Under the Companies Act, 2013 (India), a company is a voluntary association of persons formed for a common objective, registered under the Act. It is an artificial legal person with a separate legal identity distinct from its members (separate legal entity concept). Key features include: limited liability (members’ liability is limited to unpaid share capital or guarantee amount), perpetual succession (continues despite member death/insolvency), common seal (now optional, replaced by signature by authorized directors), and capacity to sue/be sued in its own name. A company can hold property, enter contracts, and commit wrongs independently. It is not a citizen but enjoys rights under the Constitution. Registration is mandatory; non-registration renders an association an illegal partnership (if for business). The Act governs incorporation, management, and winding up of companies.
Formation of Companies:
1. Promotion
Promotion is the first stage involving conceiving a business idea and taking steps to bring the company into existence. Promoters identify opportunities, assemble resources, and negotiate preliminary contracts. They are fiduciaries and must not make secret profits. Promoters decide the type of company (public/private), name, registered office, and initial capital. Post-incorporation, promoters may be reimbursed for pre-incorporation expenses if the company adopts such contracts. They file essential documents with ROC. Promoters face liability for non-disclosure or fraud.
2. Incorporation (Registration)
Incorporation is the legal process of registering the company under the Act. Promoters file with the Registrar of Companies (ROC) : (i) Memorandum of Association (MoA), (ii) Articles of Association (AoA), (iii) declarations (e.g., Form INC-7/INC-22), (iv) director consent, and (v) address proof. ROC issues a Certificate of Incorporation, which is conclusive evidence of valid registration. This grants separate legal entity status. For public companies, a Certificate of Commencement of Business was previously required, but now filing a declaration (INC-20A) suffices.
3. Capital Subscription (for Public Companies)
Public companies seeking funds from the public must issue a prospectus (or file a statement in lieu). They apply to recognized stock exchanges, obtain SEBI approval, and open public subscriptions. The minimum subscription clause (90% of issue) must be met; else, refund money. After allotment, file return of allotment (PAS-3) with ROC. Private companies skip this stage as they raise capital privately.
4. Commencement of Business
Under Section 10A (Companies Act, 2013), a company with share capital cannot commence business until it files a declaration (INC-20A) with ROC verifying: (i) subscribers paid their agreed share value, and (ii) directors have filed consent and DIN. Filing INC-20A must occur within 180 days of incorporation, failing which ROC may remove the company’s name. No separate certificate is now issued; filing is conclusive proof to start operations.
Promotion of Companies:
Promotion is the initial stage in forming a company. It involves conceiving a business opportunity and taking active steps to bring the company into existence. Promoters analyze feasibility, assemble resources, and arrange capital. The process begins before incorporation and ends when the company is ready to commence business. Promotion is not defined in the Act but is judicially recognized as a pre-incorporation stage. No registration is required at this point. A promoter may work alone or with others. The promotion stage involves risk, as contracts made before incorporation are not automatically binding on the future company.
1. Who is a Promoter?
A promoter is a person who undertakes to form a company with reference to a given project and takes necessary steps to incorporate it. The Companies Act, 2013 does not define “promoter” but Section 2(69) defines it for reporting purposes: a person named as such in the prospectus, or who controls the company’s affairs. Promoters act in a fiduciary capacity towards the company. They include professionals (lawyers, accountants) if actively involved beyond drafting. Promoters are not trustees but owe duties of good faith, disclosure, and not making secret profits. Mere professional service providers (e.g., solicitors) are not promoters unless they go beyond routine work.
2. Legal Position of Promoters
Promoters stand in a fiduciary relationship with the company, which is not yet born. They must act in utmost good faith and cannot profit secretly at the company’s expense. Any undisclosed profit made by a promoter is recoverable by the company after incorporation. Promoters cannot sell their own property to the company without full disclosure to an independent board or shareholders. They are personally liable for pre-incorporation contracts unless the company novates them after incorporation. Promoters are not agents of the company (since no principal exists pre-incorporation). They may be compensated via shares, commission, or reimbursement of legitimate expenses incurred during promotion.
3. Pre-Incorporation Contracts
A pre-incorporation contract is made by promoters on behalf of a company not yet registered. Such contracts are not binding on the company because the company had no legal existence. Under Section 15(h) of Specific Relief Act, 1963, the company cannot sue or be sued on such contracts. However, after incorporation, the company may novate (enter a new contract) adopting the same terms. Until novation, promoters remain personally liable. Third parties cannot enforce the contract against the company. To avoid risk, promoters often get a clause allowing novation. The Companies Act, 2013 provides no direct relief; common law applies. Promoters should expressly contract with the third party that liability shifts after incorporation.
Incorporation of Companies:
Incorporation is the legal process by which a company comes into existence as a separate legal entity. Under the Companies Act, 2013, promoters must file prescribed documents with the Registrar of Companies (ROC) of the state where the registered office will be situated. Key filings include: Memorandum of Association (MoA), Articles of Association (AoA), declarations (Form INC-7 for incorporation, INC-22 for registered office address), director consent (DIR-2), and proof of registered office. The ROC examines documents for compliance. If satisfied, the ROC issues a Certificate of Incorporation, which is conclusive evidence that all statutory requirements have been complied with. The company is born on the date mentioned in the certificate. After incorporation, the company must file INC-20A (declaration of commencement) if it has share capital.
1. Certificate of Incorporation (COI)
The Certificate of Incorporation (COI) is the birth certificate of a company. Issued by ROC under Section 7 of the Companies Act, 2013, it serves as conclusive evidence of valid incorporation. Once issued, neither the company nor any third party can challenge the legality of registration, even if procedural defects existed earlier (doctrine of conclusive evidence, established in Jubilee Cotton Mills Ltd. v. Lewis). The COI bears a unique Corporate Identity Number (CIN). For private companies, the COI is sufficient to start business. For public companies with share capital, previously a Certificate of Commencement of Business was required; now filing INC-20A (within 180 days of incorporation) is mandatory. Failure to file INC-20A may lead to company name removal by ROC.
2. Documents Required for Incorporation
The following documents must be filed with ROC for incorporation:
(a) Memorandum of Association (MoA): Defines company’s constitution, name, registered state, objects, liability, and capital (Section 4).
(b) Articles of Association (AoA): Contains internal management rules (Section 5).
(c) Declaration by professionals: An advocate, CA, CS, or CMA certifying that all compliances are met (Form INC-8 or INC-9/INC-14).
(d) Affidavit and consent: By subscribers/directors verifying他们没有 disqualification, and directors’ consent (DIR-2).
(e) Proof of registered office: Rent agreement or utility bill with NOC from owner (INC-22).
(f) Identity proof: PAN, Aadhaar, passport of directors/subscribers, along with DIN (Director Identification Number).
All documents must be filed electronically on MCA-21 portal with prescribed fees.
3. Effects of Incorporation (Legal Consequences)
Upon issue of the Certificate of Incorporation, the company attains:
(a) Separate Legal Entity: Company is distinct from its members (Salomon v. Salomon & Co. Ltd.). Members not liable for company debts.
(b) Perpetual Succession: Company continues despite death/insolvency of any member.
(c) Common Seal (optional): Earlier mandatory; now company can execute documents via authorized signatories.
(d) Capacity to hold property: Company can own, buy, and sell assets in its own name.
(e) Right to sue and be sued: Company can enforce legal rights and be proceeded against.
(f) Limited Liability: Members’ liability limited to unpaid share amount or guarantee.
However, the company cannot act beyond its MoA objects (ultra vires acts are void). Incorporation also triggers tax, compliance, and regulatory obligations under the Act.
4. Incorporation with Different Liability Structures
Under Section 3 of the Companies Act, 2013, a company may be incorporated as:
(a) Company limited by shares: Members’ liability limited to unpaid amount on shares held. Most common for profit-making entities.
(b) Company limited by guarantee: Members guarantee a fixed amount (e.g., ₹1 lakh) towards company’s debts in winding up. Used for non-profits, clubs, trade associations. No share capital.
(c) Unlimited company: Members have unlimited liability (like partnership). Can have share capital but uncommon in practice.
(d) One Person Company (OPC): Introduced in 2013; only one member and one nominee. Liability limited by shares. Suitable for sole proprietors wanting corporate benefits.
Each type requires specific clauses in MoA/AoA regarding liability. Guarantee and unlimited companies cannot invite public deposits. OPCs have relaxed compliance rules (e.g., no requirement to hold AGM if single director).
