Formation of company

 

The complete process of formation of a company may be divided into four stages namely:

a) Promotion.

b) Registration/Incorporation.

c) Floatation/Raising of Capital.

d) Commencement of Business.

 

Promotion

Promotion means the preliminary steps taken for the purpose of registration and floatation of the company. Gerstenberg has defined the term promotion as “the discovery of business opportunities and the subsequent organization of fund, property and managerial ability into a business concern for the purpose of making profits therefrom”. Persons who perform the task of promotion are called promoters. The word ‘promoter’ has not been defined in the Act, although this term has been used in various sections of the Act.

Justice Cockburn described a promoter as “one who under takes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose”.18 L.J. Bowen observed that the term promoter is “a term not of law but of business, usefully summing up in a single word-promotion, a number of business operations familiar to the commercial world by which a company is brought into existence”.

 

Registration/Incorporation of Company

The promoter of the company will submit the following documents with the Registrar of Companies for the registration of the company:

a) The memorandum of association.

b) The articles of association.

c) A list of persons who have consented to act as directors of the proposed company.

d) A statutory declaration of compliance.

e) Any agreement with the relevant persons of the proposed company.

 

The Registrar of Companies is to allot a Corporate Identity Number (CIN) to each company registered on or after November 1, 2000. After scrutiny of all these documents and if they are in order, the Registrar of Companies shall issue a ‘certificate of incorporation’.

This certificate of incorporation given by the Registrar shall be conclusive evidence that all the requirements of the Act have been complied with. In the case of Jubilee Cotton Mills Ltd v. Lewis20, the Registrar issued a certificate of incorporation on January 8, but dated it January 6th, which was the date he received the documents. On January 6th the company made an allotment of shares to Lewis.

It was held that the certificate was conclusive evidence of incorporation on Jan 6th and that the allotment was not void on the ground that it was made before the company was incorporated.

 

Floatation/Raising of Capital

A private company is prohibited from inviting public to subscribe to its share capital. Therefore, when a private company is formed, the requisite capital is obtained from friends and relatives by making its own arrangement. A public company can take either of the following steps:

a) Issue a prospectus in case public is to be invited to subscribe to its capital, or

b) Deliver a statement in lieu of prospectus where the company has either not issued a prospectus or though it has issued a prospectus it has not proceeded to allot any of the shares offered to the public for subscription.

 

Commencement of Business

Every private company and a company not limited by shares can commence business immediately on receipt of certificate of incorporation. But a public company limited by shares is debarred from commencing business or borrowing money without the certification of commencement of business.

 

a) Where the company has issued a prospectus — it has to satisfy the following conditions:

i. The minimum subscription in cash has been received,

ii. Every director of the company has paid on his shares in cash, a proportion equal to the proportion payable on application and allotment on the shares payable in cash.

iii. A statutory declaration duly verified by one of the directors or the secretary in the prescribed form, that the above conditions have been complied with, is filed with the Registrar. When the company has complied with the aforesaid conditions, the Registrar will issue a certificate to commence business.

 

b) Where the company has not issued a prospectue – it has to satisfy the following conditions:

i. A statement in lieu of prospectus has been filed with the Registrar,

ii. Every director of the company has paid on his shares in cash, a proportion equal to the proportion payable on application and allotment on the shares payable in cash.

iii. A statutory declaration duly verified by one of the directors or the secretary in the prescribed form, that the above conditions have been complied with, is filed with the Registrar.

When the company has complied with the aforsaid conditions, the Registrar will issue a certificate to commence business.

 

 

 

 

 

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