Prepared by:

Gargi Jain
Kena shah
PGPIBM(2010-2012)
Introduction
In simple words, a company can be defined as a group of persons associated
together for the purpose of carrying on a business, with a view to earn profits.
However, one must remember that companies may also be formed for the
promotion of commerce, art, science, religion or charity or any useful object
under the Companies Act. Lord Justice Lindley defines the company as a
company is an association of many persons who contribute money or money s
worth to a common stock and employ it in some trade or business and who
share a profit and loss arising there from. The common stock so contributed is
denoted in money and is the capital of the company. The people who contribute
it or to whom it belongs are members. The proportion of capital to which each
member is entitled is his share. The shares are always transferable although
the right to transfer is often more or less restricted. A company, formed and
registered under the Company Act, is regarded by law as a single person,
having specified rights and obligations. The law confers on a company a
distinct legal personality, with perpetual succession and a common seal.
Formation of Company:

The process of a company can be discussed under the following 4 broad headings:

1. Promotion stage
2. Incorporation stage
3. Capital subscription stage
4. Commencement of business stage

The first 2 stages are connected with the formation of a private company and a
public company no having any share capital. These companies can commence
business immediately on incorporation. But a public company having a share capital
has to pass through all the above mentioned four stages before it can commence
business.
(A) Promotion stage:
It is the first stage in the formation of a company. It refers to all those steps
which are taken to get a company going. Beginning with the discovery of an idea, it
goes on to include preliminary investigation of the feasibility of that idea, assembling
of business elements, and the provisions of necessary funds.
The promoter:
A promoter represents a person who undertakes to form a company with reference
to a given project and takes the necessary steps to accomplish that purpose. The
promoter may be an individual, a partnership firm or even a company. But
everybody connected with the formation of a company is not a promoter. For
instance, professional advisors, surveyors, engineers, etc. are not promoters
[Section 62 (6)]. Whether or not a person is a promoter depends on the facts of the
case. Only those who wish to form a company and take the necessary steps in that
direction may be called “promoters”.
Duties of promoter:
1. Not to make secret profit:
The promoter must not make secret profits at the expense of the company. If he
is discovered to have made any secret profit, he may be compelled to restore
them to the company.
2. To disclose the facts:
He must disclose all the facts relating to the property which he wants to sell to
the company.
3. No unfair use of position:
He must not make any unfair use of his position and avoid anything which has
the appearance of undue influence or fraud.
4. To disclose all private arrangements which he has made with a view to make
profits by promoting a company.
In case of default on the part of the promoter in fulfilling the above duties, the company
may:-

1. Rescind or cancel the contract made and if he has made profit on any related
transaction, that profit also may be recovered
2. Retain the property paying no more for it then what the promoter has paid for it
depriving him of the secret profit.
3. If these are not appropriate (e.g. cases where the property has altered in such a
manner that it is not possible to cancel the contract or where the promoter has
already received his secret profit), the company can sue him to for breach of
trust. Damages up to the difference between the market value of the property
and the contract price can be recovered from him.

A promoter may be rewarded by the company for efforts undertaken by him in forming
the company in several ways. The more common ones are :-

1. The company may to pay some remuneration for the services rendered.
2. The promoter may make profits on transactions entered by him with the company
after making full disclosure to the company and its members.
3. The promoter may sell his property for fully paid shares in the company after
making full disclosures.
4. The promoter may be given an option to buy further shares in the company.
5. The promoter may be given commission on shares sold.
6. The articles of the Company may provide for fixed sum to be paid by the
company to him. However, such provision has no legal effect and the promoter
cannot sue to enforce it but if the company makes such payment, it cannot
recover it back.

If the promoter fails to disclose the profit made by him in course of promotion or
knowingly makes a false statement in the prospectus whereby the person relying on
that statement makes a loss, he will be liable to make good the loss suffered by that
other person. The promoter is liable for untrue statements made in the prospectus.
A person who subscribes for any shares or debenture in the company on the faith of the
untrue statement contained in the prospectus can sue the promoter for the loss or
damages sustained by him as the result of such untrue statement.

(B) Incorporation by Registration:

The promoters must make a decision regarding the type of company i.e a pulic
company or a private company or an unlimited company, etc and accordingly
prepare the documents for incorporation of the company. In this connection the
Memorandum and Articles of Association (MA & AA) are crucial documents to be
prepared.

Memorandum of Association of a company:

Is the constitution or charter of the company and contains the powers of the company.
No company can be registered under the Companies Act, 1956 without the
memorandum of association. Under Section 2(28) of the Companies Act, 1956 the
memorandum means the memorandum of association of the company as originally
framed or as altered from time to time in pursuance with any of the previous companies
law or the Companies Act, 1956.

The memorandum of association should be in any of the one form specified in the
tables B, C, D and E of Schedule 1 to the Companies Act, 1956. Form in Table B is
applicable in case of companies limited by the shares, form in Table C is applicable to
the companies limited by guarantee and not having share capital, and form in Table D is
applicable to company limited by guarantee and having a share capital whereas form in
table E is applicable to unlimited companies.
Contents of Memorandum:
The memorandum of association of every company must contain the following clauses.

(A) Name clause:

the name of the company is mentioned in the name clause. A public limited company
must end with the word 'Limited' and a private limited company must end with the words
'Private Limited'. The company cannot have a name which in the opinion of the Central
Government is undesirable. A name which is identical with or the nearly resembles the
name of another company in existence will not be allowed. A company cannot use a
name which is prohibited under the Names and Emblems (Prevention of Misuse Act,
1950 or use a name suggestive of connection to government or State patronage.

(B) Domicile clause:

the state in which the registered office of company is to be situated is mentioned in this
clause. If it is not possible to state the exact location of the registered office, the
company must state it provide the exact address either on the day on which
commences to carry on its business or within 30 days from the date of incorporation of
the company, whichever is earlier. Notice in form no 18 must be given to the Registrar
of Companies within 30 days of the date of incorporation of the company. Similarly, any
change in the registered office must also be intimated in form no 18 to the Registrar of
Companies within 30 days. The registered office of the company is the official address
of the company where the statutory books and records must be normally be kept. Every
company must affix or paint its name and address of its registered office on the outside
of the every office or place at which its activities are carried on in. The name must be
written in one of the local languages and in English.

(C) Objects clause:

this clause is the most important clause of the company. It specifies the activities which
a company can carry on and which activities it cannot carry on. The company cannot
carry on any activity which is not authorized by its MA. This clause must specify :-

i. Main objects of the company to be pursued by the company on its incorporation

 ii. Objects incidental or ancillary to the attainment of the main objects
iii. Other objects of the company not included in (i) and (ii) above.

In case of the companies other than trading corporations whose objects are not
confined to one state, the states to whose territories the objects of the company extend
must be specified.

Doctrine of the ultra-virus: Any transaction which is outside the scope of the powers
specified in the objects clause of the MA and are not reasonable incidentally or
necessary to the attainment of objects is ultra-virus the company and therefore void. No
rights and liabilities on the part of the company arise out of such transactions and it is a
nullity even if every member agrees to it.

Consequences of an ultra virus transaction:-

1. The company cannot sue any person for enforcement of any of its rights.
2. No person can sue the company for enforcement of its rights.
3. The directors of the company may be held personally liable to outsiders for an
ultra virus

However, the doctrine of ultra-virus does not apply in the following cases :-

1. If an act is ultra-virus of powers the directors but intra-virus of company, the

company is liable.
2. If an act is ultra-virus the articles of the company but it is intra-virus of the
memorandum, the articles can be altered to rectify the error.
3. If an act is within the powers of the company but is irregularly done, consent of
the shareholders will validate it.
 4. Where there is ultra-virus borrowing by the company or it obtains deliver of the
property under an ultra-virus contract, then the third party has no claim against
the company on the basis of the loan but he has right to follow his money or
property if it exist as it is and obtain an injunction from the Court restraining the
company from parting with it provided that he intervenes before is money spent
on or the identity of the property is lost.
5. The lender of the money to a company under the ultra-virus contract has a right
to make director personally liable.

a. Liability clause:

A declaration that the liability of the members is limited in case of the

company limited by the shares or guarantee must be given. The MA of a
company limited by guarantee must also state that each member undertakes
to contribute to the assets of the company such amount not exceeding
specified amounts as may be required in the event of the liquidation of the
company. A declaration that the liability of the members is unlimited in case of
the unlimited companies must be given. The effect of this clause is that in a
company limited by shares, no member can be called upon to pay more than
the uncalled amount on his shares. If his shares are already fully paid up, he
has no liability towards the company.

The following are exceptions to the rule of limited liability of members:-

1. If a member agrees in writing to be bound by the alteration of MA / AA requiring

him to take more shares or increasing his liability, he shall be liable upto the
amount agreed to by him.
2. If every member agrees in writing to re-register the company as an unlimited
company and the company is re-registered as such, such members will have
unlimited liability.
3. If to the knowledge of a member, the number of shareholders has fallen below
the legal minimum, (seven in the case of a public limited company and two in
 case of a private limited company) and the company has carried on business for
more than 6 months, while the number is so reduced, the members for the time
being constituting the company would be personally liable for the debts of the
company contracted during that time.

b. Capital clause The amount of share capital with which the company is to

be registered divided into shares must be specified giving details of the
number of shares and types of shares. A company cannot issue share
capital greater than the maximum amount of share capital mentioned in
this clause without altering the memorandum.
c. Association clause A declaration by the persons for subscribing to the
Memorandum that they desire to form into a company and agree to take
the shares place against their respective name must be given by the
promoters.

Articles of Association
The Articles of Association (AA) contain the rules and regulations of the internal
management of the company. The AA is nothing but a contract between the company
and its members and also between the members themselves that they shall abide by
the rules and regulations of internal management of the company specified in the AA. It
specifies the rights and duties of the members and directors.

The provisions of the AA must not be in conflict with the provisions of the MA. In case
such a conflict arises, the MA will prevail.

Normally, every company has its own AA. However, if a company does not have its own
AA, the model AA specified in Schedule I - Table A will apply. A company may adopt
any of the model forms of AA, with or without modifications. The articles of association
should be in any of the one form specified in the tables B,C,D and E of Schedule 1 to
the Companies Act, 1956. Form in Table B is applicable in case of companies limited by
the shares, form in Table C is applicable to the companies limited by guarantee and not
having share capital, form in Table D is applicable to company limited by guarantee and
having a share capital whereas form in table E is applicable to unlimited companies.
However, a private company must have its own AA.

The important items covered by the AA include :-

1. Powers, duties, rights and liabilities of Directors

2. Powers, duties, rights and liabilities of members
3. Rules for Meetings of the Company
4. Dividends
5. Borrowing powers of the company
6. Calls on shares
7. Transfer & transmission of shares
8. Forfeiture of shares
9. Voting powers of members, etc

Alteration of articles of association: A company can alter any of the provisions of its
AA, subject to provisions of the Companies Act and subject to the conditions contained
in the Memorandum of association of the company. A company, by special resolution at
a general meeting of members, alters its articles provided that such alteration does not
have the effect of converting a public limited company into a private company unless it
has been approved by the Central Government.

The articles must be printed, divided into paragraphs and numbered consequently and
must be signed by each subscriber to the Memorandum of Association who shall add
his address, description and occupation in presence of at least one witness who must
attest the signature and likewise add his address, description and occupation. The
articles of association of the company when registered bind the company and the
members thereof to the same extent as if it was signed by the company and by each
member.
Registration of the Company
once the documents have been prepared, vetted, stamped and signed, they must be
filed with the Registrar of Companies for incorporating the Company. The following
documents must be filed in this connection:-

1. The MA & AA
2. An agreement, if any, which the company proposes to enter into with any
individual for appointment as its managing director or whole-time director or
manager.
3. A statutory declaration in Form 1 by an advocate, attorney or pleader entitled to
appear before the High Court or a company secretary or Chartered Accountant in
whole - time practice in India who is engaged in the formation of the company or
by a person who is named as a director or manager or secretary of the company
that the requirements of the Companies Act have been complied with in respect
of the registration of the company and matters precedent and incidental thereto.

4. In addition to the above, in case of a public company, the following documents

must also be filed :-

i. Written consent of directors in Form 29 to agree to act as directors

ii. The complete address of the registered office of the company in Form 18
iii. Details of the directors, managing director and manager of the company in
Form 32.

Certificate of Incorporation
once all the above documents have been filed and they are found to be in order, the
Registrar of Companies will issue Certificate of Incorporation of the Company. This
document is the birth certificate of the company and is proof of the existence of the
company. Once, this certificate is issued, the company cannot cease its existence
unless it is dissolved by order of the Court.
IV. Commencement of Business:
A private company or a company having no share capital can commence its business
immediately after it has been incorporated. However, other companies can commence
their activities only after they have obtained Certificate of Commencement of Business.
For this purpose, the following additional formalities have to be complied with :-

1. If a company has share capital and has issued a prospectus, then :-

a. Shares up to the amount of minimum subscription must be allotted

b. Every director has paid to the company on each of the shares which he
has taken the same amount as the public have paid on such shares
c. 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.
d. 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 filed

2. If a company has share capital but has not issued a prospectus, then:-

a. It must file a statement in lieu of prospectus with the Registrar of

Companies
b. Every director has 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
c. 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 filed
3. 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.
References: