Understanding Company Structures and Incorporation: A Comprehensive Guide

Posted on May 23, 2024 in Law & Jurisprudence

Companies Limited by Shares

The liability of each member is limited to the face value of shares held by him. If the shares are fully paid, the liability of the shareholder is nil.

Holding Company and Subsidiary Company (Sec 2(46) & 2(87))

A holding company has control over the affairs of another company, known as a subsidiary company. A company becomes a subsidiary under the following circumstances:

  1. If the composition of the board of directors of the company is controlled by the holding company.
  2. If more than half in nominal value of equity share capital of the company is held by the holding company.

If a subsidiary company has control over another company, that company will also be deemed a subsidiary of the holding company.

Government Company (Sec 2(45))

If the central government, state government, or both hold at least 51% of the paid-up share capital of a company, it becomes a government company. Special provisions applicable to government companies are:

  1. The auditor is appointed by the Comptroller and Auditor General of India (CAG).
  2. The auditor submits a copy of the audit report to the CAG.
  3. The CAG has the right to comment on the audit report.
  4. Comments on the audit report are placed before the general meeting of the company.
  5. The central government, as a member, prepares an annual report on the company’s working and affairs within three months of its annual general meeting. This report, along with the audit report and any CAG comments, is laid before both houses of Parliament.

Foreign Company (Sec 2(42))

A company incorporated outside India but with a place of business within India is called a foreign company. Within 30 days of establishing a place of business in India, a foreign company must deliver the following documents to the Registrar of Companies:

  1. A certified copy of the charter, statute, or instrument containing the company’s constitution.
  2. The full address of the registered or principal office of the company.
  3. The full address of the directors and secretaries of the company.
  4. The name and address of any person(s) resident in India authorized to accept services of processes and notices on behalf of the company.

A foreign company may issue a prospectus offering shares or debentures for subscription even without a place of business in India. It must also prepare a balance sheet and profit and loss accounts every calendar year, delivering three copies to the Registrar.

Illegal Association (Sec 464)

According to Section 464 of the Companies Act, an association or partnership of more than 50 members formed for business purposes to acquire gain must be registered as a company under the Act or any other applicable law. Exceptions include:

  • Associations of 50 or more persons conducting non-profit activities.
  • Joint Hindu families carrying on a business (unless the business involves two or more families in partnership and the total number exceeds 50).

Promoter

Promoters undertake preliminary steps in forming a company, including:

  1. Preparing the Memorandum of Association.
  2. Preparing the Articles of Association.
  3. Entering into preliminary contracts.
  4. Registering the company.

Promoters can be individuals, firms, associations, or syndicates. They determine the company’s name, Memorandum and Articles of Association, and arrange for directors, bankers, auditors, and the company secretary.

Legal Relationship Between Promoter and Company

a) Disclosure of Interest

A promoter must disclose material facts when selling their property to the company. Failure to do so allows the company to repudiate the sale or affirm the contract and recover the promoter’s profit (Erlanger vs. New Sombrero Phosphate Company, 1878).

b) Secret Profit

A promoter cannot make a secret profit at the company’s expense without its knowledge and consent. The company can compel the promoter to account for any secret profit (Gluckstein vs. Barnes, 1900).

Remuneration of Promoters

Promoters can be remunerated in several ways:

  1. Selling their property to the company at a profit for cash or fully paid shares.
  2. Receiving a commission on shareholdings.
  3. Getting an option to buy a certain number of shares at par.
  4. Receiving a lump sum payment from the company.

Preliminary or Pre-Incorporation Contracts

These contracts are made by promoters with third parties on behalf of the proposed company, usually to acquire property or rights (Kelner vs. Baxter, 1866).

Incorporation or Registration of a Company

Application for Incorporation

Rule 12 of the Companies Act mandates filing an application with the Registrar of Companies within whose jurisdiction the company’s registered office is proposed.

Documents Required for Registration (Sec 7)

  1. Memorandum and Articles of Association signed by all subscribers (seven for public companies, two for private companies, and one for one-person companies).
  2. Declaration form INC-8 by an advocate, chartered accountant, cost accountant, or company secretary engaged in company formation.
  3. Affidavit from each subscriber and first directors.
  4. Correspondence address until the registered office is established.
  5. Particulars (name, surname, residential address, proof of identity) of each subscriber.
  6. Particulars of first directors mentioned in the Articles of Association.

The Registrar registers the documents and information and issues a Certificate of Incorporation.

Memorandum of Association

The Memorandum of Association is the company’s constitution, defining its relationship with the outside world and the scope of its activities. It must be printed, divided into consecutively numbered paragraphs, and signed by the required number of subscribers.

Contents of Memorandum (Sec 4)

1. Name

The name must end with “Limited” for public companies and “Private Limited” for private companies. It should not:

  1. Be identical or too similar to an existing company’s name.
  2. Be undesirable in the opinion of the central government.
  3. Constitute an offense under any law (Asiatic Government Security Life Insurance Co. Ltd. vs. New Asiatic Co. Ltd.).

Change of Name (Sec 13)

Requires a special resolution and central government approval. The Registrar updates the register, issues a new certificate, and the change affects the company’s obligations.

Rectification of Name (Sec 16)

Allows correction of inadvertent errors in the registered name. Failure to comply with a direction to change the name within three months attracts penalties.

2. Office Clause (Sec 12)

Mandates a registered office capable of receiving communications and notices from the 15th day of incorporation.

Documents Required:

  • Registered document of title for the registered office premises in the company’s name.
  • Notarized lease or rent agreement in the company’s name with a recent rent receipt (not older than one month).
  • Authorization from the owner for using the premises as the registered office and proof of ownership.

3. Objects Clause

Clearly states the company’s objectives, including:

  1. The primary objects for incorporation.
  2. Matters necessary for furthering the main objectives (Ashbury Railway Carriage & Iron Company vs. Riche, 1875).

Doctrine of Ultra Vires

Actions beyond the powers conferred by the Companies Act or the Memorandum are considered ultra vires and void, even if ratified by all shareholders (A. Lakshmana vs. LIC, 1963).

Effects of Ultra Vires:

  1. Injunction: Members can obtain an injunction to restrain the company from proceeding with an ultra vires act.
  2. Personal Liability of Directors: Directors are personally liable for using company capital for ultra vires purposes.
  3. Breach of Warranty: Outsiders induced into contracts based on ultra vires representations can sue the directors for losses.

However, a company can recover money lent, even if the contract is ultra vires.

4. Liability Clause

States the liability of members, which can be limited by shares, unlimited, or limited by guarantee. Companies limited by shares must state that members’ liability is limited to the unpaid amount on their shares.

5. Capital Clause

Specifies the authorized share capital and its division into shares of a fixed amount. This is also known as the nominal or registered capital.

Constructive Notice

The registered Memorandum and Articles of Association are public documents open for inspection. Anyone dealing with the company is presumed to have knowledge of their contents (Kotla Venkata Swamy vs. Ramamoorthy, 1934). This doctrine applies to outsiders dealing with the company.