Formation of Company/Incorporation of company

A company is an artificial person created by law. In Pakistan companies are

formed under the companies ordinance 1984.
The formation of company can be divided into four stages:

1- Promotion stage
2- Incorporation stage
3- Capital subscription stage
4- Commencement of business stage

But in case of private company it needs to go through first two stages.

 Promotion

This is the first stage in formation of a company. Promotion means discovery

of business idea, raising of funds, acquiring property and managing staff.
The following steps are included in promotion stage.
Idea of business
Preliminary investigation about the availability of resources.
Assembling those resources
Estimate the preliminary expenses
Decision about financial sources of business
Name of the company
Arrangement of capital issues
Preparation of essential documents.
They also decide that whether the company will be a private or a public
company, and also responsible for minimum numbers of members in such
company.
Promoters
The ordinance has not defined the term ”Promoter” and there is no
universal definition of this term. Although the term promoter has been
defined in different cases through many aspects.
Justice Cockburn defined promoter as: “ one who undertakes to form a
company with reference to a given project and to set it going and who takes
necessary steps to accomplish that purpose”
From above definition it is clear that the person who initiate the business of
company is called promoter. But the functions of a promoter come to an
end as soon as they hand over the company business to the board of
directors.
If a person who acts in his professional capacity is not considered as
promoter of the company. For example if a solicitor who prepares the
primary documents of a company on behalf of promoters is not regarded as
a promoter of the company.

 Legal position of promoters:

1- Not an Agent or Trustee:

The legal position of promoters is not as a trustee or agent of the

company because there is no company yet in existence.

2- Fiduciary Relationship:

Promoters stand in a fiduciary position towards company about to be

formed. The relation between promoter and director floated by him is
fiduciary in nature.
This relation was explained by lord Carnie in these words: “In my
opinion undoubtedly promoters having a fiduciary relationship with
company. They have in their hands the creation and molding of
company. They have a power of defining how and when, and in what
shape and under what supervision the company shall start into
existence and begin to act as a running corporation.”

 Fiduciary Duties of Promoters:

Following are the fiduciary duties of a promoter.

1- Duty to disclose all material facts related to formation of company.
2- If any initial contract is made the whole transaction should be
disclosed.
3- The disclosure should be actual and in expressive form.
4- It must be made to a body of persons acting on behalf of company
who can exercise independently provided that commission should be
satisfied with all the information provided by the promoters is
 correct, undoubtedly, transparent and clear. If there is any wrong
statement provided by promoters the commission may recommend not
to register or incorporate the company.

 Liabilities of promoters:

These are the following

liabilities of promoters:
1) Promoter is liable to account of company for all
secrets profit made by him without full disclosure to
the company.
2) Company can also sue for recession(cancellation)of
contents of sales by the promoters of the company.
where the promoter has not disclosure his interest
there in.
3) Any sort of the mis-statement by the promoter in the
prospectus liable for criminal liability and a criminal
proceeding will be start against the promoters.
4) A suit for damages can be institute in the court of
component jurisdiction on the basis of deficit to the
company by negligence,malafied intention.
5) A promoter is also liable to e publically examine by
the court as to his conducts dealing when an order
has been made for winding up of his company by the
court and officially liquidator has made to the court
starting that in his opinion a fraud has been
committed by the promoter in the promotion or
formation of a company or any matter incidental
there to.
6) Last but not least the promoter is liable to
compensate the company if he has mis-applied or
retained any money or property of the company ask
 for or he has guilty of any misfeasance or breach of
trust in relation to the affair of the company.

 Remuneration of Promoters:

A promoter has no
right to get remuneration from the company for his
services. However ,if there is a contract with the company
about his remuneration he may get as follows:

1) He may sell his property at a profit to a company.

2) He may take commission on shared sold.
3) He may take a fixed amount.
4) He may take some shares.
5) He may take commission on property bought by him for
company.

 Preliminary Contracts or Pre-Incorporation

Contracts:

Preliminary contracts are those contracts that is made on

behalf of the company, yet to be incorporated. In
preliminary contract, the promoter act as trustee of a
company and such contract are not legally binding on the
company Even a company cannot ratify such contracts
after incorporation. Because the principal must have been
in existence at the time when the promoters entered into
such contracts.
 Company not Bound by Preliminary
contracts:

A company is not bound by preliminary contracts even if it

takes benefit of work done on its behalf. It can be
explained for the following case:

Case Law:

 English and Colonial Produce Ltd

A solicitor of a company about to be formed prepared

memorandum and article of association on the
instructions of person who become directors of the
company. He also paid the necessary registration fees.
The company went into liquidation and he claimed the
fees and expenses. It was held that the company was not
bound to pay the fees and expenses to the solicitor.
Because it was not in existence at the time when the
expenses were incurred.

 Promoters Liability for Preliminary

Contracts:

It has already clear that the company is neither bound nor

have benefit of pre-incorporation contracts. It is a
 promoter who remain liable for a pre-incorporation
contracts. Where a contract is made on behalf of a
company know the both parties to be non-existent.the
contract is deemed to have been entered into a
personally by the promoter they will be liable for such
contract.
Fact that the adoption of the preliminary contract is
made one of the objects of the company in its
memorandum and article. or the company has passed a
special resolution to adopt it. It can be explained for the
following case law:

Case law:

 Howard v Potent Ivory Co.

Promoter had made a contract for purchase of property for the company to
be formed and the contract of sale was carried into effect by the
conveyance of property and by issue of debentures which was to be
consideration. It was held to be an evidence of a fresh contract between the
company and vendor.

 Specific Performance of Preliminary

Contracts:

Where a promoter of a company , before its incorporation

entered into a contracts for the purpose of the company
and such contracts are warranted by term of
incorporation .specific performance may be obtained by
or enforced against the company if the company has
accepted the contract after its incorporation and has
communicated such acceptance to the other party.

 Preliminary Contracts and Provisional

Contracts:

Any contract made by a public company after

incorporation but before the date on which it is entitled to
commence business shall be provisional only and shall not
be binding on the company until the certificate of
commencement of business is obtained.
There are 3 situation in the case of public company in
which contracts are made on its behalf:

1) Contracts made before its incorporation-preliminary or

pre-incorporation contracts.
2) Contracts made after incorporation of a public company
but before obtaining the Certificate of commencement of
business-provisional contracts.
3) Contracts made by a public company after obtaining
the certificate of commencement of business are legally
binding on the company.

 In case of Private Company:

It may be noted here that a private company can

commence business immediately after obtaining the
certificate of incorporation. Therefore contracts which are
made before incorporation of a private company are
known as preliminary or pre-incorporation contracts.
 Hence there is no need for provisional contracts in the
case of a private company.

Registration or Incorporation

This is the second stage of formation of the company. In this stage the
company is registered with the Registrar of the company under the
company’s ordinance 1984. To form a Public company at least 7 persons
and for a Private Company at least 2 persons are required. These persons
will subscribe their names for registration, to form a company.
Before registration, the promoters must take the following steps.

1. They must take a decision whether the company proposed to be

formed, is to be a public company or a private company.
2. They must take the approval of the proposed name from the Registrar
of the company.
3. They must have necessary documents prepared and printed.
4. They must prepare preliminary contracts and a prospectus or
statement in lieu of a prospectus.

 Filling Documents With The Registrar

The following documents are to be filed with the registrar of the

companies of the state in which the registered office of the company is
to be situated, along with prescribed fees:

1. The memorandum of association of the company, with at least

one witness who shall attest his signature.
2. The article of association of the company. A public company
limited by shares may not have its own articles and in that
case, Table A, the model set of Articles, shall be applicable.
3. The agreement, if any, which company proposes to enter into
any individual for appointment as its managing or manager.
 4. Notice of address of the registered office of the company.
5. A list of directors.
6. The written consent of each director along with a written
undertaking to take up and pay for qualification shares if any
must be filed with registrar.
7. Declarations that all the requirement of this Act in respect of
registration have been compiled with.

 Registration Of The Company

The Registrar will examine the documents, if he satisfied that all

requirement of the Ordinance in respect of registration have been
compiled with, he will register the company and place its name in the
register of companies. A certificate of in corporation will be issued.
If the registrar improperly refuses to register the company, he
may be compelled to register the company by an order of the court.

 Effect Of Registration

The company becomes capable of exercising all the function of an

incorporated company having perpetual succession and a common
seal.

 CONCLUSIVENESS OF CERTIFICATE OF IN
CORPORATION

The certificate of incorporation is the birth certificate of the company.

The company comes into existence from the date mentioned in the certificate
of incorporation and the date appearing on it is conclusive, even if wrong.

 Case Law:

 JUBILEE COTTON MILLS LTD. V. LEWIS

 In this case, the necessary documents were delivered to the registrar of
registration on 6 January. Two days later, the Registrar issued the
certificate of incorporation but dated it 6 January instead of 8 January,
the day on which the certificate was issue. On 6 January, some shares
were allotted to Lewis. The question arose whether the allotment made
before the certificate was actually issued was void. It was held that the
certificate of incorporation is conclusive evidence of all that it contains.
The company comes into existence from the date mentioned in the
certificate, even if wrong. Therefore the allotment of shares was valid.

• A certificate of in corporation given by the registrar in respect of

any association shall be conclusive evidence that all the
requirements in respect of this Ordinance have been compiled with
in respect of registration [sec 33].
• Where the 5 subscribers to the memorandum were minors, the
registrar should not have issued the certificate of incorporation.
• Similarly, where the object of the company is illegal the registrar of
the company will also not issue the incorporation certificate, or if
issue than certificate is not valid.
• Where the memorandum was materially altered after the signature
of the subscribers but before registration, and the company was
registered, it was held that the certificate is conclusive and no court
has power to annul it.

 Capital Subscription

It is stated that a private company can commence business on the receipt of

the certificate of incorporation. but a public company has to go through
‘capital subscription stage and commencement of business stage.

For this purpose company makes necessary arrangements for raising the
capital like a meeting of the board of directors will be convened to deal with
the following business:

a).Appointment of secretary.
b)Appointment of bankers,brokers,solicitors and auditor.
c).Adoption of preliminary contracts entered by the promoters.
d).Adoption of underwriting contracts in order to secure minimum
subscription.
e)Adoption of the drafts “prospectus”
f)Appointment of managing director
g)Approval of the design of the common seal
h)Listing of shares on the stock exchange.

The most common method of raising capital is the initial public offering
(IPO) or debentures.

 Inviting Public Subscription:

In this concern directors of public company will file a copy of the prospectus
with the registrar of companies.
On the advertised date the prospectus will be issued to the public.
Prospective investors can obtain copy of the prospectus either from the
company’s registered office or its bankers.
Investors can forward application along with application money too the
company’s bankers mentioned in the prospectus.
Then these applications will be forward to the directors of the company and
then shares will be allot to the winner prospects and letter of regret is send
to those who have been refused.

 Arranging Capital Privately

Sometimes company does not need to raise capital from the general public
in this concern the company will file a statement in lieu of prospectus with
the registrar at least 3 days before the allotment of shares. here there is no
need to issue a prospectus.

 Commencement Of Business

A private company can commence business after getting the certificate of

incorporation. But a public company cannot commence business until it
receives the certificate of commencement of business.
  Companies Issuing Prospectus:

A company cannot commence any business or exercise any borrowing

unless and until
a)shares payable in cash have been allotted to an amount should not less
than the minimum subscription
b)a declaration duly verified by one of the directors or the secretary that the
above requirements have been compiled with is filed with the registrar.

 Companies Not Issuing Prospectus

Where a company with a share capital has not issued a prospectus inviting
the public to subscribe for its shares cannot commence any business unless
and until.
a)A statement in lieu of a prospectus is filed with the registrar
b)Every director of the company had paid the company in cash application
and allotment money on his shares in the same proportion as others.
c)A declaration duly verified by one of the directors or the secretary that
above requirements have been compiled with is filed with the registrar.
When the company fulfils the above conditions ,the registrar shall certify
that is entitled to commence business .

 Provisional Contracts
Any contract of the company before the acquirement of commencement
certificate will be deemed as provisional and shall not be binding of the
company until the certificate is obtained.

 Failure To Commence Business

It may also noted that court can wind up company. If it does not start business within a
year of its incorporation.
 ……………….The End……………..

COMPANY LAW
Topic:
“ Incorporation/Formation Of
Company”
Presented To:

Prof. Naeem Ullah

Presented By:

Zeeshan mehndi 272

Salman Raees 282
Ahsan Rashid 291
Abdul Rehman 297
M.Usman Sharif 302

Hailey College Of Commerce, University Of

The Punjab, Lahore