FORMATION OF A COMPANY

ABSTRACT

A creating modern world requires a legal form of possession that would give limited liability to the proprietors and interminable life for the business. The solution is forming a company. A company is an artificial individual being made by the law that has an existence separate from its owners. This article intends to understand the formation of a company – a brief analysis of different stages of formation of company, i.e. the promotion stage, registration stage and capital subscription stage. This research paper also deals with the preliminary contracts, and important documents to get a company registered (MoA, AoA etc.) and Certificate of Incorporation. At the end of this article, the reader will have a thorough understanding of the pre-requisites of formation of a company.

INTRODUCTION

The Companies Act, 2013 is an act passed by the Parliament to consolidate and revise the laws related to companies and extend to whole of India. According to Section 2(20) of Companies Act, 2013, “A company incorporated under the companies Act, 2013 or any previous company law.” Therefore, a company has been defined as “an incorporated association which is an artificial person, having a separate legal entity with a perpetual legal succession, a common seal and a common capital compromised of transferable shares and limited liability.”

STAGES OF FORMATION OF A COMPANY

The important stages in formation of company are:

  1. PROMOTION STAGE

The first stage in formation of company is promotion. No business endeavor can appear all alone. It is the outcome of the individual or group efforts that a business comes into existence successfully. Promotion begins with the conceptualization of the birth of an organization and assurance of the reason for which it is to be framed. The persons who devise the idea of a company and translate that idea into action are the promoters of the company. No legal status has been given to the promoters in the Company Law. Since it is a non-entity before incorporation, a promoter is neither an agent nor a trustee. He stands in a fiduciary position. 

The different types of promoters in business are Professional Promoters, Occasional Promoters, Financial Promoters and Managing Agents as Promoters (now abolished in India).

The fundamental obligations of the promoters towards the company is: he should not make any secret profit, for example benefits made without unveiling them to the organization and its individuals, out of promotion of the organization. Likewise, the promoter must make complete disclosure of all the applicable realities to the organization and its individuals including benefit made by him in transaction with the organization. In case the promoter neglects to perform his obligation, the organization may repeal the agreement made, retain the property paying no more for it or sue him for breach of trust.

PRELIMINARY CONTRACTS

The promoters come into various contracts with third parties during the promotion of a company. These contracts are entered into before the incorporation of the company and thus, the company can neither sue nor be sued on the basis of such contracts. Promoters remain subject for every single such agreement except if another agreement on indistinguishable terms from old one is made after the incorporation. As provided under the provisions of the Specific Relief Act, 1963, “specific performance of such contracts can be enforced by other parties if such contracts are warranted by the terms of incorporation of the company.”

REGISTRATION STAGE

The second stage in formation of company is the registration stage. A company comes into existence when it is registered under the Companies Act, 2013 and the Registrar of Companies has provided a Certificate of Incorporation.

The important documents required to get a company registered are:

  • Memorandum of Association: It is a document that defines the constitution and scope of powers of the company. No company can be registered under the Companies Act without this document. According to Section 2(56) of the Companies Act, 2013, “memorandum means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act.” As per Section 4 of the Companies Act, 2013, the Memorandum of Association shall contain the Name Clause, Domicile Clause, Object Clause, Liability Clause and Capital Clause.
  • Article of Association: According to Section 2(5) of the Companies Act, 2013, “article 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.” Section 5 of the Companies Act, 2013 deals with the AoA. The AoA contains the regulations for management of the company and it cannot prevent the company from including additional matters which are necessary for its management.
  • List of Directors: A listing of directors with their names, address and occupation is to be arranged and recorded with the Registrar of Companies.
  • Written Consent of the Directors: A written agreement of all the directors along with an undertaking that they have agreed to take the qualification shares and are ready to pay for it is to be filed with the Registrar of Companies.
  • Notice of the Address of the Registered Office: Notice of the address of the company’s registered office is to be given within 30 days after the date of incorporation.
  • Statutory Declaration: A legal presentation by any advocate of Supreme Court or High Court or any lawyer qualified to show up before a High Court or a practicing CA in India or an individual demonstrated as Director, Managing Executive, Secretary or Administrator of the organization mentioning that the necessities of the Act have been agreed to, will be  documented with the Registrar of Companies.

AVAILABILITY OF COMPANY NAME

The first step that lies while incorporating a company is the appropriate selection of a company name for its easy identification. In case of a public company, its name should end with ‘Limited’ and for private company, it should end with ‘Private Limited’. In order to check whether the selected name is available for adoption, an application needs to be written to the Registrar of Companies and Rs.500 is to be paid along with the application. Once the legal documentation formalities are fulfilled within the period of three months, the Registrar allows the company to adopt the name given.

  • CAPITAL SUBSCRIPTION STAGE

A privately owned business or a public organization not having share capital can start business expeditiously on its incorporation. ‘Capital Subscription Stage’ and ‘Commencement of Business Stage’ are pertinent only for the public company that offers shares. In order to obtain necessary capital, a meeting of Board of Directors assembles for the appointment of Secretary, Bankers, Solicitors, for adoption of prospectus and underwriting contract.

CERTIFICATE OF INCORPORATION

On the registration of MoA, AoA and other documents, the Registrar of Companies will issue a ‘Certificate of Incorporation’, which is an evidence of the way that organization is joined and properly enlisted, the terms of MoA are within the law and all requisites of the Companies Act have been complied with. With the issue of this certificate, the company takes birth with a separate legal entity.

REFERENCES

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s