Incorporation of A Company

Introduction

• The Companies Act, 2013 outlines the procedure for the registration and incorporation of companies in India, applicable to both private and public entities. For a private company, a minimum of two directors and two shareholders are required, whereas a public company requires at least three directors and seven shareholders.
• At the time of incorporation, a private company must have a minimum paid-up capital of Rs. 1 Lakh (INR 100,000), while a public company must have Rs. 5 Lakhs (INR 500,000). Companies established with Foreign Direct Investment (FDI) must be incorporated under the Companies Act, 2013 with the Registrar of Companies (ROC).
• Once registered in India, companies are governed by Indian laws. The formation of a company is completed by registering the Memorandum and Articles of Association with the Registrar of Companies in the state where the company’s main office will be located.

Incorporation of A Company under Companies Act, 2013

Under the Companies Act, 1956, the incorporation process required the filing of essential documents with the Registrar by the company. Under the Companies Act, 2013, Section 7 governs the incorporation process. It mandates that documents be filed with the Registrar who has jurisdiction over the area where the company’s registered office is to be located.

According to section 7(1), the following documents and information must be filed for incorporation:

1. The duly signed Memorandum and Articles of Association by the subscribers, in the prescribed manner.
2. A declaration in the prescribed form from an advocate, chartered accountant, company secretary, or a person named in the Articles as a director, manager, or secretary of the company, confirming that all incorporation requirements have been met.
3. An affidavit from each subscriber to the Memorandum, affirming that they have not been convicted of any fraud or offense related to the company’s promotion, formation, or management.
4. Details of each subscriber, including their name, surname, residential address, nationality, and identity proof. If the subscriber is a corporate body, additional prescribed details are required.
5. Details of the individuals mentioned in the Articles as the first directors of the company.

Based on the documents and information provided under section 7(1), the Registrar will issue a Certificate of Incorporation, confirming that the company is incorporated under the Act. Section 7(3) stipulates that from the date mentioned in the Certificate of Incorporation, the Registrar will assign a Corporate Identity Number (CIN) to the company, which will provide it with a distinct identity and be included in the certificate.

The Act also requires the company to maintain and preserve all filed documents and information at its registered office. If any false information is provided, the person responsible is liable for penalties under Section 477 of the Act. In such cases, the Tribunal may issue orders to regulate the company’s management or remove the company’s name from the register if necessary. Before passing such orders, the Tribunal must provide the company with a reasonable opportunity to be heard and consider any transactions, obligations, or liabilities the company has incurred.

Formation of A Company

• Section 3 of the Companies Act, 2013 outlines the procedure for forming a company. According to this section, a company can be established for any lawful purpose by at least seven individuals in the case of a public company, by at least two individuals in the case of a private company, or by a single individual in the case of a One Person Company, which is treated as a private company under the Act. These individuals must subscribe their names to a memorandum and comply with the registration requirements set forth in the Act of 2013.
• The section further specifies that companies formed under subsection (1) may take one of three forms: a company limited by shares, a company limited by guarantee, or an unlimited company.
• For One Person Companies, the memorandum must include the name of another individual, with that person’s prior consent, to become a member of the company in the event of the subscriber’s death or incapacity to contract. The Act requires that this consent be filed in writing with the Registrar at the time of incorporation, along with the memorandum and articles of the One Person Company.
• Additionally, the Act allows the nominated person to withdraw their consent, but only in the prescribed manner. If any changes occur, such as a change in the name of the nominated person or any other relevant alteration, the One Person Company must notify the Registrar in the manner prescribed by the Act.

Incorporation of the company

For incorporation of a company, the following procedure is required:

1. Pre – Incorporation Contracts
2. Approval of Name
3. Memorandum of Articles and Articles of Association
4. Registration of a Company
5. Incorporation Certificate

1. Pre- Incorporation Contracts

• Sometimes contracts are entered into on behalf of a company even before it is officially incorporated. However, no contract can legally bind a company before it gains the capacity to contract through incorporation. This is because a valid contract requires two consenting parties, and the company, prior to incorporation, is considered a non-entity with no legal standing.
• As such, a company cannot have income for tax purposes before its incorporation, and any attempt to acquire shares in the name of the company before incorporation is not valid. This principle was affirmed in the case of English & Colonial Produce Co. Re^[1], where a transfer form was rejected because the name of a proposed, but not yet incorporated, company was entered as the transferee.
• In order for an “association of persons” to enjoy the benefits of a corporate personality, it is essential that they become incorporated under the Companies Act. Without incorporation or the issuance of a certificate of commencement of business, the association cannot engage in any official business operations in the company’s name. This situation can be inconvenient, as the association might need to arrange for office space, a workplace, or hire workers even before the company is formally established.
• To address these challenges, promoters of a company may enter into agreements on behalf of the association or the prospective company. These agreements, known as pre-incorporation contracts, are intended to benefit the future company once it is officially formed.

1. Privity of Contracts

• At the time of a pre-incorporation contract, the company is not yet in legal existence. Since a non-existent entity cannot be a party to a contract, the doctrine of privity of contract excludes the company from liability. This principle was confirmed in cases like Kelner v. Baxter^[2] and Phonogram Ltd v Lane^[3]. Under pure common law, a pre-incorporation contract does not bind the company. However, certain exceptions to this rule have developed in jurisdictions such as the USA, India, and later in England.
• One notable exception is found in the Specific Relief Act, 1963, particularly under sections 15(h) and 19(e). Section 15 allows a stranger to the contract, who has an interest or is entitled to a benefit under the contract, to sue, though with certain limitations.
• Specifically, section 15(h) provides that a company, even though it is a stranger to a pre-incorporation contract, has the right to sue the other contracting party, provided that the contract aligns with the terms of its incorporation. This provision contradicts the common law doctrine that a company cannot ratify or adopt a pre-incorporation contract. Instead, under this provision, a promoter can transfer their right to sue to the company.

2. Specific Performance of Pre-Incorporation Contracts

• Section 19(e) further states that, except as otherwise provided, specific performance of a contract may be enforced when promoters of a company have entered into a contract before its incorporation, provided that the contract is warranted by the terms of incorporation and that the company has accepted and communicated this acceptance to the other party.
• This means that the company, while generally not bound by or entitled to benefit from a pre-incorporation contract, can enforce the contract under certain conditions, as affirmed in Vali Pattabhirama Rao v Sri Ramanuja Ginning and Rice Factory Pvt. Ltd^[4].

3. Novation of Contracts

• Another exception involves the concept of novation, as defined in Scarf v Jardine^[5], where an existing contract is replaced by a new one, either between the same parties or different parties, with the consideration being the discharge of the old contract.
• In the context of novation, a company can replace the promoter in a pre-incorporation contract. However, such a contract would no longer be classified as a pre-incorporation contract but rather as a post-incorporation contract, since novation results in a new contract. The English Court recognized the validity of novation in the case of Howard v Patent Ivory Manufacturing^[6].

2. Approval of Name

This approval is granted subject to certain conditions, such as: 

1. There must not be another company already registered under the same name.
2. In the case of a private company, the company’s name must include the words “Private Ltd.,” while for a public company, the name must end with “Limited,” if the company is incorporated with limited liability for its shareholders.
3. The application for name approval should list at least four preferred names for the company in order of priority.

The ROC is required to inform the company within seven days of submission whether the requested names are available. Once a name is approved, it remains valid for six months. During this period, the Memorandum and Articles of Association, along with other required documents, must be filed.

If the company fails to submit these documents within the six-month window, it can apply for a renewal of the name approval by paying additional fees. After receiving name approval, the process of incorporating the company typically takes about two to three weeks, depending on the location of the company’s registration.

3. MOA and AOA

• For the purpose of incorporation, the Memorandum and Articles of Association are the most crucial documents that must be submitted to the Registrar of Companies (ROC).
• The Memorandum serves as the foundational document of the company, outlining its objectives and the scope of its activities, and defining the company’s relationship with the external world.
• On the other hand, the Articles of Association detail the internal rules and regulations that govern the management of the company’s affairs.
• While the Memorandum specifies the objectives and purposes for which the company has been established, the Articles lay down the procedures and rules for achieving these objectives.
• Once all the necessary documents are submitted to the ROC along with the required registration fees, the ROC will issue a certificate of incorporation, provided that all formalities are duly met.
• The first step towards forming a company is obtaining approval of the company’s name from the Central Government. This legal formality is carried out by the Registrar of Companies, who must be located in the State or Union Territory where the company’s registered office will be situated.

4. Registration of a Company

• Conducting business as a company provides promoters with the benefits of corporate personality, including a distinct corporate existence. Additionally, promoters enjoy several advantages, such as tax benefits and protection of the business name. Another key benefit of registration is the legal liability protection it offers.
• Incorporating a company shields promoters from personal responsibility for certain accidents and liabilities. This protection can make it easier to secure business insurance or attract investors, as they are assured that the promoters are not personally liable for the company’s obligations.
• For these reasons, registering a company is a crucial step in starting a business. Before doing so, promoters must fulfill certain legal requirements and decide on the type of company they wish to establish, whether it be a public, private, limited, or unlimited company.
• They must also prepare the necessary documents for incorporation, including the Memorandum and Articles of Association.

5. Incorporation Certificate

• After the duly stamped Memorandum and Articles of Association, along with the required documents and forms, are filed and the necessary fees are paid, the Registrar of Companies (ROC) carefully reviews the submissions.
• If any issues are identified, the ROC may instruct the authorized person to make the necessary corrections. Once all documents meet the required standards, the ROC issues a Certificate of Incorporation.
• This certificate officially brings the company into existence and serves as “conclusive evidence that all the requirements of this Act have been complied with in respect of registration and matters precedent and incidental thereto and that the company is authorized to be registered under this Act.”
• Typically, it takes one to two weeks from the date of filing the Memorandum and Articles to receive this Certificate of Incorporation.

Significance of Incorporation Certificate

The significance of the Certificate of Incorporation as conclusive evidence was underscored in the case of Moosa Goolam Arif v. Ebrahim Goolam Ariff^[7].

• In this case, only two adult persons signed the memorandum, with one of them acting as a guardian for five other members, all of whom were minors at the time.
• Lord Macnaghten, speaking for the Privy Council, remarked, “Their Lordships will assume that the conditions of registration prescribed by the Indian 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 all purposes.”
• This case illustrates the binding nature of the Certificate of Incorporation, even if procedural defects are later discovered.

Conclusion

The incorporation of a company under the Companies Act, 2013, is a thorough legal process that ensures businesses in India operate within a clear regulatory framework. The Act specifies requirements for private and public companies, such as a minimum number of directors, shareholders, and paid-up capital. The process starts with obtaining name approval from the Registrar of Companies (ROC), followed by the preparation and submission of essential documents, including the Memorandum and Articles of Association. Once these documents are approved, the ROC issues a Certificate of Incorporation, which conclusively establishes the company’s legal existence. Incorporation provides significant advantages, such as corporate personality, legal liability protection, and tax benefits, but also requires compliance with legal obligations, like maintaining accurate records. Case law underscores the binding nature of the Certificate of Incorporation, even in the presence of procedural defects, underscoring its essential role in confirming a company’s legal status.

^[1] [1906] 2 Ch. 435.

^[2]  (1866) LR 2 CP 174.

^[3] [1982] QB 938.

^[4] AIR 1984 SC 1782.

^[5] (1882) 7 App Cas 345 (HL).

^[6] (1888) 38 Ch D 156.

^[7] 1913 41 I.A. 235 (P.C.).