Chapter formation-of-a-company: Formation of a Company | Summary

Promotion is the first stage of company formation. It begins with the identification of a business opportunity and involves conceiving a business idea, analysing its feasibility, and taking the necessary steps to form a company. Promoters are those who conceive the idea, decide to form a company, take steps for its formation, and bear the associated risks. As per the Companies Act 2013, a promoter includes any person named in the prospectus, anyone who controls company affairs, or anyone whose directions the Board of Directors is accustomed to follow.

Key functions of promoters include: identifying a business opportunity; conducting technical, financial, and economic feasibility studies; obtaining name approval from the Registrar of Companies; fixing signatories to the Memorandum of Association; appointing professionals such as bankers and auditors; and preparing necessary documents for registration. Promoters hold a fiduciary relationship with the company and must not make secret profits. They are personally liable for pre-incorporation contracts and are not legally entitled to reimbursement of promotion expenses unless the company chooses to pay them.

Several key documents must be prepared and submitted for company registration. The Memorandum of Association (MoA) is the most important document, defining the company's objectives through five clauses: Name Clause, Registered Office Clause, Objects Clause, Liability Clause, and Capital Clause. It must be signed by at least seven members for a public company and two members for a private company.

The Articles of Association (AoA) contain rules for internal management and are subordinate to both the MoA and the Companies Act. Other required documents include the written consent of proposed directors, any agreement with the Managing Director or whole-time director, a statutory declaration of compliance, and documentary evidence of registration fee payment. Public companies may adopt Table F of the Companies Act in lieu of filing their own Articles.

The Memorandum of Association and Articles of Association differ significantly in purpose, position, and legal effect. The MoA defines the company's objectives and its relationship with the outside world, while the AoA governs the internal management of the company. The MoA is the principal document, subordinate only to the Companies Act, whereas the AoA is subsidiary to both the MoA and the Act.

Acts beyond the MoA are ultra vires and cannot be ratified even by a unanimous vote of members, making it an absolute boundary. In contrast, acts beyond the AoA can be ratified by members, provided they do not violate the MoA. While every company must file a MoA, a public limited company may adopt Table F of the Companies Act instead of filing its own AoA.

Incorporation is the second stage of company formation. After preparing the required documents, promoters submit an application to the Registrar of Companies (ROC) of the state where the company's registered office is to be situated, along with the required documents and registration fees. The Registrar examines the documents to ensure compliance with statutory requirements, though is not obligated to investigate the authenticity of every fact mentioned.

Upon satisfaction, the Registrar issues the Certificate of Incorporation, which is the birth certificate of the company. The company comes into legal existence on the date printed on this certificate. It becomes a separate legal entity with perpetual succession and the capacity to enter into valid contracts. The Certificate of Incorporation is conclusive evidence of the company's legal existence, meaning even if there were defects in registration, the certificate cannot be challenged. Both public and private companies must obtain a certificate for commencement of business within 180 days of incorporation.

Capital Subscription is the third and final stage, applicable only to public companies raising funds from the public. It begins with obtaining SEBI approval, as the regulator mandates full disclosure of all material information to protect investors. A prospectus is then filed with the ROC, which serves as an invitation to the public to subscribe for shares or debentures of the company. Bankers are appointed to receive application money, brokers to distribute forms, and underwriters may be appointed to guarantee subscription.

The Companies Act requires minimum subscription to be met before shares can be allotted. As per SEBI guidelines, this minimum is 90% of the issue size. Applications must also be made to at least one stock exchange for listing. Upon successful subscription, allotment letters are issued to successful applicants, excess money is refunded, and a Return of Allotment is filed with the ROC within 30 days. A public company not raising funds from the public must file a Statement in Lieu of Prospectus at least three days before allotment.

Preliminary contracts (also called pre-incorporation contracts) are contracts signed by promoters with third parties on behalf of the company before its incorporation. These contracts are not legally binding on the company. The company, after coming into existence, may choose to enter into fresh contracts on the same terms, but it cannot ratify a preliminary contract. Promoters remain personally liable for preliminary contracts.

Provisional contracts, on the other hand, are contracts entered into after incorporation but before the company receives its certificate to commence business. These become binding on the company once it obtains the commencement certificate. The distinction between the two types of contracts is important for understanding the legal liabilities of promoters and the company at different stages of formation.

The Companies Act 2013 introduced the concept of the One Person Company (OPC), allowing a single natural person who is an Indian citizen and resident in India to form a company. This concept encourages the corporatisation of micro businesses and entrepreneurship. The JJ Irani Expert Committee had recommended OPC formation in 2005 to provide small entrepreneurs with a simpler legal regime.

An OPC enjoys all benefits of a private limited company, including separate legal entity status, protection of personal assets from business liabilities, and perpetual succession. Key restrictions include: no person can be a member or nominee of more than one OPC; no minor can be a member or nominee; the OPC cannot carry out Non-Banking Financial Investment activities; and it cannot voluntarily convert into another type of company for two years from incorporation unless its paid-up share capital exceeds fifty lakh rupees or average annual turnover exceeds two crore rupees.

The formation of a company is a structured legal process comprising three stages: Promotion, Incorporation, and Capital Subscription. Each stage involves specific activities, documents, and regulatory compliances. Promoters play a central role in navigating these stages while bearing personal liability and fiduciary responsibilities. The Certificate of Incorporation marks the legal birth of the company, and the subsequent certificate for commencement of business enables actual operations. The introduction of the One Person Company concept reflects the evolving legal framework aimed at encouraging entrepreneurship.

From an examination perspective, this chapter is highly important as it tests students' understanding of procedural, legal, and conceptual aspects of company formation. Questions frequently appear on the functions of promoters, clauses of the MoA, distinctions between MoA and AoA, the nature of preliminary and provisional contracts, and the steps involved in capital subscription. A clear understanding of the stages and the documents involved is essential for scoring well in board examinations.