FORMATION AND INCORPORATION

FORMATION
4 STAGES 1. PROMOTION 2. INCORPARATION / REG. 3. SUBSCRIPTION 4. COMMENCEMENT

I. PROMOTION
DISCOVERY OF BUSSINESS OPPURTUNITIES PROMOTER INDIVIDUAL, FIRM,

ASSOCIATION OF PERSONS THE IDEA TO START A BUSINESS

To start 1. a new business altogether, or 2. To acquire an already running business, if it is available at considerable attractive terms and conditions. Some time it does happen that some people may start a business without having sufficient knowledge or sufficient experience or sufficient funds and later on they decide to dispose of that business to avoid huge losses. In such a case it may be better to acquire a running business with favorable terms and conditions and it may prove to be a good decision. The other important matters be decided before the formation of the company could be the decision regarding the product to be produced, the size of the company, the capital involved in the project, the sources of the capital and whether it shall be a Private Company or a Public Company. Any of the above decisions i.e., to start a new business altogether or to acquire an already running business, along with the other matters shall have to be taken by some person or persons who are at the helm of the affairs. They are called PROMOTERS.

FUNCTIONS
collect the no. of persons for pub. or pvt. to subscribe & sign MOA, AOA arranges minimum subscription prepares for prospectus, filing & advt. arranges for registration to obtain the certificates negotiation in case of purchase of existing business Remuneration to the promoter it also must be disclosed in the prospectus

DUTIES
MAKE GOOD TO THE COMPANY NO SECRET PROFITS IF MADE THEN DISCLOSE

II. INCORPORATION & REG

Promoter must decide types of company PUB & PVT Propose name Sec.20 corporate identity no. for companies registered on or after nov 1. 2000. Preparation of MOA & AOA
defines area, states the objects, the capital , liability, registered office AOA rules & regulations vetting of MOA & AOA, the printing, stamping & signing of the same
by every subsciber or his agent

Preparation of other documents like

power of attorney particulars of directors notice of registered address etc

 Filing of documents for registration Certificate of Incorporation:

Gets scrutinised, registers the company Can you conclude in the following example that the company does not exist?
The MOA of a company was signed by two adults and by a guardian of five members, who were minors. The registrar registered the company and issued a certificate.

pvt co commences once registered. public co

must obtain certificate of commencement

It is assumed that: There are no 7 subscribers shouldnt have granted but is conclusive for all purposes cannot say the company does not exist.
Though a company is a person: Company not a citizen- In State Trading Corporation of India v. CTO, the SC held that a company is not a citizen neither under the provisions of the Constitution nor under the Citizenship Act.

EFFECTS OF REGISTRATION
When a company is registered and a Certificate of Incorporation is issued by the Registrar, it shall have the following effects :
The company shall become Separate Legal Entity from the date mentioned on the Certificate of Incorporation, which is considered as date of birth of the company.
The Company acquires Perpetual Succession. The members may come, members may go, but it goes for ever. The company becomes the owner of its property and the Promoters of Shareholders have the right to share in the profits of the company. The company can sue and can be sued in its own name.

Will have a Common Seal

Limited Liability

Disadvantages of Incorporation
I. Formality and expense- Incorporation is a very expensive affair. It requires a number of formalities to be complied with both as to the formation and administration of affairs. Lifting of corporate veil (veil does not exist)- though for all purposes of law a company is regarded as a separate entity it is sometimes necessary to look at the persons behind the corporate veil. Determination of character For benefit of revenue Fraud or improper conduct Agency or Trust or Government company Under statutory provisions

II.

a) b) c) d) e)

CORPORATE VEIL also known as "disregarding the corporate entity"

corporate veil definition Legal concept that separates the personality of a corporation from the personalities of its stockholders (shareholders), and protects them from being personally liable for the firm's debts and other obligations. However This protection, is not ironclad or impenetrable. Where a court determines that a firm's business was not conducted in accordance with the provisions of corporate-legislation (or that it was just a faade/front for illegal activities) it may hold the stockholders personally liable for the firm's obligations under the legal concept of 'lifting (or piercing) the corporate veil. That means no separate personality for liability

When can Corporate Veil of a Company be Lifted? The separate entity of the company is disregarded and the schemes and intentions of the persons behind are exposed to full view which is known as lifting or piercing the corporate veil.
This is usually done in the following cases

1.

Determination of character a company was incorporated in England for the purpose of selling tyres manufactured in Germany by a German company. The German company held the bulk of the shares in the English company and all the directors of the company were Germans, resident in Germany. During the First World War the English company commenced an action to recover a trade debt. And the question was whether the company had become an enemy company and should therefore be barred from maintaining the action.

 The House of Lords held that though the company was registered in England it is not a natural person with a mind or conscience. It is neither loyal nor disloyal; neither friend nor enemy. But it would assume an enemy character if the persons in de facto control of the company are residents of an enemy country.

2. For benefit of revenue The separate existence of a company may be disregarded when the only purpose for which it appears to have been formed is the evasion of taxes. In Bacha F Guzdar v. CIT, Bombay, a member of a tea company, who claimed that the dividend held by her in respect of her shares should be treated as agricultural income(as it was exempted from tax) and not income from manufacture and sale of tea. Suggestions?

3. Fraud or improper conduct In Gilford Motor Co v. Horne, Horne was appointed as the MD of the company on the condition that he shall not solicit for anything at any point of time the customers of the company. He formed a new company which undertook solicitation of plaintiffs customers. The company was restrained (bringing to a control) by the Court.

4.

Agency or Trust or Government company The separate existence of a company may be ignored when it is being used as an agent or trustee. In State of UP v. Renusagar Power Co, it was held that a power generating unit created by a company for its exclusive supply was not regarded as a separate entity for the purpose of excise.

5. To avoid welfare legislation

where the sole purpose of formation of new company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the SC pierced its corporate veil. The Workmen Employed in Associated Rubber Industries Ltd. v. The Associated Rubber Industries Ltd

6. Under statutory provisionsThe Act sometimes imposes personal liability on persons behind the veil in some instances like, where 1. business is carried on beyond six months after the knowledge that the membership of company has gone below statutory minimum 2. when contract is made by mis describing the name of the company - HENDON vs. ADIEMAN

III. CAPITAL SUBSCRIPTION/FLOATATION

Go ahead with raising sufficient capital Pvt co has to approach friends relatives and arrange privately Pub co: - issue prospectus if public is to be invited to raise cap. the very 1st time to subscribe to its capital. - deliver a statement in lieu of prospectus - the min. subscription as mentioned in prospectus is not received (90% of entire issue according to SEBI) then refund to the applicants

IV. COMMENCEMENT OF BUSSINESS

PRIVATE CO NO SHARE CAPITAL MAY COMMENCE BUSSINESS. PUBLIC CO HAVING SHARE CAPITAL MUST OBTAIN CERTIFICATE TO COMMENCE BUSINESS

RESTRICTION ON COMMENCEMENT OF BUSINESS

CO HAS ISSUED PROSPECTUS SEC.149 (1) APPLICABLE
CANNOT COMMENCE UNLESS
SHARES UPTO THE AMT OF MIN. SUBSCRIPTION HAVE BEEN ALLOTTED BY CO

FILE WITH REGISTRAR DULY VERIFIED DECLARATION BY ONE OF THE DIRECTORS OR THE SECRETARY OR, WHERE THE COMPANY HAS NOT APPOINTED A SECRETARY AS WHOLETIME PRACTICE

 HAVING SHARE CAPITAL & HAS NOT ISSUED PROSPECTUS - THEN 149 (2) APPLIES - CANNOT COMMENCE UNLESS
FILE A STATEMENT IN LIEU OF PROSPECTUS

FILE WITH REGISTRAR DULY VERIFIED DECLARATION BY ONE OF THE DIRECTORS OR THE SECRETARY, OR WHERE THE COMPANY HAS NOT APPOINTED A SECRETARY AS WHOLETIME PRACTICE

PENALTY
PUBLIC CO IF COMMENCES RS.5000/- FINED EVERY DAY OF DEFAULT

PUBLIC CO
SEC. 3(1)(iv) A CO. WHICH IS NOT PVT. HAS A MIN. PAID UP CAPITAL OF 5 LKS. NO MAX. LIMIT FOR MEMBERS MIN. LIMIT IS 7 NO RESTRICTION ON TRANSFER OF SHARES CAN INVITE PUBLIC FOR SUBSCRIPTION OF ITS SHARES & DEB.

PVT CO
SEC 3(1)(iii) BY ITS ARTICLES - MIN. CAP. 1 LKH. - MAX LIMIT IS 50 - MIN IS 2 - NO FREE TRANSFER OF SHARES. 1ST PREFERENCE TO ITS MEM. - JOINT SHARES CONSIDERED AS ONE. - PVT LTD LAST WORDS

 CANNOT INVITE PUB TO SUBSCRIBE FOR ITS SHARES OR DEB. ONCE A YEAR MUST FILE WITH THE REGISTRAR ANNUAL RETURN & A STATEMENT WITH FACTS --. CERTIFICATE SAYING NO INVI. TO PUBLIC . NOT MORE THAN 50 MEM. . CORPORATE SHAREHOLDING LESS THAN 25% SHARE CAP.