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The promoter has to take the following preliminary steps:1. Ascertainment of availability of the proposed name of the company. 2. Application for Licence. 3. SEBIs approval to draft Prospectus. 4. Prepare & finally get printed the companys Memorandum and Articles of Association.
Functions of a Promoter.
1. To conceive an idea of starting a business. 2. To conduct the negotiation for the purchase of the business. 3. To collect the requisite number of person. 4. To decide on the following
Memorandum of Association
Meaning: It contains the fundamental conditions upon which alone the company is allowed to be incorporated. Its purpose is to enable shareholders and those who deal with the company to know what its permitted range of activities are. Contents of Memorandum of Association (MA) 1.Name Clause 2.Registered Office Address Clause 3.Objects Clause 4.The Capital Clause 5.The Liability Clause 6.The Association Clause
Company Law
Articles of Association Articles of Association(AA)are the rules regulations and bye-laws for the internal management of the affairs of the company AA next only in importance to the MA. AA are framed with the object of carrying out the aims and objectives as set out in the MA.
Limitations to Alterations(AA).
1.Must not be inconsistent with the Act . [Eg., alteration cant give powers to company to buy its own shares]. 2.Must not conflict with emorandum. 3.Must not sanction anything illegal.
Contd..Limitations to alteration[AA]
4.Must be for the benefit of the company. [Brown Vs British Abrasive Wheel Co.Ltd.]1919 5.Must not sanction anything illegal. 6.Must not increase liability of members[unless there is a written consent]. 7.Alteration by special resolution only. [Even clerical errors must be set right by a special resolution].
Regulations required in case of an unlimited company,company limited by guarantee and private company limited by shares[Sec.27]
1.Unlimited Company: In case of an unlimited company ,the Articles shall state No .of .Members with which company is to be registered If it has a share capital,the amount of share capital with which company is to be registered.[Sec.27(1)]
COMPANIES HAVE BEEN GIVEN VERY WIDE POWERS TO ALTER THEIR ARTICLES A company may by passing special resolution,alter regulations contained in its Articles anytime. A copy of every special resolution altering the Articles shall be filed with the Registrar within 30 days of its passing. Any alteration so made in the Articles shall be as valid as if originally contained in the Articles.[Sec.31(1)].
2.Company to members:
A company is bound to the members: A company is bound to the members in the same manner as the members are bound to to the company .It can,therefore,exercise its rights ,as against any member ,only in accordance with the Memorandum and Articles. A member can obtain an injunction restraining a company from doing an ULTRA VIRES act.
2 .Negligence: Where a person dealing with a company could discover the irregularity if he had made proper inquiries,he cannot claim the benefit of the rule of indoor management.
[A L Underwood v/s. Bank of Liverpool]1924. The sole director of a company in this case paid in to his own account checks drawn in favor of the company .Held the bank was liable as it ought to have made proper inquiries before creating the account of the director.
3.
A company can never be held bound for forgery.Eg; A share certificate was forged by a secretary of a company.The secretary then issued it to R under the seal of the company .R, the holder of the certificate ,claimed to be entitled to be registered as the holder of the shares.Held the certificate did not confer any right on the shareholder.
If an officer of a company enters in to a contract with a third party and if the act of the officer is beyond the scope of his authority,the company is not bound. Eg., [Kreditbank Cassel V/s Schenkers Ltd(1927)].A branch manager of a company drew and indorsed bills of exchange on behalf of the company.He had no authority from the company to do so .Held company was not bound.
5. ..Contd
e] Location of project. f] Plant and machinery ,technology,process ,etc. g] Collaboration ,any performance guarantee or assistance in marketing by the collaborators. h] Infrastructure facilities for raw materials and utilities like water ,electricity, etc. i] Schedule of implementation of the project and progress made so far ,giving details of land acquisition ,civil works,installation of plant and machinery ,trial production,date of commercial production etc. j] The products: (i)Nature of product/s-consumer/industrial and users. (ii) Approach to marketing and proposed marketing set up (iii) Export possibilities and export obligations,if any (in case of a company providing any service particulars, as applicable, be furnished). k) Future prospects-expected capacity utilization during the first three years from the date of commencement of production,and the expected year when the company would be able to earn cash profits and net profits. Stock market data for shares/debentures of the company high/low price in each of the last three years and monthly high/low during during the last six months(where applicable).
Which made any capital issue during the last three[3] years.
Name of the company. Year of issue. Type of issue(public/rights/composite). Amount of issue. Date of closure of issue. Date of completion of delivery of share/debenture certificates. Date of completion of project ,where object of the issue was financing of a project. Rate of dividend paid.
Every director,promoter and every person who authorizes the issue of the prospectus (no matter whether he has seen it or not) is liable to pay compensation to the aggrieved party(who subscribes for any shares or debentures on the faith of the prospectus) for loss or damage he may have incurred by reason of any untrue statement in the in the prospectus.
Section 64 continues.
2.Intention to offer shares or debentures to the public:Normally,an allotment of,or an agreement to
allot,any shares in or debentures to an Issuing House is deemed to have been made with a view to the shares or debentures being offered for sale.
3.Additional Information:
a]Worth of shares or debentures which are offered b]Issuing House to be deemed director. c]Signing of prospectus by at least two directors.
Continued.
Mis-statements and non-disclosure of material facts in a prospectus are fatal to the contract for the purchase of shares and debentures.As such the greatest care is necessary in its preparation.The obligations imposed on those responsible for the issue of a prospectus are not only to state accurately all the relevant facts,but also not to omit any fact which may be relevant.This is the golden rule as to framing of prospectus which was laid down in New Brunswick & Canada Rly &Land Co.Vs.Muggerbridge,(1860).
Contd
3.The shares and debentures,giving a summary ,distinguish wherever possible between shares issued for cash,bonus shares, and shares other than bonus shares issued as fully or partly paid otherwise than in cash. 4.Particulars of the indebtedness of the company in respect of all shares(including mortgages) which are required to be registered with the Registrar.
Contd.
5.A list containing the names,addresses, descriptions and occupations,if any, of members and debenture holders, past and present, and stating the number of shares or debentures held by each. 6.Particulars with respect to directors, managing directors, managers, and secretaries,past and present.
Contd
If any of the five preceding returns has given full particulars required as to past and present members and the shares held and transferred by them and the shares held by them. The copy of the annual return filed with the Registrar shall be signed by director and by the manager or secretary ,if any ,or by 2 directors.
Contd..
The return shall be accompanied with a certificate signed like wise stating, that the return states facts as they stood on the day of the annual general meeting. The fact that no annual general meeting was held is no justification for not complying with the requirements of Sec.159
Annual Return
of a company not having share capital:
It shall state the following particulars: 1. The Registered Office Address Of Co. 2.The names of members and respective dates on which they became members and the names of persons who ceased to be members since the date of the last AGM and the dates on which they ceased to be members.
Contd.
3. All such particulars with respect to the persons who,at the date of the return,were the directors,its manager and its secretary; 4. A statement containing the particulars of the total amount of indebtedness of the company in respect of charges which are to be registered with the registrar.
Contd..
The copy of the Annual Return filed with the Registrar shall be signed by a director and by the manager or secretary , if any,or by two directors. The return shall be accompanied with a certificate signed likewise stating, that the return states facts as they stood on the day of annual general meeting.
Formation of a Company
Stages in formation
Promotion stage. Incorporation stage. Capital subscription stage. Commencement of business stage.
Promotion
It refers to all those steps which are taken to get a company going. It is the process of organising & planning the finances of a business enterprise under the corporate form. It is the discovery of an idea,assembling of business elements & the provision of necessary funds.
Promoter
Person/s with an intention to form a company & who take the necessary steps to carry that intention into operation. He directs solicitors to prepare the memorandum & other necessary documents for filing with the Registrar. Chooses a name for the company,raises necessary funds,decides about location of the registered office. Selects the persons who will be directors. Promoter may be an individual,a partnership firm,or even a company.
Promoters remuneration
Lump sum either in cash or in the form of share and debentures. Commission on the purchase of price of the business taken over by the company. May be inducted to the board. May sell his own property to the company at an inflated price provided full disclosure is made May be given an option to buy share of the company at Par when the market price is higher. Where remuneration is paid to thepromoter it must be disclosed in the prospectus if paid within 2 years preceding the date of prospectus( Clause 15, Part I of Schedule II)
Provisional contracts
These are made by a public company after incorporation but before commencement of business. This becomes binding only when the company gets the certificate of commencement of business-u/s 149. However the company can rescind provisional contracts which are fraudulent or voidable.
Incorporation (contd..)
FILING OF DOCUMENTS MoA duly signed by the subscribers-u/s 33(1)(a). AoA ,if any, duly signed by the subscribers to the MoA. The agreement which the company proposes to make with an individual for appointment as its managing or whole-time director-33(1)(c). The written consent of the directors to act as such & to take up qualification shares-u/s 266. A statutory declaration that all requirements of the Act have been complied with-to be signed by An advocate of the supreme or High court An attorney or pleader entitled to appear before a High court. A CS or a CA in hole time practice & engaged in the formation. A person named in the AoA as director,manager or secretary.