2 Registration, Incorporation And Commencement Of Business By Companies

Ms.Ankita Sangwan

 

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Introduction

 

The Companies Act, 2013 stipulates the process for registration and incorporation of companies in India for all types of companies including private and public companies. Minimum two directors and two shareholders are required for incorporating a private company 1 whereas minimum three directors and seven shareholders are required for incorporating a public company2. Minimum paid- up capital of a private company at the time of incorporation should be Rs. 1 Lakh (INR 100,000) and it should be Rs. 5 lakhs (INR 500,000) for a public company. Companies which are set up with Foreign Investment (FDI) have to be incorporated under the Companies Act, 2013 with the Registrar of Companies (ROC). Once a company is registered in India, it is guided by the Indian laws.

 

A company is formed by registering the Memorandum and Articles of Association with the Registrar of Companies of the State in which the main office of the company is to be located

 

Learning outcomes

 

 

REGISTRATION OF COMPANIES

 

Doing business in a company form of organization gives its promoters all the advantages of a corporate personality which include separate corporate existence. Besides, the promoters get many advantages for instance, tax benefits, and safe guarding the name of business etc. Another benefit of registration is receiving some legal liability protection. If you incorporate a company, you will not be held personally responsible for certain accidents and other liabilities. Consequently, you may find it easier to obtain business insurance, or attract investors, since they will know you are not personally responsible for the company’s well-being. Following the above reasons registration of a company is an important part of starting a business. Therefore, before registering a company one needs to fulfill some legal formalities for which promoters must make a decision regarding the type of company they want to start i.e a pulic company or a private company or limited or an unlimited company and accordingly prepare the documents for incorporation of the company. In this connection the Memorandum and Articles of Association (now known as Memorandum and Articles respectively) are fundamental documents to be prepared.

 

Benefits of Registration:

 

Section 3 of the Companies Act, 2013 lays down the process for forming a company. The section states that a company can be formed for any lawful purpose by seven or more persons in case of public company and two or more persons in case of private company and by one person in the case of One Person Company which is regarding as a private company by the Act by subscribing their names to a memorandum and complying with the requirements of the Act of 2013 in respect of registration. Section also states that the companies formed under sub-section (1) may be either- a company limited by shares; or a company limited by guarantee; or an unlimited company. Provided that memorandum of One Person Company shall indicate the name of the other person with his prior consent for the same for the purpose of becoming a member of the company, in the event of the subscriber’s death or his incapacity to contract. It is also laid down in the Act that a written consent should be filed with the Registrar at the time of incorporation of the One Person Company along with it memorandum and articles by the said other person nominated. It is further provided by the Act that if such other person wants to withdraw his consent he can do the same in the prescribed manner only. In case of One Person Company if some changes are brought in, in regards of change in the name of the person or any other change, then the company shall intimate this to the Registrar in the manner prescribed.4

 

The declaration must be submitted with the following annexure:5

 

Memorandum and Articles6

 

For the purpose of incorporation Memorandum and Articles the most important documents to be submitted to the ROC. Memorandum is a document that sets out the foundation of the company. It contains the objectives and the scope of activity of the company as well also defines the relationship of the company with the outside world.7

 

Articles contain the rules and regulations of the company for the management of its internal affairs. Objectives and purposes for which the company has been formed are contained in Memorandum of Association, and the rules and the regulations for achieving the objectives of the company are laid down in the Articles.

 

After the required documents have been presented to the ROC along with the required registration fees, he will give the certificate of incorporation to the company if all formalities are complied with.

 

Approval of the name by the Central Government is the first step towards the formation of a company. Registrar of the company who is authorized to do this legal formality should be in the State/Union Territory in which the company has their registered office. This approval is provided subject to certain conditions: for instance-

  • There should not be an existing company by the same name.
  • In the case of private company the last words of the name of the company should include “Private Ltd.” And in case of a public company the name of the company should include “Limited” word at the end of its name in case the company is incorporated with limited liability of its shareholders.
  • In order of preference, the application filed by the company for the allotment of the names should mention at least four suitable names to be proposed for the company.

 

Within seven days from the date of submission of the application, the ROC should inform the concerned company about the availability of names applied for is available or not. Once a name is approved, it is valid for a period of six months, within which time Memorandum and Articles together with miscellaneous documents should be filed. If one is unable to do so, an application may be made for renewal of name by paying additional fees. After obtaining the approval of name, it normally takes approximately two to three weeks to incorporate a company depending on where the company is registered.

 

Certificate of Incorporation

 

After the duly stamped Memorandum and Articles, documents and forms are filed and the filing fees are paid, the ROC examines the documents and, if required, instructs the authorized person to make necessary corrections. Thereafter, a Certificate of Incorporation is issued by the ROC which brings the company into existence; it also is “the conclusive evidence that all the requirements of this Act have been complied with in respect of registration and matters precedent and incidental thereto and the company is authorized to be registered under this Act”.9 It takes one to two weeks from the date of filing Memorandum and Articles to receive a Certificate of Incorporation.

 

In the case of Moosa Goolam Arif v. Ebrahim Goolam Ariff10, only two adult persons signed the memorandum and one of them signed as a guardian of the other five members who were all minors at the time. Lord Macnaghten in the Privy Council said: “Their Lordships will assume that the conditions of registration prescribed by the Indian Companies Act were not duly complied with; that there were no seven subscribers to the memorandum and that the Registrar ought not to have granted the certificate. But the certificate is conclusive for all purposes.”

 

Pre-Incorporation Contracts

 

Sometimes contracts are made on behalf of a company even before it is duly incorporated. But no contract can bind a company before it becomes capable of contracting by incorporation. “Two consenting parties are necessary to a contract, whereas the company, before incorporation, is a non-entity”.11A company has no status prior to incorporation. It can have no income before incorporation for tax purposes.12 Shares cannot be acquired in the name of the company before incorporation, a transfer form is liable to be rejected where the name of a proposed company is entered in the column of the transferee, was held in the case of English & Colonial Produce Co. Re13 . In order to get the benefits of a ‘corporate personality’, it is very necessary for ‘an association of persons’ to become incorporated under the Companies Act.

 

It would be a matter of inconvenience that ‘an association of persons’ cannot perform any official business operation in the name of company before its incorporation or the issue of certificate of commencement of business; they may have to make arrangement for office, place of work, workers, etc. Promoters of a company may enter into the agreements for the benefit of ‘association of persons’ or prospective company; these agreements are known as pre-incorporation contracts.

 

One might question that ‘why is company not liable, even if it is a beneficiary to contract’ or one might also question that ‘doesn’t promoter work under Principal-Agent relationship’?

Answer to such questions is simple. The company is not in legal existence at time of pre-incorporation contract. A person not in legal existence cannot be a party to contract, and ‘Privity to Contract’ doctrine excludes company from the liability. In Kelner v Baxter14, Phonogram Limited v Lane15 this position was confirmed.

 

In pure common law sense, pre-incorporation contract does not bind the company. But there are certain exceptions to this contract, and these exceptions were developed in USA, India and later in England.

 

Exceptions mentioned above are the following:

  1. Under the Specific Relief Act 1963, section 15(h) and 19(e) are the two important sections for pre-incorporation contract. Section 15 is about stranger’s right to sue if he is entitled to a benefit or has any interest under the contract, although it has certain limitations. Section 15(h) talks about the company, being a stranger to pre-incorporation contract, has the right to sue to the other contracting party. But the necessary condition is that the contract should be warranted by the terms of its incorporation. This provision clearly negates the common law doctrine which says that the company cannot ratify or adopt the pre-incorporation contract. Under this provision promoter can give his right to sue to the company. Whereas, the relevant portion of section 19(e) states that “Except as otherwise provided by this Chapter, specific performance of a contract may be enforced against, – when promoters of a company have before its incorporation, entered into a contract warranted by the terms of the incorporation, provided that the company has accepted the contract and communicated such acceptance to the other party to the contract. Therefore, so far as the company is concerned, it is neither bound by, nor can have the benefit of, a pre-incorporation contract. In Vali Pattabhirama Rao v Sri Ramanuja Ginning and Rice Factory Pvt. Ltd16 this position was accepted. S. 19(e) is not explained.
  2. Novation of contract is defined in Scarf v Jardine17 as, ‘being a contract in existence, some new contract is substituted for it either between the same parties (for that might be) or different parties, the consideration mutually being the discharge of the old contract’. In the situation of novation of contract, the company can replace the promoter from the pre-incorporation contract. But one might say that such contract would not be called pre-incorporation contract, but it should be called post-incorporation contract because novation of contract result into a new contract. In Howard v Patent Ivory Manufacturing18, the English Court accepted the novation of contract.

 

Commencement of Business19

Under the Companies Act, 1956, a private company had the right to commence its business right from the date of its incorporation.20 However, in the case of a public company, a certificate for the commencement of the business had to be obtained. For this purpose, the following additional formalities had to be complied with:

 

If a company had share capital and had issued a prospectus, then:

  • Shares up to the amount of minimum subscription must be allotted;
  • Every director must have paid to the company on each of the shares which he has taken the same amount as the public have paid on such shares;
  • No money is or may become payable to the applicants of shares or debentures for failure to apply for or to obtain permission to deal in those shares or debentures in any recognized stock exchange;
  • A statutory declaration in Form 19 signed by one director or the employee – company secretary or a company secretary in whole time practice that the above provisions have been complied with must be filed21.If a company had share capital but did not issue a prospectus, then:
  • It must file a statement in lieu of prospectus with the Registrar of Companies;
  • Every director must have paid to the company on each of the shares which he has taken the same amount as the other members have paid on such shares;
  • A statutory declaration in Form 20 signed by one director or the employee – company secretary or a company secretary in whole time practice that the above provisions have been complied with must be filed22.

 

Once the above provisions have been complied with, the Registrar of Companies grants “Certificate of Commencement of Business” after which the company can commence its activities.

 

Under the Companies Act, 2013 a company having a share capital is not entitled to commence its business or exercise borrowing powers unless firstly, a declaration is filed by a director of the company with the Registrar of the Companies (ROC) that every subscriber to the memorandum has paid the value of the shares agreed to have been taken by him and that the paid-up share capital of the company is Rs 5, 00, 000/- in case of a public company and Rs 1, 00, 000/- in case of a private company. Secondly, the company has filed with the Registrar of the Companies (ROC) a verification of its registered office. In case, no declaration is filed by a director of any company within 180 days of the incorporation of the company and the ROC has reasonable belief that the company is not carrying on business or is not in operation, he may initiate action for removal of company’s name from the register of companies.

 

Incorporation of Company under the Companies Act, 2013

 

Under the Companies Act, 1956 for incorporation all the important documents are filed with the Registrar by the Company, under 2013 Act section 7 talks about the incorporation of company, it states that the documents shall be filed by the company to the Registrar within whose jurisdiction the registered office of a company is proposed to be situated.

 

Sub-section (1) of section 7 lays down the list following documents and information which is required to be filed by the company for incorporation23:

  • – Duly signed memorandum and articles of the company by the subscribers of the memorandum in the manner prescribed.
  • – A declaration in the prescribed form by an advocate, a charted accountant, company secretary, a person named in the articles as a director, manager or secretary of the company that all the requirements have been complied with.
  • – An affidavit from each of the subscriber to the memorandum, that he is not convicted of any fraud or offence in connection with the promotion, formation or management of the company.
  • – The particulars of name, surname, residential address, nationality of every subscriber to the memorandum with an identity proof and in case of a subscriber being a body corporate, such particulars as may be prescribed
  • – The particulars of the person mentioned in the articles as the first directors of the company.

 

On the basis of documents and information filed under the sub-section (1), the Registrar shall issue a certificate of incorporation in the prescribed form, to this effect the proposed company is incorporated under this Act. Sub-section (3) of section 7 of this Act states that on and from the date mentioned in the certificate of incorporation, the Registrar shall allot to the company a corporate identity number, which will provide a distinct identity to the company and will also be mentioned in the certificate. Under the present Act of 2013 the company shall also maintain and preserve at its registered office all the documents and information filed and if any person furnishes any false information, he shall be liable for action under section 477 of the given Act. Regarding the above penal action a Tribunal may pass an order, as it may think fit, for regulation of the management of the company, or may direct to remove the name of the company from the register of the companies on being satisfied of the situation under sub-section (7)

 

After the certificate of incorporation issued, the Registrar shall allot to the company a corporate identity number. Provided that before passing any order in this regard the Tribunal should give the company a reasonable opportunity of being heard and the Tribunal shall take into consideration the transaction entered by the company, including the obligations, if any, contracted or payment of any liability.

 

Procedure for formation of a company in India:

  • Obtain directors identification number for the proposed directors of the company.
  • Obtain digital signature certificate for at least one director for the purpose of filing the forms electronically.
  • File an application for the approval of name for the company.
  • Preparing the Memorandum of Association and Articles of Association of the company.
  • Have the appropriate number of persons to subscribe to the Memorandum of the company (minimum two in case of private company and minimum seven in the case of public company).
  • Submit all the documents along with the required fees to the ROC.
  • ROC issues a receipt of certificate of incorporation.
  • In case of a public company obtain a certificate of commencement of business from ROC.
  • Introduction to the first and the most important step in forming a company – Incorporation under the Companies Act, 2013
  • Understanding the basic documents of a company which are memorandum of association and articles of association and understanding their importance in incorporating a company under the law.

 

Summary:

 

In the module, students were informed about the incorporation of companies under the Companies Cat, 2013, commencement of business by companies, documents which are required to be prepared by promoters of companies for incorporation purposes. An effort has been made to provide all aspects of incorporation including pre-incorporation contracts and comparison between provisions regarding incorporation under the Companies Act, 1956 and the Companies Act, 2013.

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References:-

 

• The Companies Act, 2013

• The Companies Act,1956

• Companies (Central Governments’) General Rules and Forms,1956

• The Specific Relief Act, 1963

• Nikhil Ranjan, Conclusiveness of Certificate of Incorporation and Companies Bill, 2009

• N K Jain, Corporate Laws- Administration and Management ( Deep&Deep Publication Pvt Ltd 2007)

• B K Sen Gupta, Company Law ( Eastern Law House, 2nd edn 1990)

• Avtar Singh, Company Law ( Eastern Book Company, 15th edn 2009)

• Andreas Cahn and David C Donald, Comparative Company Law ( Cambridge University Press 2010)

• A K Majumdar and Dr GK Kapoor, Company Law and Practice ( Taxmann Publications (P) Ltd, 16th edn 2011)

 

Web –Links:

 

• http://www.registerinindia.com/procedure-for-incorporating-a-company-in-india.html

• http://www.legalserviceindia.com/company%20law/company_formation_procedure.htm

• http://www.lawteacher.net/contract-law/essays/pre-incorporation-contracts-and-the-promoter.php

• https://www.pwc.in/en_IN/in/assets/pdfs/publications/2013/companies-act-2013-Key-highlights-and-analysis.pdf

• http://www.registerinindia.com/flow-chart.html