Page 1 :
THE FORMATION AND INCORPORATION OF A COMPANY, The formation and incorporation of a company are very much similar to the, birth of a human like it also goes through various stages of formation of its body, parts during the womb stage. Various ground work is carried out to bring a, company into existence. The process of an idea converting into a company, includes various stages, these crucial stages of the pre-incorporation and formation, stages are discussed in detail as under., , Promotion, As the n ame suggests this stage of incorporation deals with the promotions of the, yet to be incorporated Company. It is the stage where the Promoter walks in the, market of the potential investors to collect the investment towards an idea which, might be his own brainchild or of someone else., The Promoter induces the confidence on the idea, over the investors and tries to, build upon the investment so as to be able to incorporate the company. Promoter, has been defined under Section 2(69) of the Companies Act, 2013. Technically a, promoter is a person so named in the prospectus of the Company. The Company, shall also name their promoter in the annual return made under Section 96 of the, Companies Act, 2013., A Promoter is to a company, as Parents is to a child. The Promoter along with, convincing investors towards the idea of the company also brings together the, physical capital of the labour, raw materials, managerial ability, machinery etc., The Promoter although is passionate towards the company’s ideas, but has to, SWOT analyze the idea with respect to the future prospects and feasibility with, respect to the societal dynamics.

Page 2 :
The idea of promoter can be seen with having 3 different perspectives:, , , promoter is someone who is identified in the prospectus of the company, or is mentioned as a promoter in the annual returns of the company,, and/or, , , , promoter is a person who has the power to appoint majority of members, of board of directors or person having authority over making policies or, making decisions for the company, and/or, , , , promoter is a person on whose advice board of directors are accustomed, to act., , Functions of a Promoter, (i) Spotting a Business Demand in the Market, The promoter before promoting a company idea first identifies a potential business, opportunity. The potential opportunity may be any new product or a new service or, may even be the production or manufacture of an already established product by, new means., (ii) The practicality of the Idea, The promoter has to evaluate the idea of the new potential company under the, magnifying glass of technical and financial feasibility. Therefore, it is but, important that the promoters undertake detailed studies regarding all aspects of the, business idea by using various tools such as the economic studies of the market,, taking opinions of the technical experts of such products, opinions of the chartered, accountants, economists etc. The idea which the promoter intends to use for, perpetrating the market. The feasibility of the idea can be evaluated using the, below mentioned three tests.

Page 3 :
, , Technical conceivability: the ideas of the business may be good but, sometimes they may be technically difficult to conceive into reality given, such hurdles regarding the raw material acquisition, the difficulty of, making a product with limited funds, etc., , , , Budgetary feasibility: Sometimes it may not be possible to gather a, large fund required for the business being under the sword of limited, means and sometimes stipulated time. Also, financial institutions may be, hesitant to give huge loans to new ventures., , , , Monetary feasibility: A business idea may be technically and financially, feasible but not monetarily appreciable. It may not be gainful or may not, return enough profits. In such a case, the promoters refrain from, promoting the idea of business., , (iii) Name of the Company, The Promoter after fixing the launch of the idea intends to get a name to the, Company. Promoter applies to the registrar of companies of that jurisdiction, wherever the promoter intends to make the registered head office of the Company., Application to registrar contains three names “X or Y or Z” in the sequence of, priority and Promoter adheres to Section 8 of the Companies (Incorporation), Rules, 2014., (iv) Finalizing Signatories to MOA, The promoters decide who all will be the members signing the Memorandum of, Association of the Company which is to be formed. Generally, the signatories of, the MOA are the first Directors of the Company. The written consent of the, signatories of the memorandum is essential to become Directors of the company.

Page 4 :
(v) Hiring Professionals, Promoters are required to appoint certain professionals such as mercantile bankers,, auditors, lawyers, etc. These professionals aid the promoter in the preparation of, necessary documents that are to be filed with the Registrar of Companies during, the registration of the Company., (vi) Preparation of Necessary Documents, The promoters are the ones who are responsible to collect documents that are, submitted to the Registrar of the Companies for getting the company registered., These documents are a return of allotment, Memorandum of Association, Articles, of Association, consent of Directors and statutory declaration., , Duties of the Promoter, The relation of promoter with the company cannot be described as a principalagent relation as during pre-incorporation stage, the company has not even come, into existence. Various judicial interpretations towards understanding the nature of, relation between the promoter and the company has taken place in the common law, Courts as well as Indian Courts and it has been decided that the relation between, the promoter and the company is fiduciary in nature. Duties of the Promoter shall, be discussed herewith:, 1. Duty to disclose secret profit, As mentioned earlier the promoters stand in a fiduciary relationship with the, company which will be incorporated. The duty of a promoter is to disclose the, secret profit made by him if any to the company. The Promoter has a right to claim, expenses if any made during the incorporation stage from the company.

Page 5 :
2. Duty to keep the company informed about the transactions, A promoter may intend to sell, lease or rent any property of the company. But if, such a transaction is made without informing the company, the company may, repudiate such contract of sale, lease or rent, the company may even claim the, profit made by the promoter from the transaction by allowing such a contract made, by the promoter., 3. Fiduciary duty towards the future Shareholders, The promoter is bound by a fiduciary relationship with the company, signatories of, memorandum of association and also show the future allottees of share of the, company. Relation of trust between promoter and future shareholders goes to show, that the promoter shall uphold all the values expected of him by the Company., 4. Duty to disclose profits gained during promotion, The promoter during the promotion of the company may certain times be subjected, to certain private arrangements leading to his personal profit, given the promoter, stands in fiduciary relationship with the company he must disclose the profits gain, during promotion as explained about to the company., 5. Duty to pay the company whatever received as trustee, The promoter stands in a fiduciary relationship with the company, and it is the duty, of the promoter to make good to the company whatever he has obtained as the, Trustee of the company.

Page 6 :
Liabilities of the Promoter, A Promoter is subjected to liabilities under the various provisions of, the Companies Act, 2013. The liabilities of the promoter are:, 1. Liability to justify the transactions to the company, The promoter stands in a fiduciary relationship with the company, therefore the, company has all rights to enquire into the transactions made by the promoter, without the consent of the company. The company while dealing with such a, transaction may either repudiate such an agreement made by the promoter with the, third party or may even sue the promoter to recover the money along with profits, so made by him behind the back of the company., 2. Liability against the misstatement made in the prospectus, Section 26 of the Indian company act lists down the matters that are to be stated in, the prospectus. The promoter may be held liable for not having complied with the, provision. Section 63 of the Companies Act, 1956 also provided criminal liability, for misstatement in prospectus and Promoter maybe made liable under this section., Section 63 prescribed imprisonment that may be extended to two years and fine, that may be extended to 5000 Rs. for making untrue statements in the prospectus., Under Section 34 and Section 35 of the Companies Act, 2013 promoter maybe, held liable for any untrue statement made in the prospectus because of which a, person subscribed for shares and debentures believing the prospectus statements to, be true. However, the liability of the promoter is capped towards only the original, allottees of the shares and not the subsequent ones.

Page 7 :
3. Personal liability towards the contracts, All the contracts entered upon by the promoter during pre-incorporation stage of, the Company, the promoter may be held personally liable for the aforementioned, contracts till it’s discharged according to contract terms or when the company, takes up the liability from the promoter after it is incorporated., 4. Liability of the promoter during the winding-up process of the company, In the process of winding up, the official liquidator under Section 340 of, the Companies Act, 2013 may by application request the court to make the, promoter liable for the misfeasance or breach of trust towards the Company. Also, under Section 300 of Companies Act, 2013 promoter may be liable to examination,, if it is alleged by the liquidator that there is fraud in the promotion or the formation, of the company., , Registration/Incorporation of the Company, The Registration of the Company is legal recognition given to the body corporate, under the Company Law. The procedure of registration has been clearly stated, in Section 7 of the Companies Act, 2013. This provision clearly lays down the, requirements for the incorporation of the company. The details of the documents, namely:, , , Memorandum of association, which is the constitution of the company, wherein the signatories in case of a public company has been fixed to a, minimum number of 7 and for a private company a minimum number of, 2 this document is duly stamped;, , , , Articles of Association, this is the document filed along with the MOA;

Page 8 :
, , List of directors, wherein the details regarding their names, occupation, and address is mentioned;, , , , Written consent of the directors, the consent of the directors is to be, submitted to the registrar of the companies;, , , , Verification document, wherein such document is to be digitally signed, by any recognised chartered accountant, Company secretary, Advocate., , Certificate of Incorporation, The registration of the memorandum of the association, the article of association, and other documents are filed with the registrar. After getting satisfied with the, application & documents submitted, the registrar will consider issuing the, certificate of incorporation’. A certificate of incorporation is the ultimate proof of, the existence of a company., Effect of the Certificate of Incorporation, 1. Certificate of incorporation is the conclusive evidence of the legal, existence or presence of the Company., 2. Even if there are formal deficiencies in the documents submitted for the, incorporation of the company, once the certificate of incorporation is, issued, the certificate becomes conclusive evidence regarding the legal, existence of the company from the date mentioned in the incorporation, certificate., 3. If the certificate of incorporation was received on 24th but the certificate, reflects the date 22nd then the company shall be taken to have come into, existence from 22nd as reflected by the certificate of incorporation and, this will also authenticate the transactions made by such company on, 22nd and 23rd in the eyes of law.

Page 9 :
Certificate of Commencement of Business, , , As soon as a private company gets the certification of incorporation it can, start its business. Once the certificate of incorporation is received by the, company, a public company issues a prospectus for inviting the public to, subscribe to its share capital. It fixes the minimum subscription in the, prospectus. Then, it is required to sell the minimum number of shares, mentioned in the prospectus., , , , After completing the sale of the required number of shares, the certificate, is sent to the registrar along with the letter from the bank stating that all, the money is received., , , , The registrar then scrutinizes the documents. If all the legal formalities, are done then the registrar issues a certificate known as ‘certificate of, commencement of business’. This is the conclusive evidence for the, commencement of business for the public company., , Conclusion, From the above, we understand that the company’s incorporation period can be, understood to be the integration of Pre incorporation period and incorporation, period. Pre incorporation period may be understood as the idea phase of the, company. The promoter whose name is reflected in the prospectus of the company, plays a very important role in collecting the funding for the company. The, promoter also conducts a SWOT analysis of the company to understand the, potential of such a company in the marketplace and making it a feasible option to, invest upon by the investors. The duties and liabilities of the promoter has been, discussed in detail showing how the relationship between the promoter and the, company is fiduciary in nature. The principle of promoter’s liability relation to the, pre-incorporation contract has been dealt in detail coming to a conclusion that the

Page 10 :
promoter shall be held personally liable for all the pre-incorporation contracts,, unless there is novation of the contract or in case of India when the provisions of, Specific Relief Act applies wherein the company ratify the contract and send, communication to the other party of contract regarding their liability. The role of, the government in easing the process of incorporation is very crucial as it, determines the potential intention of the investors towards companies in the, market., The ease of incorporation has been increased by making it online affair, The, Ministry of Corporate Affairs provides options to incorporate the company with a, unique name by providing the online option of submitting the memorandum of, association along with the articles of association online with the declaration, digitally signed stating that all the procedures of incorporation of a company under, law have been followed by the respective company. The State’s duty as an enabler, of business for the growth of the economy finds its presence in this legislation., Certificate of incorporation plays a crucial role to prove that the company has been, duly incorporated and the same cannot be taken back unless the winding up is, initiated for the registrar of company finds that the company incorporated has, played fraud for its incorporation. The certificate of incorporation speaks for itself, and receipt date of the same does not affect the date of incorporation.