1

Formation & Registration of a Company

BETS

Company Law

Zahid Safdar Zahid Safdar

BAHND-f-11857 BAHND-f-11857

British Education & Training Systems

Higher National Diploma

Unit Title: Company Law

Unit Code: F/601/1069

Assignment Title: Formation and Registration of a Company

Roll no: BAHND-f-11857 Submission date: 10th December, 2013

Number of words: 6,864

Assessor: Ms. Javaria Qais

Acknowledgements:
Apart from my efforts, the accomplishment of my report depends largely on the encouragement and guidelines of many others. I take this opportunity to express my gratitude to the people who have been involved in the successful completion of this report. I would like to show my greatest appreciation to Ms. Javaria Qais. I can't say thank you enough for her tremendous support and help. I feel motivated and encouraged every time I attend her lectures. Without her encouragement and guidance this report would not have materialized.

Executive Summary:
This report is about the formation and registration of a company. This report is concerned with the concept of corporate personality and lifting the veil. This report consists on the analysis of advantages and disadvantages of incorporation and I advised the proposed company by A and D accordingly. This report also consists of laws about promoter s, pre-incorporation contracts and guidelines for the proposed company. I also wrote requirements for registration and commencement. This report shows a discussion about requirements for the memorandum of association to the given scenario. I also draw up the article of association for the proposed company by A and D. The analysis of doctrine of ultra vires is also part of this report. Moreover, detailed discussion about contents of a prospectus and listing particulars.

Table of Contents:
1 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Acknowledgements Executive Summary Table of Contents Tables and Figures AC (1.1) Corporate Personality and Lifting the Veil AC (1.2) Advantages and Disadvantages of Incorporating AC (1.3) Law on Promoters and Pre-incorporation Contracts AC (1.4) requirements for Incorporation and Commencement AC (2.1) Memorandum of Association AC (2.2) Article of Association AC (2.3) Doctrine of Ultra Vires AC (2.4) Prospectus Conclusion Self-Evaluation Bibliography 3 4 5 6 7 8 10 12 13 14 15 16 18 19 20

Tables and Figures:

Figures 1. 2. 1. Directors personal liability Formation of a company Tables Difference between AOA and MOA 15 9 11

AC (1.1) Corporate Personality and Lifting the Veil:

This is the personality a company gets after incorporation. It enables the company the right to sue and to be sued. The company does that in its own name rather than on behalf of shareholders. The company as a corporate personality can own and hold its own property, by virtue of that; it is liable for its own debts. The principle of corporate entity was established in the case of Salomon v A. Salomon, now referred to as the Salomon principle:

Salomon Principle
On incorporation a company becomes a legal entity separate and distinct from its shareholders and it is not the agent of those shareholders not even if it is a one man company with one shareholder controlli9ng all its activities. (Pettet, 2005)

Salomon v Salomon & company (1897)

The facts Salomon v A. Salomon case was that the owner of a business sold it to a company he had formed, in return for fully paid-up shares to himself and members of his family, and secured debentures. When the company went into liquidation, the owner, because of the ownership of the debentures, won his claim to be paid off in priority to other creditors, as the secured debt ranked at a higher priority to those debts and successfully proved that he did not have to indemnify the company in respect of its debts, as it had a separate legal personality. The House of Lords affirmed this principle, and stated that the company was also not to be regarded as an agent of the owner, as stated by Lord Macnaughten in the House of Lords as the company is at law a different person altogether from the subscribers to the memorandum and the company is not in law the agent of the subscribers or a trustee for them. There are occasions when it seems that the Salomon principle may be unfair, and then the courts are under pressure to review the principle and make decisions contrary to it upon various grounds. This is termed as piercing the corporate veil. (SOOK YEE, 2010)

Lifting the veil:

The concept that if a corporation is a shell or alter ego of a person who can claim limited liability through the corporate liability shield, the shield can be pierced by creditors in order to reach the assets of the person defrauding them. This also applies when a company has been so undercapitalized at its inception as to be unable to maintain assets to cover its debts. The concept was developed to prevent abuse of the limited liability structure by people hiding from creditors.

The general purpose is to

Enforce statutory rules of company law Prevent fraud or other avoidance of legal obligations by the use companies Recognize that in economic reality the entity is group and not the individual companies within it

8 The liabilities of proposed company by A and D are the legal responsibility of the company and the members will not be liable for the companys debts. When both companies A and D will get register their proposed company under the Company act, all the dealings with the company will be in the name of company, and the members will be disregarded. This shows that there is a veil drawn between the company and its members. This veil is partition or curtain between the company and its members. Sometimes the Court can Lift the veil where it is essential to secure justice, in public interest or for the benefit of revenue. But it must be keep in mind that a separate legal entity is still a general rule.

AC (1.2) Advantages and Disadvantages of Incorporating:

Advantages of incorporating
The most common reason for incorporating is to shield a business owner from the debts and liabilities of the business, but there are many other advantages.

Limited liability The owners of the corporation (the shareholders) are generally not liable for the
debts and obligations of the corporation unless they have provided a personal guarantee.

Perpetual existence The existence of the corporation is not affected by a change in the people
that own and/or manage the corporation. The shareholders, directors and officers may retire or sell their shares, but the corporation continues in existence.

Capital acquisition Corporations can issue various classes of shares (in addition to other debt
instruments such as bonds) in order to raise capital. This is an attractive feature to investors because it allows for partial ownership of the corporation.

Tax advantages there are tax advantages to incorporating your business, such as lower income tax
rates and the carrying forward of losses from previous years to offset profits in subsequent years.

Mergers & acquisitions a corporation can merge or amalgamate with another corporation.

Disadvantages of incorporating
Start-up costs a corporation is more expensive to form and organize than other methods of
carrying on business.

Record keeping requirements A corporation is required to maintain corporate records, elect

directors, hold directors and shareholders meetings, and provide shareholders with financial information, among other duties.

Annual filings corporations are required to file annual government returns. Double taxation of dividends Income generated by a corporation is taxed at both the
corporate level and shareholder level. A corporation must pay taxes on its income and the shareholders must pay taxes on the dividends (the profits they receive from the corporation). According to the given scenario proposed company by A and D will have separate legal entity apart from its members after incorporation. After incorporation the proposed company will attain its perpetual existence, whatever happens to the shareholders or owners/ managers the company will continue its existence. Another advantage for proposed company is limited liability of members. Incorporation will give a benefit to proposed company to commence and defend legal actions in its own name. By getting incorporated the proposed company can hold property in its own name. After incorporation directors may be still exposed to personal liability from fuduciary and managemnt reponsibilities.

Source: (Carter.ca) Both companies A and D should keep in mind that Incorporating will take longer to set up compared to other types of business structures. Incorporating includes higher start-up expenses. The proposed company can face double taxation. Double taxing involves corporation tax and income tax. The extra paperwork does not stop with the filing of two tax returns. Not only double taxation but proposed company will also need to take care of detailed books, take notes at meetings, as well as create reports, a share register, tax return files, a transfer register, bank account records, and audit books. So Companies A and D should understand the negative aspects of being incorporated.

10

AC (1.3) Law on Promoters and Pre-incorporation Contracts:

Law on promoters
A person who takes the necessary steps to form a company is called a 'promoter'. In Whaley Bridge Calico Printing Co v Green (1879) 5 QBD 109, Bowen J explained that: The term promoter is a term not of law, but of business, usefully summing up in a single word a number of business operations familiar to the commercial world by which a company is generally brought into existence.

Duties
Core duty of a promoter is that of loyalty and good faith. Given the activities of promoters in bringing a company into existence, a process which often involves acquiring property for the yet unformed corporation, the core duty is translated into a prohibition against making secret profits from such transactions. The promoter of a company decides its name and ascertains that it will be accepted by the Registrar of Companies. He settles the details of the companys Memorandum and Articles, the nominations of directors, solicitors, bankers, auditors and secretary and the registered office of the company. He arranges for the printing of the Memorandum and Articles, the registration of the company, the issue of prospectus, where a public issue is necessary.

Promoter will do the following things for the proposed company by A and D: To arrange for filing of the necessary documents with the Registrar. To enter into preliminary contracts with the vendors. To settle preliminary agreements for acquisition of assets. To appoint bankers, brokers and legal advisers for the company. To originate the scheme for formation of the company.

From the above it should be clear that a promoter is one who performs the preliminary duties necessary to bring a company into existence. Thus, the true test to describe a person as a promoter lies in finding out whether he is keen to from a company and take steps to give it a concrete shape.

11

Pre-incorporation contracts
A pre incorporation contract is one which is purportedly made by or on behalf of a corporation at a time when the corporation has not yet been incorporated. Because the corporation named in the promoter's contract has not been formed at the time the contract is made, the corporation when formed is not bound by the contract. However, adoption of the contract is anticipated by the parties to the contract. If the corporation in fact adopts the contract, then it will assume those rights and liabilities set out in the contract. When a promoter enters into a contract on behalf of a corporation to be formed, the promoter may be considered personally liable to meet the obligations of the corporation if for some reason the corporation is not formed or does not adopt the contract. When the pre-incorporation contract is made, the corporation is not in existence and therefore cannot be a party to the contract. The promoter thus must be a party to the contract, and, under agency law principles, the promoter will be personally bound as an agent acting on behalf of a non-existent principal.

Effects of pre-incorporation contracts

A company, when it comes into existence, cannot be sued on pre-incorporation contracts. A company cannot by adoption or ratification obtain the benefit of a contract made on its behalf before the company came into existence. The agents who contract for a proposed company may sometimes incur personal liability.

According to company ordinance 1984 the process of company formation is divided into four categories.

Formation of a comapny

Promotion

Incorporation
Source: (Company Law in Pakistan)

Prospectus

Commencement

12

Promotion:
Promotion means to start the business it is the first stage in the formation of company that people who take initial steps in the formation of company are called promoters these people prepare the legal documents and takes step for its registration the promoters shall have to observe the legal formalities drafting the following documents:

Ac (1.4) requirements for Incorporation and Commencement:

Incorporation
The second stage for formation of company is to get the company registered. For registration of company following documents are submitted registrars for the registration of company. Memorandum of association Article of association Nominal capital Qualification of shares Declaration List of directors

If the registrar is satisfied with documents then he will issue certificate of incorporation private limited company can start its business after receiving certificate of incorporation but a public limited company wait for certificate of commencement.

Commencement
A public company has to receive the certificate of commencement before starting the business. A company submits the following documents to registrar: Prospectus Directors shares Minimum subscription

After verifying these documents registrar issue a certificate of commencement they can start the business.

SECP
Securities and Exchange Commission of Pakistan established under the Pakistan Act 1997. It was operational as a body Corporate on 1st January 1999. The important function of the SECP is registration

13 of companies. This task has been entrusted to the Registration Department, Company Law Division which has its field offices known as Company Registration Offices (CROs).

AC (2.1) Memorandum of Association:

An important step in the formation of a company is to prepare a document called Memorandum of Association. It is the charter of the company that contains the basic conditions on which the company is incorporated.

Contents
Name: It is the legal requirement that a company must state the name of the company. Address: A company is required to state the name of the province in which the office is situated its also necessary to give the exact address and name of the city where the company is located. Object: It defines the limits and extent of the activities of the company. Liability: This Clause show the nature of the liability of the members etc. Capital: The amount of share capital with which the company is to be registered divided into shares must be specified giving details of the number of shares and types of shares. A company cannot issue share capital greater than the maximum amount of share capital mentioned in this clause without altering the memorandum.

Alteration of MOA
Alteration of name: A company may change its name at any time by passing a special resolution.
The old name of the company will stand abolished and the new name will come into existence from the date of passing such resolution. However, it does not affect the rights and obligations of the company.

Alteration of registered office: Shifting of registered office from one province to another is a
complicated affair. For this purpose, A special resolution of the company and the sanction of the company law board. The Board can confirm the alteration only if the shifting of the registered office from one state to another is necessary for any purposes.

Alteration of objects: A company may alter its objects with the passing of a special resolution. The
confirmation of the company law board is not required for this purpose. In case of alteration of objects, a copy of the resolution should be filed with the Registrar of Companies within one month from the date of resolution. Name clause: According to this clause both companies A and D should states the name of the proposed company. The name of a corporation is the symbol of its personal existence. The name should not be, in the opinion of the government, undesirable. Generally it is so when it is identical with or too nearly

14 resembles the name of another company. The proposed company by A and D is a private company so the last name of the company will be private limited. The name of the proposed company by A and D must be painted outside of every place where the company carries on business and printed on every business document and official letter of the company. Registered office clause: A and D need to specify the province in which the registered office of the company shall be situate. Within 30 days of incorporation or commencement of business, whichever is earlier, the exact place where the registered office is to be located must be decided and sent to the registrar. Objects clause: According to this clause A and D should states the objects of the proposed company. The basic intention of this clause is that the investors (Companies A and D) must be informed of the objects of the proposed company in which their money is going to be employed and the creditors must feel protected when they know the assets are being used for the authorized objects. Liability clause: Liability clause will state whether the liability of the members of both companies A and D shall be limited by shares or by guarantee or unlimited. Capital clause: The last clause states the amount of capital with which the company is proposed to be registered and the kinds, number and value of shares into which the capital is to be divided. After the Companies (Amendment), the minimum paid up capital of one lakh or more for a private company.

AC (2.2) Article of Association:

These are the regulations that govern the internal management affairs of the company and the conduct of its business. The Articles are subordinate to the Memorandum of Association.

Contents
Amount of share capital issued. Rights of shareholders regarding voting dividend return of capital. Rules regarding issue of shares and debentures. Procedure as well as regulation in respect of making calla on share. Procedure of transfer of shares. Matters related to the account and audit etc.

15 Rules regarding to the winding of the company. Numbers, qualification, power and liabilities of directors. Rules regarding appointment of directors, managing directors, agents and secretaries.

Difference between Articles and Memorandum of Association

Points Nature Contents Relations defined Status Alteration Legal effects MOA Charter of the company Objects and powers of the company Relations between company and outside world Supreme document Strict restriction Cannot ratified AOA Internal rules and regulations By-laws for carrying out the companies objects Relations between company and its management Subordinate to MOA Altered by resolution Ratified

Source: (Lawteacher.com) Articles of Association of a the proposed company by A and d will contain the rules and regulations regarding to the management of its internal Affairs. It will also defines the rights, powers and duties of the management of the proposed company. Both companies A and D should aware of that AOA is not containing anything which is against the memorandum of association or against the companies Act or Public policy. The Articles of Association of proposed company by A and D must be printed, divided into paragraphs, numbered consecutively and signed by each signatory to the MOA in the presence of at least one attesting witness. And most of all the proposed company should track all the contents mentioned above while creating an AOA.

AC (2.3) Doctrine of Ultra Vires:

Ultra means beyond and Vires means powers. It means beyond power. That is, any act done by the company beyond its legal powers and authority. Any act done by the company which is neither authorized by its objects nor by the Act, that act is ultra vires the powers and authority of the company. Such an act is void and cannot bind the company. And since it is void, it cannot be ratified by shareholders either. An act ultra vires the powers of Directors but not ultra vires the company can be ratified by the shareholders. Similarly and act ultra vires the Articles of the company but within the powers of the Memorandum can be ratified by altering the articles. Essentially, an act ultra vires the company is void and cannot be ratified.

16

Doctrine of Constructive Notice

Memorandum and Articles on registration with ROC assume the character of Public documents. Every outsider dealing with the company is deemed to have notice of the contents of the same. This is known as Doctrine of Constructive Notice

Doctrine of Indoor Management

The doctrine of indoor management is an exception to the rule of constructive notice. It imposes an important limitation on the doctrine of constructive notice. According to this doctrine, a person dealing with a company is bound to read only the public documents. He will not be affected by any irregularity in the internal management of the company. Effects of Doctrine of Ultra Vires: Following are the effects of doctrine of ultra vires: The company cannot sue any person for enforcement of any of its rights. No person can sue the company for enforcement of its rights. The directors of the company may be held personally liable to outsiders for an ultra vires.

It can be concluded that an UV act is void and cannot be ratified. So it will prevent the proposed company by A and D from wrongful application of the companys assets likely to result in the insolvency of the company and thereby protects its creditors. It will also prevents directors of proposed company from departing the object for which the company has been formed and, thus, puts a check over the activities of the directions. However, it has sometimes led to injustice of third parties acting in good faith. Thus, the doctrine of constructive notice seeks to protect the proposed company by A and D against the outsider by deeming that such an outsider had the notice of the public documents of the company. However, in Pakistan the courts with a view to protect the innocent third parties acting in good faith have not relied upon the doctrine seriously.

AC (2.4) Prospectus:
A prospectus is an invitation to the public and general investors to purchase shares and debenture of a company. In other words, a prospectus may be defined as a document that contains notice, circular, advertisement demanding invitation for investment and deposits from the public and general investors for the subscription and purchase of offering share and debentures of a corporation.

Legal Requirements of Prospectus

Prospectus shall be issued within ninety days of its registration.

17 Before a prospectus is issued, a copy of it must be registered with the registration of companies. The prospectus must be dated. The prospectus must contain all the particulars, listed in the schedule of Companies act. A Prospectus is required to be issued only after the incorporation of company.

Contents
General Information
It contains: Name and address of registered office of company. Name of stock exchange where application for listing is made. Date of opening of the issue. Date of closing of the issue. Name and address of companys manager and managing directors.

Particulars of the Issue

Objects Project cost Means of financing

Capital Structure of Company

Authorized, issued, subscribed, and paid-up capital. Size of the present issue giving separately reservation for preferential allotments to promoters and others.

According to the given scenario when company A and D will get a certificate of incorporation the promoters will issue prospectus of the company with a copy of application form for share. Prospectus shows the rules regarding purchase and sale of share and about the mode of payment. A copy of prospectus should be submitted to the registrar. When the requisite minimum number of share has been subscribed and the qualifying shares of the directors have been paid then both companies A and D will submit a declaration to the registrar.

18

Conclusion:
The liabilities of proposed company by A and D are the legal responsibility of the company and the members will not be liable for the companys debts. When both companies A and D will get register their proposed company under the Company act, all the dealings with the company will be in the name of company, and the members will be disregarded. This shows that there is a veil drawn between the company and its members. This veil is partition or curtain between the company and its members. According to the given scenario proposed company by A and D will have separate legal entity apart from its members after incorporation. After incorporation the proposed company will attain its perpetual existence, whatever happens to the shareholders or owners/ managers the company will continue its existence. Another advantage for proposed company is limited liability of members. Incorporation will give a benefit to proposed company to commence and defend legal actions in its own name. by getting incorporated the proposed company can hold property in its own name. The proposed company can face double taxation. Double taxing involves corporation tax and income tax. Not only double taxation but proposed company will also need to take care of detailed books, take notes at meetings, as well as create reports, a share register, tax return files, a transfer register, bank account records, and audit books. So Companies A and D should understand the negative aspects of being incorporated. The promoter is one who performs the preliminary duties necessary to bring a company into existence. It will also define the rights, powers and duties of the management of the proposed company. Both companies A and D should aware of that AOA is not containing anything which is against the memorandum of association or against the companies Act or Public policy. It will also prevent directors of proposed company from departing the object for which the company has been formed and, thus, puts a check over the activities of the directions. According to the given scenario when company A and D will get a certificate of incorporation the promoters will issue prospectus of the company with a copy of application form for share.

19

Self- Evaluation:
Below is a list of strengths I believe my assignment possesses: I think my assignment is decently organized. I believe that my assignment is written according to the given instructions. I believe I have solved all the given questions. I feel I used a variety of methods to get my point across. I feel I used a wide quantity of quality sources. I feel my personal experiences on the assignment, and how I used it in my assignment is what makes my assignment good. This assignment will really help me in future when Ill start my own business. I asked for help to assessor regarding to assignment from time to time.

20

Bibliography:
(n.d.). Retrieved October 2014, from lexology: http://www.lexology.com/library/detail.aspx?g=45280db4-5693-4750-b036-c6f32aea6243 (n.d.). Retrieved November 2014, from itna Consultants: http://www.itnaconsultants.com/knowledgecenter/44-company-registration-in-pakistan-conditions-for-alteration-in-memorandum-of-association (n.d.). Retrieved November 2014, from VU help Desk: http://www.vuhelp.net/assignments-mercantilelaw/37413-q-what-memorandum-association-company-limited-shares.html Company Law Notes. (n.d.). Retrieved November 2014, from Hanumant: http://www.hanumant.com/CompanyLaw-ByAvinash.html Pettet, B. (2005). Company Law. Pearson. Saeed, P. D. (2011). Company Law in pakistan. Lahore: Khawaja Publishers. SOOK YEE, L. (2010, March). Retrieved October Monday, 2013, from Barely Legal Blogspot: http://barely-le-gal.blogspot.com/2010/04/salomon-principle-blessing-or-otherwise.html