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Wednesday, April 20, 2016

Formation and Incorporation of a Company - Various Stages, Advantages and Disadvantages

Various stages in Formation and Incorporation of a Company
Without incorporation a company cannot be formed. It comes into existence only after registration and issue of certificate of incorporation. A promoter for registration takes the following steps:
(1) Preliminary Steps
(2) Delivery of Documents to the Registrar
(3) Scrutiny of Documents by the Registrar
(4) Obtaining Certificate of Incorporation
(1) Preliminary Steps : Following preliminary steps are taken by promoter for registration :
(i) A Promoter decides the type of Company : either private or a public company he wants to be registered. It will be either limited by shares or guarantee or with or without share capital. The company may be registered with unlimited liability
(ii) The promoter also decides the place of registered office of the company. If the proper place is not decided then the name of state is at least decided by him.
(iii) Selecting the Name of the Company : The promoter also suggest four names of a proposed company as alternatives in form 1-A with a free of Rs.500 to the registrar of the company to decide about the availability and desirability of the name out of four names. This name will be decided by the registrar within seven days it will be reserved for six months.
(iv) Drafting Memorandum : The promoter may draft the memorandum with help of his solicitor, company secretary and etc.

(v) Drafting of Articles of Association for private company is essential but for a private company it is optional in place of it, it can use Table-A.
(vi) Vetting of the Drafts: The registrar may help in avoiding mistake and unnecessary delay in avoiding mistake and unnecessary delay in registration of the company.
(vii) Printing of Memorandums: Such as Memorandum and Articles of Association are required to be printed by the promoter.
(viii) Stamping on both the documents is a must according to laws applicable to them.
(ix) Signature by the Subscribers: At least 7 and 2 in case of public and private company respectively, signed by the subscribers on these public documents. In case of illiterate subscriber, he may give his thumb impression or mark.
(x) Dating : The subscribers must mention the dates on both the documents but not before the date of stamping.
(xi) Statutory Declaration : The legal compliance is completed nothing remain to be declared in connection to registration of the company. It is duly signed by the competent person prescribed in the act.
(xii) Getting consent of directors that they will act as directors of the company by the promoter.
(xiii) Getting undertaking to take at least one share which is called qualification shares by the director this consent is also taken by the promoter.
(xiv) Other contracts such as preliminary are to be drafted by the promoter.
(2) Delivery of the Documents to the Registrar : The promoter delivers the following documents to the registrar:
a)      Application for availability of name
b)      Memorandum of Association
c)       Articles of Association
d)      Copy of proposed agreement
e)      Statement on nominal capital
f)       Address of the registered office
g)      List of directors and their consent
h)      Undertaking to take up qualification shares
i)        Statutory declaration
 (3) Scrutiny of Documents: When the promoter duly file all the documents relating for incorporation to the registrar, the registrar then will scrutinize these documents from legal point of view. If all the documents found correct, he may issue a certificate of incorporation, but if finds any minor defect in the documents, then he may require for rectification. But if there is no defect, then he may be compelled to register if he denies.
(4) Certificate of Incorporation: When the registrar; after scrutiny of document feels satisfaction regarding formation formalities, he may retain all the relevant documents with him and he shall issue a Certificate of Incorporation to the company.
Advantages of incorporation
Incorporation offers certain advantages to a company as compared with all other kinds of business organizations. They are:
1)      Independent corporate existence- the outstanding feature of a company is its independent corporate existence. By registration under the Companies Act, a company becomes vested with corporate personality, which is independent of, and distinct from its members. A company is a legal person. The decision of the House of Lords in Salomon v. Salomon & Co. Ltd. (1897 AC 22) is an authority on this principle:
One S incorporated a company to take over his personal business of manufacturing shoes and boots. The seven subscribers to the memorandum were all his family members, each taking only one share. The Board of Directors composed of S as managing director and his four sons. The business was transferred to the company at 40,000 pounds. S took 20,000 shares of 1 pound each n debentures worth 10,000 pounds. Within a year the company came to be wound up and the state if affairs was like this: Assets- 6,000 pounds; Liabilities- Debenture creditors-10,000 pounds, Unsecured creditors- 7,000 pounds.
It was argued on behalf of the unsecured creditors that, though the co was incorporated, it never had an independent existence. It was S himself trading under another name, but the House of Lords held Salomon & Co. Ltd. must be regarded as a separate person from S.
2)      Limited liability- limitation of liability is another major advantage of incorporation. The company, being a separate entity, leading its own business life, the members are not liable for its debts. The liability of members is limited by shares; each member is bound to pay the nominal value of shares held by them and his liability ends there.
3)      Perpetual succession- An incorporated company never dies. Members may come and go, but the company will go on forever. During the war all the members of a private company, while in general meeting, were killed by a bomb. But the company survived, not even a hydrogen bomb could have destroyed it (K/9 Meat Supplies (Guildford) Ltd., Re, 1966 (3) All E.R. 320).
4)      Common seal- Since a company has no physical existence, it must act through its agents and all such contracts entered into by such agents must be under the seal of the company. The common seal acts as the official seal of the company.
5)      Transferable shares- when joint stock companies were established the great object was that the shares should be capable of being easily transferred. Sec 82 gives expression to this principle by providing that “the shares or other interest of any member shall be movable property, transferable in the manner provided by the articles of the company.”
6)      Separate property- The property of an incorporated company is vested in the corporate body. The company is capable of holding and enjoying property in its own name. No members, not even all the members, can claim ownership of any asset of company’s assets.
7)  Capacity for suits- A company can sue and be sued in its own name. The names of managerial members need not be impleaded.
8)      Professional management- A company is capable of attracting professional managers. It is due to the fact that being attached to the management of the company gives them the status of business or executive class.
 Disadvantages of incorporation
 1)      Lifting of corporate veil- though for all purposes of law a company is regarded as a separate entity it is sometimes necessary to look at the reasons behind the corporate veil:
a)      Determination of character- The House of Lords in Daimler Co Ltd. v. Continental Tyre and Rubber Co., held that a company though registered in England would assume an enemy character if the persons in de facto control of the company are residents of an enemy country.
b)      For benefit of revenue- The separate existence of a company may be disregarded when the only purpose for which it appears to have been formed is the evasion of taxes. – Sir Dinshaw Maneckjee, Re / Commissioner of Income Tax v. Meenakshi Mills Ltd.
c)       Fraud or improper conduct- In Gilford Motor Co v. Horne, a company was restrained from acting when its principal shareholder was bound by a restraint covenant and had incorporated a company only to escape the restraint.
d)      Agency or Trust or Government company- The separate existence of a company may be ignored when it is being used as an agent or trustee. In State of UP v. Renusagar Power Co, it was held that a power generating unit created by a company for its exclusive supply was not regarded as a separate entity for the purpose of excise.
e)      Under statutory provisions- The Act sometimes imposes personal liability on persons behind the veil in some instances like, where business is carried on beyond six months after the knowledge that the membership of company has gone below statutory minimum, when contract is made by mis-describing the name of the company, when business is carried on only to defraud creditors.
2)      Formality and expense- Incorporation is a very expensive affair. It requires a number of formalities to be complied with both as to the formation and administration of affairs.

3)      Company not a citizen- In State Trading Corporation of India v. CTO, the SC held that a company though a legal person is not a citizen neither under the provisions of the Constitution nor under the Citizenship Act.