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Chapter 3 Promoter and Incorporation of Companies

❖ Introduction
➢ Promoters are persons who conceive the idea of forming a company and take the necessary steps to incorporate it
by registration, provide it with share and loan capital and acquire for it business or property, which it is to
manage.
➢ The relationship between the promoter and the company that he has floated is a fiduciary relationship from the
day on which he started the work of floating and it continues till he hands over the same to the directors.
➢ After reading this lesson you would be able to understand the concept of promoters, their legal position, duties,
liabilities and their remuneration.
➢ It also enumerates the important steps which are to be followed while forming a company such as application for
name availability with the Registrar of Companies, preparation of Memorandum of Association, Articles of
Association and other legal documents etc., including formation procedures as to one person companies and
companies with charitable objects, etc.,

PART 1 – PROMOTERS

❖ Definition of Promoter – Section 2(69)

➢ Section 2 (69) of the Companies Act, 2013 defines the term ‘promoter’ as under:-
▪ “Promoter” means a person—
(a) who has been named as such in a prospectus or is identified by the company in the annual return referred
to in section 92; 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 sub-clause (c) shall not apply to a person who is acting merely in a professional capacity.
▪ By virtue of above definition, persons in accordance with whose advice, directions or instructions the Board
of Directors of the company is accustomed to act are also treated as promoters. However, if a person is merely
acting in a professional capacity i.e. giving only professional advice to the Board of directors, he shall not be
treated as a promoter.

➢ Further, according to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, “promoter”
includes:
(i) the person or persons who are in control of the issuer;

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(ii) the person or persons who are instrumental in the formulation of a plan or programme pursuant to which
specified securities are offered to public;
(iii) the person or persons named in the offer document as promoters.

❖ Is a director/officer/employee of the issuer a promoter?

➢ A director/officer/employee who has control over the affairs of the company, directly or indirectly whether as
a shareholder, director or otherwise is considered as a promoter.
➢ As per section 2 (27), control” shall include the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a person or persons acting individually or in concert, directly or
indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting
agreements or in any other manner.
➢ However, a director or officer or employee of the issuer or a person, if acting as such merely in his professional
capacity, shall not be deemed as a promoter.

❖ EXPLANATION AND CASE LAW

➢ It was held in Twycross v. Grant, (1877) 2. C.P.D. 469 that promoter is "one who undertakes 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".
➢ In Whaley Bridge Calico Printing Co. v. Green (1880) 5 Q.B.D. 109, Bowen, L.J. held that the term "promoter"
is a term not of law but of business usually summing up in a single word a number of business operations
familiar to the commercial world by which a company is generally brought into existence".
➢ But a person may be a promoter even if he has undertaken a lesser active role in the formation of a company.
➢ A company may have several promoters. A promoter may be a natural person or a company. It is clear from the
foregoing that the word "promoter" is used in common parlance to denote any individual, corporate, syndicate,
association or partnership which has taken all the necessary steps to create and mould a company and set it going.
➢ The promoter
- originates the scheme for the formation of a company;
- gets together the subscribers to the memorandum,
- gets the Memorandum and Articles prepared,
- executed and registered,
- finds the bankers,
- brokers and legal advisers,
- finds the first directors,
- settles the terms of preliminary contracts with vendors and agreement with underwriters, and
- makes arrangement for preparation,
- advertisement and circulation of the prospectus and
- placement of the capital.

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➢ But a person who merely acts in a professional capacity on behalf of the promoter, such as a solicitor who
draws up an agreement or articles, an accountant or valuer who prepares figures or valuation on behalf of a
promoter, and who is paid for the same, is not a promoter.

❖ PROMOTERS' CONTRACT — RATIFICATION THEREOF

➢ As regards ratification of promoters’ contracts, the view taken in Kelner v. Baxter LR (1886) 2 CP 174 was that
the company could not ratify contract made by a promoter before its incorporation.
➢ Specific performance of a contract may be enforced against a company in respect of contracts entered into by
promoters on behalf of the company, if such a contract is warranted by the terms of incorporation and the
company has accepted the contract and communicated the acceptance to the other party.
➢ (Section 15 of the Specific Relief Act, 1963). Section 19 of the same Act provides that the other party can also
enforce the contract if the company has adopted it after incorporation and the contract is within the terms of
incorporation.
➢ As long as the company does not ratify, as required by the Specific Relief Act, 1963 the position remains the
same as under the common law.
➢ Warranted by the terms of incorporation means within the scope of the company’s objects as stated in the
memorandum.
❖ CASE LAW
➢ In D.R. Patil v. A.S. Dimilov AIR 1961 MP 4 AT 5, it was held that a promoter is personally liable to third parties
upon all contracts made on behalf of the intended company, until with their consent, the company takes over this
liability.
➢ If the promoter commits a breach of duties, the company can either
- rescind the contract or
- can compel him to account for any secret profits that he has made.

❖ LEGAL POSITION OF A PROMOTER

➢ While the accurate description of a promoter may be difficult, his legal position is quite clear.
➢ A promoter is neither an agent of, nor a trustee for, the company because it is not in existence. But he occupies a
fiduciary position in relation to the company and therefore requires to make full disclosure of the relevant facts,
including any profit made by him as held by Lord Cairns in Erlanger v. New Sombrero Phosphate Co. (39 LT
269).

❖ CASE LAW
➢ Lindley L.J. in Lydney and Wigpool Iron Ore Co. v. Bird, (1866) 33 Ch. D. 85, described the position of a
promoter as follows:

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- "Although not an agent for the company, nor a trustee for it before its formation, the old familiar principles of
law of agency and of trusteeship have been extended and very properly extended to meet such cases.
- It is well settled that a promoter of a company is accountable to it for all money secretly obtained by him from
it just as the relationship of the principal and agent or the trustee and cestui que trust had really existed
between him and the company when the money was obtained".
➢ Similarly, it was observed in Lagunas Nitrate Co. v. Lagunas Syndicate, (1899) 2 Ch. 392 that "promoters" stand
in a fiduciary relation to the company they promote and to those persons whom they induce to become
shareholders in it".
➢ In a series of similar cases under the English Law it has been held that the promoters, being in a fiduciary
position, may not make, either directly or indirectly, any profit at the expense of the company and that if he does
make a profit in disregard of this rule, the company can compel him to account for it.
➢ The promoters can be compelled to surrender the secret profits [Emma Silver Mining Co. v. Grant, (1879) 11
Ch. D. and Erlanger v. New Sombrero Phosphate Co, (supra)].

❖ DUTIES OF A PROMOTER
➢ The Companies Act, 2013, contains some provisions regarding the duties of promoters. The fiduciary duties of a
promoter includes:
(i) As per section 102(4), where as a result of the non-disclosure or insufficient disclosure in any explanatory
statement annexed to the notice of a general meeting , by a promoter, director, manager, if any, or other
key managerial personnel, any benefit accrues to such promoter, director, manager or other key
managerial personnel or their relatives, either directly or indirectly, the promoter, director, manager or
other key managerial personnel, as the case may be, shall hold such benefit in trust for the company, and
shall, without prejudice to any other action being taken against him under this Act or under any other law
for the time being in force, be liable to compensate the company to the extent of the benefit received by
him.
• In the case of default in complying with above provisions, every promoter, director, manager or other
key managerial personnel who is in default shall be punishable with fine which may extend to 50,000
rupees or five times the amount of benefit accruing to the promoter, director, manager or other key
managerial personnel or any of his relatives, whichever is more.
• [Sub-section (5) of Section 102]. The above provision is based on the principle that a promoter cannot
make either directly or indirectly, any profit at the expense of the company he promotes, without the
knowledge and consent of the company and that if he does so, in disregard of this rule, the company
can compel him to account for it.
• In relation to disclosure it may be noted that part disclosure will also attract the same
consequences.

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• A promoter is not forbidden to make profit but he is barred from making any secret profit. He
may make a profit out of promotion with the consent of the company in the same way as an agent
may retain a profit obtained through his agency with his principal's consent.
❖ CASE LAW
➢ In Gluckstein v. Barnes, (1900) A.C. 240 it was held that where a promoter makes some profits in connection
with a transaction to which company is a party and does not make full disclosure of his profits; the company has
the right to affirm the contracts and promoter should handover his profits to the company.

❖ CASE LAW
➢ In Erlanger v. New Sombrero Phosphate Co., (1878) 3 A.C. 1218, a syndicate of which E was the head
purchased an island containing mines of phosphate for £ 5,000. E then formed a company to buy this island.
➢ A contract was made between X a nominee of the syndicate and the company for its purchase at £ 1,10,000.
➢ The details of the sale were not disclosed to the shareholders or to the independent Board of directors.
➢ The company now sought to rescind the contract of sale. It was held that as there had been no disclosure by the
promoters of the profit they were making, the company was entitled to rescind the contract.
➢ In case, therefore, the promoter wishes to sell his own property to the company, he should either disclose the fact:
(a) to an independent Board of directors; or
(b) in the articles of association of the company; or
(c) in the prospectus; or
(d) to the existing and intended shareholders directly.
➢ In addition to disclosing secret profits, a promoter has the duty to disclose to the company any interest he has in a
transaction entered into by him.

(ii) As per section 13(8), a company, which has raised money from public through prospectus and still has
any unutilised amount out of the money so raised, shall not change its objects for which it raised the
money through prospectus unless a special resolution is passed by the company and the dissenting
shareholders shall be given an opportunity to exit by the promoters and shareholders having
control in accordance with regulations to be specified by the Securities and Exchange Board.
(iii) As per section 27(2), the dissenting shareholders being those shareholders who have not agreed to the
proposal to vary the terms of contracts or objects referred to in the prospectus, shall be given an exit offer
by promoters or controlling shareholders at such exit price, and in such manner and conditions as may be
specified by the Securities and Exchange Board by making regulations in this behalf.
(iv) As per section 167(3), where all the directors of a company vacate their offices under any of the
disqualifications specified in sub-section (1), the promoter or, in his absence, the Central Government
shall appoint the required number of directors who shall hold office till the directors are appointed by the
company in the general meeting.

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(v) As per section 168(3), where all the directors of a company resign from their offices, or vacate their
offices under section 167, the promoter or, in his absence, the Central Government shall appoint the
required number of directors who shall hold office till the directors are appointed by the company in
general meeting.
(vi) As per section 284(1), the promoters, directors, officers and employees, who are or have been in
employment of the company or acting or associated with the company shall extend full cooperation to the
Company Liquidator in discharge of his functions and duties during winding up by the Tribunal.

❖ Promoter’s duties under the Indian Contract Act

➢ Promoters’ duties cannot depend on a contract because at the time the promotion begins; the company is not
incorporated, and so cannot contract with its promoters.
➢ The promoter's duties must be the same as that of a person acting on behalf of another individual without a
contract of employment. If he does make any misrepresentation in a prospectus he may be held guilty of fraud
under Section 17 of the Indian Contract Act, 1872 and would be held liable for damages. Termination of
Promoters' Duties.
➢ It is a general opinion that a promoter completes his duty the moment the company, that he promotes, is
incorporated or when the Board of directors is appointed. But, in reality it continues until the company has
acquired the property for which it was formed to manage and has raised its initial share capital, [Lagunas Nitrate
Co. v. Lagunas Syndicate Ltd. (Supra)] and the Board takes over the management of the affairs of the company
from the promoters.

❖ REMEDIES AVAILABLE TO THE COMPANY AGAINST THE PROMOTER

➢ If a promoter makes a secret profit or does not disclose it, the company has got a remedy against him. This varies
according to the circumstances, which can be divided into two possible situations.
1. Where the promoter was not in a fiduciary position when he acquired the property which he is selling to
the company, but only when he sold it to the company.
- If a person acquires property or has had it before he takes any active steps in the promotion of a company and
sells it to the company at a profit, he is entitled to retain that profit.
2. Where the promoter was in fiduciary position when he acquired the property and when he sold it to the
company. This may happen in any of the following circumstances:
(a) Where the promoter bought property with a view to sell it to the company which he intends to promote, he
occupies fiduciary position vis-a-vis the company. He must disclose all the facts to the company.
(b) Where the promoter resells property to the company at an increased price, the property which he purchased
after he has commenced to act in the capacity of a promoter, he cannot retain the profit which he has not
disclosed to the company.
(c) Where a person is a promoter for acquiring the property for the company, the rules of agency will apply, so
that any profit he makes will belong to the company.

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❖ Where, the promoter bought the property with a view to sell it to the company he promotes, the company may
either—
(a) rescind the contract and if he has made a profit on some ancillary transaction that may also be recovered; or
(b) retain the property, paying no more for it than what the promoter has paid, depriving him of his profit; or
(c) where the above remedies would be inappropriate, such as when the property has been altered so as to render
recession impossible and the promoter has already received his inflated price, the company may sue him for
misfeasance (breach of duty to disclose). The measure of damages will be the difference between the market
value of the property and the contract price.

❖ LIABILITIES OF PROMOTERS
A promoter is subject to the following liabilities under the various provisions of the Companies Act, 2013:-
➢ Incorporation of company by furnishing false information:-
- As per section 7(6), where, at any time after the incorporation of a company, it is proved that the company has
been got incorporated by furnishing any false or incorrect information or representation or by suppressing any
material fact or information in any of the documents or declaration filed or made for incorporating such
company, or by any fraudulent action, the promoters, the persons named as the first directors of the company
and the persons making declaration shall be liable for fraud under section 447.
➢ Section 26 of the Act lays down matters to be stated and reports to be set out in the prospectus.
- The promoter(s) may be held liable for the non-compliance of the provisions of this Section. Further, as per
ection 26(1)(a)(xiv) prescribed disclosures about sources of promoter’s contribution has to be made in
prospectus.
➢ Civil Liability for misstatements in prospectus:-
- A promoter is liable for any misleading statement in the prospectus to a person who has subscribed for any
securities of the company on the faith of the prospectus.
- By virtue of section 35(1), where a person has subscribed for securities of a company acting on any statement
included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained
any loss or damage as a consequence thereof, the company and certain persons as mentioned in the said
section, including a promoter of the company shall, without prejudice to any punishment to which any person
may be liable under section 36, be liable to pay compensation to every person who has sustained such loss or
damage.
- No promoter shall be liable under this section, if he proves
i. that the prospectus was issued without his knowledge or consent, and that on becoming aware of its
issue,
ii. he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.
➢ Punishment for fraudulently inducing persons to invest money:-

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- As per section 36, any person who, either knowingly or recklessly makes any statement, promise or forecast
which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person
to enter into, or to offer to enter into,
(a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting securities;
or
(b) any agreement, the purpose or the pretended purpose of which is to secure a profit to any of the parties
from the yield of securities or by reference to fluctuations in the value of securities; or (c) any agreement
for, or with a view to obtaining credit facilities from any bank or financial institution, shall be liable for
punishment for fraud under section 447.
➢ Contravention of provisions relating to private placement:
- If a company makes an offer or accepts monies in contravention of the provisions of private placement as
stated in section 42, the company, its promoters and directors shall be liable for a penalty which may extend
to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company
shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty.
[Section 42(10)]
➢ Criminal Liability for misstatement in prospectus:
- Besides civil liability, the promoters are criminally liable under Section 34 for the issue of prospectus
containing untrue or misleading statements in form or context in which it is included or where any inclusion
or omission of any matter is likely to mislead.
- Section 447 imposes severe punishment for fraud on promoters who make untrue or misleading statements in
prospectus with a view to obtaining capital.
- The punishment prescribed is imprisonment for a term which shall not be less than six months but which may
extend to ten years and also a fine which shall not be less than the amount involved in the fraud, but which
may extend to three times the amount involved in the fraud.
- Further, where the fraud in question involves public interest, the term of imprisonment shall not be less than
three years.
- A promoter can, however, escape the punishment if he proves:
1. that the statement or omission was immaterial; or
2. that he had reasonable grounds to believe, and did, up to the time of the issue of prospectus, believe
that statement was true or the inclusion or omission was necessary.

❖ RIGHTS OF PROMOTERS
➢ Right to receive preliminary Expenses
- A promoter has no legal right to claim promotional expenses for his services unless there is a valid contract.
Without such a contract he is not even entitled to recover his preliminary expenses. [Re. English & Colonial
Produce Company (1906) 2 Ch. 435 CA].

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- The promoters are entitled to receive all the expenses incurred for in setting up and registering the company,
from Board of Directors
- . The articles will have provision for payment of preliminary expenses to the promoters. The company
may pay the expenses to the promoters even after its formation, but such payments should not be Ultra Vires
the articles of the company.
- The Articles may have provision regarding payment of fixed sum to the promoters.
➢ Right to recover proportionate amount from the Co-promoters
- The promoters are held jointly and severally liable for the secret profits made by them in the formation of a
company. Therefore if the entire amount of secret profits is paid to the company by a single promoter, he is
entitled to recover the proportionate amount from co-promoters.
- Likewise, if the entire liability arising out of mis-statement in the prospectus is borne by one of the promoters;
he is entitled to recover proportionately from the co-promoters.

PART 2 INCORPORATION OF COMPANIES

❖ FORMATION OF COMPANIES
➢ Section 3(1) states that a company may be formed for any lawful purpose by -
(a) seven or more persons, where the company to be formed is to be a public company;
(b) two or more persons, where the company to be formed is to be a private company; or
(c) one person, where the company to be formed is to be One Person Company that is to say, a private company
by subscribing their names or his name to a memorandum and complying with the requirements of this Act in
respect of registration:

INCORPORATION OF COMPANIES - PROCEDURAL ASPECTS

❖ Application for Availability of Name of company

➢ As per section 4(4) a person may make an application, in such form and manner and accompanied by such fee, as
may be prescribed, to the Registrar for the reservation of a name set out in the application as -
(a) the name of the proposed company; or
(b) the name to which the company proposes to change its name.

➢ As per Rule 9 of Companies (incorporation) Rules 2014, an application for the reservation of a name shall be
made in Form No. INC.1 along with the fee as provided in the Companies (Registration offices and fees) Rules,
2014.
➢ According to section 4(2), the name stated in the memorandum of association shall not -

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(a) be identical with or resemble too nearly to the name of an existing company registered under this Act or any
previous company law; or
(b) be such that its use by the company—
(i) will constitute an offence under any law for the time being in force; or
(ii) is undesirable in the opinion of the Central Government.
➢ Section 4(3) provides that without prejudice to the provisions of section 4(2), a company shall not be registered
with a name which contains—
(a) any word or expression which is likely to give the impression that the company is in any way connected with,
or having the patronage of, the Central Government, any State Government, or any local authority,
corporation or body constituted by the Central Government or any State Government under any law for the
time being in force; or
(b) such word or expression, as may be prescribed unless the previous approval of the Central Government has
been obtained for the use of any such word or expression.
➢ Section 4(5)(i) lays down that upon receipt of an application under sub-section (4), the Registrar may, on the basis
of information and documents furnished along with the application, reserve the name for a period of 60 days from
the date of the application.
➢ Rule 8 of Companies (Incorporation) Rules, 2014 states that in determining whether a proposed name is identical
with another, the differences on account of certain aspects may be disregarded, the details of the same is stated in
that rule.

❖ SPICE: Simplified Proforma for Incorporating Company Electronically

➢ Application for incorporation of companies. An application for registration of a company shall be filed, with the
Registrar within whose jurisdiction the registered office of the company is proposed to be situated, in Form
No.INC-32
➢ (SPICe) along with the fee as provided under the Companies (Registration offices and fees) Rules, 2014; Provided
that in case pursuing of any of the objects of a company requires registration or approval from sectoral regulators
such as the Reserve Bank of India, the Securities and Exchange Board, registration or approval, as the case may
be, from such regulator shall be obtained by the proposed company before pursuing such objects and a declaration
in this behalf shall be submitted at the stage of incorporation of the company”.
➢ “provided further that in case of incorporation of a company having more than seven subscribers or where any of
the subscriber to the MOA/AOA is signing at a place outside India, MOA/AOA shall be filed with INC-32
(SPICe) in the respective formats as specified in Table A to J in Schedule I without filing form INC-33 and INC-
34”; (ii.) In sub-rule (2), after the proviso, the following proviso shall be inserted, namely:- ‘Provided further that
in case of companies incorporated, with effect from the 26th day of January, 2018, with a nominal capital of less
than or equal to rupees ten lakhs or in respect of companies not having a share capital whose number of members
as stated in the articles of association does not exceed twenty, fee on INC-32 (SPICe) shall not be applicable”.

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➢ for Form No. INC-1, the ‘RUN (Reserve Unique Name)’ form shall be substituted

❖ Preparation of Memorandum and Articles of Association

➢ The Memorandum of Association is the charter of a company. It is a document, which amongst other things,
defines the area within which the company can operate.
➢ Section 4(1) states that the memorandum of a company shall state -
(a) the name of the company with the last word “Limited” in the case of a public limited company, or the last
words “Private Limited” in the case of a private limited company
(b) the State in which the registered office of the company is to be situated;
(c) the objects for which the company is proposed to be incorporated and any matter considered necessary in
furtherance thereof;
(d) the liability of members of the company, whether limited or unlimited, and also state –
(i) in the case of a company limited by shares, that liability of its members is limited to the amount unpaid, if
any, on the shares held by them; and
(ii) in the case of a company limited by guarantee, the amount up to which each member undertakes to
contribute –
(A) to the assets of the company in the event of its being wound-up while he is a member or within one
year after he ceases to be a member, for payment of the debts and liabilities of the company or of such
debts and liabilities as may have been contracted before he ceases to be a member, as the case may be;
and
(B) to the costs, charges and expenses of winding-up and for adjustment of the rights of the contributories
among themselves;
(e) in the case of a company having a share capital, -
(i) the amount of share capital with which the company is to be registered and the division thereof into
shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to
subscribe which shall not be less than one share; and
(ii) the number of shares each subscriber to the memorandum intends to take, indicated opposite his
name;
(f) in the case of One Person Company, the name of the person who, in the event of death of the subscriber, shall
become the member of the company.
➢ Section 5(1) states that the articles of a company shall contain the regulations for management of the company.
- The details of conditions as to Memorandum and Articles of Association is contained in chapter 4 of this
study.

❖ FILING OF DOCUMENTS WITH REGISTRAR OF COMPANIES

Section 7(1) states that there shall be filed with the Registrar within whose jurisdiction the registered office of a company
is proposed to be situated, the following documents and information for registration, namely: -

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➢ Application for Incorporation of Companies (Form INC 2 or INC 7)

➢ Declaration from the professional (Form INC – 8)
➢ Declaration from the subscribers to the Memorandum (Form INC 9)
➢ Furnishing verification of Registered Office (Form INC 22)
➢ Particulars of first directors along with their consent to act as directors (Form DIR 12)
➢ The specimen signature and latest photograph duly verified by the banker or notary shall be in the
prescribed Form No.INC.10.
➢ Power of Attorney

❖ Issue of Certificate of Incorporation by Registrar – Section 7(2)

➢ Section 7(2) states that the Registrar on the basis of documents and information filed under sub-section (1) of
section 7, shall register all the documents and information referred to in that sub- section in the register and issue
a certificate of incorporation in the prescribed form to the effect that the proposed company is incorporated under
this Act.
➢ From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the
memorandum and all other persons, as may, from time to time, become members of the company, shall be a body
corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated
company under this Act and having perpetual succession and a common seal with power to acquire, hold and
dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by
the said name. (Section 9). The subscribers would become the members of the company.

❖ Conclusive Evidences
➢ A Certificate of Incorporation given by the Registrar in respect of any association shall be conclusive evidence
that all the requirements of the Act have been complied with in respect of registration and matters precedent and
incidental thereto, and that the association is a company authorised to be registered and duly registered under the
Act.
➢ The Certificate of Incorporation is conclusive evidence that everything is in order as regards registration and that
the company has come into existence from the earliest moment of the day of incorporation stated therein with
rights and liabilities of a natural person, competent to enter into contracts [Jubilee Cotton Mills Ltd. v. Lewis,
(1924) (A.C. 958)].
➢ The validity of the registration cannot be questioned after the issue of the certificate.

❖ CASE LAW
➢ In Moosa v. Ebrahim ILR (1913) 40 Cal. 1 (P.C.)
- The Memorandum of Association of a company was signed by two adults and by a guardian of the other
5 subscribers, who were minors. The Registrar, however, registered the company and issued under his

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hand a Certificate of Incorporation. It was contended that this Certificate of Incorporation should be
declared void.
- Lord Macnaughten said: "Their Lordships will assume that the conditions of registration prescribed by the
Indian Companies Act were not duly complied with; that there were no seven subscribers to the
Memorandum and that the Registrar ought not to have granted the certificate. But the certificate is
conclusive for all purpose. Thus, the certificate prevents anyone from alleging that the company does
not exist".
➢ [Performing Right Society Ltd. v. London Theatre of Varieties (1992) 2 KB 433].
- It is for the purpose of incorporation only that the certificate was made conclusive by the legislature and
the certificate cannot legalise the illegal object contained in the Memorandum.
- Where the object of a company is unlawful, it has been held that the certificate of registration is not
conclusive for this purpose.

❖ Allotment of Corporate identity number - Section 7 (3)

➢ Section 7(3) states that on and from the date mentioned in the certificate of incorporation issued under
subsection (2), the Registrar shall allot to the company a corporate identity number, which shall be a distinct
identity for the company and which shall also be included in the certificate.

❖ Documents of incorporation to be preserved

➢ Section 7(4) states that the company shall maintain and preserve at its registered office copies of all
documents and information as originally filed under sub-section (1) till its dissolution under this Act.

❖ Punishment for furnishing false or incorrect information at the time of incorporation

➢ The Companies Act, 2013 imposes severe punishment for incorporation of a company by furnishing false or
incorrect information.
➢ The persons furnishing false or incorrect information shall be liable for following punishment:-
(i) If any person furnishes any false or incorrect particulars of any information or suppresses any material
information, of which he is aware in any of the documents filed with the Registrar in relation to the
registration of a company, he shall be punishable for fraud under section 447. [Section 7(5)]
(ii) Without prejudice to the above liability, where, at any time after the incorporation of a company, it is
proved that the company has been got incorporated by furnishing any false or incorrect information or
representation or by suppressing any material fact or information in any of the documents or declaration
filed or made for incorporating such company, or by any fraudulent action, the promoters, the persons
named as the first directors of the company and the persons making declaration under section
7(1)(b) shall each be punishable for fraud under section 447. [Section 7(6)]

❖ Powers of the Tribunal in case of incorporation of a company by furnishing false or incorrect information*

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➢ As per Section 7(7), where a company has been got incorporated by furnishing any false or incorrect information
or representation or by suppressing any material fact or information in any of the documents or declaration filed
or made for incorporating such company or by any fraudulent action, the Tribunal may, on an application made to
it, on being satisfied that the situation so warrants:-
a. pass such orders, as it may think fit, for regulation of the management of the company including
changes, if any, in its memorandum and articles, in public interest or in the interest of the company and its
members and creditors; or
b. direct that liability of the members shall be unlimited; or
c. direct removal of the name of the company from the register of companies; or
d. pass an order for the winding up of the company; or
e. pass such other orders as it may deem fit:

➢ Provided that before making any order under this sub-section,—

(i) the company shall be given a reasonable opportunity of being heard in the matter; and
(ii) The Tribunal shall take into consideration the transactions entered into by the company, including the
obligations, if any, contracted or payment of any liability.

❖ PROVISIONS SPECIFICALLY RELATING TO INCORPORATION OF ONE PERSON COMPANY

❖ Note :- This explanation is practical oriented and given here for sake of knowledge. In exam, just provide name of
the forms and its functions.
➢ Nomination by the subscriber or member of One Person Company
- According to the first proviso to section 3(1), the memorandum of One Person Company shall indicate
the name of the other person, with his prior written consent in the prescribed form (INC-3), who shall, in
the event of the subscriber’s death or his incapacity to contract become the member of the company and
the written consent of such person shall also be filed with the Registrar at the time of incorporation of the
One Person Company along with its memorandum and articles.
- As per second proviso to section 12(3) relating to painting, affixing of details of name, Registered office
etc. out side every office or place of business, states that the words ‘‘One Person Company’’ shall be
mentioned in brackets below the name of such company, wherever its name is printed, affixed or
engraved.
❖ Following Rules provide for licensing provisions of Companies with charitable objects under Section 8
Note :- This explanation is practical oriented and given here for sake of knowledge. In exam, just provide name of
the forms and its functions.
➢ Rule 19-20 of Companies (Incorporation) Rules, 2014.

❖ Rule 19 - License under section 8 for new companies with charitable objects etc.-

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1) A person or an association of persons (hereinafter referred to in this rule as “the proposed company”), desirous of
incorporating a company with limited liability under sub-section (1) of section 8 without the addition to its name
of the word “Limited”, or as the case may be, the words “Private Limited”, shall make an application in Form
No.INC.12 along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 to the
Registrar for a license under subsection (1) of section 8.
2) The memorandum of association of the proposed company shall be in Form No.INC.13.
3) The application under sub-rule (1) shall be accompanied by the following documents, namely:—
(a) the draft memorandum and articles of association of the proposed company;
(b) the declaration in Form No.INC.14 by an Advocate, a Chartered Accountant, Cost Accountant or Company
Secretary in practice, that the draft memorandum and articles of association have been drawn up in
conformity with the provisions of section 8 and rules made there under and that all the requirements of the
Act and the rules made thereunder relating to registration of the company under section 8 and matters
incidental or supplemental thereto have been complied with;
(c) an estimate of the future annual income and expenditure of the company for next three years, specifying the
sources of the income and the objects of the expenditure;
(d) the declaration by each of the persons making the application in Form No. INC.15.

❖ Rule 20 -License for existing companies.-

1) A limited company registered under this Act or under any previous company law, with any of the objects
specified in clause (a) of sub-section (1) of section 8 and the restrictions and prohibitions as mentioned
respectively in clause (b) and (c) of that sub-section, and which is desirous of being registered under section 8,
without the addition to its name of the word “Limited” or as the case may be, the words “Private Limited”, shall
make an application in Form No.INC.12 along with the fee as provided in the Companies (Registration offices
and fees) Rules, 2014 to the Registrar for a license under sub-section (5) of section 8.

2) The application under sub-rule (1), shall be accompanied by the following documents, namely:-
(a) the memorandum and articles of association of the company;
(b) the declaration as given in Form No.INC.14 by an Advocate, a Chartered accountant, Cost Accountant or
Company Secretary in Practice, that the memorandum and articles of association have been drawn up in
conformity with the provisions of section 8 and rules made there under and that all the requirements of the
Act and the rules made there under relating to registration of the company under section 8 and matters
incidental or supplemental thereto have been complied with;
(c) For each of the two financial years immediately preceding the date of the application, or when the company
has functioned only for one financial year, for such year (i) the financial statements, (ii) the Board’s reports,
and (iii) the audit reports, relating to existing companies;
(d) a statement showing in detail the assets (with the values thereof), and the liabilities of the company, as on the
date of the application or within thirty days preceding that date;

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(e) an estimate of the future annual income and expenditure of the company for next three years, specifying the
sources of the income and the objects of the expenditure;
(f) the certified copy of the resolutions passed in general/ board meetings approving registration of the company
under section 8; and
(g) a declaration by each of the persons making the application in Form No.INC.15.

3) The company shall, within a week from the date of making the application to the Registrar, publish a notice at his
own expense, and a copy of the notice, as published, shall be sent forthwith to the Registrar and the said notice
shall be in Form No. INC.26 and shall be published-
(a) at least once in a vernacular newspaper in the principal vernacular language of the district in which the
registered office of the proposed company is to be situated or is situated, and circulating in that district, and at
least once in English language in an English newspaper circulating in that district; and
(b) on the websites as may be notified by the Central Government.
4) The Registrar may require the applicant to furnish the approval or concurrence of any appropriate authority,
regulatory body, department or Ministry of the Central Government or the State Government(s).
5) The Registrar shall, after considering the objections, if any, received by it within thirty days from the date of
publication of notice, and after consulting any authority, regulatory body, Department or Ministry of the Central
Government or the State Government(s), as it may, in its discretion, decide whether the license should or should
not be granted.
6) The licence shall be in Form No.INC.16. or Form No.INC.17, as the case may be, and the Registrar shall have
power to include in the licence such other conditions as may be deemed necessary by him.
7) The Registrar may direct the company to insert in its memorandum, or in its articles, or partly in one and partly in
the other, such conditions of the license as may be specified by the Registrar in this behalf.

Previous attempts’ questions

Topic Questions Attempt Marks

COI What is the meaning of "Certificate of Incorporation" under the M06 5
provisions of the Companies Act, 1956?
COI Though six out of seven signatures to the Memorandum of Association of M07 5
a company were forged, the company was registered and the Certificate
of Incorporation issued. Can the registration of the company be
challenged subsequently on the ground of forged signatures?

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COI A company was incorporated on 6th October, 2003. The certificate of N03 5
incorporation of the company was issued by the Registrar on 15th
October, 2003. The company on 10th October, 2003 entered into a
contract which created its contractual liability. The company denies from
the said liability on the ground that company is not bound by the contract
entered into prior to issuing of certificate of incorporation. Decide, under
the provisions of the Companies Act, 1956, whether the company can be
exempted from the said contractual liability.
Commencement Noble Meters Limited was incorporated with the equity share capital of N09 5
of Business Rs. 50 lakh. The company received the certificate of incorporation on
20th May, 2009. The company issued the prospectus inviting the public to
subscribe for its equity shares. Meanwhile, the company intended to
commence its business. Whether Noble Meters Ltd. is entitled to
commence its business without obtaining the certificate to
commencement of Business?
Advise the company stating the conditions to be fulfilled for obtaining the
certificate to commencement of Business from the Registrar of
Companies under Companies Act, 1956.
Incorporation Which documents are required to be filed with the Registrar of M11 4
Companies at the time of registration of a company under the provisions
of the Companies Act, 1956 ?
Incorporation RTP
Explain in brief the mode of incorporation of a company. M12
Incorporation Mr. X desires to form a public company .He seeks your advise on the RTP
incorporation of a company. Explain him in brief the mode of N12
incorporation of a company.
Incorporation A company wants to get registered with the Registrar of companies. As a RTP
Chartered Accountant advise as to how it can get itself incorporated as N16
per the Integrated Process of Incorporation under the provisions of the
Companies Act, 2013.
Incorporation Some of the creditors of M/s Get Rich Quick Ltd. have complained that N04 5
with fradulent the company was formed by the promoters only to defraud the creditors
purpose. and circumvent the compliance of legal provisions of the Companies Act,
1956. In this context they seek your advice as to the meaning of corporate
veil and when the promoters can be made personally liable for the debts
of the company.

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Name Decide, under the Companies Act, 1956 whether Mr. Prabhu can M13 4
Availability incorporate a new company using the phrase “Electoral Trust” with the
name of the company.
Preincorporation K Ltd. was in the process of incorporation. Promoters of the company M13 8
Contract signed an agreement for the purchase of certain furniture for the
company and payment was to be made to the suppliers of furniture by the
company after incorporation. The company was incorporated and the
furniture was received and used by it. Shortly after incorporation, the
company went into liquidation and the debt could not be paid by the
company for the purchase of the above furniture. As a result supplier
sued the promoters of the company for the recovery of money.
Examine whether promoters can be held liable for the payment under the
following situations:
(i) When the company has already adopted the contract after
incorporation?
(ii) When the company makes a fresh contract with the suppliers in
substitution of pre-incorporation contract?
Preincorporation out the correct answer from the following and give reasons: 3x1=3 N09 1
Contract (i) Contracts which are entered into, by agents or trustees on behalf of
a prospective company before it has come into existence are called:
(1) Provisional contracts
(2) Pre–incorporation contracts
(3) Both provisional and pre–incorporation contracts
(4) None of the above.
Preincorporation XYZ limited obtained certificate of Incorporation and Certificate of JN09 5
Contract Commencement of Business from the registrar of companies on 10th
January, 2009 and 10th February, 2009 respectively. On 15th January,
2009, the company purchased office furniture worth Rs.10,000 from the
SAB Private Limited on credit. Later on the Company refuses to make
payment of the said amount on the ground that company is not bound by
contract entered into prior to issuing of Certificate of commencement of
Business. In the light of the provisions of the Companies Act, 1956,
advise whether XYZ Limited can be exempted from the above liability.
Preincorporation M04 5
What do you understand by Pre–incorporation Contracts? Distinguish
Contract
between Pre–incorporation contracts and Provisional contracts.

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Preincorporation Before the incorporation of the company, the promoters of the company M08 5
Contract entered into an agreement with Mr. Jainson to buy an immovable
property on behalf of the company. After incorporation, the company
refused to buy the said property. Advise Mr. Jainson whether he has any
remedy under the provisions of the Companies Act, 1956?
Preincorporation Sunrise Limited submitted the documents for incorporation on 5th N07 5
Contract October, 2006. It was incorporated and certificate of incorporation of the
company was issued by the Registrar on 20th October, 2006. The
company on 14th October, 2006 entered into a contract which created its
contractual liabilities. The company denies the said liability on the
ground that company is not bound by the contract entered into prior to
issuing of certificate of incorporation. Decide under the provisions of the
Companies Act, 1956, whether the company can be exempted from the
said contractual liability.
Preincorporation A Company was incorporated on 6th July, 2014. The certificate of RTP
Contract incorporation of the company was issued by the Registrar on 15th July, N14
2014. The company on 10th July, 2014 entered into a contract, which
created its contractual liability. The company denies from the said
liability on the ground that company is not bound by the contract entered
into prior to issuing of certificate of incorporation. Decide, under the
provisions of the Companies Act, 1956, whether the company can be
exempted from the said contractual liability.
Preincorporation XYZ Co. Ltd. was in the process of incorporation. Promoters of the RTP
Contract company signed an agreement for the purchase of certain furniture for N15
the company and payment was to bemade to the suppliers of furniture by
the company after incorporation. The company was incorporated and the
furniture was used by it. Shortly after incorporation, the company went
into liquidation and the debt could not be paid by the company for the
purchase of above furniture. As a result suppliers sued the promoters of
the company for the recovery of money.
Examine whether promoters can he held liable for payment under the
following situations:
(i) When the company has already adopted the contract after
incorporation?
(ii) When the company makes a fresh contract with the suppliers in terms
of pre incorporation contract?

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Promotor - 2(69) Who shall be considered as promoter according to the definition given in N14 4
the Companies Act, 2013? Explain.

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