Formation Incorporation of a Company Corporate Law Notes
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Describe the legal requirements relating to the formation of a public company under the Companies Act.
Describe the legal formalities that are to be compiled with under Indian Company Act, 2013 regarding the formation of a company.
Write the procedure of incorporation of a company.
Discuss the procedure of incorporation of a company and also enumerate the various documents to be filed with the Registrar.
What is meant by incorporation of a company ? Describe in brief the process of incorporation of a Joint Stock Company.
Ans. Registration and Incorporation of a company
Incorporation brings a company into existence as a separate corporate entity.
As per Section 3(1) a company may be formed for any lawful purpose by:
(a) seven or more persons, where the company to be formed is to be a public company;
(b) two or more persons, where the company to be fokmed is to be a private company; or
(c) one person, where the company to be formed is to be One Person Company (OPC) that is to say, a private company, by subscribing their names or his namy to a memorandum and complying with the requirements of this Act in respect of registration. The registration and incorporation of a company usually involves the following steps:
(l) Preliminary Steps
(Il) Application for Incorporation and delivery of documents
(Ill) Scrutiny and registration of documents by the Registrar.
(IV) Issue of certificate of Incorporation and CIN
(I) Preliminary Steps
In order to get a company registered, following preliminary steps are taken by the promoters:
1. As per Section 4(2) a company cannot be registered with a name which a name is considered to be undesirable in the opinion of the Central Government. The name should not be identical with or resemble too nearly to the name of an existing company or registered under this Act or any previous company law. Therefore the promoters are advised to make an application in the Form l A to ascertain the availability of maximum six names in the order of their preference.
2. A fee of? 500 has to be paid alongside and the digital signature of the applicant proposing the company has to be attached in the form. If proposed name is not available, the user has to apply for a fresh name on the same application.
3. After the name approval the applicant can apply for registration of the new company by filing the required forms (i.e. Form . l, 18 and 32) within 60 days of name approval.
4. Before promoters begin the incorporation of a company, they have to appoint chartered accountants, lawyers etc. to. help them in preparing various documents.
5. Arrange for the drafting of the memorandum and articles of association by solicitors, vetting of the same by Registrar of Companies and printing of the same. The Memorandum and Articles must be signed by at least 7 subscribers (2 in case of private company) along with address, description, occupation, if any, in the presence of at least one witness. The subscribers should also clearly mention the number and nature of shares subscribed by them.
(Il) Application for Incorporation and Delivery of Documents
After having done the preliminary work, the Promoter of company shall file an application for incorporation of his company in Form No. INC-2 in case of a OPC and Form No. INC-7 in case of a company other than a OPC along with the prescribed fee. The application shall be filed with the Registrar within whose jurisdiction the registered office of the company is proposed to be situated. [Section 7(1) and Rule INC-12]
The application shall be accompanied by the following documents and information:
(a) the memorandum and articles of the company duly signed by all the subscribers to the memorandum in such manner as may be prescribed;
(b) a declaration in the prescribed form by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of the company, and by a person named in the articles as a director, manager or secretary of the company, that all the requirements of this Act and the rules made there under in respect of registration and matters precedent or incidental thereto have been complied with;
(c) an affidavit from each of the subscribers to the memorandum and from persons named as the first directors, if any, in the articles that he is not convicted of any offence in connection with the promotion, formation or management of any company, or that he has not been found guilty of any fraud or misfeasance or of any breach of duty to any company under this Act or any previous company law during the preceding five years and that all the documents filed with the Registrar for,registration of the company contain information that is correct and complete and true to the best of his knowledge and belief; (d) the address for correspondence till its registered office is established; (e) the particulars of name, including surname or family name, residential address, nationality and such other particulars of every subscriber to the memorandum along with proof of identity, as may be prescribed, and in the case of a subscriber being a body corporate, such particulars as may be prescribed;
(f) the particulars of the persons mentioned in the articles as the first including surnames or family directors of the company, their names , names, the Director Identification Number, residential address, nationality and such other particulars including proof of identity as may be prescribed; and
(g) the particulars of the interests of the persons mentioned in the articles as the first directors of the company in other firms or bodies corporate along with their consent to act as directors of the company in such form and manner as may be prescribed. (Ill) Scrutiny and Registration of Documents by the Registrar After receiving application- and delivery of documents for incorporation, the Registrar shall scrutinize the documents. When- all documents are found in order, the Registrar on the basis of documents and information filed to him shall register all these documents and information in the register of companies. [Section 7(2)] If there is any minor defect in any document, the Registrar may require for its rectification by the authorised person. But if there is a material defect, he may return all the documents for rectification. He may refuse to register a company on only lawful grounds. But if he refuses to register on a ground which is not legitimate, he may be compelled to register.
(IV) Issue of Certificate of Incorporation and CIN On registration of all the documents and information, the Registrar shall issue a certificate of incorporation in the Form No. INC-II to the effect that the proposed company is incorporated under this Act. [Section 7(2) and Rule INC-18]
On and from the date mentioned in the certificate of incorporation, the Registrar shall allot to the company a Corporate Identity Number or CIN. This CIN shall be a distinct identity for the company. The CIN shall also be included in the certificate of incorporation. [Section 7(2) and (3)]
Integrated Process of Incorporation
With effect from 1st May, 2015, the MCA has introduced a new process of incorporation of companies which is called as the ‘Integrated process of Incorporation of Companies.’ It is an alternative process of incorporation by which a company may be registered within 24 hours of the application.
Applicability of Procedure: The integrated process of incorporation is applicable for the registration of the following kinds of companies: (i) O PCs: (ii) Private companies; (iii) Public companies; and (iv) Producer companies.
Non-trading companies or not for profit companies or charitable companies (formed under Section 8) cannot be registered by following this procedure. L Rule INC-36(2)J
Effects of Incorporation of Company
Section 9 [AS amended by the Companies (Amendment) Act, 2015] of the Act sets out the effects of incorporation of a company. This section is reproduced below: “From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name.”
Q. 9. “A certificate of incorporation is conclusive evidence that all the requirements of the Companies Act have been complied with.” Comment.
What is the effect of issuing a certificate of incorporation ? Can a court annul a certificate of incorporation which has been improperly issued ?
“The validity of a certificate of incorporation cannot be disputed on any ground whatsoever.” Comment.
Certificate of Incorporation
Certificate of incorporation is a legal document relating to formation of a company which confirms the name by which the company is registered under the Companies Act and date of incorporation, The Registrar of Companies issues certificate of incorporation in the prescribed form on the basis of submission of the required documents and information laid down by the Companies Act.
“From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name.” (Section 9 as amended by the Companies (Amendment) Act, 2015)
Thus, the consequences of certificate of incorporation are:
l. The certificate of incorporation brings the company into existence from the date mentioned in the certificate.
2. It grants legal personality, corporate existence and perpetual succession to the company.
3. The subscribers to the Memorandum together with such other persons, as may from time to time become members of the company, become a body corporate with a distinct entity from such members having a perpetual succession with the liability of the members limited to the amount for the time being unpaid on the share S held by them.
4. The Memorandum and Articles of Association become binding upon the members and the company as if they have been signed by the company and by each member.
Certificate of Incorporation: A Conclusive Proof of Date of Incorporation: The certificate of incorporation brings the company into existence as a distinct legal entity. It is a proof of registration and existence of a company as a legal person. The date of incorporation mentioned in the certificate of incorporation is deemed to be the date of incorporation of the company. Section 91 A company comes into existence from the earliest moment of the day of incorporation stated in the certificate. The date appearing on it is conclusive evidence of the date of incorporation even if it is wrong. [John Thomas Vs. Dr, K. Jagadeesan (2001) 106 company cases 619 SC]
Conclusiveness of the Certificate of Incorporation
The certificate of incorporation is conclusive evidence that the requirements of the Act have been complied with and prevents the reopening of matters prior and incidental thereto, and it places the existence of the company as a legal person beyond doubt.
The certificate of incorporation shall be conclusive evidence that
(i) all the requirements of the Act have been complied with in respect of registration,
(ii) the company is duly registered, and
(iii) that the company came into existence on the date mentioned ‘in the certificate. Certificate of incorporation does not mean all objects are legal. The certificate only proves conclusively that it has been properly incorporated. It does not prove that all the objects mentioned in it are legal or permissible. The certificate cannot validate illegal objects. A company cannot carry out an illegal object even if it is specified in the memorandum. Hence, it has been held that the certificate of incorporation is not conclusive for this purpose. Certificate of incorporation cannot be cancelled—A certificate of incorporation cannot be declared void even if all the signatures of subscribers are forged or all the signatories are minor. It cannot be cancelled even if the objects for which it is registered are unlawful. However, the Tribunal has power to order winding up of the company.
Validity of Certificate of Incorporation
The validity of the certificate of incorporation cannot be disputed on any grounds whatsoever. It prevents the re-opening of the matters prior to the registration and essential to it. The reason underlying is that once a company is registered and has begun business and entered into contracts it would be disastrous if any person could allege that the company was not duly registered. Section 7(6) of the Companies Act 2013 provides that where at any time after the incorporation of a company, it is proved that the company has been got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company, or by any fraudulent action, the promoters, the persons named as the first directors of the company and the persons making declaration shall each be liable for action under Section 447 of the Companies Act.
Short Answer Questions
Q. I. Write short note on the Provisional Contracts.
Distinguish between Preliminary Contracts and Provisional Contracts.
Ans. Provisional Contracts : Contracts which were entered into by a company after obtaining the ‘Certificate of Incorporation’ but before getting the ‘Certificate of commencement of business’ were known as ‘provisional contracts’, Such contracts were not legally binding on the company until the company obtained the Certificate of Commencement of Business. Since the Companies (Amendment) Act, 2015 has done away with the requirement of obtaining the ‘Certificate of Commencement of Business’ by omitting Section J there cannot a ‘provisional contract’ now,
The difference between preliminary contracts and provisional contracts is that the preliminary contracts are made by the promoters of the company before its incorporation but the provisional contracts are made after incorporation. The company cannot ratify the preliminary contracts after its formation whereas provisional contracts becomes automatically binding on the company without any ratification as soon as the company commences business.
Q. 2. Write a note on Commencement of Business.
Ans. According to the latest provisions of the Companies (Amendment) Act, 2015 every company is entitled to commence its business as soon as it obtains its certificate of incorporation. No other formality is required to be complied with for commencement of business by any company after its incorporation.
If a company fails to commence its business within one year of its incorporation, the Registrar may initiate action for removing its name from the register of companies. [Section 248]
Q. 3. “A company cannot ratify a pre-incorporation contract though it is open to it to enter into a fresh contract.” Comment.
‘ ‘A company cannot ratify a pre-incorporation contract.” Comment.
Ans. A contract made by promoters on behalf of the company before its incorporation is termed as pre-incorporation contract. The company, when formed, can neither be bound by such contract nor has any rights under it.
It is correct to say that a company cannot ratify pre-incorporation contracts. This is because only that principal can ratify a contract under Section 196 of the Contract Act, who was in. existence and competent to contract on the date of making the contract. Since company was not in existence at the time of making the contract, the ratification is not possible.
A company gets a legal status only after incorporation. Therefore, the only remedy open to the company after incorporation is to enter into a fresh contract to carry out the contract made by its promoters.
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