"Promotion and Incorporation" of Companies
Key Points:
1.Meaning of Promotion.
2. Definition of Promotion.
3. Meaning of Promoter.
4. Definition of Promoter.
5. Who are Promoters?
6. Types of Promoters.
7. Functions or Duties of a Promoter.
8. Rights of Promoters.
9. Liability of Promoters.
10. When the liability of Promoters Commences?
11. Preliminary Contract.
12. Legal Position.
13. Meaning of Incorporation.
14. Process of Incorporation.
15. Certificate of Incorporation.
16. Effects of Incorporation.
17. Commencement of business: section (11).
Link : https://smckk14.blogspot.com/2023/07/prevention-of-oppression-and.html
Formation of Companies:
Company is an artificial person created by law. So it
cannot be created instantly. It requires various legal formalities which is a
long process.
From an idea to estimate a company to commencement of
business, there are three steps -
(i) Promotion, (ii) Incorporation and (iii) Commencement.
A private company requires first and second steps only
to commence business. While the public company has to follow all three steps to
commence of business.
1.Meaning of Promotion:
(Dictionary meaning Film promotion, Job promotion)
Promotion means 'start'. This is the first step
towards formation of a company.
Idea - Collection of resources with abilities - Experts
etc.
Promotion is process in which the journey of formation
of a company starts with an Idea and includes all the formalities /works till
the company is formed in real.
2. Definition of Promotion:
According to Professor ES Mead - 'Promotion involves four
elements - Discovery, investigation, assembling and financing'.
According to CW Gerstenberg - 'Promotion maybe defined
as the discovery of business opportunities and the subsequent organisation of
funds, property and managerial ability into a business concern for the purpose of
making profits therefrom'.
3. Meaning of Promoter:
Promoter means a person, partner, company or any group
of a persons who do the work of promotion. Promoter is a person who generates
the idea of formation of a company in his mind and take necessary steps to
convert the idea into reality. He investigates about business, forms of a
company according to a fixed plan, assembles necessary resources and performs preliminary
expenses. He takes the complete risk because if company gets failed, he would
have to bear all the losses.
4. Definition of Promoter:
U/s 2 (69): Promoter means a 'person' -
(i). Who has been named as such in a prospectus or is
identified by the company in the annual return referred to in section (92). or
(ii) Who has control over the affairs of the company
directly or indirectly whether as a shareholder, director or otherwise, or
(iii) In accordance with whose advice, directions or
instructions the Board of Directors of the company is accustomed to act.
Provided that nothing in the sub clause (c) shall
apply to a person who is acting merely in a professional capacity.
According to Francis Palmar - 'Promoter means a person
who originates a scheme for the formation of a company, has the memorandum and
articles get prepared, get them registered, and appoints the first directors,
settles the terms of preliminary contract and prospectus, if any, and make
arrangements for an advertising and circulating of the prospectus and placing
the capital.
5. Who are Promoters?
A promoter does the work of formation and
incorporation of the company and is responsible as a promoter under provisions
of Companies Act. It is not mandatory for a promoter that he should take part
directly or completely in promotion of company.
Advocates, Chartered Accountant, Legal Experts and
Accountants are not promoters because they do not take part in the process.
(i) Promoters Need not be a Person -
Not necessary that a person, or group of persons a firm,
incorporation, originations maybe promoters. At present, generally companies
perform the work of promoter.
(ii) Need not be a Partner in Proposed Company –
He /they can receive remuneration but in practice
generally the promoters participate in the company by accepting the post of
managerial post or director.
(iii) Being a Promoter Depend upon Facts –
Any person is a promoter of a company or not, is a
matter of fact. In each case, by reviewing the circumstances, it is decided. If
a person gets Incorporation of company as a chief person or assists in promotion,
he cannot get rid of responsibility that the works had been done by his
representatives. This is to be noted that person doing the work of promotion in
the capacity of a professional cannot be called promoters. e.g. lawyer, printer
and publisher of a prospectus, accountant, chartered accountant, engineers. One
who assists in promotion only, can be promoter.
6. Types of Promoters:
(i) Professional Promoters -
They promote (establish) a company and handover to the
shareholders. there are many professional Promoter in India to promote a
company.
(ii) Occasional Promoters -
Their main profession is not to promote a company but
other business. sometimes they promote a company. e.g. Engineer, Architect, Lawyer
etc.
(iii) Financial Promoters -
Some financial companies take up the work of promotion
depending on situation of the market. They do so to earn financial profits and
provide financial assistance too.
(iv) Technical Promoters.
7. Functions or Duties of a Promoter:
(i) Idea in mind.
(ii) Thinking about initial problems - Place of
business, Labour, Raw materials, Power, Market etc.
(iii) Determining deciding Name, Objects and Capital
and Place of business.
(iv) Finding the signatories of MOA - Private minimum
2, public 7.
(v) Appointment of first Directors.
(vi) Appointment of Legal advisors, Bankers, Auditors
etc.
(vii) Preparing important documents.
(viii) Payment of preliminary expenses.
(ix) Contract with underwriters.
(x) Issue of prospectus - Prepare printing and issuing.
(xi) Obtaining license - If needed.
(xii) Application to Stock Exchange.
(xiii) Obtaining Certificate of Incorporation.
(xiv) Obtaining Certificate of Commencement of Business.
If promotion of a company, is to be performed by purchasing
any existing business, then dealing with buyers of Assets and selling of assets
with mutual agreement.
8. Rights of Promoters:
(i) Right to Receive Preliminary Expenses -
Expenses incurred in connection with promotion are
called preliminary expenses. e.g. - Preparation of MOA and AOA, Advertisement,
Fees to Legal advisor, Primary investigation etc. They can get back the amount
of preliminary expenses under AOA of company by submitting necessary documents
but cannot file suit against the company because (i) There was existence of the
company before incorporation, (ii) In case of nonexistence of the company,
there cannot be any contract /agreement between company and promoter (s), (iii)
If there is no contract, no liability of payment arises.
(ii) Right to Receive Proportionate Amount from Co-Promoters
–
If due to any misstatement given in prospectus, anyone
of the promoter has to indemnify, he can recover the proportionate amount from
co-promoters because promoters have joint and separate liability towards
company.
(iii) Rights to Receive Documents -
Promoters are allotted to receive the amount spent by
them on incorporation and formation of the company, but in this regard, they
cannot file a Suit against the company as long as there is such a contract
between them and company after formation of the company. They can receive
remuneration, through - (i) Commission on purchase price of business or assets (ii)
Profit on assets (iii) Fixed amount (iv) Allotment of shares and debentures.
9. Liability of Promoters:
(i) To Disclose Secret Profits -
Promoters have fiduciary relationship with company. So
it is expected not to earn any secret profits. If they have earned, it has to
be disclosed and returned to the company with proper detail. If they do not do
so and company comes to know, the company can recover the Secret profit from
them.
(ii) Liability in Purchase of Property -
If promoters induce the company to purchase any
property or purchases property from the money of company, it is necessary for
them to disclose important facts to the company. If any property is purchase
without disclosing important facts and details and company bears any loss due
to it, the promoters will have to reimburse the loss.
(iii) Liability for Default in Prospectus -
If there is only statutory error in prospectus due to
carelessness of promoters, the promoters will be liable to shareholders.
(iv) Liability for Misrepresentation or Fraud in Prospectus
- To shareholders.
(v) Liability in case of Death - His assets are liable
for his work done.
(vi) Liability in case of Insolvency - Amount of
liability can be recovered from assets.
(vii) Liability for works done before Incorporation -
Personally liability for preliminary works. if after
incorporation, the company approves the works of promoters, they are released
from their liability.
(viii) Liability on report of official liquidator -
If at the time of liquidation of company, the official
liquidator submits report to the court, the promoters have done fraud in
promotion, the court may order for public enquiry. If fraud guilty, they will be
liable.
(ix) Liability for Breach of duty - In case of loss,
liable
(x) Liability in case of promotion - Liability for all
the works.
(xi) Liability for offence -
If they violate the provisions of Companies Act, 2013,
they will be liable financially and punishable offence. e.g. misrepresentation or
fraud in prospectus, maybe fined or imprisoned or both.
10. When the liability of Promoters Commences?
Liabilities starts as and when the works of promotion
gets started. but to be noted that this liability arises only when the company
is Incorporated.
11. Preliminary Contract:
These are the contracts which are done by on behalf of
company before Incorporation.
12. Legal Position –
Promoters are personally liable for preliminary
contract. A promoter is neither an agent nor a Trustee of a company. He acts in
a fiduciary position towards the company. He takes steps for the formation of
the company and incurs the preliminary expenses for incorporation of company
like registration expenses, payment of stamp duty, professional fees etc. The
persons with whom the preliminary contract were made cannot file a suit against
the company because at the time of making contract, there was no existence of
the company. Such contract cannot even be rectified because nobody can rectify
that contract. Which were done before coming into existence. If the company
after its registration decides to accept the contract made by promoters with
vendors, then it will make a fresh contract directly. Thereafter, promoters
will be relieved from their liability and company will be liable for that
contract. This new contract with company will eliminate the old contract done
with promoters.
Second stage
Incorporation of company: under section (7):
13. Meaning of Incorporation:
Registration of a company under section 2 (20), of
Companies Act is called Incorporation. Legal existence of a company comes after
incorporation. A company is treated as an artificial person only after
incorporation and its existence becomes separate from its members.
14. Process of Incorporation:
(1) Preliminary process:
(i) Determining name of company -
First decide then confirm with ROC about availability.
For this an application with prescribed fees is send to ROC. If the proposed
name is similar to the name (s) of any existing company, ROC rejects. Name
should not be objectionable as per Central Government. After scrutiny, ROC send
reply within 7 days. After getting approval, company must be incorporated
within 6 months. If not done so, that name maybe allotted to other company by
ROC.
(ii) Determining place of registered office - Name of
state.
(iii) Preparing agreements.
(iv) Preparing MOA and AOA.
(v) Appointment of experts – Advocate, Engineer,
Charted Accountant, Agents, Underwriters, Financial Advisor etc.
(2) Submitting the document to the ROC –
An application form should be annexed with following
documents –
(i) MOA or Memorandum of Association –
This is the most important document of the company
also known as constitution of the company. Every company has to prepare it and
has to submit in ROC office. In MOA name of company, place of registered office,
main and incidental object, liability of members, capital are mentioned. in
case of public company, signature minimum of 7 persons and in case of private
company signature of minimum 2 done in MOA. It is printed, divided into
paragraphs, serially number and signed by members. Stamp of required value is
must. Value of stamp vary from state to states.
(ii) AOA or Article of Association –
In AOA, rules for systematic operations of the
business, to obtain the objectives of MOA are mentioned. It is also signed by
those persons who have signed in MOA. To be noted that preparation of AOA in
all types of the companies and submitting to the ROC is not compulsory. If a
company limited by shares does not prepare its AOA then rules of schedule ‘F’
will be applicable on the company. At the time of submitting MOA to ROC, if AOA
has not been made, it should be marked with ‘registered without articles’. Making
and submission of AOA is compulsory for private company, unlimited company and
companies Limited with guarantee.
(iii) Contract Relating to Appointment of Managerial Personnel
–
If the company resolves to appoint a person as
Managing Director, Whole Time Director or Manager, contract of appointment must
be presented before ROC.
(iv) List of Directors –
In this list, names, addresses and other details of
those person are to be given who are ready to become a director in the company.
This is not compulsory for a private company. In case of public company, there
must be particulars of minimum 3 persons.
(v) Written Consent of Directors –
Must for public company but not must for private
company.
(vi) Notice of Registered Office –
Along with other documents, information about
registered office is also sent. This information maybe send within 30 days of
Incorporation.
(vii) Prescribed Fee –
Prescribed amount of registration fees should also be
sent. This fees is based on capital of the company. Fees are given in 2013. The
fees is deposited into RBI government account. In addition to registration fees,
filing fees is also charged.
(3) Verification of Documents –
(a) Issue of receipt of receiving the document and
registration fees.
(b) Verification of MOA and AOA –
(i) Name of company is appropriate or not.
(ii) Objectives of MOA should not be illegal and against
public policy.
(iii) Signatures on MOA and AOA. In case of company
with share capital, each signatory must take at least one share. Signs of signatories
must be authenticated by such person who is not member of company.
(c) Verification of a document.
(d) Return of document in case of default.
(4) Issue of Certificate of Incorporation –
When Registrar is satisfied with all the documents
submitted for incorporation, he incorporates the company and issues a
certificate of incorporation. In this regard, following provisions exist –
(i) Incorporation cannot be denied by ROC after
completion of all conditions.
(ii) Writ petition can be filed on refusal by ROC.
(iii) Registration - Issue of Certificate of Incorporation.
15. Certificate of Incorporation:
After registration the ROC issues a certificate under
his signature and official seal that the company has been incorporated and (in
case of limited liability Company) it is a company with limited liability. This
certificate is known as "Certificate of Incorporation".
Following points are given in certificates – (i) Full
name of company (ii) Liabilities of members (iii) Date of issue of certificates
(iv) Amount of stamp duty (v) Official seal of ROC and (vi) Signature of ROC.
16. Effects of Incorporation:
(i) Company becomes an incorporated organisation.
(ii) Date of company coming into existence is the date
of issuance of certificate of Incorporation.
(iii) Contract between company and its members through
MOA and AOA.
(iv) Separate legal entity.
(v) Pre Incorporation Contract –
Company is not bound to accept pre incorporation
contracts and if they are accepted, there must be fresh /new contract.
(vi) Perpetual Existence –
After Incorporation, the company becomes of permanent
existence and it is not affected by death, insanity or insolvency of any member.
(vii) No Dispute in Relation of Existence –
After incorporation, no one can challenge the
existence of it in the court.
(viii) Effects on Creditors –
After incorporation, creditor can file suit against
company to recover their money.
(ix) Funds payable by members is considered to be loan
of company –
After incorporation, under the provisions of MOA and
AOA, any amount payable by members is treated as loan of the company.
(x) Incorporation will not be void due to Irregularity
of Pre Incorporation –
If after incorporation, it comes to the knowledge that
there were some discrepancies in the process of incorporation, in such a case
incorporation would not be void. Certificate of incorporation is a conclusive
prove that incorporation is valid.
Once the certificate of incorporation is issued, it
cannot be declared invalid. But under provisions of Companies Act, company may
get liquidated.
Stage 3
Commencement of business: section (11)
17. Commencement of business: section (11):
(i) Any company with share capital shall not exercise
the power of purchase of business or borrowing powers, until –
(a) One director shall file a declaration to ROC that
every subscriber of MOA has paid the amount of shares taken by them and in case
of public company paid up share capital, is not less than ₹ 5 lakhs and in case
of private company is not less than ₹ 1 lakhs.
(b) The proof of registered office has been submitted
to ROC.
(ii) If any violation is made in compliance to this
section, the company shall be punishable with penalty of up to ₹ 5000 and every
officer shall be punished at the rate ₹ 1000 per day, till the default continues.
(iii) If after incorporation within 180 days, the declaration is not filed to registrar and the registrar comes to know that the company is not commencing its business, the registrar may initiate the procedure to eliminate the name of company from the register of company.
