Corporate law

75 EP-CL-3 STUDY III INCORPORATION AND ITS CONSEQUENCESII PROMOTERS AND FORMATION OF COMPANIES A. PROMOTERS DEFINITION -The Companies Act, 1956, does not define the expression 'promoters' though according to SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997, ‘promoter’ means: (a)any person who is in control of the target company; (b)any person named as promoter in any offer document of the target company and it includes any person of a promoter group as defined in these Regulations -Promoters are those who have an intention to form a company and who take the necessary steps to carry that intention into operation. -A company may have several promoters. -A promoter may be a natural person or a company. -The promoter performs various functions like conceiving the scheme for the formation of a company; getting together the subscribers to the memorandum, getting the Memorandum and Articles prepared, executed and registered, finding the bankers, brokers Executive Short Notes – Incorporation and Its Consequences ‐ II ICSI eLearning Coaching Program © GOLS 2011 76 EP-CL-3 and legal advisers, settling the terms of preliminary contracts with vendors and agreement with underwriters, and making arrangement for preparation, advertisement and circulation of the prospectus and placement of the capital. -However a person who merely acts in a professional capacity like solicitor, accountant, valuer etc. on behalf of the promoter is not a promoter. PROMOTERS' CONTRACT — RATIFICATION THEREOF -Disclosure by promoters to the company should be through the medium of the Board of Directors. -The company cannot 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, the promoter is personally liable to third parties LEGAL POSITION OF A PROMOTER -A promoter is neither an agent of, nor a trustee for, the company because it is not in existence. Executive Short Notes – Incorporation and Its Consequences ‐ II ICSI eLearning Coaching Program © GOLS 2011 77 EP-CL-3 -He occupies a fiduciary position in relation to the company and therefore requires full disclosure of the relevant facts, including any profit made DUTIES OF A PROMOTER 1. 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, the company can compel him to account for it. -A promoter is not forbidden to make profit but is forbidden to make secret profit. 2. A promoter cannot make profit from the sale of his own property to the company without making full disclosure of material facts. -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. Termination of Promoters' Duties -It continues until the company has acquired the property for which it was formed to manage and has raised its initial share capital and the Board takes over the management of the affairs of the company from the promoters. Executive Short Notes – Incorporation and Its Consequences ‐ II ICSI eLearning Coaching Program © GOLS 2011 78 EP-CL-3 REMEDIES AVAILABLE TO THE COMPANY AGAINST THE PROMOTER 1. Where the promoter was not in a fiduciary position when he acquired the property which he is selling to the company, but gets the fiduciary position only when he sold it to the company, he can retain any profits by disclosing it to the company. If he does not disclose, the company can rescind the contract or claim damages for breach of duty of disclosure 2. Where the promoter was in fiduciary position when he acquired the property and also when he sold it to the company, he must disclose all the facts to the company and the profits will belong to the company LIABILITIES OF PROMOTERS 1. Section 56 and Schedule II 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. 2. Under Section 62, a promoter is liable for any untrue statement in the prospectus to a person who has subscribed for any shares or debentures on the faith of the prospectus. 3. By virtue of Section 203, of the Companies Act, 1956 the Court may suspend a promoter from taking part in the management of a company for a period of 5 years for some specified offences in connection with an issue Executive Short Notes – Incorporation and Its Consequences ‐ II ICSI eLearning Coaching Program © GOLS 2011 79 EP-CL-3 4. The promoters are criminally liable under Section 63 for the issue of prospectus containing untrue statements. A promoter can, however, escape the punishment if he proves that the statement was immaterial or he believed it to be true etc -Some remedies are available to the subscriber who has been deceived and he may repudiate the contract, he may bring action against promoter, director etc REMUNERATION OF PROMOTERS -A promoter has no legal right to claim promotional expenses for his services or to recover the preliminary expenses unless there is a valid contract. -A promoter may be remunerated by paying for his property sold to the company if proper disclosures are made; he may get commission for shares sold; he may get a fixed sum as provided in the Articles of association.- Remuneration as above will be paid when the company comes into existence -Whatever be the nature of remuneration or benefit, it must be disclosed in the prospectus, if paid within 2 years preceding the date of the prospectus. Executive Short Notes – Incorporation and Its Consequences ‐ II ICSI eLearning Coaching Program © GOLS 2011 80 EP-CL-3 B. FORMATION OF COMPANIES Important Steps -Before the promoter proceeds to incorporate a company, he has to decide the following aspects: (a) Type of the Company -Under the Companies Act, 1956 only three types of companies can be registered, viz., (i) Public companies; (ii) Private companies; and (iii) Producer companies. -Section 12 of the Act provides the minimum number required for forming a private or public company -These companies may further be classified as follows: (i) Companies limited by shares; (ii) Companies limited by guarantee with or without share capital; and (iii) Unlimited companies with or without share capital. (b) Application for Availability of Name of company -The promoters should decide upon at least five suitable names apart from one main name, in the order of preference to afford flexibility to the Registrar to ascertain the availability. -The Registrar of Companies shall furnish the information regarding availability of name within seven days of the receipt of application. -The name of a company must end with the word "Limited" in the case of a public company and the words "private limited" in the case of a private company. This does not apply to a company licenced Executive Short Notes – Incorporation and Its Consequences ‐ II ICSI eLearning Coaching Program © GOLS 2011 81 EP-CL-3 under Section 25 of the Act -According to Section 20 of the Act a company cannot be registered with the name which is undesirable or which is identical with or too nearly resembles the name of an existing company or which is prohibited under the Emblems and Names (Prevention of Improper Use) Act, 1950. -For deciding the availability of names, the Department of Company Affairs (now Ministry of Corporate Affairs) has issued guiding instructions dated 15.3.1962 and further clarifications from time to time which will be followed by ROC authority as may be nominated by the Government, in this behalf. – These guidelines also provide for situations if the name starts with small letters, use of generic names etc -The Companies (Central Government's) General Rules and Forms, 1956 vide Rule 4A, require the promoters of a company under a proposed name to make an application in e-Form No. 1A, with a fee of Rs. 500 to the Registrar of Companies of the State in which the registered office of the proposed company is to be situated, for ascertaining as to whether the proposed name is undesirable within the meaning of Section 20 of the Act. -In case the name is undesirable, the registrar may reject the same within normally 3 days - The applicant shall be given only upto two opportunities for resubmission of their proposal against the fee paid in the first instance for name availability after the original application is filed. -Where the Registrar informs the promoters of the Executive Short Notes – Incorporation and Its Consequences ‐ II ICSI eLearning Coaching Program © GOLS 2011 82 EP-CL-3 company that the name is not undesirable, such name shall be available for adoption by the promoters of the company for a period of sixty days or another extended 30 days from the date the name is allowed. -ROC shall register the company only in cases where the promoters, as per the availability of name application are also subscribers to the Memorandum and Articles of Association of the proposed company at the time of its registration. (c) Preparation of Memorandum and Articles of Association (d) Vetting of Memorandum and Articles, Printing, Stamping and Signing of the same -The draft of the Memorandum and Articles should be prepared and typed and usually sent by the promoters to ROC for vetting the same - For vetting the Memorandum and Articles no fees needs be paid by the promoters. - After the vetting by the Registrar, the Memorandum and Articles may be printed as required under Section 15 of the Act. -The Memorandum and Articles have to be stamped and the value of stamp differs from State to State as per respective State Stamp laws. -Memorandum should be signed by each subscriber (or his duly authorized agent) who should add his address, description and occupation, if any, in the presence of at least one witness who shall attest the signature and shall likewise add his address, description and occupation, if any. -In case of companies having share capital, the Executive Short Notes – Incorporation and Its Consequences ‐ II ICSI eLearning Coaching Program © GOLS 2011 83 EP-CL-3 subscribers to the Memorandum should at least take one share each and they have to state clearly the number and nature of shares taken by them. Where necessary one witness can attest the signatures of all subscribers. -The Articles of Association should also be signed separately by subscribers or their duly authorized agents. The signatures of the subscribers in the Articles of Association are also to be attested by a witness. -Guidelines of the Department should be followed if the memorandum is executed by an illieterate -After the documents are stamped, signed and dated, they should be printed. -Under the MCA-21 system also, the Memorandum and Articles of Association are required to be printed, stamped, signed physically and submitted physically at ROC office. A scanned copy of the duly stamped and executed memorandum and articles is also required to be attached with e-Form 1 and submitted electronically. However, they are not required to be filed as attachment for a company licensed under Section 25 as they are already attached with e-form 24. (e) Power of Attorney -With a view to fulfill the various formalities that are required for incorporation of a company, the promoters may appoint an attorney empowering him to carry out the instructions/requirements stipulated by the Registrar. This requires execution of a Power of Attorney on a non-judicial stamp paper of a value prescribed in the respective State Stamp Laws. Executive Short Notes – Incorporation and Its Consequences ‐ II ICSI eLearning Coaching Program © GOLS 2011 84 EP-CL-3 (f) Additional Documents Required (i) e-Form No. 29: Consent of directors in case of public companies (ii) e-Form No. 18: Notice of Registered address (iii) e-Form No. 32: Particulars of Directors (g) Statutory Declaration in e-Form No. 1 by an advocate or practising CA or practicing CS that all requirements under Companies Act have been fulfilled -The above declaration should be on a non-judicial stamp paper of appropriate value with reference to the State in which the office of the Registrar of Companies is situated. (h) Payment of Registration Fees -The fee prescribed for registration of company in Schedule X to the Act is required to be paid to the Registrar and the quantum of registration fees depends on the nominal capital of the company to be incorporated (i) Certificate of Incorporation -If all legal requirements have been complied with, ROC shall register the memorandum and articles of the company -ROC then shall certify under his hand that the company is incorporated and, in the case of a limited company that the company is limited company. -From the date of Incorporation mentioned in the Certificate of Incorporation, it will become a body corporate with all features attached to it Executive Short Notes – Incorporation and Its Consequences ‐ II ICSI eLearning Coaching Program © GOLS 2011 85 EP-CL-3 Conclusive Evidence -As per Section 35 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 - The validity of the registration cannot be questioned after the issue of the certificate. – It is a conclusive evidence for the purpose of incorporation only and it cannot legalise any illegal objects contained in the Memorandum Executive Short Notes – Incorporation and Its Consequences ‐ II ICSI eLearning Coaching Program © GOLS 2011