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incorporation Of companies

ABSTRACT

Incorporation is a legal process in order to form a company or a corporate entity. In other words, incorporation means the registration of the Company in Registrar of Company (Known as ROC). The corporation is a legal entity that separates the income and firm’s assets from its investors and owners.

The Companies Act, 1956, regulates the incorporation of Companies in India or any foreign corporation. The Companies Act deals with all the requirements of establishing the rules and regulations of both private and public companies in India.

The very primary step to form a company is the approval of the name by the Registrar of Companies in the State/Union Territory, where the company will maintain its registered office. However, this comes with certain conditions as well as there should not be any two companies with the same name. The last words in the name are required to be “Private Ltd.” in the case of Private Company and “Limited” in the case of a Public Company. For foreign countries engaged in trading and manufacturing activities, the Reserve Bank of India is permitted to open its branch in India.

KEYWORDS

  • Companies  Act 2013
  • Memorandum of Association (MOA)
  • Article of Association (AOA)
  • Share Capital
  • Director Identification Number (DIN)
  • One Person Company

INTRODUCTION

A company comes into existence only when it is incorporated, and the Registrar issues the certificate of incorporation. Under the 2013 Act, the ministry has provided the online mechanism for incorporating a Company as per which Simplified Pro Forma for Incorporating Company Electronically (SPICe) has been developed.

RESEARCH METHODOLOGY

The proposed study mainly is descriptive in nature. The data are mainly collected from secondary sources like- Thesis, newspapers, journals, magazines, publications, articles, research papers and websites.

REVIEW OF LITERATURE

Dr Rabindra Kumar Sahu(Jan 2016) had conducted a study on “the Companies Act,2013 vis-a-vis the companies act 1956-a brief review of some provisions” and analysed the difference between some provisions of the companies act 1956 and companies act 2013 and found out that the new act focuses on e-governance, good corporate governance, corporate social responsibility, protection of minority shareholders etc.

Debendra Kumar Ojha and Dr Kishore Kumar Das(Jan 2016) had studied the provisions relating to one person company or a single-member company under the Companies Act 2013 and stated that the advent of one personal company would be brought a revolutionary change in the Indian business sector.

Nishant Sharma and RuchitaDang(May 2014)B has studied the historical background of the companies act and compared the Companies Act 2013 and Companies Act 1956 on various topics under different chapters of the Act.

STEPS OF INCORPORATION OF COMPANY

First and foremost, reliance must be placed on the basic requirement of the composition of a company, meaning thereby, the number of persons which are required for each type of company to be duly incorporated under the 2013 Act. In accordance with Section 3 of the 2013 Act, a company may be formed:

a. by seven or more persons in case of a public company, and

b. by two or more persons in case of a private company; and

C. by one person in case a company is a private company but is to be formed in the nature of a One Person Company.

Such members need to subscribe their names to a memorandum and comply with the requirements of the 2013 Act. Hence, it is the promoters job to gather the requisite numbers of members for the formation of a company.

GENERAL DOCUMENTS REQUIRED TO BE FILED FOR INCORPORATING THE COMPANY

A) Memorandum of Association and Articles of Association, duly signed by the subscribers and the required witnesses;

B) Application for reservation of name (Form INC-1);

C) Self-attested copies of Identity proof of directors and shareholders;

D) Self-attested copies of Address proof of Directors and shareholders (electricity bill/water bill/telephone bill and bank statement/ passbook);

E) Photographs of members and directors;

F) Declaration by proposed directors(Form DIR-2);

G) Application for allotment of DIN (Director Identification Number) or details of

DIN, if it already exists;

H) Proofs pertaining to Registered Office:

(i) No-objection letter from the Owner of the property and permission to allow the premise to be used as registered office of the Company

 (ii) electricity bill/water bill or other address proof, signed by the Owner.

PROCESS OF INCORPORATION: HOW TO PROCEED

1. Obtaining the Digital Signatures of Managing Director, Director, Manager, Company Secretary is very important. The same should be obtained for at least one director enabling him to sign the e-forms related to the company.

2. Obtaining a Director Identification Number (DIN) is mandatory under Section 153 of the 2013 Act, and this should precede the submission of form for the availability of name of the company;

3. Checking the availability of the name of the proposed company is an important stage. Section 4(4) of the 2013 Act read with Rule 9 of the Companies (Incorporation). Rules, 2014 stipulates that the same shall be done via Form INC and a Rs fee. 1000/-;

4. Preparation of Memorandum of Association (MOA) and Articles of Association (AOA’) is the next important step, and the objects mentioned herein must be in consonances with the objects stipulated in Form INCA:

5 Application for incorporation is the next stage. In accordance with Rule 12 of the Companies (Incorporation) Rules, 2014, an application for incorporation shall be filed with the Registrar in Form INC. 7 along with Form INC. 22 (for registered office) and DIR-12. The following attachments also need to be provided:

Attachments for Form INC.7:

  1. MOA;
  2.  AOA;

D[1]declaration in the Form. INC-8 by an advocate, CA, CMA or CS who has been

engaged in the formation of the company that all requirements under the 2013 Act and

the related rules have been complied with.

d. Affidavit in Form INC-9 by each subscriber to the MOA that he/she is not convicted of any offence in connection with promotion, formation or management of any company or that he has not been found guilty of any fraud during the preceding 5 years.

e. Proof of residential address, which shall be the address of correspondence till the time the registered office is approved.

f. Form INC. 10 for verification of the signature of subscribers.

g. NOC in case there has been a change in the promoters.

h. Proof of identity of every subscriber.

i. Entrenched AOA, if any.

j. PAN card in case of Indian nationals.

k. Form DIR.12, which basically comprises the particulars of each person mentioned in AOA as the first directors and his interests in other firms, if any and his willingness to act as the director of the company.

1. Certified true copy of the consent of all subscribers to MOA.

m. Form INC.22, which basically relates to the verification of registered office, which shall be coupled with proof of the address of the proposed registered office such as conveyance deed etc.; utility bills etc.

6. After the requisite filings, the Registrar is satisfied with their truth and content. The registrar will issue the certificate of incorporation in Form INC. 1 according to Rule 18 of the Companies (Incorporation) Rules, 2014.

Please Note: To find out the requisite fees applicable under the Act, it is provided under The Companies (The Registration Offices and Fees) Rules, 2014.

MEMORANDUM OF ASSOCIATION (‘MOA’)

Memorandum of Association (MOA) is referred to as the Charter or the Constitution of the Company, which defines the object and purpose of the Company. It is the foremost document for incorporating any new Company, and it is a public document, which can be accessed on the MCA portal. It helps to identify the possible scope of operations of the company and beyond which actions cannot be taken. In the case of Ashbury Railway Carriage & Iron Co. Ltd. v. Riche [1875] L.R. 7 H.L. 653, it was observed that “the MOA defined the limitations on the powers of the company…it contains in it both that which is affirmative and that which is harmful. It states affirmatively the ambit and extent of vitality and power which by law are given to the corporation. It states if it is necessary to state, negatively, that nothing shall be done beyond that ambit…. For example, if the object of the business is to sell cookies, the company cannot start another business with banking services without making an amendment to the MOA. This amendment/ alteration has to be done in accordance with the procedure provided under the 2013 Act.

IMPORTANT POINTS ON MOA

  • It defines and limits the scope of activities that the Company can carry out. Any act which is ultra-vires the MOA shall be void.
  • It governs the relation of the Company with outsiders. It enables the shareholders, creditors, suppliers and all other persons dealing with the Company to know the nature and scope of activities carried out by the Company.
  • Section 2(56) of the 2013 Act defines MOA, and Section 4 prescribes the contents of MOA. Further, Table A, B, C, D, & E of Schedule I provide various sample drafts of MOA, depending on the nature of the Company.
  • At least 2 members must sign the MOA in the case of a private company and at least 7 members in a public company, who would be referred to as subscribers to the MOA. It requires the attestation of one witness.
  • As per Section 6 of the 2013 Act, the MOA must be in compliance with the 2013 Act and case of any conflict, the provisions of the 2013 Act shall override the memorandum.
NAME OF THE CLAUSE                                                                EXPLANATION
Name  ClauseThis clause states the name of the Company. The name must not be identical or similar to the name of the existing Company. It must be in accordance with Section 4(2) read with Rule 8 & 8A of the Companies (Incorporation) Rules, 2014. It should contain the words ‘limited in the case of a public company or private limited in the case of a private. Company or ‘OPC’ in brackets for a One Person Company. A section 8 company may be licensed by the Central Government to not use the word ‘Limited or Private Limited as a part of its name.
Registered Office ClauseThis clause provides the address of the registered office of the Company. If the registered office has not been finalized at the time of incorporation, then the MOA may mention the State in which the company’s registered office will be situated. However, the Company must decide its registered office within 30 days of This clause provides the address of the Company’s registered office. If the registered office has not been finalized at the time of incorporation, then the MOA may mention the State in which the company’s registered office will be situated. However, the Company must decide its registered office within 30 days of
Object   ClauseThis clause provides the objects and indicates the scope of the activities with which the proposed Company is being incorporated. The object cannot be illegal, immoral or opposed to public policy or against the provisions of the 2013 Act. The company cannot act beyond the scope of its objects. Otherwise, such an act is considered ultra vires and transaction void ab initio. No one in the company can later ratify this.
Liability   ClauseThis clause defines the liability of the members of the Company. Liability can be limited or unlimited. In the case of limited liability, it can be limited by shares or by guarantee.
Capital ClauseThis clause states the amount of capital with which the Company is to be registered (also known as Authorized Capital). The share capital is further divided into shares having a fixed value. A company cannot issue more shares than mentioned in the clause without altering the MOA as prescribed
Subscriber   ClauseThis clause contains the name and details of initial subscribers of MOA, i.e. the founding members of the Company. These subscribers sign the MOA in front of at least one witness. [Please read point 2.1 above] If the subscriber is Illiterate, a thumb impression or mark shall be affixed with a person who will write on his behalf and authenticate with his signature.If the subscriber is a body corporate, it shall be signed by a director or any other duly authorised person.If the subscriber is a Limited Liability Partnership, it shall be signed by a duly authorised partner.Each subscriber must take at least one share.

ARTICLES OF ASSOCIATION (AOA’)

Articles of Association (AOA) contains the rules and regulations for internal management of the Company. It defines the mechanism in which the Company’s operations would be carried out to achieve the objects set out in the MOA. The AOA are subordinate to MOA and derive their validity from the MOA. The AOA defines the powers, duties and functions of the management and officials of the Company. The AOA establishes a contract between the Members and the company and between members themselves. The MOA and AOA must be read together in case of ambiguity.

IMPORTANT POINTS REGARDING AOA

  • Section 2(5) of the 2013 Act defines the AOA, and Section 5 prescribes the contents of AOA.
  • Under the Companies Act, 2013, every Company must have AOA. Table F, G, H, I and J of Schedule I provide various sample drafts of AOA, depending on the nature of the Company.
  • The Company can alter AOA by passing a Special Resolution in the general meeting. However, when AOA is to be amended to convert the public company into a private company, then the approval should be taken from the central government.

PROVISIONS OF ENTRENCHMENT IN AOA

The 2013 act, for the first time, provides for AOA to have provisions in relation to entrenchment under Section 5(3). This means that the entrenched provisions cannot be altered through a mere special resolution. To alter the entrenched provision, additional procedural guidelines are to be complied with. provided only by Such provisions may be

a. Private Company: Either on the formation of the company or by way of an amendment in the AOA provided the same is consented by all the members of the company;

b. Public Company: Only by way of a special resolution.

BINDING NATURE OF MOA AND AOA

The members and the Company are bound by the terms stipulated under the MOA and AOA of the Company. This is provided under Section 10 of the 2013 Act, which states that, on registration, MOA and AOA bind the company and the members as if they have each entered into a separate contract with the Company. The legal effect of the Memorandum and Articles are in the following ways:

  • Members are bound towards the Company
  • The company are bound to the Members
  • Members bound to other Member

However, these documents do not create any contract between the Company and outsider, and the outsiders cannot claim any right under the terms stipulated in the AOA and MOA.

IMPORTANT DOCTRINES

  1. DOCTRINE OF ULTRA VIRES – Any act beyond the scope of objects of the Company, as stipulated in MOA, is ultra vires, and the same is void ab initio. The company members cannot ratify ultra vires acts, and all such acts would be treated as null and void. However, the Company may carry out acts that are necessary and incidental to attain the objects of the Company. These are usually considered implied powers. It is based on the assumption that the Company has the power to do everything that is reasonably necessary to achieve its objects, apart from the words in the MOA. The following points are also required to be considered in this regard:
  2. The act which is ultra vires the AOA, but intra vires to MOA can be ratified by amending the Articles.
  3. The act which is ultra vires the powers of the Director, but intra vires the powers of Company can be ratified by the Company.
  4. The act that falls within the Company’s powers and objects but has been done irregularly can be validated by the shareholders.

Important Judgment: Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1875) LR7 HL 65  

EFFECT OF ULTRA VIRES TRANSACTIONS:

  • Void ab initio: The company is not bound by these acts. It cannot sue or be sued upon with respect to such a transaction.
  • Injunction: If a company is about to enter into an ultra vires transaction or activity, one or more members can file for an injunction in a court to restrain the Company from proceeding further.
  • Personal Liability of Directors: If the directors sign off on any ultra vires transaction, the director can be held personally liable for the same. This liability is both towards the company as well as third parties. For example, suppose the funds have been utilised in an activity beyond the scope of the Company’s objects. In that case, the Director will be personally liable to replace the funds used for such an activity. If the activity results in a loss for the third party, then the directors are also liable to them.
  •  It is important to differentiate between transactions that are ultra vires the company and ultra vires the powers of the directors. The situation above applies to the former case. In the case of the latter, the transaction can be ratified by shareholders.
  • DOCTRINE OF CONSTRUCTIVE NOTICE: Section 399 of the 2013 Act states that the MOA and AOA become public documents and can be accessed by any person on the MCA portal to pay a prescribed fee. Therefore, a presumption is made that any person dealing with the Company has the knowledge of these documents before entering into any contractual or business relationship with the Company. Since no actual notice is given to the other party regarding the contents of the public documents, the presumption is that he has implied (constructive notice) of the same.

ILLUSTRATION: Articles of Company X states that any promissory note favouring a third party has to have the signatures of two directors. A promissory note in favour of ‘Z’ has the signature of only one director. In this case, Z will not have a right to claim money based on the promissory note. This is because the promissory note is not valid, and it is presumed that Z had constructive notice of the fact mentioned in the Articles.

  • DOCTRINE OF INDOOR MANAGEMENT: This doctrine is opposed to the Doctrine of Constructive Notice and protects the interests of outsiders. An outsider’s knowledge is merely restricted to the information mentioned in such public documents. This doctrine came into being because constructive notice put outsiders to a company to a disadvantage in cases where outsiders did not know about the internal management and functioning of the Company and impacted the claims of outsiders against the company. This is particularly in those cases where directors and other officers of the Company could enter into transactions subject to prior approvals. It would be difficult for an outsider to ascertain whether the director/officer has actually obtained such approval. Any irregularity in the Company’s internal management will not prejudice the rights and interests of the outsider.

Important Judgment: Royal British Bank v. Turquand, (1856) 6 E&B 327

WHY DO YOU NEED TO INCORPORATE YOUR BUSINESS?

YOU NEED TO INCORPORATE YOUR BUSINESS FOR –

  • Savings of tax
  • Protection of the liability
  • The credibility of the business
  • Ease of raising capital
  • Perpetual duration
  • Ownership transfer
  • Privacy

DISADVANTAGES OF INCORPORATION OF A COMPANY

LIFTING THE CORPORATE VEIL

Under this concept, the court disregards the status of a company as a separate legal entity if the members of the company try to take advantage of this status. The intentions of the persons behind the veil are completely exposed. They are made personally liable for using the company as a vehicle for undesirable purposes. This can be done where the only purpose of incorporation of a company was to evade taxes, where the company was brought forth for fraudulent purposes etc.

The corporate veil can also be lifted when the members of the company go against the statutory provisions. For example, in cases where a business is carried on beyond six months after the knowledge that the company’s membership has gone below the statutory requirement, the company members will be held liable.

PAPERWORK AND EXPENSES

Incorporating a company is both an expensive affair in monetary terms and a cumbersome process because of the paperwork it requires.

THE COMPANY IS NOT A CITIZEN

A company, though a legal person, is not a citizen. It can have the benefit of only such fundamental rights as are guaranteed to every “person”, whether a citizen or not. A company, however, does have a nationality,domicile and residence. A company incorporated in a particular country possesses the nationality of that particular country, but unlike a particular person, it cannot change its nationality.

CONCLUSION

The incorporation of a company thus has its pros and cons. Incorporation dramatically depends on the needs of the business. If the members perceive the business as scalable, then the high incorporation costs are completely justified.

REFERENCE

BY : Hardik Sangal (BVIMR)


* Please refer to the following link to refer to a sample MOA:

https://docs.google.com/document/d/1KB5tyLLV1ERtiWcjHTp9PLNjAiO5Te82RzKJBi2Wvf0/edit

* Please refer to the following link to refer to a sample AOA:

https://docs.google.com/document/d/1yOCnXJ4CSiUqhChebkBnxyJGeJu_J1mGwoIhtiropl0/edit