HOW CORPORATIONS ARE CREATED AND THE ROLE OF PROMOTER

Author: Soumya Kumari, a student at School of Law UPES, Dehradun

Abstract 

This Article deals with formation of a corporation and the roles of a Promoter. The corporations are governed through the Companies Act,2013 in India. This Article covers the essentials and process of incorporation of a company and how a Promoter works for a company. The Promoter has a significant role in establishment and development of a company. The role and liabilities of a Promoter before and after the incorporation of a company are explained under this Article. The related provisions for the formation of a company are also discussed under this Article. The case laws referred in this article are showing the relevance with the given concepts.  The rules and regulations for proper governance of a corporation are getting evolved with time.

Keyword: – Incorporation, Companies Act, Corporation, Promoter, Prospectus 

Introduction

  As corporation is a separate legal entity, a corporation is also born like a natural person but after its registration. The registration of a company in India happens as per the Companies Act,2013. The process from pre-incorporation to final winding up of a company are governed through the Companies Act. The registration of a company has some benefits for the members like it would limit the liability, that’s why a registered company is an option to do a business in India.  A corporation after incorporation become a legal personality which has some legal obligations like a corporation – can sue and can be sued, can perform contractual obligations, can hold property, has a perpetual existence, etc. A corporation as a separate legal entity provides limited liabilities to their shareholders. The case of Salomon v. Salomon and Lee v. Lee Air Farming Ltd., are landmark cases which hold the principle of a corporation as a separate legal entity. In India through Kandoli Tea Co Ltd, re, case the Calcutta High Court recognised the principle of separate legal entity of a corporation, even before case of Salomon. 

Formation of a Corporation

The company formed only after incorporation that means through registration process on the basis of The Companies Act, 2013. Section 3 of the Companies Act, 2013 deals with the provision for the formation of Public, Private and One person companies. A company come into existence after getting the certificate of incorporation as per Section 7 the Companies Act. In India, it has become necessary to register a company as per the Companies Act, 2013. Only after registration a company can become a legal entity and the certificate of incorporation would be considered as a birth certificate for a company. The incorporation of a company creates a legal boundary between the shareholders and a company which generates limited liability on the shareholders. The various Jurists had proposed different theories on corporations as a legal personality. Each theory has its own opinion on corporate personality, some theories are fiction theory, realistic theory, Kelson’s theory, organism theory, purpose theory, bracket theory, ownership theory, and concession theory, etc. There are different types of companies on different basis. On the basis of the number of members, the companies are of three types: i) Private Company, ii) Public Company, iii) One person Company. And on the basis of mode of incorporation there are mainly two types of company i.e. i) Statutory Company and ii) Registered Company. Section 2(68), Section 2(71) and Section 2(64) of the Companies Act define private company, public company, and one person company respectively. All different companies need different requirements to be fulfilled for the commencement of their business. There are several stages for the formation of a company.  

Essentials for Incorporation of a company

There are certain essential elements required for incorporation of a company which need to be fulfilled before the registration process. The process of formation of a company begins with an idea to start a business and the objective of that business. An idea and objective of business are the primary essentials for the formation of a company. To reflect the idea and an objective of a company a prospectus needs to be issued, which contains the relevant details of the company. The prospectus contains the name of a promoter who is basically a lawful guardian of a company before the incorporation. The prospectus is a legal document which has the details regarding the Board of Directors, management, voting rights, capital structure, stock exchange, name, date, punishment and penalty etc. All the essential works are done by a promoter before the incorporation of a company. A promoter can be of different types i.e. professional promoter, occasional promoter, financial promoter, and entrepreneurial promoter. A promoter can enter into a contractual obligation on behalf of a company during pre-incorporation period. A promoter is responsible for the preparation of all required documents for the registration of a company. The various documents need to be prepared such as memorandum of association and articles of association. All the basic essentials for the incorporation of a company are the responsibility of a promoter. 

Stages of the Incorporation

The stages for the formation of a private company are: – 

1. Promotion 
2. Incorporation 
3. Commencement of Business 

The stages for the formation of Public Company are: – 

1. Promotion 
2. Incorporation 
3. Subscription of capital 
4. Commencement of Business 

1. Promotion is the prior stage for the formation of a company. For promotion of a company, there are some people who actively participate in promotion and that person is known as a promoter. A prospectus is issued by a company before its incorporation. The prospectus is a legal document which has all the relevant details of the company. The prospectus contains name, objective of a business, type of a company, rights of shareholders, information regarding Board of Directors, rules and regulations, penalties, registered office, etc. The promoter has to prepare all the required documents for the registration process. 
2. Incorporation means legal establishment of a company. After registration the company gets a certificate of incorporation. The process of incorporation of a company is given in Section 7 of the Companies Act.  The process regarding the registration for a company: – 

• Types of a company need to be decided by a promoter whether the company would be private, public, or one person company. Different types of companies need to have different numbers of members and Board of Directors. The public company requires a minimum of seven members and a private company needs to have a minimum number of two members. The minimum number of Board of Directors in public company is three and in private company is two. As the name indicates that in one person company the minimum number of Board of Directors is one. 
• Name of the company: A Promoter has to select a unique name for a company. The name of a company depends on the type of company. Section 4 of the Companies Act deals with the nomenclature of a company. The name of a company must not be identical to any other company’s name. The word ‘Pvt ltd’ can be used by private companies. Some restrictions are also there for the name of the companies like private companies cannot use the words like government, national, public, etc in their name. Section 13 of the Companies Act deals with the alteration of the name of a company, if a company wants to change their name, then they have to get approval from the central government. 
• Preparation of the required documents: various documents need to be prepared such as memorandum of association and articles of association. Memorandum of association is like a constitution of a company which contains several clauses i.e. object clause, liability clause, name clause, registered office clause, subscription clause, capital clause, etc. Articles of association contain rules and regulations. Section 5 of the Companies Act. 

3. Subscription of a capital: The share issued for public is prohibited in case of a private company, but public companies can issue their shares with the public. The company can raise its capital by several ways like – private placement, by issuing the bonus shares, through inviting the public to invest in the company. 
4. Commencement of the Business: The private company can start its business just after getting the certificate of incorporation. But the public company needs to issue a prospectus to invite the public for subscription of shares after getting the certificate of incorporation. The public company needs to sell the least number of shares which are mentioned in the prospectus. When the public company completes the required number of sales, then the certificate is sent to the registrar with a bank statement. After this, the registrar scrutinises the given document and gives the certificate of commencement of business. 

The certificate of incorporation is considered as conclusive evidence for the lawful existence of a company. As in case of Moosa v. Ibrahim, the court held that the certificate of incorporation is valid and it would be considered as conclusive evidence. Now, it has become mandatory to register a company in India as per the Companies Act,2013, to provide the status of a separate legal entity to a company. 

Role and Duties of a Promoter for incorporation of a company 

Promoter is considered as a legal guardian of a company. He has a fiduciary relationship with the company, he must always act in good faith and his actions should be in the benefit of a company. Promoter is not an agent nor a trustee of a Company. In case of Erlanger v New Sombero Phosphate, court held that a promoter is not an agent or trustee of a company, he has only a fiduciary relationship with a company. Promoters play an important role in forwarding the desired company into reality. The name of a promoter must be written in the issued prospectus. Section 2 (69) of the Companies Act defined a promoter.  Promoter is the one who is responsible for the incorporation of a company and putting forward the objective of a business through prospectus. The roles of the Promoter before the incorporation of a company are: – 

• Pre analyse the market opportunities for the business set up. 
• Establish the name of a company
• Arrange all the required documents for the incorporation of a company
• Hire all necessary professionals
• A promoter has an advisory role even after incorporation of a company

The promoter also has some essential duties because he holds a significant position in the establishment and growth of a company. Some important duties of a promoter are: – 

• Duty to disclose all secret profits
• Duty to disclose all the transactions related to the company
• Duty to inform all gained profit during promotion of a company
• Duty to maintain fiduciary relation with a company

Liabilities of a Promoter

 As the promoter is a lawful parent of a company, he deals on behalf of the company especially before the incorporation of company. That’s why he would be liable for any misconduct regarding the pre-incorporation contracts or promotion activities of a company. The important liabilities of a promoter are: – 

• He is liable to justify all the transactions 
• He would be liable for any misstatement mentioned in the prospectus
• He would be personally liable for pre-incorporation contracts

Before the incorporation of a company, the promoter enters into any contractual obligation on behalf of the company. Because a company cannot enter into a contract before its incorporation, and if any contract happens in the name of a company as a party of a contract, then that contract would be declared void. That’s why a promoter would be liable for any issue regarding the pre- incorporation contract. A company cannot be sued before attaining its legal recognition. As in case of Kelner v. Baxter (1866), the court explained the liability of a promoter for pre-incorporation contracts.  

Rights of a Promoter after Company’s incorporation

The role of a promoter would not end even after the incorporation of a company. A promoter has a significant role in the establishment of the company. After the incorporation of a company, a promoter should be entitled with all the expenses which he had spent on the promotion or business activities of a company. There are some rights which a promoter has after the incorporation of a company are:

• to indemnity
• to recover preliminary expenses
• to remuneration 

Conclusion

India has become the efficient ground for the businesses, entrepreneurs, companies, and investment etc. India has developed proper statutory provisions and corporate governance for effective governance of the companies. This article particularly dealt with the process and stages of formation of companies in India and the role of promoters. The incorporation of the company as per the companies act 2013, makes it a separate legal entity. The certificate of incorporation is considered as conclusive evidence. The certificate of incorporation is just like a birth certificate. This article has covered all the relevant concepts related to the formation of a company as per the Indian legal system and the role, duties, liabilities, and rights of a promoter. The Companies Act, 2013 governs the companies in India. A proper legislation is beneficial for smooth governance, as in case of companies the Companies Act plays that role. The Companies Act, 2013 provides a proper rules and process for establishment of the companies and also explains the roles of different members of a company. Section 447 of the Companies Act also provides the provision for fraud. The role of a promoter and its definition is also mentioned in the Companies Act. The process from pre-incorporation to final winding up of a company are governed through the Companies Act. The registration of a company has some benefits for the members like it would limit the liability, that’s why a registered company is an option to do a business in India. A promoter plays an important role in proper establishment and development of a company. A promoter has a fiduciary relationship with a company, that’s why he is bound to do everything in the favour of a company.