Process of Incorporation Under Corporate Law

PROMOTION

It is a term of wide importance denoting the preliminary steps taken for the purpose of registration or flotation of the company.

A promoter may be an individual, syndicate, association, partner or company.

 

  • Who is a promoter?

Section 2(69) of the Companies Act,2013.

 

Palmer’s View: Any one who assists in the promotion, for example, by obtaining the services of a director, or agreeing to place shares or negotiating an agreement or merely by bringing a vendor in touch with persons who may form a company to exploit or purchase his goods may find himself as a promoter of a company which is formed.

 

  • Legal position of a promoter

– Not an agent because there is no existence of any company yet

– Not a trustee because there is no trust in existence.

 

Erlanger V. New Sambrero Phosphate Co. (39 LT 269)

The promoters of a company stands undoubtedly in a fiduciary position. They have in their hands the creation and moulding of the company. They have the power of defining how and when, and in what shape and under whose supervision it shall come into existence and begin to act as a trading corporation.

 

  • Duties of promoter

-Promoter must make full disclosure of all material facts.

-Do not make any secret profit.

 

  • Disclosure to be made to whom?

To independent and competent Board of Directors(BOD).

If no BOD, then to the whole body of persons who are invited to become shareholders and this can be done through prospectus.

 

 

  • Liabilities of promoters
  • For non- Disclosure

   The company may:

-Rescind the contract and recover the purchase price where he sold his own property to the company.

-Recover the profit made, even though the recession is not claimed or is impossible.

-Claim damages for breach of his fiduciary duty.

Damages= Market Value of property – Contract price

 

  • Under Companies Act,2013

-Section 26: Matters that should be stated and the reports that should be set out in the prospectus.

 

(If not under section 26, then, he will be liable u/s 35)

-Section 35: To compensate the share holders.

Section35: Civil liabilities for any misstatements made in the prospectus.

Section 34: Criminal liabilities for using a prospectus which contains untrue statements.

(Imprisonment: Not less than 6 months which may extend to 10 years and

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Fine: Not less than the amount involved in fraud which may extend to the 3X the amount involved in fraud)

 

-If fraud in question involves public interest then, the person shall be imprisoned for not less than 3 years.

 

  • Remuneration of promoters

-Not entitled to get any remuneration unless there is a valid contract between him and company.

-Companies after registration may pay or agree to pay some remuneration to the promoters for the services rendered. In practice, a promoter is remunerated in any of the following ways:

 

  • He may sell his own property to the company after making full disclosure to an independent BOD or shareholder.
  • May take commission on shares sold.
  • May be paid a lump sum by the company.

 

#Whatever be the nature of remuneration or benefit, it must be disclosed in prospectus.

 

  • Pre -incorporation Contracts

Section 15(h) of the Specific Relief Act,1963 provides that where the promoters of a public company have made a contract before its incorporation for the purposes of the company, and if the contract is warranted by the terms of its incorporation, the company may enforce it.

 

  • Nature and Content
  • Registration/ Incorporation of a company(Section 3)

The promoters will have to get together at least seven persons in the case of a public company and two persons in the case of a private company to subscribe to the MOA.

 

  • Procedure for registration/ incorporation of a company
  • Type of company : Public or Private
  • Application for availability/reservation of name
  • Preparation of memorandum and Article of Association (Sec 4-5)
  • Preparation of other documents

-Power of Attorney

-Consent of directors

-Particulars of manager

-Affidavit by subscribers to memorandum & first directors

-Address for communication and notice of registered address

-Statutory Declaration

  • Filing of application and documents for                                    registration (Section 7)

 

  • Certificate of Incorporation {Section 7(2)}

When all the requirements have been done, the registrar of the central registration centre will enter the name of the company in the register of companies and shall certify under his hand that the company is incorporated and that the company is limited by shares/limited by guarantee/unlimited company, as the case may be.

 

He would issue certificate in the prescribed form, under his signature, certifying that the company is incorporated.

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Certificate shall contain:-

  1. Name of the Company
  2. Date of issue
  • Signature of Registrar of central registration centre with his seal.
  1. Permanent Account number of company issued by Income Tax Department.
  2. Company’s birth certificate

 

  • Allotment of corporate identity number(CIN) {Section 7(3)}

On and from the dates mentioned in the certificate of incorporation, the registrar shall allot to the company, CIN, which shall also be considered as distinct identity for a company and which shall also be included in the certificate.

 

  • Doctrine of Indoor Management

The person entering into a transaction with the company only needed to satisfy that his proposed transaction is not inconsistent with the articles and memorandum of the company. He is not bound to see the internal irregularities of the company and if there are any internal irregularities, then company will be liable as the person has acted in good faith and he did not know about the internal arrangement of the company.

 

Royal British Bank V. Turquand (1856) 6E & B 327

Directors of company were authorized by articles to borrow on bonds such sums of money as should from time to time, by a resolution of company in general meeting, be authorized to be borrowed. The directors gave a bond to S without the authority of any such resolution.

The question arose, whether the company was liable on the bond?

Held: Company was liable on the bond, as S was entitled to assume that the resolution company in general meeting had been passed.

 

EXCEPTIONS:-

  • Where the outsider had knowledge of irregularity
  • No knowledge of Articles
  • Forgery
  • Negligence
  • Others

 

  • Doctrine of Ultra Vires

A company owes its incorporation to statutory authority cannot effectively do anything beyond the powers expressly or impliedly conferred upon it by the statute or memorandum.

Any purported activity beyond such powers will be ineffective even if agreed by all the members.

 

It may however, be noted that section 3(1)(c) of the Act provides that any matter considered necessary in furtherance of the main objects can well be presumed. Thus, in case any incidental object has not been specified, it would be allowed by the principle of reasonable construction of memorandum.

 

  1. Implied Powers
  2. Powers which are not implied
  • Acquire any business similar to company’s own.
  • Entering into an agreement with other company or person for partnership or sharing profits.
  • Taking share in other company having similar objects
  • Promoting other company or helping them financially
  • A power to use funds for political purposes
  • A power to gift and make donations or contributions for charities not relating to the objects stated in memorandum.
  • A power to sell company’s undertaking.
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  1. Effects of ultra vires transactions
  • Void ab initio
  • Injunction
  • Personal Liability of Directors
  • Acquisition of property that is ultra vires
  • Directors personally liable to third parties

 

  • Doctrine of Constructive Notice

Every person dealing with the company is presumed to have read all documents and understood them in their true perspective.

Even if the party dealing with the company does not have actual notice of the contents of these documents it is presumed that he has an implied notice of them.

 

Lord Hatherley: Whether a person actually reads them or not, he is to be in the same position as if he had read them.

 

#Statutory reform of constructive notice

This doctrine is more or less is an unreal doctrine. It does not take notice of realities of business life. People know a company through its officer and not through its documents. Section 9 of the European Communities Act,1972 has abrogated this doctrine. These provisions are now incorporated in section 35 of the (english) companies Act,1985.

 

CONCLUSION:

Thus, the doctrine of constructive notice seeks to protect the company against the outsider by deeming that such an outsider had the notice of public documents of the company. However, in India, the courts with a view to protect the innocent third parties acting in good faith have not relied upon the doctrine seriously.

 

 

Author:Akanksha Chhabra,

Intern at Lawportal,

Email: akankshachhabra990@gmail.com

Author: Akanksha Chhabra,
Ideal Institute of management and technology, IV year/ Student

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