Formation and Incorporation of Company
Formation and Incorporation of Company
Formation and Incorporation of Company
Company
UPES SoL
Formation of co.- 4 stages
Commence
Registratio
Promotion
n
Floatation ment of
Business
Promotion
Promotion
• Preliminary step for regn. and floatation of co.
• Promoters: who assume task of promotion- individual, syndicate,
partner, co.
• S. 2 (69) Companies Act, 2013:
(a) who has been named as such in a prospectus or is identified
by the company in the annual return; or
(b) who has control over the affairs of the company, directly or
indirectly whether as a shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions
the Board of Directors of the company is accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a
person who is acting merely in a professional capacity.
Contd.
• R. 405 (a), US Securities Exchange Commission Rules:
person who, acting alone, or in conjunction with other
persons directly or indirectly, takes the initiative in
founding or organizing the business enterprise.
• Assn. need not be from initial formation of co.,
subsequent help for arranging floatation of capital
equally regarded as promoter (Lagunas Nitrate Co. v.
Lagunas Syndicate, [1899] 2 Ch. 392 C.A.)
• Persons assisting promoters in official capacity- not
promoters
Contd.
• Promoter/s are those persons who, in forming
the co., secure for themselves the management
of the co. being formed or are persons who
convert their own pvt. business into a ltd. co.,
pub. or pvt. and secure for themselves more or
less a controlling interest into the co.’s
management (A Ramaiya, Guide to Co.s Act)
Beginning & End of Promotion
• Fiduciary relationship between promoter and co.
starts from the date of floating a co. and
continues till directors take into their hands
responsibility of the remaining acts of forming
the co. (Twycross v. Grant, 1877 2 C.P.D. 469
C.A.)
• Status of promoters terminates on formation of
BoD
• After handing over- fiduciary relationship ceases
Legal position of a Promoter
• Neither an agent, nor a trustee
• Fiduciary position
• Lord Cairns in Erlanger v. New Sombrero
Phosphate Co. (39 LT 269):
“the promoters of a co. stand undoubtedly in a
fiduciary position. They have in their hands the
creation and moulding of the company.”
Duties of a Promoter
Duty to Duty to
disclose secret disclose
profits interest
Interest of the
Gluckstein v. promoter in
Barnes [1900] AC transaction
240 entered into by
co.
Disclosure to
whom?
Independent and
competent BoD
Duties of a Promoter
• Termination of promoters’ duties:
- not on incorporation nor on constitution of BoD
- Till co. acquires property/business for which it is
formed and till it raises its initial capital
(Lagunas Nitrate Co. v. Lagunas Syndicate,
[1899] 2 Ch. 392 C.A.)
- Till BoD takes over the management of co.’s
affairs from promoters (Twycross v. Grant, 1877
2 C.P.D. 469 C.A.)
Remedies for breach of duty
• Rescission of contract
• Recovery of secret profits
a. Promoter not in fiduciary position while acquisition of property but only while
selling it- no claim for recovery of profits
b. Promoter in fiduciary position while acquisition of property & while selling it
to co.
- Property bought with intention to sell it to co. which promoter intends to
promote
- Property purchased after promotional activities and resold to co. at
increased price
- Where the person is a promoter for acquiring the property for co. in
capacity of agent
Remedy
- Rescission of contract, profit on ancillary transaction also recovered
- Retention of property, not paying more resulting in deprivation of profit
- Above remedies inappropriate- co. may sue for misfeasance (breach of duty
to disclose)
Liability of promoters
1. S. 26: liability for non compliance of the
provisions of the section wrt matters to be
stated in prospectus
2. Ss. 34 & 35: liability for untrue statement in
prospectus to an investor
Remedies:
a. rescission of contract to purchase shares
b. suit for damages
c. prosecution- imprisonment from 06
months to 10 yrs/ fine not less than amnt
involved in the fraud or 03 times of it.
Remuneration of promoters
• Unless there is a valid contract to that effect, promoter
not entitled for remuneration (including preliminary
expenses)
• AoA authorizes directors to pay for preliminary expenses
incurred by promoters
• Co. may decide to pay remuneration later in following
manner, which should be disclosed in prospectus:
a. May sell his own property for cash or against fully paid
up shares
b. May take commission on shares sold
c. May be paid lump sum by co.
Pre-incorporation contracts
• Validity of contracts made before incorporation
of co.?
• “Two consenting parties are necessary to a
contract, whereas the co. before incorporation is
a non-entity” (Kelner v Baxter [1866] 15 LT 213)
Position before
1963
Legal position of
pre incorporated
contracts
Position since
1963
Position before 1963
• Pre incorporation contract not binding- co.
before incorporation has no existence
• Co. cannot ratify pre-incorporation contract-
ostensible owner not in existence at the time of
making contract
• Co. not entitled to sue on a pre incorporation
contract
Position after 1963
• S. 15 (h), Specific Relief Act, 1963: if promoters of a
co. make pre incorporation contract for co., and the
same is warranted by terms of incorporation, co.
may enforce it
• S. 19, Specific Relief Act, 1963: third parties
allowed to enforce contract under following
circumstances;
a. Co. adopts the same after incorporation
b. Contract is warranted by terms of incorporation
Pre-incorporation contracts
• Liability of promoters when co. does not execute
fresh contract and the contracts is not warranted
for incorporation?
Promoters personally liable for damages as well
a suit for specific performance like any other
party to a contract
Registration/Incorporation
Procedure for registration/incorporation of
Co.- steps to be taken by promoters
Type of co.: pub./pvt.res or /OPC- Section 3
Co. ltd by guarantee/ shares or unlimited co.
Power of attorney