14b103- formation of company.pdf
TRANSCRIPT
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Presented By
Aishwarya Shetty (14B103)
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Stages in formation
Promotion stage
Promoter
Fiduciary position
Duties of promoter
Liabilities of Promoter
Promoters Remuneration
Pre-incorporation contracts
Legal position of pre-incorporation contracts
Ratification under Specific Relief Act
Provisional Contracts
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Pre-incorporation contracts Vs Provisional Contracts
Incorporation or Registration Stage
Issue of Certificate of Incorporation
Capital Subscription Stage
Commencement of Business Stage
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The Promotion Stage
The Incorporation Stage
The Capital Subscription Stage
The Commencement of Business Stage
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Discovery of an idea
Preliminary investigation of the feasibility of the idea
Assembling of business elements
Provision of necessary funds
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A person who undertakes to form a company with reference to a
given project and takes necessary steps to accomplish that purpose.
A promoter may be an individual, a partnership firm or even a
company
A promoter directs the solicitors to prepare the memorandum & other
necessary documents for filing with the Registrar, chooses a name for
the company, raises necessary funds, decides about the location of
registered office, selects the persons who would be directors and so
on
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Neither a trustee nor an agent
In law, promoter occupies a fiduciary position towards the company
to be formed
A fiduciary position signifies a position of trust and confidence and
imposes the following duties on promoter:
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Not to make secret profit
To disclose the facts:
To Board of Directors
To The whole body of persons who have been invited to become shareholders
through a prospectus
In the articles of the company
No unfair use of position
To disclose all private arrangements
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Secret Profits:
Company may rescind the contract and recover the price paid
Company may recover profits without claiming rescission
Company may sue for damages for breach of fiduciary duty
Liability for mis-statements in the prospectus
Liability for misfeasance or breach of trust [ Section 543]
Liability to public examination [Section 478]
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Expect in case of express contract to that effect, promoter has no right to claim remuneration
Paid a lumpsum either in cash or in form of shares or debentures of the company
Given commission on the purchase price of business taken over by the company
Inducted to the Board of Directors
Sell his own property to the company at an inflated price provided full disclosure is made thereof
Given an option to buy shares of company at par value when market price is higher
When remuneration paid to promoter, it must be disclosed in the prospectus if paid within 2 years preceding the date of the prospectus [ Clause 15, Part I of Schedule II]
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Contract made by promoter on behalf of the company before its
incorporation.
These agreements made as agents or trustees of the company
Before incorporation, company is a non-entity and lacks contractual
capacity
Company is not liable for the acts of promoters done before its
incoporation
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In Natal Land and Colonisation Co. vs Pauline Colliery Syndicate 1904
AC 120, a company made an agreement with B who acted on behalf
of a syndicate to give the syndicate a lease of coal mining rights.
Subsequently the syndicate was registered as a company. It claimed
performance from the company, which was refused. Held, the
syndicate cannot enforce the contract against the company as it was
not in existence at the time the contract was made.
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Not binding on the company
Not binding on other party
No ratification
Personal liability of promoters
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In Kelner vs Baxter (1886) L.R. 2 CP 174, a promoter who
represented himself as an agent of a company in relation to
pre-incorporation contracts was held to be personally
liable on such contracts
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Under Section 15(h) and Section 19(e) of the Specific Relief Act, a pre-incorporation contract can be specifically performed by or against the company provided:
The contract is made for and on behalf of the company
Such a contract is warranted by the terms of the incorporation
The company has accepted the contract and communicated its acceptance to the other party
Private Company becomes legally bound the moment it makes a fresh contract or ratifies a contract immediately after its incorporation.
A public Company becomes legally bound only after getting the certificate for commencement of business
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These are contracts made by a company after its incorporation but before
becoming entitled to commence business
According to Section 149, any contract made by a company before the date
on which it is entitled to commence business shall be provisional only and
hence, shall not be binding on the company until that date.
This leads to following consequences
If company does not get the certificate to commence business, the
provisional contract shall lapse
If company obtains the certificate to commence business, the provisional
contract shall become binding on the company. There is no need for
ratification of such a contract
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Pre-incorporation Contracts Provisional Contracts
These are made before the company
comes into existence
These are made after the company has
come into existence
Not binding on the company Become binding after the company has
received the certificate of
commencement of business
These may become binding after
ratification by the company under the
Specific Relief Act
These become binding automatically on
the company after obtaining the
certificate of commencement of business
Promoters are personally liable if such
contracts are not adopted by the
company
Those signing the provisional contracts,
on behalf of the company, are not
personally liable thereon
These are made both in the case of a
public and a private company
These arise only in case of a public
company
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Preliminary Steps:
Ascertain the availability of proposed name from the Registrar of Companies by
submitting 3 proposed names in order of priority
Prepare and get printed the Memorandum & Articles of Association and a
draft copy of the prospectus
Appoint the underwriters, bankers, solicitors, auditors and assemble the
requisite number of signatories to the Memorandum
Get the Memorandum subscribed by the requisite number of persons ( 7 & 2 in
the case of public company and private company respectively)
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Filing of Documents: The following documents, duly stamped and signed b the subscribers, shall be filed with the Registrar of Companies of the State in which the registered office of the company is to be situated: The Memorandum of Association duly signed by the subscribers [Section
33(1)(a)]
The Articles of Association, if any, duly signed by the subscribers to the memorandum [Section 33(1)(a)]
The agreement which the company proposes to make with an individual for appointment as its managing or whole-time director [Section 33(1)(c)]
The written consent of the directors to act as such and to take up qualification shares
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A statutory declaration that all the requirements of the Act in respect of registration have been compiled with. It shall be signed by
An advocate of the Supreme or High Court
An attorney or pleader entitled to appear before a High Court
A Company Secretary or a Chartered Accountant in whole time practice and engaged in the formation of the company
A person named in the Articles as director, manager or secretary of the company [Section 33(2)]
The Address of the Registered Office within 30 days of incorporation
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Scrutiny of documents: The Registrar scrutinizes the documents filed with him. If
they are found to be in order, he registers the company and issues a certificate of
incorporation.
Conclusiveness of certificate of incorporation: depends on following:
That the company is duly registered and it has fulfilled all the requirements
relating to registration
That the date borne on the certificate is the date of birth of the company
The certificate is conclusive even if it was legally impossible that the company
could have been properly registered such as when all the signatories to the
memorandum are minors. But the certificate would not validate the objects
which are illegal.
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Effect of Registration:
The company becomes a distinct legal entity from the date mentioned in the
certificate
Acquires perpetual succession
The Memorandum and Articles become binding on the members
The liability of members of a limited company becomes limited
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A public company having share capital has to fulfil following formatilities:
Where a prospectus is issued [Section 149(1)]: A public company issuing
prospectus must file the following with the registrar:
A copy of the prospectus
A statutory declaration verified by a director or secretary of the company to the effect
that:
The directors have taken up and paid for the qualification shares in cash an amount
equal to the amount payable by other subscribers on application and allotment
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The shares payable in cash have been allotted up to the amount
of minimum subscription, and
That no money has become liable to refund by reason of the
failure of the company to apply for or obtain permission of the
stock exchange to deal in its shares or debentures
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Where a prospectus is not issued: Such a company should file
following documents with the Registrar:
A statement-in-lieu of prospectus, and
A statutory declaration verified by one of the directors or secretary of the
company that every director has taken up and paid for the shares an amount
equal to what is payable on application and allotment by other subscibers
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Following additional conditions must be fulfilled:
Where the company is an existing company and wants to take up an
object other than that included in its objects clause, it must pass a
special resolution in the general meeting
A special resolution is also needed when it wants to start a business
included in the other objects clause
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On compliance with all the above formalities, the Registrar issues a certificate that
the company is entitled to commence business
Certificate is conclusive evidence that company is so entitled [Section 149(3)]
If company does not commence business within a year of its incorporation, it may
be wound up by the Tribunal [Section 433 (e)]
The company may also commence business by passing an ordinary resolution if
the approval of the Central Government has been obtained for the same