Companies Act - Formation of Company & Promotion

FORMATION AND
INCORPORATION OF A
COMPANY
FORMATION OF A COMPANY
PROMOTION  (Role of Promoter)
 SPICe Performa  (Section 3 of the Companies Act,

 Conclusiveness of the Certificate INCORPORATION/ 2013 – Formation of a Company)
 (Section 9 of the Companies Act,
of Incorporation REGISTRATION 2013 – Effects of Registration)
CAPITAL SUBSCRIPTION
 (Section 10A of the Companies

COMMENCEMENT Act, 2013 – Commencement of
Business)
PROMOTION
 It is the first stage of formation and means to conceive and idea of
forming a company and taking all necessary steps, in this regard, namely
organising funds, property and managerial ability.
 The person who discovers business opportunities and takes the above
mentioned steps is called a ‘PROMOTER’.
PROMOTER
A promoter is a person who undertakes to form a company with reference to

a given project and set it going and takes the necessary steps to accomplish
that purpose.
Definition of PROMOTER under
Companies Act, 2013
Section 2(69): Promoter means a person—
(a) who has been named as such in a prospectus or is identified by the
company in the annual return; or
(b) who has CONTROL over the affairs of the company, “directly” or
“indirectly” whether as a shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board
of Directors of the company is accustomed to act
Provided that nothing in sub-clause (c) shall apply to a person who is acting
merely in a professional capacity, e.g. Company Secretary, Chartered
Accountants, Lawyers, and even Merchant Bankers & Lead Managers etc.
LEGAL POSITION OF A PROMOTER
A promoter is neither an agent of, nor a trustee for, the company because it is not
in existence. But he occupies a fiduciary position in relation to the company
and therefore requires to make full disclosure of the relevant facts,
including any profit made by him.
Fiduciary Duty:
 Buying Assets for the company – Land, Machinery etc.
 Elects 1st Directors and Auditors (if necessary) of the Company.
 Files all Financial Documents necessary for incorporating the company.
 Prepares the MOA & AOA of the company
 Prepares the Prospectus for the company. (in case if the company intends to
list)
DUTIES OF A PROMOTER
(Most Important)
 NOT TO MAKE “SECRET PROFITS” –

 As a result of the non-disclosure or insufficient disclosure by a promoter, any benefit accrues to
such promoter either directly or indirectly, the promoter shall be liable to compensate the
company to the extent of the benefit received by him.
 The promoters should not make a secret profit from the company.
 He should not make any secret profit at the expense of the company he promotes, without the
knowledge and consent of the company and if he does so, the company can compel him to account
for it.
Note -
The law does not prohibit making of a profit by the promoters or paying any remuneration to promoters.
What the law prohibits is making of secret profit by promoters. In other words, a promoter can make
profit in respect of any transaction with the company, only if he makes a full and fair disclosure of such
profit.
DISCLOSURE TO WHOM ?
A pertinent question arises that such profits should be declared to whom and how. In
this regard it may be submitted that such disclosures of personal profits may be made
to following:
i. Independent Board of Directors (Independent – “Non-Biased”), or
ii. Disclosure in Articles of association (AOA), or
iii. Disclosure in Prospectus – to the prospective shareholders or debt holders
(prospectus is issued in case of issue of any form of security – equity or debt), or
iv. To the existing Shareholders
 SELLING HIS PROPERTY WITHOUT DISCLOSURE –
A promoter is not allowed to derive a profit from the sale of his own property to the company unless all
material facts are disclosed. If a promoter contracts to sell his own property to the company without making a
full disclosure, the company may either repudiate the sale or affirm the contract and recover the profit made
out of it by the promoter. Either way the dishonest promoter is deprived of his advantage.
EMILE ERLANGER vs. NEW PHOSPHATE CO. LTD.

EMILE ERLANGER vs. NEW PHOSPHATE CO. LTD.
Facts:
Erlanger, was a French banker who, along with two other people, bought the lease of an
island enriched in phosphate for the purpose of mining of the same at £55,000. He then
established New Erlanger Phosphate Co (Phosphate), whose objective was to purchase the
lease of the island and work/conduct the mining business. He appointed 5 directors for
controlling the management of the company. When two directors were abroad the other
three directors who were the puppet of Erlanger, ratified the sale of the lease and thereby
purchased the island from Erlanger for £110,000. The company issued prospectus that
disclosed the purchase amount of £110,000, but remained silent on the part of profit made
by Erlanger in the role of promoter. Many people invested in Phosphate due to Erlanger’s
skills at promotion. Eventually, the investors realised that Erlanger had sold the lease to
the company for double the price he had bought it for, and a case was filed against
Erlanger for non-disclosure in prospectus and also on account of secret profit made by
him.
JUDGMENT:
 The court held that the relationship between a promoter and a newly formed company
attracts a fiduciary relationship, wherein a promoter owes duties of good faith and
honesty to the company and if the promoter breaches any duty to the company by
failing to disclose to the company conflicting interests, would be held liable
 The court held that a promoter is not prevented from selling his own property to the
company but when he does so, he is bound to take care that he sells it to the company
through the medium of board of directors who can exercise independent and intelligent
judgement on the transaction and the promoters in no case shall make secret profits in
the name of the company,
LIABILITY OF THE PROMOTERS
 Incorporation of company by furnishing false information

 For omission in the prospectus, about the matters to be stated and
information to be given in the prospectus.
 Criminal liability for mis-statement in the prospectus.
 Civil liability for mis-statement in prospectus.
 Punishment for fraudulently inducing persons to invest money.
 For non – disclosure of secret profit.
 Failure to cooperate with Company Liquidator during winding up
REMUNERATION OF PROMOTER
 A promoter must be remunerated for the initiative and effort he puts into
launching the enterprise as a going concern.
 However, the promoter has no right to get compensated from the company for
his services in promoting the company unless there is a contract to that effect.
The company may pay the promoter in the following ways:
1. Commission on shares sold.
2. An option to buy further shares in co.
3. A ‘Lump-sum’ for the service rendered.
4. The profit in the transactions of the company which are disclosed by the
promoter can be considered as remuneration.
LEGAL STATUS OF CONTRACTS
Promoter
Promotion
Pre-Incorporation Contracts
Incorporation
Provisional Contracts/Post-Incorporation
Contracts
Commencement
COMPANY
No contract can bind a company before its incorporation because by that time the
company is not in existence.
However, the situation will differ once the company (private or public) receives the
certificate of commencement. (As per Sec10 A, Companies (Amendment) Ordinance,
2019.)
The contracts which the promoters enter into for the company may be for
Before Incorporation i.e. Pre-Incorporation Contracts: Not legally binding upon the
company, as before incorporation the company remains a non legal entity therefore
cannot enter into a contract.
Post- Incorporation contracts: Not binding on the company until it is entitle to
commence business, becomes binding on the company from the date it is entitled to
commence the business i.e. only when the company receives the Certificate of
commencement.
REGISTRATION &
INCORPORATION OF A COMPANY
Formation of a Company
• Section 3 of the Companies Act: Formation of company –
A company may be formed for any lawful purpose by—
 seven or more persons, where the company to be formed is to be a public company;
 two or more persons, where the company to be formed is to be a private company; or
 one person, where the company to be formed is to be One Person Company that is to say, a
private company,
by subscribing their names to the memorandum of association (MOA) and complying with the
requirements of the Companies Act in respect of registration.
PROCESS OF INCORPORATION OF A COMPANY
OBTAIN THE DIGITAL SIGNATURE CERTIFICATE (DSC) FOR THE PROPOSED DIRECTORS OF THE
COMPANY
OBTAIN DIRECTOR IDENTIFICATION NUMBER (DIN) FOR THE PROPOSED DIRECTORS
SELECT SUITABLE COMPANY NAME, AND MAKE AN APPLICATION TO THE MINISTRY OF CORPORATE
AFFAIRS (MCA) FOR THE AVAILABILITY OF THE NAME.
DRAFT THE MEMORANDUM OF ASSOCIATION (MOA) & ARTICLES OF ASSOCIATION (AOA) FOR THE
COMPANY.
SIGN & FILE MOA & AOA, AS THE CO.’S PROMOTER ALONG WITH THE DIRECTORS, TO THE
REGISTRAR OF COMPANIES – NOW DONE ELECTRONICALLY
PAYMENT OF REQUISITE FEE TO THE MINISTRY OF CORPORATE AFFAIRS (MCA) AND ALSO THE STAMP
DUTY
SCRUTINY OF APPLICATION/ DOCUMENTS BY THE REGISTRAR OF COMPANIES (ROC)
RECEIPT OF CERTIFICATE OF REGISTRATION/INCORPORATION FROM THE ROC

SIMPLIFIED PROFORMA FOR INCORPORATING COMPANY
ELECTRONICALLY (SPICe) (FOR BASIC INFORMATION)
SIMPLIFIED PROFORMA FOR INCORPORATING COMPANY
ELECTRONICALLY (SPICe)
EFFECT OF REGISTRATION
 Section 9 of the Companies Act: Effect of registration.—

From the date of incorporation mentioned in the certificate of incorporation:
 Such subscribers to the memorandum (MOA) and all other persons, from time to time, will
become the members/shareholders of the company,
 The Company shall become a body corporate by the name contained in the memorandum (MOA),
i.e. the Company, now, will be capable of exercising all the functions of an incorporated
company;
 It will have perpetual succession
 The Co. will have the power to acquire, hold and dispose of property, both movable and
immovable, tangible and intangible,
 It will have the right to contract and
 It, now can sue and be sued, by the said name.
The Certificate of incorporation as per Section 34 & 35 of the Companies Act is considered as the CONCLUSIVE
EVIDENCE - that the company has complied with all the requirements, in respect of registration, and that the company has
come into existence.
However, as per Section 7(7) of the Companies Act, 2013, the Tribunal/Courts can pass a Winding Up order against the
company after the Certificate of Incorporation has been received, if it is proved that the company had been incorporated by
furnishing false information or suppression of material facts or was incorporated by any fraudulent action.

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FORMATION AND

PROMOTION  (Role of Promoter)

 SPICe Performa  (Section 3 of the Companies Act,

 (Section 10A of the Companies

A promoter is a person who undertakes to form a company with reference to

 NOT TO MAKE “SECRET PROFITS” –

EMILE ERLANGER vs. NEW PHOSPHATE CO. LTD.

 Incorporation of company by furnishing false information

OBTAIN DIRECTOR IDENTIFICATION NUMBER (DIN) FOR THE PROPOSED DIRECTORS

SCRUTINY OF APPLICATION/ DOCUMENTS BY THE REGISTRAR OF COMPANIES (ROC)

RECEIPT OF CERTIFICATE OF REGISTRATION/INCORPORATION FROM THE ROC

 Section 9 of the Companies Act: Effect of registration.—

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