position of a promoter may be summedup as follows:- Not to make any profit at the expense of the company.which they have promoted without the knowledge andconsent of the company. In case they do so , they may becompelled to account for it. To give benefit of negotiations to the company. Theycannot sell their property to the company at a profit unlessall the material facts are disclosed at the independentboard of directors or the shareholders of the company. Ifthey do so, the company may repudiate the contract of saleor confirm the sale after recovering the profit made by thepromoter.
  10. 10.  To make full disclosure of interest or profit Not to make unfair use of position
  11. 11. Remuneration of Promoters No right to get compensation from the company forpromoting the company unless there is a contract inthis effect.
  12. 12. Incorporation of a company The purpose for which a company is incorporatedmust be lawful it means a purpose not forbidden bylaw or contrary to public policy A certificate of incorporation does not mean that thatthe objects of the company are lawful
  13. 13.  Subscribing their names to the memorandum ofassociation means putting their signatures to thememorandum It means a agreement between the persons concernedto associate themselves into the body corporate The persons who subscribe to the MoA of the companyshould not be lunatic, an undischarged bankrupt, aninfant, an alien enemy or a person disqualified by lawfrom entering into a contract
  14. 14. Availability of name Section 20 of the Companies Act provides that a companycannot register by a name, which in the opinion of theCentral Government is undesirable So it is advisable that the promoters find out theavailability of the proposed name of the company for theRegistrar of Companies. The promoters are required to select at least fouralternative names in order for preference for the proposedcompany and secure the company name by making anapplication to the Registrar of Companies of the state inthe prescribed form (Form No. 1A) along with prescribedfees (Rs. 500)
  15. 15. Revalidation of Name availability Where the Registrar of Companies informs thepromoters of the company that the changed name orthe name with which the proposed company is to beregistered is not undesirable, such name will beavailable for adoption for 6 months from the date ofintimidation by the Registrar If within the stipulated period of 6 months, thecompany is not incorporated by the name madeavailable by the Registrar or if the existing name of theCompany is not changed to the new made available bythe Registrar, the validity period of the name expires
  16. 16.  In order to make the revalidation of the name, anapplication has to be made in the office of theRegistrar explaining the reasons for not having availedthe name in the stipulated period of time
  17. 17. Documents to be filed to theRegistrar1. The Memorandum of Association duly signed by thesubscribers2. The Articles of Association, if any, duly signed by thesubscribers to the memorandum3. The agreement, if any, which the company proposes toenter into with any individual for appointment as itsmanaging or whole time director or manager4. A statement of nominal capital5. A notice of address of the registered office of thecompany. This may be done within 30 days of registrationif it cannot be filed at the time of registration.
  18. 18. 6. A list of directors who have agreed to become the firstdirectors of the company and their written consent to actsigned by each7. An undertaking in writing signed by each such directorto take and pay for his qualification shares8. A declaration that all requirements of the Act have beencomplied with Such declaration may be signed by any of the followingpersons:- And advocate of the HC of the SC A CA in whole time practice in India A person named in the Articles as a director, manager or asecretary of the company
  19. 19.  On the presentation of the documents to the to theRegistrar, a requisite fee is payable, which fee is notrefundable even though the documents are refusedregistration. If the registrar is satisfied that all the requisite documentsdelivered to him are in order, he shall retain and registerthe memorandum and the articles, provided he is satisfiedon the following points The relevant provisions of the Act have been complied with The objects of the company are lawful The requisite number of persons required under the Act havesubscribed and duly signed
  20. 20.  The memorandum and the articles comply in allrespects with the provisions of the Act The name selected by the company is acceptable The statutory declaration has been properly made It is not within his province to make enquiries intomatters which are unconnected with the conditionsenunciated in Section 33 If there is a material defect, he may refuse registration If there is a minor defect, he may ask for itsrectification
  21. 21. Certificate of incorporation On registration, the Registrar will issue a certificate ofincorporation whereby he certifies that the company isincorporated From the date of incorporation mentioned thecertificate of incorporation, the company becomescapable of exercising all functions of an incorporatedcompany having perpetual succession and a commonseal The company becomes a legal person separate from itsshareholders
  22. 22. Conclusiveness of the certificate ofincorporation A certificate of incorporation given by the Registrar inrespect of a company is conclusive evidence that all therequirements of the Companies Act have been compliedwith in respect of registration. This is known as Rule inPeel’s Case The certificate of incorporation shall be conclusiveevidence that All the requirements of the Act have been complied with inrespect of the registration The company is duly registered the company came into existence on the date mentioned inthis certificate
  23. 23.  Case- Moosa vs. Ibrahim(ILR 191340) MoA was signed by two members and the guardian of 5other minor members The certificate was issued to the company The Court held that the certificate was conclusive for allpurposes of the company
  24. 24. Effects of Registration The company becomes a distinct legal entity The company acquires perpetual succession The company’s property is not the property of theshareholders
  25. 25. Doctrine of Ultra Vires Consolidated in the late 1800’s Any act outside the objects of a company is not onlybeyond the authority of the executives, but is alsobeyond the capacity of the company itself. An activity of the company beyond the authority of itsobjects come to be held as nullity Ultra- Beyond Vires- Power
  26. 26. Doctrine of Constructive Notice Every person dealing with a company must read thepublic documents of the company. If he does not read them, it is his fault It apples to MoA, AoA, details of Directors etc.
  27. 27. Doctrine of Indoor Management Reverse side of Doctrine of Constructive Notice It states that outsiders do not have knowledge as tohow the company’s internal matters are handled by itsexecutives.