1. Chapter 3 PROMOTION AND INCORPORATION OF COMPANIES
By Chirag Chotrani

2. PROMOTERS
As per section 2(69) of the Companies Act,2013 ‘promoter’ means a person :
Who has been named as such in the prospectus,
Who has the power to control the Board of Directors or we can say on whose advice the BOD are accustomed to work,
Who has control over the company, directly or indirectly whether as a shareholder , director .
However any person giving professional service or advice to the BOD , he shall not be counted as the promoter of the company.
Even a director or employee can be considered as a promoter if he has control over the affairs of the company, but a person if acting merely in his professional capacity can not be deemed as promoter.

3. ‘Control’ shall include the right to appoint or remove majority of the directors. In Twycross v/s Grant (1877) court held that promoter is the one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose. Note : A company may have several promoters and a promoter may be a natural person or an artificial person. The term ‘promoter’ is a term not of law but of business LEGAL POSITION OF A PROMOTER Promoter is neither an agent nor a trustee of the company because the company is not into existence. So the position or relationship of a promoter with the company is a ‘fiduciary’ relationship.

4. DUTIES OF A PROMOTER
Duty to disclose : if because of non disclosure or insufficient disclosure by the promoter , any benefit accrues to the promoter , he shall hold such benefit in trust for the company and must compensate the company to the extent of the benefit received by him.
(default in which will lead to a fine of or five time of the profit made whichever is higher.)
Duty not to earn any kind of secret profit : a promoter is never debarred by law to earn profit , the rule clearly states not to earn any kind of secret profit i.e. if the promoter is earning any kind of profit then he must disclose it to the company and If is not disclosed then it will attract the same provision as above .

5. In Erlanger v/s New Sombrero Phosphate co.
A syndicate of which ‘E’ was the head, purchased an island containing mines of phosphate for 5000 pounds.
‘E’ formed a company to buy this and a contract was made between ‘X’ a nominee of the syndicate and the company for its purchase at 1,10000 pounds.
No disclosure was made by the promoter to share holders or to the Independent directors .
Now the company was to rescind the contract.
It was held that the company was entitled to rescind the contract as no proper disclosure was made by the promoter .

6. Key notes :
In addition to secret profit , the promoter is also liable to disclose any kind of interest in the company.
A company which has raised money by issuing prospectus and still has some unutilised money , shall not change its object until a special resolution has been passed and the dissenting share holders have been given an exit option.(price of the exit option will be in the manner specified by SEBI)
If all the directors of a company vacate their offices due to any disqualification or all the directors resign from their offices , the promoter or in his absence , the central government shall appoint the required number of directors who shall hold the board till the new directors are appointed by the company in the general meeting.

7. LIABILITIES OF PROMOTERS
Incorporating the company by furnishing false information will render the promoter and all the connected parties to the fraud personally liable under section 447
Civil liability for misrepresentation in the prospectus
Liability as to not to induce any person fraudulently to invest money in the company
To cooperate with the company liquidator during winding up
Criminal liability for misrepresentation in prospectus
LIABILITY UNDER SECTION 447 OF THE COMPANIES ACT 2013: any person who has been found guilty of fraud , shall be punishable with not less than six months but which may extend to 10 years and shall also be liable for a fine not to be less than the amount involved but which may extend to three times of the amount involved

8. REMEDIES AVAILABLE TO THE COMPANY AGAINST THE PROMOTER
If the company comes to know that any kind of secret profit has been earned by the promoter or promoters , the company may either :
To rescind the contract and recover whatever he has earned from the company.
Retain the property and not to pay anything more
And where both the above measures can not work, in that case the company might sue the promoter for misfeasance (breach of duty).

9. PRE INCORPOATION CONTRACT Companies Act, 2013 does not contain any provision regarding the promoter’s contract. The promoter of a company usually enter into contracts with various vendors for the company which is yet to be incorporated , such contracts are called as pre incorporation contract or preliminary contract . The legal position is quite clear that the company is not liable for such kind of contracts , as the relation of principal and agent is not there because the intended company will acquire the status of separate legal entity after the incorporation. So when the company comes into existence it will not be bound by the contracts entered before its incorporation . A company can not ratify the contract entered into by the promoter , as ratification of the acts before its incorporation is impossible . The only way by which a company can accept the contract is by novation.

10. However section 15 (h) and section 19 (e) of the specific relief act has the solution to the problem of pre incorporation contracts and to save promoter from heavy liabilities . The section clearly states when the promoters of a company have, before its incorporation , entered into contract for the purposes of the company and such contract is warranted by the terms of incorporation , provided that the company has accepted the contract and communicated it to the other party. In that case the company can be sued for specific performance and can also sue the other party to the contract.

11. Remuneration to Promoters
Usually the promoter is not entitled to any kind of remuneration, however if the promoter has made proper disclosure , he may expect some kind of reward for his efforts in the incorporation of the company.
But remuneration is subject to the approval of the company and if the company is not willing to give remuneration to its promoter or promoters , it can not be held liable or the company cannot be forced to do so.
If accepted , a promoter can be remunerated by the following ways :
He may sell his property to the company at a price above its actual price , provided disclosure of the same has been done by the promoter to an Independent board or share holders.
He may be given an option to buy shares at par(even if the shares are trading at premium)
Commission on shares sold can be given to the promoter
Lump sum amount payment.

12. FORMATION OF COMPANIES
Now to incorporate a company some simple steps are to be followed :
Application for availability of name of company
Application for reservation of name shall be made in Form no. INC 1 to the central registration center.
One can pre hand search the availability of name and after that he or she can apply for the name in form no. INC 1 along with 5 more preferences.
Fees for the application of form is Rs and if all the names are rejected , 2 more opportunities will be provided by the CRC (i.e. in 1 form a person can apply up to 18 names)
CRC communicates within 7 days regarding availability of name
If the name which has been applied is available then the CRC will reserve it for a period of 60 days.

13. Key points
The name stated in the MOA :
Should not be identical or resemble too nearly to the name of an existing company.
Must not constitute an offence under any law
Must not be undesirable in the eyes of Government
Shall not use any word which is likely to give the impression that the company is having any kind of connection or patronage of any government or local authority (if the approval of the central government is taken then it can be used)
PENALTY
If the name was taken by issuing false information
(a) And the company has not been incorporated : Firstly, the reserved name will be cancelled and after that penalty which shall extend to RS

14. If the company has been incorporated : registrar will give OOBH (opportunity of being heard)to the company and after that either
(i) direct the company to change its name or
(ii) strike off the name of the company from the register of companies or
(iii) proceed for its winding up
If the company chooses the first option then it has to change its name within a period of three months by passing an ordinary resolution.
PREPARATION OF MEMORANDUM OF ASSOCIATION AND ARTICLE OF ASSOCIATION
The memorandum of the company must state :

15. Name clause
Registered office
Object clause
Liability clause
Capital clause
Subscription clause
Now, filing of the documents with the registrar of the state where the company is going to have its registered office .
Filing of application with ROC for incorporation of the company under INC 7 (INC 2 in case of OPC)
There is also a new form E Form 29 for integrated incorporation of companies , it relates to a single application for approval of the name of the company , incorporation of a new company , and application Of DIN. Maximum 3 directors are allowed to file at the time of incorporation for the allotment of DIN .

16. The MOA and AOA must be duly signed by all the subscribers
The manner in which it must be signed is :
Sign of each subscriber to the memorandum along with name, address , occupation and description in the presence of at least one witness who shall attest the signature along with the same details that of the subscriber.
Where the subscriber is illiterate he shall fix his thumb impression , which shall be described by the person writing for him and he will authenticate the name and thumb of the subscriber. Also he will read and explain the content of the MOA & AOA
Where it is body corporate it must be signed by any person authorised by the board .

17. Declaration from the professional
A declaration by a CA,CWA,CS in practice or an advocate in Form INC 8 stating that all the requirements of the Act have been complied.
Affidavit from the subscribers to the memorandum and from the first directors
An affidavit that he is not convicted of any kind of offence in connection with the promotion , formation or management of the company in Form INC 9
5) Furnishing verification of registered office
From the date of incorporation , within 15 days the company must have its registered office , so that communication can be done and verification of the same must be done within 30 days from the incorporation .
Verification of registered office shall be filed under Form no INC 22

18. Particulars of the subscribers
Particulars of the first directors along with their consent to act as director
Particulars of the first director of the company and his interest shall be disclosed in Form DIR 12 . For application of DIN (Form DIR 3)
Power of attorney
To complete the remaining part or formalities for incorporation of company , the promoter appoint professionals and in order to give them the power to work freely , power of attorney in their favor is created .
After the ROC is satisfied about receiving everything about the registration process , he issues a certificate of incorporation. A company is deemed to have come in existence from the date of incorporation or on the date specified in the COI.

19. CERTIFIACTE OF INCORPORATION (CONCLUSIVE EVIDENCE) The certificate of incorporation once issued becomes a conclusive evidence, which clearly means that once a company has been created and the certificate has been issued by the registrar about the incorporation , that certificate cannot be challenged to be declared as void on any ground . This was proved in the case of MOOSA V/S EBRAHIM The MOA of a public company was signed by 2 adults and guardian of other 5 subscribers , who were minor . The registrar however issued the certificate of incorporation . It was contended that the certificate should be declared void. JUDGEMENT Lord Macnaughten clearly stated the condition of creating a valid company i.e. 7 subscribers is not complied with , but once the certificate of incorporation is issued it becomes a conclusive evidence and cannot be declared as void and the certificate prevents the company.

20. However it is for the purpose of incorporation that the certificate was made conclusive by the legislature and the certificate cannot legalise the illegal object in the memorandum , where the object of the company is void or unlawful, it was held that the certificate of incorporation was not conclusive for this purpose.
Also in case of similarity of name the tribunal can ask to change the name but in such a case , the company will be the same just the name will be changed.
PROCEDURE FOR INCORPORATION OF ONE PERSON COMPANY
Application of availability and reservation of name to be made in INC 1
Preparation of MOA & AOA and the MOA must contain the name and consent of the nominee.
Form no. INC 2 must be filled along with :

21. MOA and AOA of the company
Proof of residence of the member
Form no. INC 3 in which the consent of the nominee is taken and in INC 2 company shall nominate such person who is deemed fit to be the nominee in that company.
Declaration by the first directors and initial subscriber that all procedure of incorporation are followed and they are not debarred by law from incorporating company in India.
Proof of registered office
ROC if satisfied will issue the certificate of incorporation.
KEY NOTE :
The nominee can withdraw his consent by giving notice in writing to the sole member and the company.

22. Sole member should appoint a new nominee within 15 days from the date of notice and shall intimate the company in writing , along with the written consent of the nominee in Form INC 3
Within 30 days from the date of withdrawal, the company must intimate the ROC about such withdrawal and new appointment of nomine in Form no. 4 along with the consent of the new nominee in Form no. INC 3
The name “one person company” must be mentioned below the name of the company wherever the name is used

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