UNIVERSITY INSTITUTE OF LEGAL STUDIES,

PANJAB UNIVERSITY, CHANDIGARH

Project Report of Company Law on

“INCORPORATION OF A COMPANY”

Submitted to: Submitted By:

DR. RITA GHIAL KANIKA
BA. LL. B(Hons.)
8TH Semester
Section-B
Roll No.-61/20

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 ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to my teacher, Dr.Rita

whose insightful leadership and knowledge benefited me to steer out this project
successfully. This project helped me in doing a lot of research and I came to know
about so many things. I express deep and sincere gratitude to my parents whose
guidance, encouragement, suggestion and very constructive criticism have
contributed immensely to the evolution of my ideas on the project. I must also
thank my friends who have always been a major source of support when things
get a bit discouraging. Lastly, I would like to thank the Almighty for giving me
enough strength and wisdom to finish the project.

I AM REALLY THANKFUL TO ALL THOSE WHO HELPED ME!

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 TABLE OF CONTENTS
INTRODUCTION .............................................................................................................................................. 4
STAGES OF FORMATION OF A COMPANY ..................................................................................................... 5
INCORPORATION ........................................................................................................................................... 5
CONCLUSIVE EVIDENCE ................................................................................................................................. 8
WHEN A COMPANY IS LIABLE FOR PRE-INCORPORATION CONTRACT ......................................................... 9
PUNISHMENT FOR THE FALSE PARTICULARS .............................................................................................. 11
ADVANTAGES OF INCORPORATION ............................................................................................................. 12
BIBLIOGRAPHY ............................................................................................................................................. 15

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 INTRODUCTION
Company is an association of person who takes their meals together. The term is derived from the
Latin word (“com” meaning “with” or “together”; “panis” that is “bread”) Section 2(20) of
Companies Act, 2013 states that a company means any association of person registered under the
present or the previous companies act. It is called a “body corporate” because the persons
composing it are made into one body by incorporating it according to the law and clothing it with
legal personality. Under common law, a company is defined as a ‘legal person’ or ‘legal entity’
separate from its member and capable of being surviving beyond the lives of its members. Whereas
it is not merely legal, it is rather a legal device for attainment of any social or economic end and
to a large extent publicly and socially responsible. It is, therefore, a combined political, social,
economic and legal institution.

The formation and incorporation of a company are very similar to the birth of a human, as it also
goes through various stages of the formation of its body parts during the womb stage. Various
groundwork is carried out to bring a company into existence There are three forms of companies
classified on the basis of the number of members required for its incorporation.

• One person company-Section 2(62) of companies act 2013 defines one person company as a
company that is to be incorporated with one person as a member. Whereas section-3 companies
act specifies certain exceptions that are to be followed for making registration of a one person
company. For example- AVV AD Avenue (OPC) Pvt. Ltd. company, etc.
• Private companies-According to section 2(68), a private company except in the case of one person
company limits the number of its members to two hundred, minimum paid-up capital is as may be
prescribed. Such companies prevent any public invitation to subscribe to any of its securities.
• Public companies-Public companies defined under section 2(71), as not a private company, whose
shares are exchanged in an open trade market. It issues its shares via an initial public offering and
the same can be bought by the general public. The minimum number of members required to form
a public company is at least seven and may extend to unlimited. There is no restriction on the
transferability of its shares.

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 STAGES OF FORMATION OF A COMPANY
Company formation is the term for the process of starting of a company. Generally, a company comes into
existence by a process referred to as incorporation. Once a company has been legally incorporated, it
becomes a separate legal entity from those who invest their capital and labour to run the company. The
persons who wish to start a company are called promoters. They take necessary steps to form a company.
The whole process of formation of a company is divided into four stages. They are:

➢ Promotion of Company
➢ Incorporation or Registration of Company
➢ Subscription of Capital
➢ Commencement of Business

INCORPORATION
It is the second stage in the company formation. It is the incorporation or registration that brings
a company into existence. Incorporation is a legal process used to form a corporate entity or a
Company. It involves drafting of legal documents that list the primary purpose of the business, its
name and its location and the number of shares and class of stock being issued, if any. A company
is legally formed only on being registered under the Act and after the issue of Certificate of
Incorporation by the Registrar of Companies.

The Companies Act, 2013, lays down the following rules for the incorporation of both the public
as well as private Company. As per section 3 of the Companies Act, 2013, in case of Private
Company atleast 2 members are required, whereas in Public Company, 7 persons are required and
in case of One person Company, 1 person is required.

For the incorporation of a company the promoters take the following preparatory steps according
to section 7 of the act that specifically deals with incorporation of a company.:

❑ Application for name; According to sec. 4(2) of the Act, a Company cannot be registered
with identical name or resemble too nearly to the name of an existing company registered

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 under the Act. As per section 4(4) of the Act, the person can make an application to propose
the name of the Company to be registered with fees as may be prescribed. Upon receipt of
the application, the Registrar on the basis of information and documents furnished along
with the application, may reserve the name for a period of 20 days from the date of approval
of the said application. Provided that in case of change of name by any existing company,
the Registrar may reserve the name for a period of 60 days from the date of approval.
Therefore, it is necessary for the promoters to find out the availability of the name of the
company from the Registrar of Companies. This approval is provided subject to certain
conditions. For instance, there should not be an existing company by the same name.
Further, the last words in the name are required to be “Private Ltd.” in the case of a private
company and “Limited” in the case of a Public Company.
❑ Filing an application: According to section 7(1) of the Companies Act, 2013, an
application shall be filed with the Registrar within whose jurisdiction the registered office
a Company is proposed to be situated in Form no. INC.2 (in case of One person Company)
and Form no. INC. 7 (in case of public and private Company) along with fees as provided
in the Companies (Registration office and fees) Rules, 2014 for registration of a company.
❑ The application should be accompanied by the following documents:
• Memorandum of association properly stamped, duly signed by the signatories of the
memorandum and witnessed. The Memorandum of Association is the Constitution of the
Company which must contain the basic information of the Company. The purpose of MOA is to
enable the members of the Company, its creditors and the public to know what its powers are and
what is the range of its activity. It must be signed by every subscriber along with address,
description, occupation, if any, in the presence of atleast one witness who shall attest the signature
and shall likewise sign and add his name, address, description and occupation, if any.
• Articles of Association, if necessary. Articles of Association (AoA) are the byelaws that govern
the functioning and management of a company. They represent the ethics and values of the
promoters. All the subscribers to the MoA are required to sign the AoA. It is pertinent to note that
the AoA is a document that is subordinate to the MoA. If the AoA and MoA contain inconsistent
provisions, then the MoA would prevail over the AoA. The MoA states the object for which the
company is formed, while the AoA embodies the manner in which the object is to be achieved.

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• A copy of the agreement, if any, which the company proposes to enter into with any individual
for his appointment as managing or whole-time director or manager.
• A written consent of the directors to act in that capacity, if necessary.
• A statutory declaration stating that all the legal requirements of the Act prior to incorporation
have been complied with. This declaration is to be signedby an advocate of the Supreme Court or
High Court or attorney or a pleader having the to appear before High Court. Alternatively, this
declaration can be signed by a Company Secretary or Chartered Accountant in whole time-
practice, who is engaged in the formation of a company or a person named in the articles as a
director.
❑ Payment of Stamp Duty and Filing Fee: The Company has to pay the necessary stamp
duty and filing fee, according to the authorized share capital of the company.
❑ Registered Office: As per section 12 of the Companies (Amendment) Act, 2017, the
Company on and from 30 days of its incorporation and at all time thereafter must have
registered office capable of receiving and acknowledging all communication and notices
as may be addressed thereto. The Company shall furnish to the Registrar verification of its
registered office within a period of 30 days of its incorporation in such a manner as may be
prescribed.
❑ Certificate of Incorporation or Registration: After receiving all the required documentsthe
Registrar will scrutinize these documents. If the Registrar finds the document to be
satisfactory, he registers them and enters the name of the company in the Register of
Companies and issues a certificate called the certificate of incorporation (Section 34). On
and from the date mentioned in the certificate of incorporation issued, the Registrar shall
allot the Company a Corporate Identity Number (CIN) which shall be distinct identity for
the Company and which shall also be included in the certificate.The certificate of
incorporation is the birth certificate of a company. The company comes into existence from
the date mentioned in the certificate of incorporation. Once the company is created it cannot
be got rid-off except by resorting to provisions of the Act which provide for the winding
up of company. The certificate of incorporation, even if it contains irregularities, cannot be
cancelled.

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 The government of India issued a circular in 2011 to all Regional Directors and all Registrar of
Companies. This circular aimed to ease the registration process by making it possible to obtain
online and quick incorporation. The Ministry of Corporate Affairs has started issuing digital
certificates of incorporation. The digital services enable the promoters to get their companies
registered within a period of 24 hours, which provides great ease to the corporate world.

CONCLUSIVE EVIDENCE
A certificate of incorporation is conclusive evidence of the legal existence or presence of the
company as per Section 7 of Companies Act, 2013. The certificate serves as legal proof that all
the legal requirements mandated for the incorporation of the company have been complied with.In
the case of Moosa v. Ibrahim (1912)1, a company had been incorporated, but later it was found
that there were certain procedural irregularities as the MoA had been signed by a guardian of five
minor members. However, the Court held that the certificate of incorporation was valid and
conclusive proof of the company’s lawful formation.

Similarly, in the case of Jubilee Cotton Mills v. Lewis (1924),2 a company filed for registration
before the Registrar of Companies. The documents required for registration were submitted to the
registrar on January 6th. On January 8, the registrar issued a certificate of incorporation, but he
mentioned the date of incorporation as January 6 on the certificate. The company had allotted
certain shares to Lweis on January 6th itself, and the validity of the allotment was challenged
before the House of Lords. The Court held that the company came into existence on the date
mentioned on the certificate of incorporation and thus, the allotment was legally valid.

• Even if there are formal deficiencies in the documents submitted for the incorporation of the
company, once the certificate of incorporation is issued, the certificate becomes conclusive
evidence regarding the legal existence of the company from the date mentioned in the
incorporation certificate.
• If the certificate of incorporation was received on 24th, but the certificate reflects the date of the
22nd, then the company shall be taken to have come into existence on the 22nd as reflected by the

1
Moosa Goolam Ariff v. Ibrahim Goolam Ariff (1912) 39 Ia 237: ILR (1913) 40 Cal 1
2
Jubilee Cotton Mills Ltd. v. Lewis [1924] A.C. 958

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certificate of incorporation, and this will also authenticate the transactions made by such company
on 22nd and 23rd in the eyes of law.

WHEN A COMPANY IS LIABLE FOR PRE-INCORPORATION CONTRACT

The non-liability of the company with respect to the pre-incorporation contracts was the same as
the common law court in India until the passing of the Specific Relief Act, 1963. The Specific
Relief Act, 1963, essentially under Section 15(h) and Section 19(e), makes the pre-incorporation
contracts and agreements valid, deviating from the trajectory followed under the common law.

Section 15 (h) provides details as to who may obtain specific performance of the contract from
the company. Clause (h) provides that when a promoter gets into a contract before incorporation
on behalf of the company and the company warrants such contract, such company must have sent
a communication of acceptance to the other party of the contract.

According to Section 19(e), a party may seek specific performance relief from the company if the
company’s promoter entered into a contract before incorporation and the contract was justified at
that time. The company must have accepted the contract and communicated such acceptance to
the other party.

The aforementioned provisions of the Specific Relief Act, 1963, change the course of action in a
case between parties where a contract was made before incorporation; unlike the regular course
of action against the promoter, here the company can be made liable if it has accepted the contract
and has communicated such acceptance to the other party to the contract.

Various cases have come before the judiciary. In order to understand the liability of promoters and
company in case of pre-incorporation contracts, we shall be discussing such cases below:

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In the case of Weavers Mills vs. Balkis Ammal and Ors. (1976)3, the promoter had agreed to
purchase some properties on behalf of the company. After incorporation, the company took
possession of the properties and also constructed structures upon it. It was held that, although
conveyance of the property had not taken place through a proper sale deed, the company’s title
over the properties was valid and couldn’t be set aside. The Madras High Court had extended the
scope of interpretation of the principle mentioned above. Promoters are generally held personally
liable for the pre-incorporation contract, unless the company ratified the contract.

The landmark case of Kelner vs. Baxter (1866) 4, which is a case where “the principle of
promoter’s liability in a pre-incorporation contract”, was explained. In this case, the promoter of
a company was approached by one Mr. Kelner to purchase his wine, and the promoter had agreed
to purchase the same on behalf of the company. Later on, the company was unable to pay Mr.
Kelner, who sued the promoter. It was interpreted as determining whether the promoter was in a
principal-agent relationship with the company and if liability could befall the company. The
learned judge interpreted that the principal agent relationship was not in existence, as the principal
of the agent cannot have existed without the incorporation. It was further added that a company
cannot take the liability of pre-incorporation contract through adoption as the company is not privy
to the contract and the company was not even existent at the time of the contract.

In the case of Newborne v Sensolid Ltd., 5 wherein the Director (Newborne) of the company had
entered into a contract before the company was incorporated. Subsequently, Newborne
approached the Court of Appeal seeking enforcement of the contract. He contended that he had
the locus standi to seek the specific performance of the contract, as he was a party to the contract.
The defendants contended that the contract was not valid as it was entered on behalf of a non-
existent company. The court concluded that since the company was not existent at the time of the
signing of the contract, the contract was invalid.

Finally, it can be concluded regarding the pre-incorporation contracts and the principle of
promoter’s liability in pre-incorporation that common law clearly shows that the promoter shall

3
Weavers Mills Ltd. v. Balkis Ammal, 1969 Mad 463: (1969) 2 MLJ 509
4
Kelner v Baxter (1866) LR 2 CP 174
5 Newborn v. Sensolid Ltd [1953] EWCA Civ J0219-2

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 be held personally liable for the pre-incorporation contracts of the company and the same was
followed in England and India prior to the legislation of the Specific Relief Act, 1963. It basically
goes on to suggest that there is no escape from the liability of the promoter. In cases of pre-
incorporation contracts, there are recognised ways in Indian law to shift the liability of the
promoter to the company, such as novation of contract. India has uniquely legislated the Specific
Relief Act, 1963, providing provisions wherein if the contract was entered upon by the promoter
during the pre-incorporation stage, the party to such a contract can make the company liable, if
the company ratifies such contract and sends communication to such a party of the ratification of
the contract. But otherwise, the promoter is held liable in the case of pre-incorporation contracts.

PUNISHMENT FOR THE FALSE PARTICULARS

If any person furnishes any false or incorrect particulars of any material information of which he
was aware, he is to be liable for action under Section 447. [S. 7(5)] Section 447 provides
punishment for fraud.

If it is proved after incorporation of the company that the incorporation was obtained by furnishing
false or incorrect information or by suppressing any material fact or information or by any
fraudulent action, the promoters, the persons named as first directors and those making the
declaration are also liable for action under Section 447. [S. 7(6)]

In such cases, an application can also be made to the Tribunal which may according to its
satisfaction pass any of the following orders:

a. pass orders for regulation of the management of the company including any changes in its
memorandum and articles in public interest or in the interest of the company and its members and
creditors;
b. direct that the liability of the members is to be unlimited;
c. direct removal of company's name from the Register of Companies;
d. pass an order for winding up, or
e. pass such other orders as it may deem fit.

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 Before any such orders the company has to be given a reasonable opportunity of being heard in
the matter. The Tribunal has to take into consideration transactions entered into by the company,
including all the obligations, contracts or payment of any liability. [S. 7(7)]

ADVANTAGES OF INCORPORATION
Incorporation offers certain advantages to a company as compared with all other kinds of business
organizations. They are:

1. Independent corporate existence: After certificate of incorporation, company obtains independent

existence. The outstanding feature of a company is its independent corporate existence. By
registration under the Companies Act, a company becomes vested with corporate personality,
which is independent of, and distinct from its members.
2. Liability: limitation of liability is another major advantage of incorporation.The liability of the
members is limited to the extent of the nominal amount of the shares subscribed. In the case of a
company limited by guarantee, the liability of the member is limited to the amount guaranteed by
him. The liability of partners in a partnership firm is unlimited. However, the liability of the
members in a limited company is limited to the face value of the shares held by him.
3. Transferability of Shares: The greatest advantage of incorporation of company is transferability
of shares. Shares in a company can be transferred easily, without the consent of other members of
the company in the manner provided by the Articles Association of the company. However, there
are certain restrictions on the transferability of shares, in a private limited company. Certain
restrictions can be imposed in a private limited company, but not in a public limited company
about the transferability of shares.
4. Perpetual Existence and Succession: An incorporated company live forever. Members may come
and go, but the company will go on. The death or insolvency of the members does not affect the
existence of the company. Only on winding up of the company, it ceases to exist.
5. Separate property: The property of an incorporated company is vested in the corporate body. The
company is capable of holding and enjoying property in its own name. The members do not have
any ownership right on the property of the company.
6. Members and the Company: As an incorporated company enjoys separate legal entity distinct
from its members, it can enter into contracts with its members and sue them in the ordinary way.

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7. Capacity to Sue and be sued: A company being a body corporate, it can sue and be sued in its own
name.
8. Professional management: A company is capable of attracting professional managers. It is due to
the fact that being attached to the management of the company gives them the status of business
or executive class.

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CONCLUSION
We understand that the company’s incorporation period is the sum of the pre-incorporation period
and the incorporation period. Pre-incorporation period may be understood as the phase in which
the idea of the company is manifested into a reality. The promoter whose name is reflected in the
prospectus of the company plays a very important role in collecting initial funding for the
company.The promoter shall be held personally liable for all the pre-incorporation contracts unless
there is a novation of the contract or in the case of India, when the provisions of the Specific Relief
Act apply, wherein the company ratifies the contract and sends communication to the other party
of the contract regarding their liability. The role of the government in easing the process of
incorporation is very crucial, as it determines the potential intentions of investors towards
companies in the market.

The ease of incorporation has been increased by making it an online affair. The Ministry of
Corporate Affairs provides options to incorporate the company with a unique name by providing
the online option of submitting the Memorandum of Association along with the Articles of
Association online with the declaration digitally signed stating that all the procedures of
incorporation of a company under law have been followed by the respective company. The state’s
duty as an enabler of business for the growth of the economy finds its presence in this legislation.

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BIBLIOGRAPHY
Books-

• Ravi Puliani and Mahesg Puliani, Bharat’s Companies Act, 2013, (Bharat Law House Pvt.
Ltd., New Delhi, 2014).
• Avtar Singh, Indian Company Law, Eastern Book Company, Lucknow, 2009.
• A. Ramaiya, Guide to Companies Act, Wadhwa and Co., Agra, 2004. Bare Acts: • The
Companies Act, 2013.

Websites-

• www.indiankanoon.com
• www.scconline.com
• www.ipleadersblog.com
• www.legalservicesindia.com

Articles:

• Anushka Singhal, Section 7 of Companies Act, 2013, available at

https://blog.ipleaders.in/section-7-of-companies-act-2013/ (last accessed on Feb. 26, 2024
at 21: 02 IST).
• Gautam Badlani, Formation and Incorporation of company, available at
https://blog.ipleaders.in/Formation and Incorporation of company/ (last accessed on Feb.
27, 2024 at 23:32 IST)

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