Chapter 7 — Corporate Organisation, Finance and Trade

Chapter 7 covers the Formation of a Company, explaining the three stages involved — promotion, incorporation, and capital subscription — along with the key documents such as the Memorandum of Association, Articles of Association, and prospectus, and the legal requirements at each stage.

The formation of a company involves three stages: (i) Promotion, (ii) Incorporation, and (iii) Subscription of Capital. A private company requires only the first two stages, as it is prohibited from raising funds from the public and does not need to issue a prospectus.

A promoter is a person who undertakes to form a company with reference to a given project and takes the necessary steps to accomplish that purpose. Key functions include identifying the business opportunity, conducting feasibility studies, getting the company name approved, fixing signatories to the Memorandum of Association, appointing professionals, and preparing the required legal documents.

The Memorandum of Association is the most important document of a company that defines its objectives. It contains five clauses: the name clause, registered office clause, objects clause (the most important, defining the company's purpose), liability clause (limiting members' liability to the unpaid amount on shares), and capital clause (specifying the maximum authorised share capital).

The Memorandum of Association defines the objects for which the company is formed and its relationship with outsiders, while the Articles of Association contain rules for the internal management of the company and define the relationship between members and the company. The MOA is the main document subordinate only to the Companies Act, whereas the AOA is subsidiary to both the MOA and the Companies Act. Acts beyond the MOA are invalid and cannot be ratified, but acts beyond the AOA can be ratified by members provided they do not violate the MOA.

A Certificate of Incorporation is issued by the Registrar of Companies after verifying that all documents are in order and all statutory requirements have been met. It is conclusive evidence of the legal existence of the company and is considered its birth certificate. Once issued, it cannot be questioned even if there are flaws in the registration process.

The documents required include the Memorandum of Association (signed by at least seven members for a public company and two for a private company), Articles of Association, written consent of proposed directors, any agreement with the proposed Managing Director or whole-time director, a copy of the Registrar's letter approving the company name, a statutory declaration, a notice of the registered office address, and documentary evidence of payment of registration fees.

A prospectus is any document inviting the public to subscribe for or purchase the securities of a company or to make deposits with it. It is not required for every company — only a public company raising funds from the public must issue a prospectus. A private company, which is prohibited from raising funds from the public, does not need to issue a prospectus.

Minimum subscription is the minimum number of shares for which a public company must receive applications before proceeding with allotment. As per SEBI guidelines, the minimum subscription is 90 per cent of the issue size. If applications received are for an amount less than 90 per cent, allotment cannot be made and application money must be returned to the applicants.

Preliminary contracts, also called pre-incorporation contracts, are contracts entered into by promoters with third parties on behalf of the company before its incorporation. These contracts are not legally binding on the company. A company after coming into existence may choose to enter into fresh contracts with the same terms, but it cannot ratify a preliminary contract. Promoters remain personally liable to third parties for these contracts.

Promoters are neither agents nor trustees of the company before its incorporation. They hold a fiduciary position and must not make any secret profits. If they do, the company can rescind the contract and recover the purchase price, and may also claim damages. Promoters are not legally entitled to claim expenses incurred during promotion, though the company may choose to reimburse them.

Both public and private companies are required to obtain the certificate for commencement of business within 180 days of incorporation. Once the Registrar of Companies issues this certificate, the company can undertake its business operations.

Return of allotment is a statement giving the names and addresses of shareholders and the number of shares allotted to each. It is signed by a director or secretary and must be filed with the Registrar of Companies within 30 days of the allotment of shares.

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