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Part-4 : Formation and Incorporation of a Company



STRUCTURE
4.0 Introduction
4.1 Objectives
4.2 Promotion - What is?
4.3 Promoter
4.3.1 Legal Position
4.3.2 Liability
4.3.3 Remuneration
4.4 Pre-incorporation Contests
4.5 Incorporation or registration oI a company
4.6 CertiIicate oI incorporation.
4.7 Capital subscription or Iloatation
4.8 Commencement oI business
4.9 Summary
4.10 Check your progress



4.0 Introduction


The very step in the Iormation oI a company is to contemplate some business idea and
then to take subsequent steps like arranging Iunds, property, manpower etc. to
transIorm that idea into a reality. The person or person who assume the task oI this
nature are called as promoters and the task is known as promotion`.
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In this unit the emphasis will be on analysing the various stages in the
Iormation oI a company, public or private, and also the legal position and liability oI a
promoter to the company and to the third parties.
One oI the areas oI importance is the nature oI pre-incorporation contracts
entered into by the promoters prior to the incorporation oI the company with the third
parties. How Iar company is responsible to such contracts as 'two consenting parties
are necessary to a contract, whereas the company beIore its incorporation is a non-
entity (Kelner V. Baxter). We will discuss the legal status oI pre-incorporation
contracts prior to and aIter the enactment oI speciIic relieI Act, 1963.
4.1 Objectives
The basic purpose oI this Unit is to make the students understand the
preliminary steps to be taken by anyone desirous oI transIorming his business idea
into a real enterprise. AIter going through this Unit, you will be able to :-
Understand the concept oI Promotion` oI a company.
Know the legal status and liabilities oI promoter oI a company.
Learn the enIorceability oI pre-incorporation contracts.
Learn the various stages oI Iormation oI a company.

4.2 Promotion - What is ?
Promotion is a term oI wide import denoting the preliminary steps taken Ior the
purpose oI registration and Iloatation oI the company. The whole process oI Iormation
oI a company is very lengthy and may be divided into Iour stages namely :
1. Promotion
2. Incorporation
3. Capital Subscription or Iloatation
4. Commencement oI business
OI these stages only the Iirst two are necessary Ior the Iormation oI a private
company, and oI a public company not having any share capital. They may commence
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business immediately aIter they have received a certiIicate oI incorporation. But a
public company having a share capital has to go through all the Iour states mentioned
above beIore it can commence business.
The 'promotion is the Iirst stage in the Iormation oI a company. It may be
deIined as "the discovery oI business opportunities and the subsequent organization oI
Iunds, property and managerial ability into a business concern Ior the purpose oI
making proIits thereIrom |C.W. Gerstenberg, Financial Organisation and Management
oI Business|.
Thus, promotion begins when someone discovers on idea regarding some
business which can be proIitably undertaken by a company and includes preliminary
and detailed investigation oI the Ieasibility oI the idea, assembling oI business
elements and making provision oI the Iunds necessary to launch the enterprise as a
going concern. The person who assume the task oI promotion are called promoters. A
promoter may be an individual, syndicate, association, partner or a company.
4.3 Promoter
The expression 'promoter has not been deIined under the companies Act,
although the term is used expressly in sections 62, 69, 76, 478 and 519. Even in
English law there is no general statutory deIinition oI a 'promoter. Section 62(b)(a)
gives a restrictive deIinition oI promoter Ior a limited purpose only, as : a promoter
who was a party to the preparation oI the prospectus or oI a portion there oI containing
the untrue statement, but does not include any person by reason oI his acting in a
proIessional capacity in procuring the Iormation oI the company. Cockburn CJ., in
Twycross V. Grant |1877|2 C.P.D. 469 C.A. described a promoter as 'One who
undertakes to Irom a company with reIerence to a given project, and to set it going,
and who takes the necessary steps to accomplish that purpose.
Another deIinition is given by Bown L. J., in Whaley Bridge Printing Co. V.
Green |1880| 5 B.D. 109 - 'The term promoter is a term not oI law but oI business. It
means 'a number oI business operations Iamiliar to the commercial world by which a
company is brought into existence.
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In U.S.A. the Securities Exchange Commission Rule 405(a) deIines a promoter
as a person who, acting alone or in conjunction with other persons directly or
indirectly takes the initiative in Iounding or organizing the business enterprise.
It is important to note that to be a promoter it is not necessary that the person
should be associated with the initial Iormation oI the company. Any person who
subsequently helps to arrange Iloating oI its capital will equally be regarded as a
promoter. |Lagunas Nitrate Co. V. Lagunas syndicate (1899)2 Ch. 392|.
However, section 626 oI the companies Act makes it clear that person assisting
the promoter by acting in a proIessional capacity, eg. Counsels, solicitors, accountants
and other experts, do not thereby become promoters themselves. But when, he goes
Iurther than this i.e., by introducing this clients to a person who may be interested in
purchasing shares in the proposed company, he would be regarded as a promoter.
In India, the promoters are usually persons who, inIorming the company,
secure Ior themselves the management oI the company being Iormed or are persons
who convert their own private business into a limited company, public or private and
secure Ior themselves more or less a controlling interest into the company`s
management. |A. Ramaiya, Guide to the Companies Act, 12
th
Edn. P. 351).
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4.3.1 Legal Position
Though it is diIIicult to accurately deIine a promoter, but his legal position is
quite certain. The promoters enjoys wide powers relating to the Iormation oI a
company, but, as Iar as his legal position is concerned, he is neither an agent nor a
trustee oI the proposed company, as these is neither a principal nor a trust in existence
at the time oI his eIIort. But it does not mean that the promoter does not have any
legal relationship with the proposed company. He stands in a Iiduciary position
towards the company about to be Iormed. Lord Cairns in Erlanger V. New Sombrero
phosphate Co. 39 LT 269, has so stated the position oI a promoter - 'the promoters oI
a company stand undoubtedly in a Iiduciary position. They have in their hand the
creation and moulding oI the company. They have the power oI deIining how and
when and in what shape and under whose supervision it shall come into existence and
begins to act as a trading corporation.
Lord Justice Lindley in Lidney Wigpool Iron Ore Co. V. Bird |1866| 33 Ch. D.
85 thus describes the potions oI a promoter -
'Although not an agent Ior the company, nor a trustee Ior it beIore its
Iormation, the old Iamiliar principles oI law oI agency and oI trusteeship have been
extended and very properly extended to meet such cases. It is perIectly well settled
that a promoter oI a company is accountable to it Ior all monies secretly obtained by
him Irom it just as the relationship oI principal and agent or the trustee and cestui que
trust had really existed between him and the company when the money was obtained.
4.3.2 Liability
Following are the liabilities oI a promoter under the various provisions oI the
companies Act :-
(1) Section 56 and Schedule II lays down matters to be stated and reports to be set
out in a prospectus. A promoter may be held liable Ior non-compliance oI the
provisions as stated in the section and the schedule.
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(2) Section 62 and 63 provides Ior the liability oI promoters Ior any untrue
statement in the prospectus to a person who subscribes Ior shares or debentures
on the Iaith oI such prospectus. The liability oI the promoter in such a case
shall be only towards original allottee oI shares and would not extend to the
subsequent allottees. The remedies against the promoter may include :-
(a) The rescission oI the contact to purchase charges,
(b) Suit Ior damages,
(c) Prosecution that may led to imprisonment Ior a term upto two years or
Iine upto Rs. 50,000, or both.
(3) Section 203 provides the power to the court to suspend a promoter Irom taking
part in the management oI the company Ior a period oI Iive years iI:-
(a) he is convicted oI an oIIence in connection with the promotion, Iormation
or the management oI a company, or
(b) it appears during liquidation that -
(i) he has been guilty oI any oIIence Ior which he is punishable under
section 542, or
(ii) he while being an oIIicer oI the company has otherwise been guilty oI
any Iraud or misIeasance in relation to the company or oI any breach oI
his duty to the company.
(4) According to section 478, a promoter may be liable to public examination like
any other director or oIIicer oI the company iI the court so directs on a
liquidator`s report alleging Iraud in the promotion or Iormation oI the
company.
(5) A company may also proceed against a promoter on action Ior deceit or breach
oI duty under section 543, where the promoter has misapplied or retained any
property oI the company or is guilty oI misIeasance or breach oI trust in
relation to the company.
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(6) Where these is more than one promoter, they are jointly and severally liable
and iI one oI the co-promoters is sued and damages are rewired Irom him, he
can claim contribution Irom the other co-promoters. In case oI the death oI a
promoter his estate remains liable, and upon the insolvency oI a promoter the
company is entitled to prove its claim in the insolvency proceedings.
4.3.3 Remuneration
The remuneration to a promoter -in consideration oI his services in the
Iormation oI the company, may be paid in cash or partly in cash and partly in shares
and debentures oI the company. But, a promoter is entitled to recover any
remuneration Ior his services Irom the company iI there is a valid contract, between
him and the company enabling him to do so. Without such a contract, he is not even
entitled to recover his preliminary expenses or the registration Iees. In practice,
however, recovery oI preliminary expenses and registration Iees does not normally
present any diIIiculty as the articles generally contain a provision authorising the
directors to pay them |Touche V. Metropolitan Railway Warehousing Company
(1871) L.R. 6Ch. 671|.
The provision in the articles does not impose any legal obligation on the
company towards the promoters but as they or their nominees will usually be the Iirst
directors oI the company, the power is generally exercised in their Iavour.
In practice, a promoter is remunerated in any oI the Iollowing ways :-
(a) He may take commission on the shares sold.
(b) He may be paid a lump sum by the company.
(c) He may sell his own property to the company Ior cash or against Iully
paid shares in the company at an overvaluation aIter making Iull
disclosure to an independent board oI directors or to the intended share
holders.
Any Remuneration or beneIit given to the promoters must be disclosed in the
prospectus.
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4.4 Pre-incorporation Contracts
Sometimes the promoters enter into contracts to acquire some property or right
oI the company beIore its incorporation. Such contracts are called 'pre-incorporation
contracts or 'preliminary contracts. But no contract can bind a company beIore it
becomes capable oI contracting by incorporation. It was held in Kelner V. Baxter
,(1866) 15 LT 213, that, "two consenting parties are necessary to a contract, whereas
the company beIore its incorporation is a non-entity.
The legal status oI pre-incorporation contracts may be discussed under the
Iollowing two heads :-
(1) Position beIore 1963 (i.e. beIore passing oI SpeciIic RelieI Act,1963), and
(2) Position aIter 1963 (i.e. aIter passing oI SpeciIic RelieI Act, 1963).

Position before 1963
Prior to 1963, a pre-incorporation contact never binds a company since a
person whether legal or juristic, cannot contract beIore his or its existence and a
company has no legal existence prior to its incorporation. Even the company cannot
ratiIy the contract as the principal did not exist at the time the contract was made. The
promoters will continue to be personally liable Ior pre-incorporation contacts unless a
new contract embodying the terms oI the old one is made aIresh by the company aIter
its incorporation. Natal Land & Colonisation co. Ltd. V. Pauline Colliery Syndicate
Ltd. (1904) A.C. 120; is an illustration on the point. In this case the Natal Co.
Contracted with A`, the nominee oI the syndicate (which was not even incorporated)
to grant a lease oI certain coal mining rights Ior three years. AIter the registration oI
the Syndicate, it claimed the contracted lease which the N` Company reIused. In a
suit Ior speciIic perIormance it was held that the syndicate was not entitled to its claim
as it was not in existence when the contract was made and a company cannot obtain
the beneIit oI a pre-incorporation contract unless a new contract is made with the
company aIter its incorporation.
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Position since 1963 (i.e aIter passing oI the speciIic relieI Act, 1963). In India,
until the passing oI the speciIic relieI Act, 1963, the promoters Iound it very diIIicult
to carryout the work oI incorporation. Since the contracts prior to incorporation were
void and also could not be ratiIied, people are not keen in supplying any goods or
services Ior the promotion oI a company. Promoter also does not want to take any
personal responsibility. The SpeciIic RelieI Act, 1963 has provided certain relieI to
the promoters. Section 15(h) oI the SpeciIic RelieI Act, 1963 provides that where the
promoters oI a public company have made a contract beIore its incorporation Ior the
purpose oI the company, and iI the contact is warranted by the terms oI its
incorporation, the company may enIorce it. 'Warranted by the terms oI incorporation
means that the contract is within the scope oI the company's objects as stated in the
memorandum.
It is not only the company which is allowed, under the SpeciIic RelieI Act, to
adopt and enIorce its pre-incorporation contracts against the third parties, section 19
oI the SpeciIic RelieI Act also allows the other party to enIorce the contract against
the company iI -
(i) The company had adopted the same aIter incorporation, and
(ii) The contract is warranted by the terms oI incorporation.
4.5 Incorporation or Registration of a Company
Incorporation oI a company is the second stage in the Iormation oI a company.
It is eIIected by registration with the Registrar oI Companies. According to section 12
any seven or more persons or where the company to be Iormed will be a private
company, any two or more persons, associated Ior any lawIul purpose may, by
subscribing their names to a memorandum oI association and otherwise complying
with the requirements oI this Act in respect oI registration, Iorm an incorporated
company, with or without limited liability.
Important steps to be Iollowed Ior incorporation oI a company are :
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1. Type of company to be formed :- The Iirst thing to be decided by the
promoters is the type oI the company to be Iloated. Companies Act provides Ior
registration oI only two types oI companies viz. public and private companies.
2. Check availability of name :- According to section 20, the name oI the
company should not be such as in the opinion oI Central Government is
undesirable. AIter selecting a name which is available and not undesirable, the
promoters oI the company are required to Iile an application Ior registration in
Iorm No. 1A, to the registers oI the companies oI the state in which the
registered oIIice oI the proposed company is to situate.
Three names should be submitted to the Registrar, in order oI priority, to aIIord
same Ilexibility. The Registrar oI Companies shall Iurnish the inIormation
regarding availability oI name within seven days oI the receipt oI the
application. AIter the inIormation by the register, the promoter should adopt
the name within a period oI six months Irom the date oI intimation by the
Registrar. This period may be extended by the Registrar.
Corporate Identity Number (CIN) :- Registrar oI the companies shall allot a
Corporate Identity Number to each company registered on or aIter November
1,2000 -vide circulate No. 12/2000 dated 25-10-2000.
3. Preparation of memorandum and articles of association:- Two very
important documents oI a company are its memorandum and articles oI
association. The memorandum oI association is the constitution oI a company.
It is a document which deIines object oI the incorporation, the area within
which the company can act, the capital which it shall be allowed to raise, the
nature oI liability oI its members, the name oI the state where the registered
oIIice oI the company shall be located etc.
The articles oI association contains the rules and regulations relating to the
internal management oI the company. DraIt oI memorandum and articles oI
association should be prepared and typed, and the same shall be printed as
required by section 15 aIter the vetting by the registrar/regional director.
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Section 15 also requires that every memorandum should be signed by each
subscribes who should add his address, description and occupation, iI any, in
the presence oI at least one witness, who shall attest the signature and shall also
add his address, description and occupation. The subscribers to the
memorandum should also state clearly the number and nature oI shares
subscribed by them. It is to be noted that the subscribers have to subscribe the
shares directly-accepting a transIer Irom any other subscriber etc., shall not be
valid.
II the executants to the memorandum is an illiterate, the subscriber should put
his thumb impression or mark which should be described as such by the
subscriber or person writing Ior him. The latter should also place the name oI
the executants against or below the mark and authenticate it by his own
signature. He should also write against the name oI the subscriber, the number
oI shares taken by him. Such person should also read and explain the contents
oI the document to the executant and make an endorsement to that eIIect on the
document.
The articles oI association should also be signed by these subscribers to the
memorandum and their signatures should also be attested by a witness. The
memorandum and articles have to be stamped according to the Stamp Act
applicable to the state where the company is incorporated.
4. Preparation oI other documents :- Apart Irom the memorandum and articles oI
association, the promoters have also to prepare the Iollowing documents :-
(i) Consent oI the directors - according to section

in the case oI a public


limited company having a share capital, a written consent oI the directors
to act in that capacity, duly signed by each director, alongwith a written
undertaking by them to take the necessary qualiIication shares, iI any, as
provided by the articles is required to be submitted. This document is,
however, not to be Iiled in the case oI :-
(a) A company without share capital
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(b) A private company, and
(c) A company which was a private company prior to its becoming a
public company.
(ii) The particulars oI director :- The particulars oI the persons who are named
in the articles to act as director, manager, secretary etc. must be Iiled in
duplicate with the Registrar oI the Companies.
(iii) Statutory declaration:- Section 33(2) requires the Iiling oI a statutory
declaration, known as 'Statutory Declaration oI Compliance, stating that
all the legal requirements oI the Act prior to incorporation have been
complied with. Such a declaration must be signed by either an advocate oI
the Supreme court or oI a High Court, or by an attorney or a pleader
entitled to appear beIore a High Court, or by a Company Secretary or a
Chartered Accountant in whole time practice in India, who is engaged in
the Iormation oI the company or by a person named in the articles as a
director, manager or secretary oI the company.
Along with the above documents necessary Iiling Iees and registration
Iees at the prescribed rates are also to be paid. Schedule X, given at the
end oI the companies Act, prescribe the rate oI Iiling Iees and registration
Iees.
4.6 Certificate of Incorporation
The Registrar, aIter scrutinizing these documents and Iinding them in order,
will register the company and issue a certiIicate oI incorporation'. On obtaining this
certiIicate the company becomes a body corporate, with perpetual succession and a
common seal. |Sec. 34(2)|.
Conclusiveness the Certificate of Incorporation
According to section 35 oI the Act, the certiIicate oI incorporation give by the
Registrar shall be conclusive evidence that all the requirements oI the Act have been
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complied with and that the company has been duly registered. In other words, once a
certiIicate oI incorporation has been granted no one can question the regularity oI
incorporation. In the Iamous Peel`s case |(1867) 2Ch. APP. 674|. It has been observed
by Lord Cairns that - 'iI memorandum is Iound to be materially altered aIter signature
but beIore registration. When once the certiIicate oI incorporation is given nothing is
to be inquired into as to the regularity oI the prior proceedings. Also iI the
memorandum is signed by only one person Ior all the seven subscribers or the
signatories be all inIants, the certiIicate would be nevertheless conclusive and would
not aIIect the status and existence oI the company as a legal person although such
irregularities might give rise to claims between the subscribers. The case under
consideration is Moosa V. Ibrahim ILR 191340 Col. 1 (PC), - the memorandum oI
association oI a company was signed by two adults and by a guardian oI other Iive
members, who were minors. The Registrar, however, issued the certiIicate oI
incorporation aIter registering the company. The count held the certiIicate to be
conclusive Ior all purposes. The certiIicate prevents any one Irom alleging the
company does not exist. To the same eIIect is the decision in Jubilee Cotton Mills Ltd.
V. Lewis |1924| A.C 1958, In this case the registrar issued a certiIicate oI
incorporation on January 8, but dated it January 6, which was the date oI receipt oI
documents by him. On January 6, the Company made an allotment oI shares to Lewis.
The court held that the certiIicate was conclusive evidence oI incorporation on
January 6 and that the allotment was not void on the ground that it was made beIore
the company was incorporated.
However, iI a company has been incorporated with illegal objects, the illegal
objects would not become legal by the issue oI the certiIicate. II a company with
illegal objects happens to be registered, the eIIect will be that while the existence oI
certiIicate precludes its corporate status Irom being questioned, the company is
Iorbidden to carry on any business in Iurtherance oI its illegal objects. The legal
personality oI the company cannot be extinguished by cancellation oI the certiIicate oI
incorporation |Bowman. V. Secular Society Limited, (1917) A.C. 406|. The remedy in
such a case would be to 'wind up' the company.
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4.7 Capital Subscription or Floatation
As already discussed, a private company is prohibited Irom inviting
subscription to its share capital by public. Thus, when a private company is Iormed the
necessary capital is obtained Irom Iriends and relatives by private arrangement. Also,
a private company or a public company not having share capital can commence
business immediately on its incorporation. ThereIore, the capital subscription stage`
and the commencement oI business stage` are relevant only in case oI a public
company having a share capital. When a public company has been registered and has
received its certiIicate oI incorporation, it is ready Ior Iloatation, or, in other words, it
can go ahead with raising capital suIIicient to commence business. In the case oI a
public company also, the promoters may not invite public to subscribe to its share
capital and may arrange the capital privately as in the case oI a private company.
According to section 70, every public company has to take either oI the
Iollowing steps :-
(i) issue a prospectus is case public is to be invited to subscribe to its capital,
or
(ii) deliver a statement in lieu oI prospectus where the company has either not
issued a prospectus or though it has issued a prospectus it has not
proceeded to allot any oI the shares oIIered to the public Ior subscription.
Where prospectus has been issued inviting subscription to the shares, the
company cannot proceed to allot shares unless the amount stated in the prospectus as
minimum subscription has been subscribed and the money payable on application in
respect oI such shares has been received by the company on the closure oI the issue, in
case the issue is not underwritten or within 60 days oI closing oI the subscription list,
where the issue is underwritten (SEBI guidelines, 2000). The minimum subscription
as per schedule II and SEBI guidelines has to be 90 oI the entire issue. In case the
minimum subscription is not received, the company has to reIund Iorthwith the entire
amount received with application. In case the application money is not returned within
next 8 days (within 10 days, as per section 69), the company and the directors shall be
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liable to return the same with interest at the rate oI 15 per annum (at the rate oI 6
as per section 69).
ote: SEBI guidelines with respect to public issues will be discussed in detail in a
subsequent chapter on Shares.
4.8 Commencement of Business
As discussed earlier, a private company or a public company having share
capital may commence business immediately aIter its incorporation. But a public
company having share capital must obtain certiIicate to commence business .Irom the
Registrar oI Companies beIore commencing its business or exercising any borrowing
powers. The previsions oI section 149 oI the Companies Act must be complied with in
order to obtain certiIicate oI commencement oI business. Provision oI section 149(1)
applies in case company has issued a prospectus, and provision oI section 149(2)
becomes applicable when the company has not issued a prospectus.
Where the company has issued a prospectus :-
Section 149 (1) provides that a public company, having a share capital and
issuing a prospectus inviting the public to subscribe Ior its shares, will have to Iile the
Iollowing documents with the registrar to obtain the certiIicate oI commencement oI
business :-
(a) The declaration that shares payable in cash have been allotted upto the
amount oI the minimum subscription as stated in the prospectus,
(b) The declaration that every director has paid in cash the application and
allotment money on his shares in the same proportion as others.
(c) The declaration that no money is liable to become reIundable to the
applicant by reason oI Iailure to apply Ior or to obtain permission Ior the
shares or debentures to be dealt in on any recognised stock exchange;
(d) The statutory declaration in the prescribed Iorm (Form No. 19) by one oI
the directors or the secretary or, where the company has not appointed a
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secretary, a secretary in whole time - time practice that the above
requirements as stated in classes (a), (b) and (c) mentioned above, have
been complied with..
Where the company has not issued or prospectus :-
According to the provision oI section 149(2), a public company, having a share
capital, but not issuing prospectus has to Iile the Iollowing documents with the register
beIore commencing any business or exercising any borrowing power:-
(a) a statement in lieu oI prospectus;
(b) a declaration that every director has paid in cash the application and
allotment money on his shares in the same proportion as others;
(c) a statutory declaration in the prescribed Iorm (Form No. 20) that clause
(b) as stated above, has been complied with and duly veriIied by one oI
the directors or the secretary or, where the company has not appointed a
secretary, a secretary in the whole time public.
The Registrar, aIter scrutinizing these documents, iI satisIied that the company
has duly complied with the aIoresaid conditions, shall issue a certiIicate certiIying that
the company is entitled to commence business. It is aIter getting this Trading
CertiIicate` that the process oI the Iormation oI public company having share capital is
complete and it is now that such a company can start its business and exercise its
borrowing powers. Any contract made by the company beIore securing this certiIicate
is provisional only and shall not be binding on the company till such certiIicate has
been obtained |Sec. 149(4)|. II the company does not commence its business within a
year oI its incorporation, it may be wound up by the court |Sec. 433(c)|.
The certiIicate to commence business entitles the company to commence
business given in the main object clause oI the memorandum oI association. No
business given in the 'other object clause' can be commenced without obtaining prior
approval oI the shareholders by way oI special resolution. However, the Central
Government may allow a company to commence business in the other object clause`,
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even aIter an ordinary resolution is passed by the company in general meeting,
provided the application to that eIIect has been made by the board oI directors.
Penalty :-
II any public company having share capital commences its business or
exercises borrowing powers without obtaining certiIicate to commence business, then
every person at Iault shall be liable to Iine which may extend to Rs. 5000 |Substituted
Ior 'Rs. 500 by the companies (Amendment) Act, 2000|, Ior every day oI deIault.
|Sec. 149(6)|.
4.9 Summary
The whole process oI Iormation oI a company may be divided into Iour stages:
namely, (i) promotion, (ii) registration, (iii) Iloatation, and (iv) commencement oI
business.
Promotion denotes preliminary steps taken Ior the purpose oI registration and
Iloatation oI the company. The persons who undertake these steps are called
promoters. However, the persons assisting the promoters by acting in a proIessional
capacity do not thereby become promoters themselves. The status oI a promoter is
generally terminated when the Board oI Directors has been Iormed and they start
governing the company.
The Companies Act, 1956 contains no provisions regarding the duties oI
promoters, it merely imposes liability on promoters Ior untrue statements in
prospectus, they are parties to, and Ior Iraudulent trading. The Courts have, however,
charged them with two Iiduciary duties, namely, not to make any secret proIit out
oI promotion; and to disclose to the company any interest which he has in a
transaction entered into by it. The duties oI a promoter do not come to an end on the
incorporation oI the company, or even when Board oI Directors is appointed. They
continue until the company has acquired the property or business which it was Iormed
to manage and has raised its initial share capital.
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A promoter is not entitled to recover any remuneration Ior his services Irom the
company unless there is a valid contract, enabling him to do so, between him and the
company. Alternatively, articles may authorise the directors to pay them.
A pre-incorporation contract is void ab initio unless the company adopts the
same procedure aIter incorporation and the contract is warranted by the terms oI
incorporation.
BeIore proceeding to register a company, the promoters have to decide the type
oI company to be Iloated, make application Ior availability oI name, prepare
memorandum and articles oI association and get the same vetted, printed, stamped and
signed, prepare other necessary documents. AIter the said documents are ready, the
same should be Iiled with R.O.C. along with Iiling Iee.
AIter scrutinising the documents and on being satisIied that they are in order,
the R.O.C. issues the certiIicate oI incorporation. The certiIicate oI incorporation is
conclusive as to all the requirements oI the Act with respect to registration and matters
precedent and incidental thereto having been duly complied with.
A private company can commence its business on receipt oI certiIicate oI
incorporation but a public company must obtain another certiIicate, viz., certiIicate to
commence business. BeIore it actually gets the certiIicate to commence business, it
may have to enter into a number oI contracts. Such contracts are called provisional
contracts`. These contracts become binding, without any need Ior ratiIication, on
company becoming entitled to commence business.
The stage aIter incorporation and beIore commencement oI business is called
the Stage oI Iloatation. Under this stage, a-company is to raise the necessary capital.
To get the certiIicate to commence business, it must have received the minimum
subscription ; 90 oI the entire issue). In Iact, iI minimum subscription is not
received, the entire money which remains in a separate bank account, must be repaid
Iorthwith. In case it is not returned within next. 8 days, the company and the directors
shall be liable to return the same with interest 15 p.a.
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On complying with the requirements oI section 149, the R.O.C. grants the
company the certiIicate to commence business. Now, a public company can
commence its business.
4.10 Check Your Progress
1. Who is a promoter oI a company? Discuss his legal status in relation to the
company he promotes.
2. BeIore a company is actually incorporated, the promoters oI the company enter
into contracts on behalI oI the company. Can such contracts be enIorced by or against
the company aIter its incorporation?
3. Distinguish between certiIicate oI incorporation` and certiIicate oI
commencement oI business.

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