SUBJECT – COMPANY LAW

TOPIC – CRITICALLY ANALYSE THE PROCESS OF FORMATION OF A

COMPANY

Supervised By: MISS SHRUTI DAS GUPTA

NAME: Azal Ali Rizvi

ROLL NO.: (Admit card No.) -

(Class Roll. No.) - 06
COURSE: BBA/LL.B; Semester- 8TH

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 ACKNOWLEDGEMENT
With profound gratitude and sense of indebtedness I place on record my sincerest thanks to Miss
Shruti Das Gupta , Indian institute of legal studies, for his/her invaluable guidance, sound advice
and affectionate attitude during the course of my studies.
I have no hesitation in saying that she molded raw clay into whatever I am through her incessant
efforts and keen interest shown throughout my academic pursuit. It is due to her patient guidance
that I have been able to complete the task.
I would also thank the Indian institute of legal studies library for the wealth of information
therein. I also express my regards to the library staff for cooperating and making available the
books for this project research paper.
Finally, I thank my beloved parents for supporting me morally and guiding me throughout the
project work.

Date: Name: Azal Ali Rizvi.

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 TABLE OF CONTENT
ACKNOWLEDGEMENT………………………………………………………………….03

RESEARCH METHODOLOGY

A) Aims and objectives

B) Statement of problems
C) Research questions
D) Mode of citation………………………………………………………………………04

Chapter 1) INTRODUCTION………………………………………………………………..05

Chapter 2) FEATURES OF A COMPANY…………………………………………………06-07

Chapter 3) REGISTRATION AND INCORPORATION OF A COMPANY………………08-09

Chapter 4) THE COMPANY INCORPORATED BASEWD ON FALSE

INFORMATION……………………………………………………………………………...10

Chapter 5) EFFECTS OF REGISTERATION OF A COMPANY…………………………11

Chapter 6) COMPANY FORMATION AND ITS PROCESS………………………………12-13

Chapter 7) WHEN COMPANY FORMATION IS REJECTED……………………………14-16

Chapter 8) CASE STUDIES…………………………………………………………………17-18

BIBLIOGRAPHY…………………………………………………………………………….19

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 RESEARCH METHODOLOGY

A) AIMS AND OBJECTIVE: The aims and objective of this project is to understand the
subject matter properly and to understand the concept of project topic. The main aim of
this project is to understand what a company is and how a company does comes into
existence, the procedures and rules.

B) STATEMENT OF PROBLEM: why is a company regarded as separate legal entity?

Can a company sue and be sued in its name?

C) RESEARCH QUESTIONS: 1) what is a company?

2) What are the various functions of a company?
3) How is a company formed?
4) What are the processes of formation of a company?
5) What happens when company formation is rejected?

D) MODE OF CITATION: A uniform mode of citation is adopted throughout the project.

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 INTRODUCTION
A company is a body corporate or an incorporated business organization registered under the
companies act. It can be a limited or an unlimited company, private or a public company,
company limited by guarantee or a company having a share capital, or a community interest
company. A company can be a “corporation, partnership, association, joint-stock
company, trust, fund, or organized group of persons, whether incorporated or not, and (in an
official capacity) any receiver, trustee in bankruptcy, or similar official, or liquidating agent, for
any of the foregoing”

The Companies Act 2013 of India defines a company as-

A registered association which is an artificial legal person, having an independent legal, entity
with a perpetual succession, a common seal for its signatures, a common capital comprised of
transferable shares and carrying limited liability.
A more precise, global and modern definition of a company could be:
A business entity which acts as an artificial legal person, formed by a legal person or a group of
legal persons to engage in or carry on a business or industrial enterprise.
Few points that should be noted in this definition:
Legal Person: A legal person could be human or a non-human entity which is recognized by law
as having legal rights and is subject to obligations.
A person or a group of persons: It is no more required to be an association of persons to form a
company. A company can also be started as a single person company (one-person company)1.

There are many definitions of a Company by various legal experts. However, Section 2(20) of the
Companies Act, 2013, defines the term ‘Company’ as follows: “Company means a company
incorporated under this Act or under any previous company law.” Hence, in order to understand the
meaning of a Company, it is important to look at the distinctive features that explain the realm of a
Company2.

1
http://www.mca.gov.in/MCASearch/search_table.html.
2
http://www.mca.gov.in/SearchableActs/Section1.htm.

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 FEATURES OF A COMPANY
A Company is a Separate Legal Entity - One of the most distinctive features of a Company, as
compared to other organizations, is that it acquires a unique character of being a separate legal
entity. Hence, when you register a company, you give it a legal personality with similar rights and
powers as a human being.

The existence of a company is distinct and separate from that of its members. It can own property,
bank accounts, raise loans, incur liabilities and enter into contracts. According to Law, it is
altogether different from the subscribers to the Memorandum of Association3.

Also, it has a distinct personality which is different from those who compose it. Member can also
contract with the Company and acquire a right against it or incur a liability to it. However, for any
debts, the creditors can sue the Company but the members cannot.

A Company can own, enjoy, and dispose of a property in its own name. While the shareholders
contribute to the capital and assets, the company is the rightful owner of such assets and capital.
Further, the shareholders are not private or joint holders of the company’s property.

Perpetual Succession - Another important feature of Company is that it continues to carry on its
business notwithstanding the death of change of its members until it is wound up on the grounds
specified by the Act. Further, the shares of the company change hands infinitely, but that does not
affect the existence of the company.

In simple words, the company is an artificial person which is brought into existence by the law.
Hence, it can be ended by law alone and is unaffected by the death or insolvency of its members.

Limited Liability - One of the important features of a company is the limited liability of its
members. The liability of a member depends on the type of company.

 In the case of a limited liability company, the debts of the company in totality do not become
the debts of its shareholders. In such case, the liability of its members is limited to the extent
of the nominal value of shares held by them. The shareholders cannot be asked to pay more
than the unpaid value of their shares.
 In the case of a company limited by guarantee, members are liable only to the extent of the
amount guaranteed by them. Further, this liability arises only when the company goes into
liquidation.
 Finally, if it is an unlimited company, then the liability of its members is unlimited too. But
such instances are very rare4.

3
https://www.feedough.com/what-is-a-company-meaning-types-features-of-a-company/.

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Artificial Legal Person - Another one of the features of a company is that it is known as an
Artificial Legal Person.

 Artificial – because its creation is by a process other than natural birth.

 Legal – because its creation is by law, and
 Person – because it has similar rights to a human being.
Further, a company can own property, bank accounts, and do everything that a natural person can
do except go to jail, marry, take an oath, or practice a learned profession. Hence, it is a legal person
in its own sense.

Since a company is an artificial person, it needs humans to function. These humans are Directors
who can authenticate the company’s formal acts either on their own or through the common seal of
the company.

Common Seal - While a company is an artificial person and works through the agency of human
beings, it has an official signature. This is affixed by the officers and employees of the company on
all its documents. This official signature is the Common Seal.

However, the Companies (Amendment) Act, 2015 has made the Common Seal optional. Section 9
of the Act does not have the phrase ‘and a common seal’ in it. This provides an alternative mode of
authorization for companies who do not wish to have a common seal5.

According to this amendment, if a company does not have a common seal, then the authorization
shall be done by:

 Two Directors or
 One Director and the Company Secretary (if the company has appointed a Company
Secretary).

4
http://www.shareyouressays.com/knowledge/8-most-important-features-of-a-company-indian-companies-act-
1956/112331.
5
https://www.owlgen.com/question/define-a-company-state-the-essential-features-of-a-company.

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 REGISTERATION AND INCORPORATION OF A COMPANY
The Companies Act, 2013 details the regulations and company registration papers essential for the
incorporation of a company. In this article, we will understand all such rules and documents listed in
the Act. To begin with, let’s define the promoters of a company.

Promoters - Section 2(69) of the Companies Act, 2013, defines promoters as an individual who:-

 Is named as a promoter in the prospectus or in the annual returns of the company.

 Controls the affairs of a company, directly or indirectly.
 Advises, directs, or instructs the Board of Directors.
Hence, we can say that promoters are people who originally come up with the idea of the company,
form it and register it. However, solicitors, accountants, etc. who act in their professional capacity
are NOT promoters of the company6.

Formation of A Company - Section 3 of the Companies Act, 2013, details the basic requirements
of forming a company as follows:

 Formation of a public company involves 7 or more people who subscribe their names to the
memorandum and register the company for any lawful purpose.
 Similarly, 2 or more people can form a private company.
 One person can form a One-person company.
Registration or Incorporation of a Company - Section 7 of the Companies Act, 2013, details
the procedure for incorporation of a company. Here is the procedure:

Filing of company registration papers with the registrar - To incorporate a company, the
subscriber has to file the following company registration papers with the registrar within whose
jurisdiction the location of the registered office of the proposed company falls7.

1. The Memorandum and Articles of the company. All subscribers have to sign on the
memorandum.
2. The person who is engaged in the formation of the company has to give a declaration
regarding compliance of all the requirements and rules of the Act. A person named in the
Articles also has to sign the declaration.
3. Each subscriber to the Memorandum and individuals named as first directors in the Articles
should submit an affidavit with the following details:

6
https://www.toppr.com/guides/business-laws/companies-act-2013/registration-and-incorporation-of-a-company/.
7
http://corporatelawreporter.com/companies_act/section-7-of-companies-act-2013-incorporation-of-company/.

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 i. Declaration regarding non-conviction of any offense with respect to the formation,
promotion, or management of any company.
ii. He has not been found guilty of fraud or any breach of duty to any company in the last
five years.
iii. The documents filed with the registrar are complete and true to the best of his knowledge.
4. Address for correspondence until the registered office is set-up.
5. If the subscriber to the Memorandum is an individual, then he needs to provide his full name,
residential address, and nationality along with a proof of identity. If the subscriber is a body
corporate, then prescribed documents need to be provided.
6. Individuals mentioned as subscribers to the Memorandum in the Articles need to provide the
details specified in the point above along with the Director Identification Number8.
7. The individuals mentioned as first directors of the company in the Articles must provide
particulars of interests in other firms or bodies corporate along with their consent to act as
directors of the company as per the prescribed form and manner.

Issuing the of Certificate of Incorporation - Once the Registrar receives the information and
company registration papers, he registers all information and documents and issues a Certificate of
Incorporation in the prescribed form.

Corporate Identity Number (CIN) - The Registrar also allocates a Corporate Identity Number
(CIN) to the company which is a distinct identity for the company. The allotment of CIN is on and
from the company’s incorporation date. The certificate carries this date.

Maintaining copies of Company registration papers- The company must maintain copies of all
information and documents until dissolution.

Furnishing false information at the time of incorporation- During the formation of a company, an
individual can:

 Furnish incorrect or false information

 Suppress any material information in the documents provided to the Registrar for the
incorporation, on purpose
In such cases, the individual is liable for action for fraud under section 4479.

8
https://taxguru.in/company-law/process-incorporation-company-companies-act-2013.html.
9
//www.icsi.edu/media/portals/0/INCORPOhttpsRATION%20OF%20COMPANIES.pdf.

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 THE COMPANY INCORPORATED BASED ON FALSE INFORMATION

If a company is already incorporated but it is found at a later date that the information or documents
submitted were false or incorrect, then the promoters, first directors, and persons making a
declaration is liable for action for fraud under section 447.

Order of the National Company Law Tribunal (NCLT)

If a company is incorporated by furnishing false or incorrect information or representation or

suppressing material facts or information in the documents furnished, the Tribunal can pass the
following orders (if an application is made and the Tribunal is satisfied with it):

 Pass an order to regulate the management of the company. It can include changes in its
Memorandum and Articles if required. This order is either in public interest or in the interest
of the company and its members and creditors10.
 Make the liability of its members unlimited
 Order removal of the name of the company from the Registrar of Companies
 Order the company to wind-up
 Pass any other order as it deems fit
Before passing an order, the Tribunal has to give the company a reasonable opportunity state its
case. Also, the Tribunal should consider the transactions of the company including obligations
contracted or payment of any liability.

10
http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf.

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 EFFECT OF REGISTERATION OF A COMPANY

According to Section 9 of the Companies Act, 2013, these are the effects of registration of a
company:

 From the date of incorporation, the subscribers to the Memorandum and all subsequent
members of the company are a body corporate.
 A registered company can exercise all functions of a company incorporated under the Act.
Also, the company has perpetual succession with power to acquire, hold, and dispose of
property of all forms. Also, it can contract, sue and be sued by the said name11.
 Further, the company becomes a legal person separate from the incorporators from the date of
incorporation. Also, a binding contract comes into existence between the company and its
members as mentioned in the Memorandum and Articles of Association. Until the company
dissolves or the Registrar removes it from the register, it has perpetual existence.

From the date of incorporation mentioned in the certificate of incorporation, such subscribers to
the memorandum and all other persons, as may, from time to time, become members of the
company, shall be a body corporate by the name contained in the memorandum, capable of
exercising all the functions of an incorporated company under this Act and having perpetual
succession and a common seal with power to acquire, hold and dispose of property, both
movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said
name.

11
http://corporatelawreporter.com/companies_act/section-9-of-companies-act-2013-effect-of-registration/.

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 CONVERSION OF COMPANIES ALREADY REGISTERED
(1) A company of any class registered under this Act may convert itself as a company
of other class under this Act by alteration of memorandum and articles of the
company in accordance with the provisions of this Chapter.

(2) Where the conversion is required to be done under this section, the Registrar shall
on an application made by the company, after satisfying himself that the
provisions of this Chapter applicable for registration of companies have been
complied with, close the former registration of the company and after registering
the documents referred to in sub-section (1), issue a certificate of incorporation in
the same manner as its first registration.

(3) The registration of a company under this section shall not affect any debts,
liabilities, obligations or contracts incurred or entered into, by or on behalf of the
company before conversion and such debts, liabilities, obligations and contracts
may be enforced in the manner as if such registration had not been done12.

12
https://www.prh.fi/en/kaupparekisteri/rekisterointipalvelut/rekisteroinnin_merkitys.html.

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 COMPANY FORMATION AND ITS PROCESS
Company formation is the process of registering a business as a limited company at Companies
House. As a result, the business becomes a distinct legal entity. The process is also referred to as
‘company incorporation’ and ‘company registration’.
When you incorporate a limited company, it becomes an individual ‘person’ in the eyes of the
law. Incorporated businesses are completely separate from their owners in terms of finances,
liabilities, contractual agreements, and ownership of property and assets. Such a view is not
afforded to unincorporated businesses like sole traders as distinct legal entities.
The law does not view unincorporated businesses like sole traders as distinct legal entities.
Therefore, there is no separation between a sole trader business and its owner in terms of
finances, assets and liabilities13.
Generally, the main reason to register a limited company is to reduce the financial responsibility
of the people who own the business. This protection is known as ‘limited liability’. Private
companies can be limited by shares or limited by guarantee.
The owners of a company limited by shares are only liable for the value of their shares. The
owners of a company limited by guarantee are liable only for the value of their guarantees. Their
personal finances and assets are protected beyond the limit of their liabilities.
This is not the case for unincorporated business structures. Sole traders, for example, are wholly
liable for all business debts and liabilities because there is no legal or financial distinction
between the individual person and the business.
Aside from the obvious benefits of personal financial protection, limited company formation
creates a professional corporate image and allows business owners to manage their personal
remuneration in a more tax-efficient manner.
Furthermore, limited status gives the impression of an established and reliable business. As a
result, incorporated businesses are more attractive to investors, lenders, clients and suppliers.
Registering as a limited company is, therefore, an effective and affordable way to further the
potential of a fledgling or existing business, attract more favourable tax rates and appeal to a
wider audience.
To register a private company limited by shares or guarantee, you will require:
 Unique company name.
 Registered office address in England and Wales, Scotland or Northern Ireland.
 Minimum of one director.
 Minimum of one shareholder or guarantor (owner) – can also be the director.
 Memorandum and articles of association (governing documents).
 Share capital of at least one issued share (limited by shares companies only).
 Up to four Standard Industrial Classification (SIC) codes to describe what the business does.
 Information regarding the Company’s Register of Persons of Significant Control

13
https://www.rapidformations.co.uk/blog/what-is-company-formation/.

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 WHEN COMPANY FORMATION IS REJECTED

The most common reasons a company formation is rejected are:

 A company name is unavailable, incomplete or missing from the application.
 A company name requires supporting evidence.
 Supporting evidence for a company name has been incorrectly presented.
 A company name contains a ‘sensitive’ word or expression.
 Incomplete details are provided for a director or company secretary.
 A residential address is flagged as being a commercial property.
 Company share structure is incorrect.
 There is a problem with an officer’s authentication.
 A company director does not meet the minimum age requirement of 16.
 A director is registered as an undercharged bankrupt or a disqualified director.
 A registered office address has not been included, or it is situated in the wrong country.
 The statement of capital is incomplete or missing.
 The articles of association have not been included14.

14
https://www.rapidformations.co.uk/blog/what-is-company-formation/.

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 CONCLUSION

The formation of a company is a lengthy process. For convenience the whole process of
company formation may be divided into the following four stages: 1. Promotion Stage 2.
Incorporation or Registration Stage 3. Capital Subscription Stage 4. Commencement of Business
Stage.
1. Promotion Stage:
Promotion is the first stage in the formation of a company. The term ‘Promotion’ refers to the
aggregate of activities designed to bring into being an enterprise to operate a business. It
presupposes the technical processing of a commercial proposition with reference to its potential
profitability. The meaning of promotion and the steps to be taken in promoting a business are
discussed in brief here.

Promotion of a company refers to the sum total of the activities of all those who participate in the
building of the enterprise up to the organization of the company and completion of the plan to
exploit the idea. It begins with the serious consideration given to the ideas on which the business
is to be based.

According to Guthmann and Dougall, “Promotion starts with the conception of the idea from
which the business is to evolve and continues down to the point at which the business is full,
ready to begin operations in a going concern.”

2. Incorporation or Registration Stage:

Incorporation or registration is the second stage in the formation of a company. It is the
registration that brings a company into existence. A company is properly constituted only when
it is duly registered under the Act and a Certificate of Incorporation has been obtained from the
Registrar of Companies.

3. Capital Subscription Stage:

A private company or a public company not having share capital can commence business
immediately on its incorporation. As such ‘capital subscription stage’ and ‘commencement of
business stage’ are relevant only in the case of a public company having a share capital. Such a
company has to pass through these additional two stages before it can commence business 15.

4. Commencement of Business Stage:

After getting the certificate of incorporation, a private company can start its business. A public
company can start its business only after getting a’ certificate of commencement of business’.

After getting the certificate of incorporation:

(i) A public company issues a prospectus of inviting the public to subscribe to its share capital,

(ii) A minimum subscription is fixed, and

15
http://www.businessmanagementideas.com/company-management/formation-of-a-company-4-stages-business-
management/8962.

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(iii) The company is required to sell a minimum number of shares mentioned in the prospectus.

After making the sale of the required number of shares a certificate is sent to the Registrar stating
this fact, along-with a letter from the banks, that it has received application money for such
shares.

The Registrar scrutinizes the documents. If he is satisfied, then issues a certificate known as
Certificate of Commencement of Business. This is the conclusive evidence of the
commencement of the business.

The specimen of certificate of commencement of business is given below:

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 CASE STUDIES
1) KANDOLI TEA COMPANY LTD (1886)

FACTS- Certain persons transferred their properties in the name of company on which tax was
payable.

JUDGEMENT- Company is separate from its shareholders and this should be treated as
transfer16.

2) SALOMON V.S SALOMON & CO LTD [1896]

FACTS- Mr Salomon made leather boots or shoes in a large establishment. His sons wanted to
become business partners, so he turned the business into a limited company. The company
purchased Salomon's business on an excessive price for its value. His wife and five elder
children became subscribers and the two elder sons became directors. Mr. Salomon took 20,001
of the company's 20,007 shares which was payment from Salomon incorporated for his old
business (each share was worth £1). Transfer of the business took place on 1 June 1892. The
company also gave Mr. Salomon £10,000 in debentures. On the security of his debentures, Mr.
Salomon received an advance of £5,000 from Edmund Broderip.
Soon after Mr. Salomon incorporated his business there was a decline in boot sales. Salomon's
business failed, defaulting on its interest payments on the debentures (half held by Broderip).
Broderip sued to enforce his security. The company was put into liquidation. Broderip was
repaid his £5,000. This left £1,055 company assets remaining, of which Salomon claimed under
his retained debentures. This would leave nothing for the unsecured creditors. When the
company failed, the company's liquidator contended that the floating charge should not be
honored, and Salomon should be made responsible for the company's debts. Salomon sued.

JUDGEMENT- The Court of Appeal, declaring the company to be a myth, reasoned that
Salomon had incorporated the company contrary to the true intent of the then Companies Act,
1862, and that the latter had conducted the business as an agent of Salomon, who should,
therefore, be responsible for the debt incurred in the course of such agency.

The House of Lords, however, upon appeal, reversed the above ruling, and unanimously held
that, as the company was duly incorporated, it is an independent person with its rights and
liabilities appropriate to itself, and that “the motives of those who took part in the promotion of
the company are absolutely irrelevant in discussing what those rights and liabilities are”. Thus,
the legal fiction of “corporate veil” between the company and its owners/controllers4 was firmly
created by the Salomon case17.

16
https://www.caclubindia.com/articles/important-caselaws-on-company-law-7630.asp

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 3) Posh Exports Private Ltd. v. The Registrar of Companies- Posh Exports Private
Limited ("Petitioner Company") was incorporated as a private limited company. The
board of directors in the meeting came to know that the documents compulsorily required
to be filed by an Indian company under Companies Act, 1956 ("CA 1956") had not been
filed with the RoC by the Petitioner Company and therefore, decided to take steps in the
present petition and seek revival of the Petitioner Company. The board of directors also
undertook to make the statutory compliances and file the requisite statutory records and
the balance sheets in accordance with CA 1956. When the documents i.e., annual returns
and balance sheets, etc., were sought to be filed on website of MCA, the directors came
to know that name of the Petitioner Company has been struck of for the failure to file
requisite statutory documents. The Petitioner Company contended that the balance sheets
of the company were prepared from time to time, however, it was only recently
discovered that none of the balance sheets and the statutory records have been filed with
RoC. It was contended that the accountant did not co-ordinate and further the learned
counsel for the petitioner company submitted that the part time accountant of the
company who was dealing with the aforesaid work was no more an employee of the
company.
The petition was allowed in view of the fact that this non-compliance was due to the non-
coordination of the part time accountant and thus the petition was allowed subject to
payment of costs. Consequently, it was decided to restore the name of the Petitioner
Company on the register of the RoC subject to Petitioner Company filling all the
statutory documents and returns for the outstanding period along with the prescribed fees
in accordance with CA 1956.

4) MOOSA GOOLA ARIF V.S IBRAHIM GOOLA ARIF

FACTS- Company registered on the basis of MOA&AOA signed by two persons and guardian
on behalf of 5 minor members. Guardian signed separately for each of 5 members. The ROC
however registered the company and issued under his hand a certificate of incorporation.

JUDGEMENT- the court held the certificate to be conclusive for all purposes18.

18
http://www.mondaq.com/india/x/429880/Corporate+Commercial+Law/CASE+LAWS

18
s

BIBLIOGRAPHY
PRIMARY SOURCES:
BOOKS
Batuk Lal , The Law of Evidence(2015) ISBN-13:978-9384852214
The Indian Evidence Act, 1872
Rattan Lal & Dhiraj Lal , “The Law of Evidence”, 20th Nagpur : Wadhwa & Company, 2004
Sarkar M.C. and S.C. Sarkar, “Law of Evidence”, 16 th Ed., Nagpur: Wadhwa & Company,
2007
Singh, Avtar, “Principles of Law of Evidence”, 14th Ed., Allahabad: Central Law Publication,
2004.

SECONDARY SOURCES:
WEBSITES
http://www.legalservicesindia.com/law/article/1029/5/Res-Gestae-Section-6-Indian-Evidence-
Act-1872
http://www.legalservicesindia.com/article/2501/Doctrine-of-Res-Gestae.html
https://legaldictionary.net/7413-2/
https://www.google.com/search?q=presumption+of+the+court&rlz=1C1ASUC_enIN789IN789
&oq=PRE&aqs=chrome.0.69i59l2j69i60j69i59j69i57j0.2837j0j7&sourceid=chrome&ie=
https://en.wikipedia.org/wiki/Presumption

19