 |
| Study with love |
CHAPTER – 11 : FORMATION OF A COMPANY
1. Formation of a Company
We have studied the joint stock company, and its characteristics in the previous chapters. We will learn about its formation in this chapter.
Stages for the formation of a company
(1) Promotion
(2) Incorporation
(Procedure to get the certificate of incorporation)
(3) Commencement of Business
(Procedure to get the certificate of commencement of Business)
[1] Promotion : After thinking about the establishment of a company, converting the idea into concrete form is promotion. One who thinks of promotion and converts that idea into concrete form is known as a promoter. A promoter can be a person, partnership firm on joint stock company. After pondering upon the practical points for the establishment of a company, promoter thinks over the possibility of profit, money investment, location, type of business, etc. and then he gets busy with promotion work.
Promoter has to undertake the following steps :
(1) Idea of business (2) Primary and extensive tests (3) Mobilising the resources (4) Making arrangement for finance.
(1) Idea for the promotion of business : In the promotion of \a company firstly, one of idea, one concept should occur on what basis a company is to be established, in the promotion of company. The promoter thinks of establishing a company due to various reasons like the idea of a new product and its production to be undertaken, thinking of any available product in the market, making altogether any new type of service available.
(2) Primary and extensive tests : Company cannot be established directly, just after having an idea on the part of the promoter as stated above. It is to be tested, how much practical is this idea, whether it will be economically viable or not.
After primary test, if some conviction takes place, extensive test is to be undertaken How much capital will be needed, what will be the situation of expenditure and income how much will be technical difficulties, etc. are to be investigated and tested. For these, the help of Chartered accountant, Cost accountant, Engineer or other technical expert is needed. Due to expert advises set-back can be avoided.
(3) Mobilising the resources : Now the promoter has to mobilise human and physical resources. Contracts. of appointments are to be made with persons and officers needed for the proposed company and land, machine, plant are to be acquired.
(4) Making arrangement for finance : For mobilising the resources finance is to be procured. How much and from where finance is to be procured are the points to be pondered upon then it is to be collected. Points to be considered are: should funds to be procured be of ownership or borrowed, should shares be placed privately or be issued to public.
Thus, after the completion of promotion stage, process for getting certificate of Incorporation is to be initiated.
[2] Process for getting the Certificate of Incorporation
Joint stock company has to get the certificate of incorporation for its inception. Following procedure imposed by the Indian Companies Act is to be followed for getting the certificate of incorporation. Documents are to be prepared and they are to be registered before a government appointed officer. This officer is known as Registrar of Companies.
(1) Memorandum of Association
(2) Articles of Association
(3) List of Directors
(4) Written Consents of directors
(5) Acceptance of directors to subscribe for qualification shares, if provision for it is made.
(6) Registering the address of registered office
(7) Statement of pronouncement of observance of all the above mentioned matters.
(1) Memorandum of Association : This is a basic document of a company. This is a constitution of a company as a country has its constitution. Through this document the relations are established between the company and the third party. These relations are regulated also. The name of the company, address of registered office, capital, purposes of company and other information are contained in it.
(2) Articles of Association : Company has to establish internal relations as it has to establish them with the third party. The base of these internal relations is a document named as Articles of Association, e.g. what is the authority of a director individually or of board of directors can be assessed from the articles of association.
(3) List of Directors : Public and Registrar of companies should know who is managing the company. So, the list of names and addresses of the directors should be notified to the registrar. Besides, whether legal provision of having minimum seven members for public company and two for private company has been observed or not can also be automatically verified by notifying this list.
(4) Written Consent of the directors : The name of any person cannot be enlisted baselessly. His name has to be enlisted with his consent. For this purpose his written consent to work as a director must be obtained and to be submitted to the registrar for verification. After that only his liability as a director is determined.
(5) Acceptance to subscribe for qualification shares :Many companies are making such provision that the proposed director has to purchase certain minimum shares to become a director. These shares are known as qualification shares. Director has to give written consent that he will purchase these shares which is to be registered with the registrar.
(6) The address of registered office : Company registrar and public should have information about the place from where operations and transactions will be undertaken. For this purpose, the address of the registered office is .to be registered with company registrar. The state in which the registered office is situated is considered as the domicile of that company.
(7) Statement of observation of law : A statement pronouncing that all the provisions have been observed and all the documents have been registered with the company registrar is to be registered.
Registrar issues certificate of incorporation after the completion of above-mentioned procedure. Company comes into existence on the date when certificate of incorporation is received by the company. Certificate of incorporation injects life into the company.
[3] Procedure to get the Certificate of Commencement of Business:
As we have seen in previous chapter a company can be public company or private company. A company which is a private company can immediately start business after getting the certificate of incorporation. However, a public company can start business only after the issuance of the commencement certificate by company registrar. For getting this certificate procedure as determined by Company Act is to be followed. This procedure can be divided into following stages :
(1) Prospectus or statement in lieu of prospectus.
(2) Applying to the recognized stock-exchange for the induction of Companies share, for purchase-sale.
(3) Determining minimum subscription and to get it.
(4) Approving contracts entered before the receipt of the certificates of incorporation and the commencement of business.
(5) Registering a statement declaring the payment of predetermined amount made, by the director for qualification shares.
(6) Returning money to the share applicants.
(1) Issuing prospectus : For doing business a company will require capital. The promoter or director can collect this capital either privately or from public. The company issues prospectus for collecting finance from public. Prospectus means inviting public to participate in company’s capital.
Due tip the publication of prospectus public comes to know about the inception of company. Through this information-sheet, company can collect capital from public by informing it about the type and nature of business, the scale of probability of the success of business, quantum of capital required by the company for running business.
This prospectus is to be registered with the company registrar within prescribed time limit.
Many a time a company need not get capital from the. public. So it is not required to provide information to the public about the business of company but this information should be given to the company registrar. Hence, instead of the prospectus statement in lieu of a prospectus is to be registered with the registrar within the prescribed time-limit.
(2) Listing in recognised stock-exchange : As continuity of existence of company is formulated by law, it goes on surviving even though its shareholders buy-sell shares. If buying-selling of shares is made freely, the prestige of, company enhances. So, many companies are enlisting their shares on a recognised stock-exchange where buying-selling of shares of various companies take place. Consequently, buying-selling of shares can be made easily. Of course, it is not compulsory to enlist the shares on stock-exchange.
(3) Minimum Subscription : If a company wants to start a business, it will require certain minimum capital. The minimum requirement of capital is known as minimum subscription. If a company fails in collecting even the minimum subscription, it can be said that it does not deserve to do business. Company has to give this information of minimum capital or subscription in prospectus.
The directors of the company decide how much the minimum subscription should be but at least 90% of the purchase price of properties, primary expenditure as working capital should be included in the minimum subscription.
By insisting on the minimum subscription the law wants to protect the investors. If the company cannot collect even minimum capital, it cannot start business and has to return money of share applications within specified time-limit.
(4) Qualification Shares : As stated above, the director has to hold certain determined number of shares to become a director. This is known as qualification shares. Director has to give acceptance that he would hold these shares, which is to be made at the time of obtaining the certificate of incorporation.
Now, before getting the certificate of commencement of business he has to register a statement with the registrar that he has actually subscribed for these shares.
(5) Approving the contracts : It is necessary for the company to enter into contracts during promotion, during or before incorporation, e.g. the company might have purchased land, contracts to get services of engineer, architect, contractor, chartered accountant, solicitor, experts, etc might have been made. Promoters have made these contracts. As now the company has come into existence, reasonable contracts should be approved because company is a legal artificial person. It means that an artificial person (company) is approving contracts made by promoters on behalf of proposed company.
(6) Returning money to share applicants : Many a time when the company receives applications of more shares than the capital issued, comp y has to allot shares under the advices of stock exchange officers. It is obvious that certain applicants will receive less shares than applied or certain applicants will not get a single share. A statement is to be registered with the registrar that either the surplus amount or the total amount, as the case may be, has been returned to the concerned applicants.
The registrar will issue certificate to commence business to the company after receiving statement from the company that all the above-mentioned provisions have been observed and after the registrar is satisfied that provisions have actually been observed. After getting this certificate only, company can commence the business.
Memorandum of Association, Articles of Association and Prospectus
We have mentioned about all the three above-mentioned documents previously in this chapter. Memorandum and Articles of Association were mentioned while studying the procedure to get the certificate of incorporation. Prospectus was mentioned while studying the procedure to get the certificate of commencement of business. Now, we will get more information about all these three documents.
Memorandum of Association
Memorandum of Association is the constitution of a company. Memorandum of association is a fundamental document of a company. Basic conditions of the establishment of a company are included into memorandum of association. Memorandum of Association states the authority of company and it determines the boundary of authority of company. So, third party relies on the provisions of memorandum of association while entering into relation with company. Any work done above the preview of memorandum of association is Ultra Vires. Thus, third party gets idea of authority of company and its limitations through memorandum of association.
It is compulsory to make following provisions in Memorandum of Association according to Act:
(1) Nam e clause (2) Registered office clause (3) Ob ject clause (4) Liability clause (5) Capital clause (6) Association clause.
(1) Name clause : The name of the company is mentioned in this clause. The company is known by the name inserted in this clause and its administration is also run in this name.
A company having limited liability by share capital adds the word ‘Limited’ at the end of its name and the same type of private company adds ‘Private Limited’ words.
A name prohibited by the government rules-regulations cannot be kept by company. If any company is in existence, its name or similar to that cannot be kept.
(2) Registered office clause : The Company has to register the address of its registered office with the Registrar within time-period stipulated by the Act. So, the Registrar and public will get information of the company address. The address indicated in this clause should be written in all the documents and correspondence.
(3) Objects clause : Information of objects for which the company has come into existence and for which the business will be done by the company is available through this clause. The objects of company are to be stated very clearly in this clause and clarification has to be made about the main and the subsidiary objects.
The scope and limitations of the company are determined by object elapse: Shareholders and creditors come to know in which business activities their money is to be-utilized.
(4) Liability clause : What will be liability of the members of the company is indicated in this clause. A company with limited liability of shares has to clarify through this clause that the liability of members. is limited upto the shares held by them.
(5) Capital clause : The information of the authorised capital of the company and its division into equity and preference shares is given in this clause.
(6) Association clause : Company promoters declare through this clause that they have established the company on the basis of the memorandum of association. This clause states that minimum seven persons, if the company is public and two if it is private have established the company. These persons make this statement under their signatures.
Articles of Association
Articles of Association is prepared within the boundaries framed by the Memorandum of Association. Thus, Articles of Association is a secondary document of Memorandum of Association. Authority prescribed in Memorandum of Association is made tangible by describing how to implement it in the Articles of Association. Thus, Articles of Association is an internal administrative document.
Public company can utilise Articles of Association given as model in the Act (which is given as Table A in the Act).
The provisions given in Table - A can be accepted in total or in part. The company has to state that it has accepted provisions of Table - A in total or part. Information must be given with regard to the value of share, distribution of shares, qualification Shares, installment of shares, share forfeiture, meetings, etc.
Due to Articles of Association mutual relations between shareholders and company are established. Responsibility of members towards the company and of the company towards the members is determined through Articles of Association.
Prospectus
As we have seen previously, a public company has to publish prospectus or has to register a statement in lieu of prospectus compulsorily while receiving Certificate of Commencement of business.
A private company does not collect capital from public so private company does not issue prospectus. The public company which collects- capital from the public will issue the prospectus for the company. If the public company does not collect capital from the public, it has to register statement in lieu of prospectus with the company registrar.
The prospectus is to be registered with the registrar after receiving the certificate of incorporation and before submitting it to the public. Whoever is a director or would become will have to sign the prospectus. The date on which the prospectus is registered should be stated in it.
Following information is to be contained in the prospectus according to the Act:
(1) Main objects of company
(2) Number of qualification shares for directors
(3) Names, addresses, qualification of the directors, amount and number of shares held by them
(4) Name, address of the auditor of the company,
(5) Amount to be paid by the applicant while applying for shares and when allocation of shares takes place.
(6) Details of the underwriting agreement.
(7) Information pertaining to primary expenses
(8) Information pertaining to minimum subscription
(9) Statement that applying for getting shares under fictitious name is an offence. Public invests in share capital of the company on the basis of the prospectus. So, if any information is concealed or falsely given intentionally, the signatories of the prospectus are liable for punishment.
No comments:
Post a Comment