INCORPORATION AND

FORMATION OF A COMPANY Unit 1

DEFINITION
As per Sec. 2(20) of the Companies Act, 2013, ‘company’ means a company incorporated
“under this Act”; or “under any previous company law”.

A company is an artificial person created by law, having “separate identity” and “perpetual
succession”.

A Company is an association of many persons who contribute money or money’s worth to a

common stock and employ it for a common purpose. The common stock so contributed is
denoted in money and is the capital of the company. The persons who contribute to it or to whom
it belongs are its members. The proportion of capital to which each member entitled is his share.
 INCORPORATED
ASSOCIATION
Every company must be compulsorily registered or
incorporated under the company’s Act , 2013.
According to sec 3 the minimum number of persons required
for forming a private company is two, seven for a public
company and one for one person company. These persons are
also known as the subscribers to the memorandum.
“COMPANY HAS BEEN DEFINED AS A COMPANY INCORPORATED UNDER THIS ACT OR
UNDER ANY PREVIOUS COMPANY LAW.”

[Section 2(20) of the Companies Act, 2013]

CHARACTERISTICS:
 Separate legal entity
 Limited liability
 Perpetual succession
 Common seal
 Transferability of shares
 Separate property
 Capacity to sue
SEPARATE LEGAL
ENTITY
A company is in law regarded as an entity separate from its
member. It has an independent corporate existence
Any of its member can enter into contract with it in the same
manner as any other individual can and he can not be held
liable for the acts of the company even if he holds virtually
the entire share capital
 LIMITED
LIABILITY
 In a company limited by shares, the liability of member is limited to the unpaid value
of the shares.
 Company limited by guarantee is a incorporated firm without share capital, and in
which the liability of its members is limited to the amount each one of them undertakes
to contribute at the time the firm is wound up.

 For example if a face value of a share in a company is Rs.10 and a member has already
paid 7per share he can be called upon to pay not more than three per share during the life
time of the company
 PERPETUAL
SUCCESSION
Member may come and go but the company can go on forever. It
continues to exist even if all its members are dead. The existence of
company can be terminated only by law
Ex:- All members of a private company were killed by a bomb while
in a general meeting held, The company continues to exist through
the legal heirs of the deceased parties or member.
COMMON
SEAL
Common seal is the official signature of the company.
Any document on which common seal is affixed, is
deemed to be signed by the company.
SEPARATE
PROPERTY
As a company is a legal person distinct from its members, It is
capable of owning ,enjoying and disposing of property in its own
name.
Although its capital and assets are contributed by its
shareholders, they are not the private and joint owner of its
property.
TRANSFERABILITY OF
SHARES
In case of a public company the shares are freely
transferable but in the case of a private company
there will be certain restriction on the transferability
of shares.
CAPACITY TO SUE AND BE
SUED
A company being a separate legal entity has the legal entity to
sue others such as members, directors, debtors, outsiders etc.

Similarly, a company may also be sued by others such as

members, directors, creditors, outsiders.
 ARTIFICIAL
PERSON
A company is not a natural person. Consequently, a company
cannot fall ill, or die or be declared as insolvent.
 A company is an artificial person.
But it is not a fictitious person. A company does exist but
only in the eyes of law. In other words, a company exists only
in contemplation of law.
 SEPARATION OF OWNERSHIP
FROM MANAGEMENT
The members do not participate in day-to-day affairs of the
company.
The management of the company lies in the hands of elected
representatives of members, commonly called as Board of
directors or directors of simply the Board.
The directors are appointed as well as removed by the members.
Thus, the Act has ensured the ultimate control of members over
the company.
 LIFTING OR PIERCING OF
THE CORPORATE VEIL:
• The principle of veil of incorporation is a legal concept that separates the
personality of a corporation from the personalities of its shareholders and
protects them from being personally liable for the company’s debts and
other obligations.
• While a company is a separate legal entity, the fact that it can only act
through human agents that compose it, cannot be neglected.
Since an artificial person is not capable of doing anything illegal or
fraudulent, the façade of corporate personality might have to be removed to
identify the persons who are really guilty. This is known as lifting of the
corporate veil.
LIFTING OR PIERCING THE
CORPORATE VEIL
 Protection Of Revenue
 Prevention Of Fraud Or Improper Conduct
 Determination Of Character Of A Company Whether It Is Enemy
 Where The Company Is Sham
 Company Avoid Legal Obligation
 Company Acting As an Agent Of Shareholder
 Avoidance Of Welfare Legislation
 Protecting Public Policy.
 EXCEPTIONS TO THE VEIL OF INCORPORATION (LIFTING OF THE
CORPORATE VEIL)

GENERAL EXCEPTIONS: STATUTORY EXCEPTIONS:

1. Protection of revenue 1. Misstatement in the prospectus
2. Prevention of fraud or improper
conduct 2. Ultra vires acts
3. Determination of character of a company 3. Number of members below statutory
whether it is enemy
minimum
4. Where the company is a sham 4. Failure to refund application money in case
5. Company avoiding legal obligations of not meeting minimum subscription
6. Company acting as the agent or trustee of the 5. Holding and subsidiary companies
shareholders
7. Avoidance of welfare legislation 6. Fraudulent trading
8. Protecting public policy 7. Mis-description of company’s name
COMPANY DISTIGUISHED FROM
PARTNERSHIP
 Regulating Act.
 Mode Of Creation
 Legal Status
 Management
 Transferability Of Interset
 Authority Of Members
 Power
 Restriction On Powers.
COMPANY DISTIGUISHED FROM
PARTNERSHIP

 Insolvency Of Firm And Winding Up Of Company

 Debts.
 Dissolution.
 Number Of Members.
 Minimum
 Maximum
 Maintenance Of Books.
 COMPANY
LAW IN
INDIA
Company legislation in India owes its origin
to the English Company Law. The Companies
Acts passed from time to time in India have
been following the English Companies Acts
with Certain modifications to suit Indian
Conditions.
HISTORY OF COMPANY LAW

 Registration of joint stock companies[1850]-Based on English

Companies Act, 1844.
 Limited Liability Act of 1855.
 Joint Companies Act of 1856- Replaced Both Acts of 1844 & 1855.
 Join Companies Act 1857 passed in India
 Companies Act 1866.[Based English Companies Act 1862].
 Recast of The Companies Act1866 in 1882.
 Act of 1913.
CLASSIFICATION OF COMPANIES
Based on Based on Based on No. Based on Based on
Incorporation of Members Control Ownership
Liability

Public Holding
Companies with Company Companies Government
Statutory Unlimited
Company
Liability
Private
Company
Subsidiary
Companies
Companies with
Limited Small Company Foreign
Liablity Company
Registered • Limited By Shares (Companies
• Limited Associate Incorporated
One-Person Companies
By
Company outside India)
Gurantee

Associations Not For Profit [ Section (8) of Companies Act, 2013].

ONE PERSON COMPANY
OPC: A COMPANY THAT HAS ONLY ONE PERSON AS TO ITS MEMBER.

Features of a One Person Company

• Private company
• Single-member
• Name of company to end with ___(OPC)
• Nominee
• No perpetual succession
• Minimum one director
• No minimum paid-up share capital; maximum = Rs. 50 lakhs
• Average income in a FY not to exceed Rs. 2 crore
 SMALL COMPANY
(a type of pvt. Company)-
A company, other than a public company with
a) paid-up share capital does not exceed Rs.50,00,000/- or such higher
amount as may be prescribed which shall not be more than Rs. 5 crore;
and
a) Turnover (sales) as per its last profit and loss account does not
exceed Rs. 2 crore or such higher amount as may be prescribed which
shall not be more than Rs.20 crore
STAGES IN THE FORMATION OF A COMPANY

 Promotion
 Incorporation
 Capital Subscription
 Commencement of Business
 PROMOTERS
 A promoter is a person who does the necessary preliminary
work incidental to the formation of a company
 The first persons who control a company’s affairs are its
promoters

Functions of a Promoter-
• Business Idea, feasibility studies, steps for forming the company
form of organization
• Initial / Preliminary contracts –
• Procedures formation
• with bankers , auditors, experts, legal solicitors
• Name approval – Registrar of Companies
• MOA, AOA, all formalities for incorporation

• Steps to start business - business establishment, Suppliers, future

contracts for supply of merchandise
• Not a Trust
• Requirement is Trustee (Promoter) & Beneficiary (the company is
non-existent)
• Not an Agency relationship
• Requirements are agent & principal
• Promoters are agents – but Principal – the company is non-
existent
 LEGAL STATUS OF A PROMOTER

• Quasi-trustee (neither an agent or a trustee)

• Trustee – things entrusted. - handle finances, capital goods/ property
• Fiduciary position
• Not make any profit at the expense of the company
• In any negotiations, if benefit received , to be transferred to the company
• Make full disclosure of interests / profits
• Not to make any unfair use of position
Duty of a Promoter with respect to prospectus
• Ensure all essential particulars
• No untrue / misleading statements
Remuneration of Promoters
No right to claim any compensation / salary / reimbursement
 Provisional Contract Preliminary Contracts
Date of entering into contract After date of incorporation but Before date of incorporation
before Certificate of
Commencement

Parties to the contract Incorporated Company with 3rd Promoter & 3rd parties
parties

Validity Automatically Validated after Company cannot ratify / adopt.

receiving Certificate of Need to enter into fresh
Commencement contract with 3rd party if so
desired by the 2 parties.
STEPS IN INCORPORATION OF A
COMPANY
1. Ascertaining the availability of a name
2. Preparation of MOA and AOA
3. Printing,signing and stamping of memorandums and articles
4. Power of attorney
5. Other documents to be filled with ROC
6. Statutory declarations
7. Payment of registration fees
8. Certificate of incorporation
ONLINE INCORPORATION OF COMPANIES
• SPICE (Simplified Process for Incorporating Company Electronically)
 Online forms
 Ease of Doing Business
• Name Approval (after 6 options)
• First directors (apply DIN electronically) [DIN- Director Identification No.]
• MOA / AOA- in template
• Registrar (in the jurisdiction of the company) after verification – allotments in
DIN & INC-32. (or) also advise deficiencies
CERTIFICATE OF INCORPORATION IS HELD
CONCLUSIVE
1. The requirements of the act in respect of registration of
matters precedent and incidental thereto have been
complied with
2. The association is a company authorised to be
registered under the act, has been duly registered
3. The date borne by the certificate of incorporation is the
date on which the company comes into existence

Certification of incorporation given by ROC is a conclusive

evidence that all the requirements of the companies act
have been compiled with in respect of registration
 EFFECTS OF REGISTRATION

 The company becomes a distinct legal entity

 The company acquires a perpetual succession
 The company’s property is not the property of the shareholders
MEMORANDUM OF ASSOCIATION
 Purpose – for shareholders, for outsiders
 Printing & Signing of memorandum
 Contents
 Alteration
FORMAT of MOA & AOA : - [Link]
ALTERATION IN THE MEMORANDUM OF ASSOCIATION
This can be made by following the procedure under section 13 of the Companies Act’2013.
This section is applicable to all companies.
• Hold board meeting to recommend the proposal for members’ consideration by passing
special resolution.
• Give notice of Extraordinary general meeting in which special resolution is to be passed. The notice shall specify the place,
date, day and time of the meeting and contain a statement on the business to be transacted at the EGM.
• Since alteration of the memorandum is a special business therefore an explanatory statement u/s 102 of the Companies
Act’2013 shall be accompanied with the notice of the meeting in which special resolution is to be passed.
• Special resolution: For alteration of any of the clauses of memorandum of association, except the capital clause, consent of
members by way of special resolution is required. However, in case of alteration of authorised share capital, consent of
members by way of ordinary resolution as stated in section 61 is required.
• The company is required to file special resolution passed by shareholders for alteration of memorandum of association with
the Registrar of Companies. Form MGT-14 has to be filed for registration of special resolution within 30 days of passing of
resolution.
• A certified copy of the special resolution along with notice and explanatory statement of the general meeting in which
resolution is passed and the altered memorandum and articles are to be attached as attachments to the form MGT-14. Copy of
approval from the central govt. filed with the registrar in case of change in name and registered office clauses of the
memorandum.
• Alteration made under section 13 shall not have any effect until it has been registered.
 Change of Name – Change of Name Clause

Special resolution – absolute majority (75% of the votes)

Ordinary Resolution = simple majority ( >50% votes)
 CHANGE OF REGISTERED OFFICE
CLAUSE
• Change of premises in the same village / town / city – By passing
Board Resolution
• Change within the same State
a) Special Resolution
b) ROC jurisdiction change – additional approval of Regional Director
required
c) Copy of (a) & (b) to ROC
d) Notice of new location to ROC within 30 days of change
• Change to a different State
• Special resolution
• Central Government approval – only in certain circumstances
 ALTERATION OF OBJECT CLAUSE
- With Special Resolution

Limits with in which a company can alter its object clause:

• Alteration is made with in the following limits:
(a)To carry on its business more economically or more efficiently. OR
(b)To attain its main purpose by new improved means. OR
(c) To enlarge or change to local areas of its operation. OR
(d)To carry on some other business which may be conveniently
combined with its own. OR
• (e) To restrict or abandon any of its own objects. OR
(f) To sell its undertaking.
(g) To amalgamate with another company.
ALTERATION OF LIABILITY
CLAUSE
 ALTERATION OF CAPITAL
CLAUSE
Section 61 of Companies Act, 2013 deals with power of limited company to alter its share capital. According to this
section a limited company having a share capital may, if so authorized by its articles, alter its share capital by
passing an ordinary resolution in general meeting. Types of alteration of share capital U/s 61:
The alteration of share capital may take the following form:

(a) Increase of authorized share capital;

(b) Consolidation and division all or any of share capital into shares of a larger amount than existing shares
(consolidation and division which results in changes in the voting percentage of shareholders shall require
the approval of NCLT);
(c) Conversion of all or any of the fully paid-up shares into stock, and vice versa;
(d) Sub-division of shares, or any of them, into shares of smaller amount than is fixed by the memorandum such
that the proportion between the amount paid and the amount unpaid shall remain the same;
(e) Cancelation of shares which, have not been taken or agreed to be taken by any person, and diminish the
amount of its share capital by the amount of the shares so cancelled. (this shall not be deemed as reduction
in share capital)
ARTICLES OF ASSOCIATION
FORMAT OF
AOA
SUBJECT MATTERS OF ARTICLE OF
ASSOCIATION
Share capital and variation of rights General Meetings
Lien Proceedings of General Meetings
Calls on shares
Transfer of shares Adjournment of Meeting
Transmission of shares Voting Rights, proxy
Forfeiture of shares Board of Directors, proceedings of the board
Alteration of capital CEO, Manager, Company Secretary or CFO
Capitalisation of profits The Seal
Buy-back of shares Dividend and Reserves
Accounts, Winding Up Secrecy / Indemtiy Clause
 ALTERATION OF AN ARTICLE OF
ASSOCIATION
• There must be a board meeting whereby a resolution will be passed to alter the article.
• A notice of 21 days’ notice must be given to the members accompanied with the said
special resolution.
• The company must convene a general meeting and pass a special resolution to alter the
article.
• The company must ensure that the alteration does not go contrary to the provisions of the
memorandum of association.
• The next step would be the delivery of the printed copy of the article and printed copy of the
resolution to Corporate Affairs commission within 15 days of passing the resolution.
• Evidence of payment of Annual return must be made available at the commission and it must be
up to date.

Note: CAC do not attend to post incorporation issues of a company where the payment of their
Annual returns is not up to date.

• The company would be required to annex the resolution to every copy of the article issued after the
passing of the resolution.
LIMITATIONS OF ALTERATION
TO ARTICLES
• No inconsistency with the ACT
• No conflict with the Memorandum
• Nothing Illegal
• Benefit of the company as a whole
• Liability of Members – should not be increased
• Alteration with special resolution only
• Approval of the Tribunal (conversion of public to pvt ltd co)
• Breach of contract
• No expulsion of member
• Alteration may be with retrospective effect
• Approval of Stock Exchange(s) for Listed Companies
• Doctrine of ultra vires
• Doctrine of Constructive Notice
• Doctrine of Indoor Management
• EXCEPTIONS
• Knowledge of irregularity
• Negligence
• Forgery
• Acts outside the scope of apparent authority