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FORMATION OF COMPANIES
Authored By - RITU SINGH
Co-Autor. ABHYUDAYA SHAHI
Designation:- Student of BA.LLB
(HONS.), Semester 6
AMITY UNIVERSITY LUCKNOW CAMPUS
Contact number:- Author1. 6307194644
Author 2. 6394104190
Abstract
The development and
incorporation of an organization are especially like the introduction of a
human like it additionally goes through different phases of development of its
body parts during the womb stage. Different basis is completed to bring an
organization into reality. The course of a thought changing over into an
organization incorporates different stages, these critical phases of the
pre-fuse and development stages are examined exhaustively as under. This
article makes sense of the capabilities, obligations and liabilities of an
advertiser alongside giving experiences into cases in regards to
pre-incorporation contract. This article abides into the coordinated course of
company registration.
The development of an
organization goes through various advances, beginning from thought age to
initiating of the business. This entire cycle can be separated into 4
significant stages or steps, which we will talk about in the lines underneath.
The significant stages in line of an organization are
as per the following:
• Promotion stage
• Registration stage
• Incorporation stage
• Commencement of Business stage
Contemporary business
needs a substantial sum of money. The technical environment is changing and
becoming more competitive every day. As a result, an increasing number of
business firms favour the corporation form of organisation. Stages in the
formation of a company are the procedures that must be followed from the time a
business idea is conceived until a firm is legally capable of starting
operations. Promoters are those who are promoting a firm by taking these
actions and the ensuing dangers.
Over the past few years
India has witnessed an exponential growth in the number of companies, of
various scales and across various industries. The Government policies and the
corporate stand-still during the pandemic have fuelled the fire of the booming entrepreneurial
spirit. All in all, India is now a veritable hub of nascent companies rising
through the global rankings.
Incorporation for the company.
In order to be able to
incorporate the business, the promoter attempts to increase investor faith in the
idea and builds upon the investment. According to Section 2(69) of the 2013
Companies Act, "promoter" is a term. A promoter is, technically
speaking, a person who is thus identified in the company's prospectus. In the
annual return submitted pursuant to Section 96 of the Companies Act of 2013,
the Company shall also identify its promoter.
An advertiser is to a
business what parents are to a child. Along with persuading investors to
support the business concept, the promoter assembles the physical capital of
labour, raw materials, managerial talent, machinery, etc.
While having a strong commitment to
the company's ideas, the promoter must consider SWOT analyse
the idea with respect to the future prospects and feasibility with respect to
the societal dynamics.
The pre-incorporation contracts are the contracts
entered upon by the promoter before the company is incorporated and these are
essential for the successful running of the company in the future. The nature
of these pre-incorporation contracts is however different to that of an
ordinary contract. These contracts are Bipartite and effects of it are
tripartite. The Promoter enters into a contract with the service providers or
the interested persons and the consequential effect of these contracts help the
prospective company which is still lingering in its nonincorporated stage. The
instruments of Contract is essentially used for the quid-proquo transactions between two parties, but here it is
remarkably used for the benefit of the nonparty to contract as legally the
company is non-existent.
The Company is essentially the beneficiary of the
pre-incorporation contracts as inferred from the above said para. Now it might
stir up doubt as to why a company is not liable towards the pre-incorporation
contracts, the answer to the question to be simply put is that one cannot make
someone liable if they are non-existent and hence not a party to the aforesaid
pre-incorporation contract.
The non-liability of the
company with respect to the pre-incorporation contracts was the same as the
common law court in India until the passing of the Specific Relief Act, 1963. The Specific Relief Act, 1963
essentially under Section 15(h) and Section 19(e) makes the preincorporation contracts
and agreement valid deviating from the trajectory followed under the common
law.
Section 15(h) provides details as to who may obtain
specific performance, wherein clause h provides that when a promoter gets into
a contract before incorporation on behalf of the company and the company
warrants such contract and such company must have sent a communication of
acceptance to the other party of contract.
Section 19(e) provides that a party claiming relief
under specific performance can be claimed when the promoter of the company
before incorporation had entered into contract and if such contract was
warranted during incorporation. The company must have accepted the contract and
communicated such acceptance to the other party of contract.
Case
laws:
Once Mr. Kelner
approached the promoter of a firm about buying some of his wine, and the
promoter agreed to do so on the company's behalf. Eventually, when the business
was unable to pay Mr. Kelner, the promoter was sued. It was determined if the
promoter and the company were acting as each other's principal and agent, and
whether the company could be held liable. As the principal of the agent could
not have existed without incorporation, the learned judge concluded that the
principal-agent relationship did not exist. It was further added that the
company could not assume responsibility for the Pre-incorporation contract
through adoption because it was not a party to the contract and was not even
aware of it at the time.
An unformed corporation entered into a contract where
the other party refused to fulfil its obligations, and this is how the appeal
court understood the results of Kelner v. Baxter. The judge had noted that
there could not be a pre-incorporation contract action because the company
could not have existed or entered into a contract prior to incorporation. The
idea that if a contract was signed by an agent or promoter, the promoter would
be held personally accountable, but that the contract would be unenforceable if
that individual was acting as a representative of an unformed company,
confusion was thus caused.
Joined Process of Company
Registration-
The next step of the process is to
complete the "simplified proforma for incorporation" form online. The
performa offers a practical way to incorporate a business online, which begins
by filling out the necessary information for the company's promoter. Second,
you can fill out the e-MOA (electronic Memorandum of Association) and the e-AOA
(electronic Articles of Association) on the electronic performa in form numbers
INC-33 and INC-34, respectively. As we all know, the MOA serves as the
company's constitution and typically outlines the goal of the organisation as
well as the directors that participated in its establishment. An e-AOA option
is offered after the memorandum of association to further simplify the
incorporation process lays down rules and regulations of company affairs. E-AOA
also lays down the powers, duties and rights of managers, officers and board of
directors.
The Article of Association may be made
by the company according to its own requirements, or maybe selected by such
company from the various options available in the schedule of Companies Act.
AOA must be signed by all the directors and also attested by two witnesses. All the documents declared to be
necessary under Section 7 of the Companies Act are supposed
to be attached along with the digital signature of all the directors. The
Ministry of Corporate Affairs has tried to simplify the process of getting a
DIN number for the directors of the newly incorporated company by including
such request form along with the PAN & TAN card of the so proposed entity
which is being incorporated.
Effect of the Certificate of Incorporation
1.
Certificate of incorporation is the conclusive evidence of the
legal existence or presence of the Company as per Section 35 of
Companies Act, 1956.
2.
Even if there are formal deficiencies in the documents submitted
for the incorporation of the company, once the certificate of incorporation is
issued, the certificate becomes conclusive evidence regarding the legal
existence of the company from the date mentioned in the incorporation
certificate.
3.
If the certificate of incorporation was received on 24th but the
certificate reflects the date 22nd then the company shall be taken to have come
into existence from 22nd as reflected by the certificate of incorporation and
this will also authenticate the transactions made by such company on 22nd and
23rd in the eyes of law.
Certificate of Commencement of Business
1.
As soon as a private company gets the certification of
incorporation it can start its business. Once the certificate of incorporation
is received by the company, a public company issues a prospectus for inviting
the public to subscribe to its share capital. It fixes the minimum subscription
in the prospectus. Then, it is required to sell the minimum number of shares
mentioned in the prospectus.
2.
After completing the sale of the required number of shares, the
certificate is sent to the registrar along with the letter from the bank
stating that all the money is received.
3.
The registrar then scrutinizes the documents. If all the legal
formalities are done, then the registrar issues a certificate known as
‘certificate of commencement of business’. This is the conclusive evidence for
the commencement of business for the public company.
Memorandum of Association of a Company:
Is the company's charter or constitution that contains
the authority of the company? Under the Companies Act of 1956, no company may
be registered without a memorandum of association. According to Section 2(28)
of the Companies Act, 1956, "memorandum" refers to the company's
original memorandum of organisation or any subsequent amendments made in
accordance with any prior company law or the Companies Act, 1956. Any of the
four forms listed in tables B, C, D, and E of Schedule 1 to the Companies Act
of 1956 should be used for the memorandum of association. Companies limited by
shares
must use form
in Table B, and corporations limited by guarantee must use form in Table C.
• Name clause
The name of the company is mentioned
in the name clause. A public limited company must end with the word 'Limited'
and a private limited company must end with the words 'Private Limited'. The
company cannot have a name which in the opinion of the Central Government is
undesirable. A name which is identical with or the nearly resembles the name of
another company in existence will not be allowed. A company cannot use a name
which is prohibited under the Names and Emblems.
• Domicile clause
The state in which the registered
office of company is to be situated is mentioned in this clause. If it is not
possible to state the exact location of the registered office, the company must
state it provide the exact address either on the day on which commences to
carry on its business or within 30 days from the date of incorporation of the
company, whichever is earlier. Notice in form no 18 must be given to the
Registrar of Companies within 30 days of the date of incorporation of the
company. Similarly, any change in the registered office must also be intimated
in form no 18 to the Registrar of Companies within 30 days. The registered
office of the company is the official address of the company where the
statutory books and records must be normally being kept. Every company must
affix or paint its name and address of its registered office on the outside of
every office or place at which its activities are carried on in. The name must
be written in one of the local languages and in English.
• Objects clause
This clause is the most important
clause of the company. It specifies the activities which a company can carry on
and which activities it cannot carry on. The company cannot carry on any
activity which is not authorised by its MA.
Liability clause
A declaration that the liability of the members is
limited in case of the company limited by the shares or guarantee must be
given. The MA of a company limited by guarantee must also state that each
member undertakes to contribute to the assets of the company such amount not
exceeding specified amounts as may be required in the event of the liquidation
of the company. A declaration that the liability of the members is unlimited in
case of the unlimited companies must be given. The effect of this clause is
that in a company limited by shares, no member can be called upon to pay more
than the uncalled amount on his shares. If his shares are already fully paid
up, he has no liability towards the company.
Capital clause
The amount of share capital with which the company is
to be registered divided into shares must be specified giving details of the
number of shares and types of shares. A company
cannot issue share capital greater than the maximum
amount of share capital mentioned in this clause without altering the
memorandum.
Doctrine of the ultra-vires
Any transaction which is outside the scope of the
powers specified in the objects clause of the MA and are not reasonable
incidentally or necessary to the attainment of objects is ultra-vires the
company and therefore void. No rights and liabilities on the part of the
company arise out of such transactions and it is a nullity even if every member
agrees to it.
Consequences of an
ultra vires transaction
:-
1. The company cannot sue
any person for enforcement of any of its rights. 2. No person can sue the
company for enforcement of its rights.
3. The directors of the company may be held personally
liable to outsiders for some ultra vires.
Conclusion
According to the aforementioned article, the company's
incorporation time can be interpreted as the fusion of the Pre incorporation
period and the incorporation era. The time before incorporation might be viewed
as the company's idea phase. When it comes to raising capital for the business,
the promoter whose name appears in the prospectus of the company is crucial.
The promoter also performs a SWOT analysis of the business to determine its
market potential and whether investors would be able to consider it as a viable
investment. The promoter's obligations and liabilities have been thoroughly
explained, demonstrating the fiduciary nature of their relationship with the
company. The pre-incorporation contract principle has been thoroughly
discussed, and it has been determined that the promoter will be held personally
accountable for all pre-incorporation contracts unless there is a novation of
the contract or, in the case of India, when the provisions of the Specific
Relief Act apply, wherein the company ratifies the contract and notifies the
other party of its liability. Since it affects possible investor intentions
towards businesses in the market, the government's role in simplifying the
incorporation procedure is quite important.
The Ministry of Corporate Affairs offers options to
incorporate the company with a unique name by providing the online option of
submitting the memorandum of association along with the articles of association
online with the declaration digitally signed stating that all legal requirements
for incorporation of a company have been met by the respective company. This
has increased the ease of incorporation. This legislation reflects the State's
obligation to support business in order to boost the economy. The certificate
of incorporation is essential for demonstrating that the company has been
properly created and cannot be revoked unless the registrar of companies
decides to wind up the firm after discovering fraud in the incorporation
process. The incorporation certificate speaks for itself, and the date of
incorporation is unaffected by the date of receipt, so even if the certificate
is received on February 20 but clearly states that the date of incorporation is
February 14, all actions taken after that date are presumed to have been taken in
accordance with the law.
BIBLIOGRAPHY
Acts-
1. 1. The Companies
Act,2013
2. The Companies (Incorporation) Rules, 2014
Web-
2.
https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks.html
Article Information
FORMATION OF COMPANIES
Authors: RITU SINGH, ABHYUDAYA SHAHI
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/04/13
- Volume 2
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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