THE STAGES OF FORMATION OF A COMPANY | The Lawyers & Jurists

The formation of a company is a three-stage process entailing—

  1. Promotion
  2. Registration or incorporation

III. Commencement of business

  1. Promotion:

The bodies who take the initiative to form a Company may be individuals or even an existing company. They are called the promoters or the sponsors. The process by which a company is incorporated or put into the shape as a corporate body or floated by issuing shares is the promotion part of the job.

  1. Registration:

When a company is formed, the promoters need to get that registered with the Registrar of Joint Stock Companies and Firms. The minimum and maximum number of members fixed for them in the case of a private limited company is two and fifty respectively, while in case of public limited company it is seven as the minimum with no maximum set.   The Act provides punitive measures for any violation of this under section 222 and is liable to be wound up by the court under section 241 (iv).

The process of registration is as follows—

     For Registration the promoters have to select a name for the company and have it checked at the end of the Registrar so that it is searched that no other company exists by that name.

     The company must have a permanent head office known as ‘Registered Office’.

     The Promoters will then prepare following documents for the purpose of submitting them to the Registrar—

  1. Memorandum of association which defines the object and confines the powers of the company [Section 5 & 6]
  2. Articles of Association which contains the rules and regulation for internal management [Section 17 & 18]

iii.  List of Directors [Section 92(2)] & their particulars [Section 115 (2)]

  1. Consent of the Directors to act [Section 92(1)(a)]
  2. A contract of the Directors to take qualifying shares [Section 92(1)(b)]
  3. Intimation of address of the Registered Office (this may be done within 28 days after incorporation) [Section 77(2)]

     The Memorandum and Articles must be printed and signed by each original subscriber in the presence of at least one witness who will attest their signatures.

     All the particulars must be checked by an Advocate of the Supreme Court, or by the Director, Manager or Secretary of the Company and he will provide with a statutory declaration stating that all requirements of the Companies Act 1994 in respect of registration have been complied with. [Section 77(2)]

     All the documents properly prepared and verified shall be submitted to the Office of the Registrar for the purpose of Registration together with requisite registration fees.

     The Registrar will then issue a ‘Certificate of Incorporation’. The names of the subscribers of the memorandum shall thereupon be entered as members in the company’s book known as the ‘Register of Members’ [Section 32]

The Certificate of incorporation brings the Company into existence as a legal person. The Company’s life commences from the date mentioned in the certificate of incorporation and the date appearing on it is conclusive, even if it is wrong.

Not only does the certificate create the Company. It also is the conclusive evidence that all requirements of this Act have been complied with in respect of Registration and matters precedent and incidental thereto and that the association is a company authorized to be registered and duly registered under this Act. In other words the validity of the certificate cannot be disputed on any grounds whatsoever.

This is illustrated by the Judicial Committee of the Privy Council in Moosa Golam Ariff vs. Ebrahim Goolam Ariff -1913.

The Memorandum of Association of a Company was signed by two adult persons and by a guardian of the other five members, who were minors at the time, the guardian making a separate signature for each of the minors. The Registrar, however, registered the company and issued under his hand a certificate of incorporation. The plaintiff contended that this certificate of incorporation should be declared void.

Lord Macnaghten said—

“Their Lordships will assume that the conditions of registration prescribed by the Companies Act were not duly complied with; that there were no seven subscribers to the memorandum and that the Registrar ought not to have granted the certificate. But the certificate is conclusive for al purposes.”

Thus the position is, if a company is born, the only method to get it extinguished is not by assailing its incorporation, but by resorting to the provisions of enactments, which provides for winding up of companies.

III. Commencement of Business:

After Registration, every private company and every other company not limited by shares can straightway commence business. But the public companies limited by shares cannot yet commence business or exercise any borrowing power without obtaining from the Registrar a further certificate called Certificate of Commencement of Business (Section 150).

To be eligible for such certificate, the company should issue a prospectus or file with the Registrar a statement in lieu of prospectus. The prospectus means an invitation to the public to subscribe to the share capital of the company.

After such steps, the company will be entitled to commence business provided the following conditions are fulfilled—

  1. a) The share amounting at least to a minimum subscription must be subscribed for [Section 150(1)(a)]
  2. b) The directors must have paid for the shares to the same extent as public [Section 150(1)(b)]
  3. c) The Company Secretary or the Director must have filed with the Registrar a declaration that such conditions have been complied with [Section 150(1)(c )]

The Registrar will then issue a Certificate of Commencement after which the company will be entitled to start its business [Section 150(2)].