PROMOTION & INCORPORATION OF COMPANIES

This article was written by Aryan Srivastava, a student of the Christ Academy Institute of Law, Bangalore.

INTRODUCTION

Prior to inception of companies as a business enterprise two forms of business venture were dominant i.e. 1) monopoly also known as sole proprietorship & 2) Partnership. The concept of companies originated to overcome the drawbacks faced by above mentioned model of business which were mainly lack of capital and not being able to cater the needs of larger audience.

The Term ‘Company’ connotes two possible idea: –

• It cannot be regarded as a partnership because of numerous members.
• Members can easily transfer their interest to others within the association.

A company has a separate legal existence from its members meaning it can enter into legal transaction through its own name however that is not the case with the partnership and sole proprietorship[1]

Business venture are often carried out with an intention to earn the profits however that association has to be a valid and legal in the eyes of law. Hence it becomes absolutely essential to understand the promotion and incorporation of company as a business venture which can help an individual to commence the business by fulfilling all the necessary perquisites.

PROMOTION

Promotion is a generic term which denotes the process of forming a company as a corporate body by fulfilling all the necessary perquisites. The person who carries out the whole process is know as the promoter, they are the progenitors of a company meaning thereby they not only conceive the idea of company but also fulfils necessary requirement to make sure it becomes operational. The term ‘promoter’ has been defined under s. 2(69) of the companies act, 2013

In Twycross v. Grant[2] Lord Cockburn, CJ. Observed-

“ a promoter is a person who undertakes to form a company with reference to a given object and to set it in going and who takes the necessary steps to accomplish it”.

In a common parlance it can be said that promoters help a company to stand on its feet. It is not necessary that a person who only takes active role in formation of company can only be categorised as promoter, a person carrying out less active role can also be categorised as a promoter[3].

POSITION OF PROMOTER

A promoter’s relationship with the company is of the trust. Hence promoter is under the obligation of law to;

• Not make any Secret profit
• Disclosure of all relevant facts in terms of transaction related to company.

As per Section 26 of the Companies Act,2013 profits made by the promoters has to be disclosed in the prospectus itself & company has the remedy to severe off the ties with the promoter in case of non-disclosure.

Promoter becomes liable for their act as a promoter only under the situation when they have started acting as a promoter or have acted during the process of floatation of a company. This principle was laid down in the case of Ladgwell Mining Co. v. Brooks[4] facts of the case were 5 people purchased a mine for 5000 euros with an intention to sell that mine to company which was under formation. They had nothing to do with process of promotion of the company. The sold the mine to company under formation for 18000 euros and sale was later ratified by the company post incorporation. However, later 4 out of 5 people became the director of the company. Company as a legal entity filed a suit for non-disclosed profit 3000 euros. The court in this case held that liability of the promoter commences when they start carrying out the act of promotion & it does not extend to their previous acts.

INCORPORATION

For a company to commence its operation it has to be duly recognised in the eyes of the law meaning thereby a company has to be incorporated prior to the commencement of the business operation. As we know company is the association of the members & what good is a association which is not recognised by the law. Business association has to be legal in nature & has to be approved by law for it to become functional.

As per Section 33 of THE COMPANIES ACT 2013 a company can be incorporated by submitting certain documents to the registrar of companies and paying the stamp duty & fees. Unless all the procedure is complied with company does not have any legal validity in the eyes of law. Once all the procedures are complied with, the registrar of the companies issues certificate of incorporation. The following documents has to be submitted with the registrar of companies:

• MOA & AOA duly signed by the subscriber in the manner prescribed.
• A declaration by the advocate, C.A., or an agent that all the procedures pertaining to registration mentioned under the act has been complied by the company.
• A declaration from all the subscriber that they have not been charged under any law under force and have complied with all the laws relating to the process of registration.
• A temporary address till the registered office is established.
• All the subscribers has to give proof of their identity.
• All the directors are also supposed to give proof of their identity such as name, permanent address, nationality etc.

A company can be both public and private and the process of incorporation for both types of companies is almost similar however, there are few exceptions when it comes to private company:

• They require only 2 subscribers of memorandum rather than the normal requirement of 7.
• It is not mandatory for them to fill form.29.
• However, AOA has to be registered with the registrar of companies it is a necessary perquisite.
• They should mandatorily follow the protocol laid down under s.12 of the companies Act,2013 while preparing the AOA and MOA.

CONCLUSION

Company as a business venture originated to compensate for the shortcomings of sole proprietorship and partnership as a enterprise but with the tremendous growth of trade, commerce and industry the law relating to companies has undergone major transformation Hence it becomes absolutely essential for the company to be registered as per the procedure provided under Companies Act,2013 so as to protect the interest of the company as well as those who are interacting with the company for their sustenance and trade and  the act has made sure that procedure for the incorporation is as smooth as possible giving new wings of opportunity to the growth of this country so it can be able to scale new heights.

[1] Shah S.M.: Lectures on Company Law, (13^th Ed.)

[2] (1877) 2 CPD 469

[3] National L.S. Registration Bank v. velu Mudliar (1938) Mad. 192

[4]  35 Ch. D. 400 (1887)