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Formation of company


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formation of company law
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Formation of company

  1. 1. Formation of Company
  2. 2. Steps in formation 1. Promotion of company 2. Incorporation of company by registration 3. Commencement of business of company- Section 11 repealed by the Companies (Amendment) Act, 2015
  3. 3. Promotion • Prior to the formation of a company, some persons get together with the intention to form the company. • Necessary steps are taken by them to form a company- like conceiving the idea of forming a company, completing formalities of incorporation and registration, arranging for capital or assets for the company
  4. 4. • C.W. Gernstenberg- “as the discovery of business opportunities and the subsequent organisation of funds, property and managerial ability into a business concern for the purpose of making profits therefrom.” • Websters dictionary- “a person who alone or with others set on foot and takes the preliminary steps in the formation of a company.” • Sir Francis Palmer- “a person who originates the scheme for promotion of a company, has the memorandum and articles prepared, executed and registered and finds the first directors, settles the terms of preliminary contracts and prospectus, if any, and makes arrangement for advertising and circulating the prospectus and paying the capital. “
  5. 5. Companies Act, 2013 • Section 2(69) – A promoter is a person- (a) who has been named as such in a prospectus or is identified by the company in its annual returns as referred to in section 92; or (b) Who has control over the affairs of the company directly or indirectly, whether as a shareholder, director or otherwise; or (c) In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act. Provided that nothing in clause (c) shall apply to a person who is acting merely in a professional capacity
  6. 6. Legal position • Lord Cairns in Erlanges v. New Sombrero Phosphate Co. (1878) LR 3 App. Cas. 1218 (1236) – “they stand in a fiduciary position. They have in their hands the creation and moulding of the company. They have the power of defining how and when in what shape and under what supervision the company shall start into existence and begin to act as a Trading Corporation.” • Lagunas Nitrate Co. v. Lagunas Syndicate (1899) 2 Ch 392- “the promoters stand in a fiduciary relation to the company they promote and to those persons, whom they induce to become shareholders in it.” • Lord Justice Lindley in Lindley & Wigpool Iron Co. v. Bird (1866) 33 Ch. D 85- “Although not an agent for the company, nor a trustee for it before its formation, the old familiar principles of law of agency and of trusteeship have been extended and very properly extended to meet such cases. It is perfectly well settled that a promoter of a company is accountable to t for all monies secretly obtained by him for it just as the relationship of the principal and agent or the trustee and cestui que trust had really existed
  7. 7. Rights of promoters • Right to receive preliminary expenses • Right to recover proportionate amount from co-promoters • Right to remuneration
  8. 8. Liabilities • Section 26- provides the matters to be stated and reports to be set out in prospectus. Non-compliance of which will make the promoter liable. • Section 35- untrue statement in the prospectus gives rise to liability of promoter. Section 34- criminal liability for issue of prospectus containing false statements • If found guilty of fraud or misfeasance, breach of duty in respect of the company of which he is promoter, then punishable under section 339. • Section 300- company is being wound up by the order of the court and Liquidator alleges any fraud in promotion of company • Section 340- when promoter has misapplied or retained property of company , he can be sued by the company. • If the promoter dies, the company may recover damages or compensation from the property of the deceased promoter
  9. 9. • Liability of the promoters commences as soon as they have set out for the promotion of the company and it does not extend to any of their earlier acts- laid down in the case of Ladgwell Mining Co. v. Brooks [35 Ch D 400]
  10. 10. Pre-incorporation contracts • Also known as Preliminary contracts. • These are contracts which are made on behalf of a company before its incorporation- relating to property which promoters may buy for the company, relating to services of certain experts which are vital for the success of the company and other contracts. • Whether the company can be held liable for contracts made before its incorporation?
  11. 11. English law • Re Colonial Produce Co. Ltd. (1906) 2 Ch 435- the question was answered in the negative. The court held that it is not desirable to saddle the corporation with burdens imposed upon it in advance by overtly optimistic promoters.” • A person contracting on behalf of the company which was non- existent, he would be personally liable. • Similarly, a company cannot sue and claim any benefit under a pre- incorporation contract. The company cannot adopt or ratify such a contract. • Section 36(4) of the English Companies Act, 1985- “where a contract purports to be made by a company or by a person as agent for a company at the time when company has not been formed, then subject to any agreement to the contrary, the contract has effect as one entered into by a person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.”
  12. 12. Indian Law • No statutory provision regarding legal effects of pre-incorporation contracts in the Companies Act. • So, company not bound nor can have the benefit of a pre-incorporation contract. • The above is subject to Section 15(4) of the Specific Relief Act, 1963