Formation and Incorporation of a Company

Formation and Incorporation of Company under Companies Act, 2013

 Written By: Amrusha Sengupta BALLB 3rd Year Adamas University.

 Introduction

A Company comes into existence after it has been incorporated under the Companies Act, 2013 or any earlier Companies Act.  Every Company before starting its business transaction must get itself incorporated.  Certain preliminary decision needs to be made at the time of incorporation whether it will a private company or a public company, what would be the object of the company, how much capital will be invested in that company and many other things.

Section 7 of the Companies Act, 2013 states that the documents which are required for the incorporation of a company must be taken to the Registrar of Companies, he will make an inquiry as to whether all the documents have been duly filed or not and if the registrar is satisfied then he retains and registers the memorandum of association of a company and other relevant documents. After that a certificate of incorporation is issued by the Registrar of Companies apart from that it also issues a corporate identity number which the confers the status of separate legal entity to a company.

Once the Company id registered or incorporated it takes birth and the Certificate of Incorporation is also known as the birth certificate of Company.

 Procedure Involved in Incorporation.
  1. As per Rule 9 of the Companies (Incorporation) Rules, 2014 an application for reservation of name has to be made through form no INC-1.

The Name of the Company

  1. Must not be identical to an already registered company
  2. It should not be offensive towards any group of a society
  3. It should not be undesirable by the Central Government
  4. The Company shall not us any name or symbol which creates an impression that the company is having patronage of Central Government or State Government..
  • Rule 12 of the Companies ( Incorporation) Rules, 2014 states that an application for incorporation must be filed with the Registrar of Companies in the form INC -2 in case of One person Company and for other companies it is form no  INC – 7.
  • Rule 14 of the Companies (Incorporation) Rules, 2014 states that a declaration from a practising advocates or Chartered Accountant or Cost Accountant or Company Secretary must be filed. The declaration states that the company has fulfilled all the compliances and the declaration shall be filed in the form no INC-8.
  • An affidavit has to  be filed by each subscribers of memorandum stating that they are not convicted of any offence in connection with the promotion or is not guilty of any fraudulent activity or breach of duty of the company under this Act or any other Act, This affidavit has to be filed in the form no INC -9.
  • As per Rule 25 of the Companies (Incorporation) Rules, 2014 a verification of the registered office of the company has to be filed in the form no INC -22.
  • Particulars of the subscribers such as name date of birth, recent photographs and other things which have been prescribed in Rule 16 of the Companies (Incorporation) Rules, 2014, have to be filed with the Registrar of Companies.

 Separate Legal Entity as an advantage of Incorporation

The moment a company gets its certificate of incorporation it is said that the company has now taken birth it comes into existence. The moment it is formed it acquires the status of a separate legal entity, which separates the legal status of the company from that of its members. On incorporation the company acquires the right to sue someone and it can also get sued. The company on incorporation can enter into contracts by its own name if there is any dispute then the company can also be held liable. The Company can buy its own properties and there are other advantages as well on incorporation. The Concept of Separate Legal Entity has been explained in the following case.

Salomon vs. Salomon and Co.Ltd [1896] UKHL 1

In this particular case the concept of separate legal entity was founded. Mr Salomon had started a company which was named ‘Salomon and Co.Ltd’. Mr Salomon had invested 20000 pounds on equity shares followed by an investment of 10000 pounds in the debentures and he had also invested some cash of 8872 pounds. The total capital of the company was 38,872 pounds. Soon the company became insolvent and went for liquidation the company had only 6050 pounds left. This amount was claimed by Mr Salomon as he had invested in the debentures and being a secured creditor he has a right over that money the other investors strongly opposed stating that Mr Salomon is the owner of the majority shares of the company it’s his company they should be treated as same individual, Mr Salomon clearly stated that the company on incorporation has acquired a separate legal status and they are different. The Court agreed to this and Mr Salomon got the entire money on liquidation.

Lee vs. Lee Air Farming Ltd [1960] UKPC 33.

In this case, Lee a qualified pilot held the majority shares of his company, he also voted himself as the managing director of the company. After sometime he got himself appointed as the Chief pilot and for the same he received salary.  On an air crash he died and his wife claimed compensation. The Company stated that he was the owner of the company there was no employee and employer relationship therefore he won’t get any compensation. The Court totally disagreed with it and said the moment the company was incorporated it is a separate legal entity and even if the company belongs to him the company and Mr lee are different persons and he was an employee of that company and thus the court awarded him compensation.

          Lifting the Corporate Veil as a Disadvantage to Incorporation

The moment the company comes into existence on incorporation it becomes a legal person. It acquires a separate legal status and generally it is said that as the company has a distinct legal personality than that of its members, the members shall be free from liability. The Doctrine of lifting of corporate veil is an exception to this. Though a company is a separate legal person we should not forget that a company is an artificial personality. All the functions of a company are carried out by a natural person i.e. its members; if the members of the company are involved in any fraudulent activities then they cannot use the concept of separate legal entity to safeguard their own interest. The Court here will invoke the doctrine of lifting of corporate veil and will make the members individually liable for their wrongful activities. Though a company is a separate legal entity this principle cannot be used as a shield by its members. The members of a company can be held liable after its formation.

Re Sir Dinshaw Manekjee Petit’s Case [AIR 1927 Bom 371]

Mr Dinshaw had incorporated four companies which only existed in papers. In that company no business took place, however the investors invested money for the same. Without having any business transactions the company had profits of 10 lakhs, the company paid no taxes and it was later found out that the owners of the company had an intention of not paying the tax and to reduce its tax liability it transferred its profit from one company to the other and tried to establish that the amount which is going to the other company is an interest of some loan which the company had taken. The Court invoked the doctrine and the people who were associated with this were held liable.

 Conclusion

A company should always get incorporated it is the very first step of formation of a company. If a company fails to get incorporated the members can misuse its position and a company faces a lot of problems especially in terms of rights if it is not incorporated. The certificate of incorporation is a proof that the company is a creation of law and it can only be dissolved by the law.

       Bibliography

  1. Company Law by Avatar Singh.
  2. Elements Of Company Law by ND Kapoor
  3. Incorporation of Company, www.legalservicesindia.com
  4. Company Secretary Material, Executive Programme.

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