Unit 2
Unit 2
Unit 2
INCORPORATION
What Is Incorporation?
Incorporation is the legal process used to form a corporate entity or company. A
corporation is the resulting legal entity that separates the firm's assets and
income from its owners and investors.
Corporations can be created in nearly all countries in the world and are usually
identified as such by the use of terms such as "Inc." or "Corp." in their names. It
is the process of legally declaring a corporate entity as separate from its owners.
2. Perpetual Succession
The term perpetual succession means that the longevity of the company does
not depend on its members or their financial status. Even if all the members of
the company go bankrupt or all of them die, the company will not dissolve on its
own unless it is made to dissolve on grounds which are laid out in the act.
3. Transferable Shares
According to Section 82 of the Companies Act of 2013, the shares of a company
are deemed to be movable and transferrable in the manner provided by the
articles of the company. This enables the member to sell his shares in the open
market and to get back his investment without having to withdraw money from
the company. This provides liquidity to the investor and the stability of the
company. In a partnership, on the other hand, a partner cannot transfer his share
in the capital of the firm except with the unanimous consent of all the partners.
4. Capacity to Sue
An incorporated company is also vested with the power of suing individuals and
other companies in its name.
5. Flexibility
Every company has complete independence to form policies suited to their
organisation provided they do not violate general principles of law and equity.
6. Limited Liability
The company being a separate entity, leading its own existence, its members are
not liable for its debts. The liability of the members is limited to his or her share in
the company and the liability ends there. No one is bound to pay more than what
he has put in.
Disadvantages of Incorporation of a Company
1. Lifting the Corporate Veil
Under this concept, the court disregards the status of a company as a separate
legal entity if the members of the company try to take advantage of this status.
The intentions of the persons behind the veil are completely exposed. They are
made personally liable for using the company as a vehicle for undesirable
purposes. This can be done where the only purpose of incorporation of a
company was to evade taxes, where the company was brought forth for
fraudulent purposes etc.
The corporate veil can also be lifted when the members of the company go
against the statutory provisions. For example, in cases where a business is
carried on beyond six months after the knowledge that the membership of the
company has gone below the statutory requirement, the members of the
company will be held liable.
iii) The Memorandum and Articles are to be duly signed by at least seven
subscribers in case of a public company and two in case of a private company;
and each subscriber should give his address, description and occupation etc.
and number of shares subscribed by him. The subscribers must sign these
documents in the presence of at least one witness who shall attest the signature
iv) The agreement, if any, which the company proposes to enter into with any
individual for appointment as its managing or whole- time director or manager.
v) A list of the directors who have agreed to become the first directors of the
company (this applies to a public company limited by shares) and their written
consent to act as directors and take up qualification shares.
vi) A declaration stating that all the requirements of the Companies Act and other
formalities relating to registration have been complied with. Such declaration
shall be signed by any of the following persons: viz., an Advocate of the
Supreme Court or of a High Court; or an Attorney or a pleader entitled to
appear before a High Court; or a secretary or a Charted accountant in whole time
practice in India, who is engaged in the formation of a company; a person
named in the Articles as a director, manager or secretary of the company.
vii) The address of correspondence till the registration office is established. Then
within 30 days of the date of incorporation of the company, a notice of the
situation of the registered office of the company shall be given to the Registrar
who shall records the same in the Register book of Companies.
To check whether the chosen name is available for adoption, the promoters have
to write an application to the Registrar of Companies of the State. A 500 rupee is
paid with the application. The Registrar then allows the company to adopt the
name given they fulfill all legal documentation formalities within a period of three
months.
2. Preparation of Memorandum of Association and Articles of Association
The memorandum of association of a company can be referred to as its
constitution or rulebook. The memorandum states the field in which the company
will do business, objectives of the company, as well as the type of business the
company plans to undertake. It is further divided into five clauses
Name Clause
Registered Office Clause
Objects Clause
Liability Clause
Capital Clause
Articles of Association is basically a document that states rules which the internal
management of the company will follow. The article creates a contract between
the company and its members. The article mentions the rights, duties, and
liabilities of the members. It is equally binding on all the members of the
company.
Once these have been vetted by the Registrar of Companies, then the
memorandum of association and articles of association can be printed. The
memorandum and articles are consequently divided into paragraphs and
arranged chronologically.
4. Power of Attorney
To fulfill the legal and complex documentation formalities of incorporation of a
company, the promoter may then employ an attorney who will have the authority
to act on behalf of the company and its promoters. The attorney will have the
authority to make changes in the memorandum and articles and moreover, other
documents that have been filed with the registrar.
5. Other Documents to be Filed with the Registrar of Companies
The First – e-Form No.32 – Consent of directors
8. Certificate of Incorporation
If the Registrar is completely satisfied that all requirements have been fulfilled by
the company that is being incorporated, then he will register the company and
issue a certificate of incorporation. As a result, the incorporation certificate
provided by the Registrar is definite proof that all requirements of the Act have
been met.
MEMORANDUM OF ASSOCIATION
It sets out the fundamental and essential elements of a company, including its
name, registered office address, objectives, authorized share capital, and liability
of members. The MOA outlines the company’s scope of activities and serves as
a guide to the company’s internal operations.
Purpose of MoA
The main purpose of the Memorandum of Association is to define the legal
identity and scope of activities of a company. It serves as a charter for the
company’s formation and sets out the fundamental and essential elements of the
company.
By defining these crucial elements, the MOA provides clarity and transparency to
the company’s stakeholders, such as investors, shareholders, creditors, and
regulators. It serves as a guide to the company’s internal operations and helps in
ensuring that the company is managed in accordance with the legal framework.
Name Clause: This clause specifies the name of the company and should end
with “Private Limited” or “Limited” for a company limited by shares, or “Unlimited”
for a company not limited by shares.
Registered Office Clause: This clause sets out the registered office address of
the company. It should be located in the same state where the company is
incorporated.
Objective Clause: This clause outlines the company’s main objectives and
activities. It specifies the objects for which the company is formed and operates.
Liability Clause: This clause sets out the liability of the company’s members in
case the company goes into liquidation. The liability can be limited or unlimited,
depending on the type of company.
Capital Clause: This clause specifies the authorized share capital of the
company. It sets out the maximum amount of capital that the company can raise
through the issue of shares.
The name of the company should be unique, and the Registrar of Companies
must approve it before the company’s incorporation. The name clause should
also comply with the rules and regulations laid down by the Ministry of Corporate
Affairs. The name of the company should not be identical or similar to any
existing company, and it should not be offensive or violate any copyright or
trademark laws.
The Registered Office Clause is a crucial part of the MOA as it establishes the
official address of the company and helps in determining the jurisdiction of the
company for legal purposes.
It also helps in protecting the interests of the stakeholders by ensuring that the
company operates within the legal framework and does not engage in any
activities that are not specified in the MOA.
The memorandum of association should clearly state the nature of the company’s
liability, whether it is limited or unlimited. It is important to note that any
misrepresentation or false statement regarding the liability clause can result in
severe legal consequences.
The Liability Clause is a crucial part of the MOA as it defines the extent of the
liability of the members and helps in protecting their personal assets in case of
any debts or losses incurred by the company.
The Capital Clause should clearly state the amount of authorized capital, the
number of shares, and the nominal or face value of each share. The
memorandum of association should also specify the types of shares, such as
equity shares, preference shares, or debentures, that the company is authorized
to issue.
Any changes to the authorized capital of the company must be approved by the
shareholders and communicated to the Registrar of Companies.
The Capital Clause is a crucial part of the MOA as it defines the maximum
amount of capital that the company can raise and helps in determining the
financial capacity of the company. It also helps in protecting the interests of the
shareholders by ensuring that the company does not issue more shares than the
authorized capital.
Association Clause in Memorandum of Association
The Association Clause is a fundamental clause that must be included in the
Memorandum of Association of a company according to the Companies Act 2013
in India. It specifies the name of the company, the state in which the registered
office is situated, and the objects for which the company is formed.
The Association Clause should also include the names, addresses, occupations,
and signatures of the subscribers, who are the persons who have agreed to form
the company and become its members. The memorandum of association must
be signed by at least seven subscribers in the case of a public company, two
subscribers in the case of a private company with a share capital, and one
subscriber in the case of a private company without a share capital.
The Association Clause is a crucial part of the MOA as it establishes the legal
existence of the company and defines its identity. It also helps in identifying the
subscribers who have agreed to form the company and become its members.
Form of Memorandum
The Memorandum of Association of a company should be divided into
paragraphs numbered consecutively and printed. The memorandum of a
company should be formulated in accordance with the respective forms as
mentioned in tables A, B, C, D & E under Schedule 1 of the Companies Act,
2013.
The Companies Act 2013 in India provides a detailed procedure for the alteration
of the MOA, which involves obtaining the approval of the shareholders and
complying with the provisions of the Act. The procedure for the alteration of the
memorandum of association includes the following steps:
Approval of ROC: The ROC will scrutinize the special resolution and, if satisfied,
will approve the alteration of the memorandum of association.
According to the Companies Act 2013 in India, the MOA can be altered by
making changes to its various clauses, such as
Name Clause: The name of the company can be changed by altering the Name
Clause of the MOA.
Object Clause: The Object Clause defines the objectives and powers of the
company. It can be altered to reflect the changing needs of the company or to
include new objectives.
Liability Clause: The Liability Clause specifies the liability of the members or
shareholders of the company. It can be altered to change the liability of the
members from limited to unlimited or vice versa.
Capital Clause: The Capital Clause defines the authorized share capital of the
company. It can be altered to increase or decrease the authorized share capital.
Registered Office Clause: The Registered Office Clause specifies the registered
office address of the company. It can be altered to change the registered office
from one location to another.
The name clause is one of the essential clauses in the MOA of a one-person
company, which specifies the name of the company. The registered office clause
specifies the location of the registered office of the company. The objective
clause outlines the activities that the company can undertake, and the liability
clause determines the extent of the liability of the owner in case of debts and
losses. The capital clause specifies the amount of authorized capital of the
company.
An OPC is required to have a nominee who will take over the management of the
company in case the owner becomes incapacitated or dies. The memorandum of
association must contain a clause that specifies the name of the nominee and
their consent to act as the nominee. The MOA of an OPC must also contain a
clause that specifies that the company is an OPC.
Conclusion
The Memorandum of Association is an essential document for any company in
India. It outlines the company’s objectives, powers, and limitations, and serves as
a guide for its operations.
The MOA is a public document that can be inspected by any person, and any
alteration or amendment to the memorandum of association must comply with
the provisions of the Companies Act 2013. The MOA cannot be used to
circumvent statutory requirements or to engage in activities that are prohibited by
law.
Landmark cases such as Ashbury Railway Carriage and Iron Co. Ltd. v. Riche
and Rayala Corporation Pvt. Ltd. v. Director of Income Tax have helped to clarify
the legal interpretation of the memorandum of association in India. It is crucial for
companies to understand the clauses of the MOA and their significance in order
to avoid any legal disputes or challenges.