DD: Company Law V - The Process of Company Formation

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The process of company formation can be divided into three stages:

  1. Promotion
  2. Incorporation by Registration
  3. Commencement of Business

Promotion: The process of conceiving an idea and developing it into a concrete proposition or project to be accomplished by the incorporation and floatation of the company. The person taking the necessary steps to accomplish these objectives is known as promoter. [S. 2(69), Indian Companies Act, 2013] People in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act are also treated as promoters. 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 a promoter.
In Kelner vs. Baxter LR (1886) 2 CP 174, it was held that the company couldn't ratify contracts made by a promoter before incorporation.

However, 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. [S. 15, Specific Relief Act, 1963]

Legal Position of a Promoter
A promoter is neither an agent of, nor a trustee for, the company because it's not in existence yet. 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.

Corollary: The promoter may not 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 make secret profit in disregard of this rule, the company can compel him to account for it and surrender the secret profit. 

Incorporation by registration
Procedural Aspects

Application for availability of name of company - S. 4(2-5), Indian Companies Act, 2013

Preparation of Memorandum and Articles of Association:
MOA - Sets out the constitution of a company - foundation on which the structure of the company is built. Defines the scope of the company's activities and its relations with the outside world. S. 2(56), 4, Companies Act, 2013
AOA - S. 2(5), 5(1); and Ashbury Railway Carriage and Iron Co. Ltd. vs Riche, (1875) LR 7 HL 653.
Contain the regulations for management of the company - bye-laws or rules nad regulations that govern the management of internal affairs and conduct of business of a company.
Subsidiary role to that of MOA.
The MOA lays down the scope and powers of the company and the articles govern the ways in which the objects of the company are to be carried out and can be framed and altered by the members. They must keep within the limits marked out by the memorandum and the Companies Act. 

Filing of documents with ROC - S. 7(1), Companies Act, 2013; also see Companies (Incorporation) Rules, 2014

S. 7(2), Companies Act, 2013
The CIN given by the Registrar in respect of any association shall by conclusive evidence that everything is in order - 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 validity of registration can't be questioned after issue of the certificate. - Jubilee Cotton Mills Ltd. vs. Lewis, (1924) AC 958.

Note: The CIN cannot legalize illegal objective contained in the Memorandum. Performing Right Society Ltd. vs. London Theatre of Varieties (1992) 2 KB 433.

S. 7(3), Companies Act, 2013 deals with the allotment of Corporate Identity Number (CIN). Each Indian company (whether listed or unlisted) has a unique 21 digit CIN which is required to be quoted on all forms. The CIN is made up of an alpha-numeric code with six parts.

Commencement of business - Under the Companies (Amendment) Act, 2015, S.11 of the Companies Act, 2013, which deals with the certificate of commencement of business has been omitted. As a result, every company commences its business immediately after the incorporation of business.

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