Legal Requirements for Company Formation under the Companies Act 2013

13th October, 2023 - 7:25 am Categories: Company Act 0 Comments

Introduction

The Companies Act, 2013 has been replaced the old Companies Act,1956[1] with 470 sections and 29 chapters.This research paper is on the topic “legal requirements for company formation under the companies Act, 2013. So, the major part of this paper will be on analysing the chapter II of the act with major focus on the formation of public company[2]. The formation of company, its memorandum, registration, alteration, rectifications and other related matters are there in this chapter which will be analysed with the help of relevant case laws. The procedure of formation and incorporation of the company can be seen as similar to the birth of a human with various stages in it.[3]

Research Objectives

The aim and objective of this research paper is to understand the legal formalities and requirements during the formation and incorporation of a company. The research objectives are as follow:

1. To analyse and elucidate the legal requirements for the formation or incorporation of a public company in Indiaas outlined under chapter II of the Companies Act, 2013.
2. To analyse the key procedural steps, the regulatory bodies involved, documentation and other challenges which is faced during the formation or incorporation of a public company under the Companies Act, 2013.

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Research Question

The major question arises in this research paper for the formation of company is mainly divided into two main research question, they are as follows:

1. What are the legal requirements for the formation of a public company in India as outlined under the Companies Act, 2013?
2. Whether the main procedural steps, the documentation process, and the regulatory bodies involved in the formation of a public company are given under the Companies Act. What are the relevant case laws for those procedure provided?

Literature Review

• Company Law, Rinita Das[4]

In this book, the author has mentioned the formation and incorporation of a company under the Chapter 2 of this book. According to the author, there are few essential to form the company. They are the number of persons, number of members who subscribed in the company, the certificate of the incorporation, the memorandum of Association and all other document are very important when it comes to the formation of the company as given under the chapter 3 of this book. In simple words, the author just describes the process of formation of a company and the legal requirement in the form of documentation and other legal procedure is given.

• Key Highlights of the Companies Act, 2013- Incorporation of the Companies, Anurag Sharma[5]

The author in this journal article wants to draw attention on the legal requirement for the incorporation of the company and it concluded how the new company act made the process very easy and convenient. The new company act also provide the new standard to world which make the easiest possible procedure for the formation and related requirements for a company. The author in this article also throws a light on how the ministry of corporate has continuously given importance to online transaction to make the procedure paperless and more convenient.

• Company Law An Introduction, Avtar Singh[6]

Dr. Avtar Singh in chapter 2 of his book stated the entire process for the formation of the company by providing the essential as the number of perrons required to form a company, and the legal documentation such as memorandum and other affidavits. After that he stated how the fraudulent act is done while providing the documentation in this case. Also, what is the value of incorporation certificate in the formation of the company. Furthermore, it is shown how the new act helps to make the formation of company more convenient.

• Section 3 of the Companies Act, 2013: Formation of Company, Vidyam Shukla[7]

The author in this journal article describes the stages of the formation of the company. Once a company is legally ready for the admission, the stage of formation of company starts therein. His paper gave a depth knowledge in the process of company registration in India. In India, starting a business contains several steps which is from creating or a business idea to the output of the objectives. He describes who are the promoters in the process of incorporation and formation of the company. How is this procedure important for starting a business in India.

Analysis

The chapter II of the Companies Act deals with the formation of a public company. From Section 3 to Section 22 of this act talks about the incorporation of a company and its related incidents. First of all, there are three kinds of company. They are public company[8], private company[9] and One person Company (OPC)[10]. The chapter consists of formation of company, memorandum of association(MoA) required, Article of association(AoA) required, incorporation of a company, formation of company with a charitable object and its commencement.The major analysis is on the public company and not on the private and OPC.

Formation Of Company

Under Section 3(1)(a) of the Companies Act[11], it is stated that a public company can be formed lawfully when the formation of company is done seven or more persons only. Those seven or more than seven people have to subscribe their names in the memorandum of the company. The company such formed may be term by company limited. After that it should be get registered by the registrar of the companies. The major requirement for formation will be followed by the documentation including-

• Memorandum of Association (MoA) under section 4 of the act.[12]
• Article of Association (AoA) under section 5 of the act.[13]
• A copy of the such agreement.
• A declaration that all the documents are provide as per the requirement under Section 7(1) of the act[14].

Under section 7 of this Act[15], there has been some new requirements introduced in the formation of company. The new requirement is that every subscriber to the memorandum has to file an affidavit to the first director of the company in order to declare that there has been no offence in connection with the person. Furthermore, the company has to preserve all the documents until the dissolution of the company it originally filed under section 7(1) of the company act.

Punishments In Case If False Particulars In The Document

If any of the person is found to be liable for presenting fraud particulars in the documentation of the formation of the company, then he is to be held liable under the section 447. [S. 7(5)][16] under which the punishment for fraud is provided. If any incorporation of the company has been proved to be obtained by the false furnishing of the fact or any kind of false furnished information provided or by any of the fraudulent action in such case, then such application can be made to the tribunal which can be passed for the satisfaction to some provided orders.[17] But before passing such order there must be reasonable opportunity or time provided to the company for being heard.

In case the registrar found the document as satisfactory in nature then he can register them and can enter the name of the company in the register of the company.[18] After this he will issue a certificate which is called the certificate of incorporation.[19]

Certificate Of Incorporation

In order to make the company a legal person, it is very important to issue the certificate of incorporation. By issuance of this certificate, it can be said that the company is born. The act says that from the date of incorporation of the company, it shall be called as corporate body, which will be capable to function as the incorporated company it will include the subscriber to the memorandum and other persons. Even if the issuance of certificate is wrong, but it will commence the company’s life form the date of issuance of the certificate.

The certificate of incorporation does not only create the company but also it acts as conclusive evidence for the company, to show that it has fulfilled all the legal requiremnts for formagtion of the company . It ultimately shows that all the document are provide, all the legal requirement is fulfilled and also the company now acts as a corporate body and will be treated as a legal person. There can be no dispute on this certificate by any grounds whatsoever. In the case, Moosa Goolam Ariff v. Ebrahim Goolam Ariff[20], in this case two adults’ sand one guardian for the five minors signed the MoA. The registrar registered the company and issued the certificate. The Lordship in this case held that the requirement for document is not duly compiled. There are not seven subscribers to the memorandum. Therefore, the registrar is not ought to grant the certificate here in this case. Furthermore, In Indian laws, the Kerala High court held that there can be no writ be issued to judicial review the registration of the company or to cancel the registration of the company under the Companies Act. [21]

Formation Of Companies With Charitable Objects

Under section 8[22] of this act, When the central government satisfies that a person or a association of person who has proposed to be register as a public company must satisfies the following requirement of a charitable company:

1. The object of the company is for promoting the social, research, arts, commerce, education, sports, welfare, religion and other objects.
2. The intention of company is t apply the profits in the promotion of the objects.
3. Its intention is not to pay the member dividend of the company.

The government can give such companies licences or allows the without using the word “limited” to such company which are with the charitable objects.  In such case, the company will be enjoying the privileges of the limited company and also have the obligation of the such companies.[23]

In formation of company, another important step is promotion of the company. For this purpose, promoter is required. Promoter[24] of a company is someone who is a person or group of people who all come together in order to set up the objective of the business, A promoter can be anyone, it is not necessary that the founder of company can be only the founder. Any person who has raised money for the company and has backed with the company likewise can be termed as the “promoter of a company”[25]. It can be either an individual, or an artificial legal entity or a corporation.

Conclusion

By analysing the literature review, descriptive analysis in this research paper, it can be concluded that the formation of companies under Companies act,2013 is not trying to ease the procedure for people to make things more convenient. Under this act S.3 of the companies act, 2013[26] gives numbers of members required to subscribe to the memorandum in order to form the company. Furthermore, the documents are listed in the analysis paper of this paper such as MoA, AoA, the contract of agreement which was made and the declaration of the providing such documents. A few new requirements which have been inserted in the company act are also discussed in detail under S.7 of the companies act, 2013[27].

After fulfilment of document requirements, the registrar registers the company and issues the certificate of incorporation to the company which commences the company life and gives the company to act as a legal person. Furthermore, it can be concluded that the process of formation of company can be processed as: Selecting the name for the proposed company then applying for the DIN and DSC followed by the drafting of MoA and AoA. And subsequently followed by the filing of various stamped documents with the ROC. After the just pay the applicable fees to ROC and then the certificate of incorporation is issued. Thereafter, the company commences. All these are discussed with the possible relevant case laws.

Author: Sakshi Sinha, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

References /Bibliography

• Anurag Sharma, ‘Key Highlights of the Companies Act, 2013- Incorporation of the Companies’ (2015) 1 (IJAEMS).
• Avtar Singh, Company Law an Introduction (13th edn, Eastern Book Company 2022).
• Companies Act 2013
• Anik Kumar Thakur and Dr. Jyoti Rattan, Company Law (1st edn, Bharat Law House Pvt. Ltd. 2022).
• Link Hire Purchase & Leasing Co (P) Ltd. V. State of Kerala, (2001) 103 Comp Ca 941 (Ker).
• Maluk Mohamed v. Capital Stock Exchange Kerala Ltd, (1991) 72 Comp Cas 333 Ker.
• Rinita Das, Company Law (1st edn, Eastern Book Company 2022)
• Sunil Dev v. Delhi and District Cricket Assn, (1994) 80 Comp Cas 174 (Del).
• Vidyam Shukla, ‘Section 3 of the Companies Act, 2013: Formation of Company’ (2022) 4 Indian JL & Legal Rsch 1.

[1]. Companies Act 1956.

[2]. Companies Act 2013, s.3(1).

[3]. Dr. Anik Kumar Thakur and Dr. Jyoti Rattan, Company Law (1st edn, Bharat Law House Pvt. Ltd. 2022).

[4]. Rinita Das, Company Law (1st edn, Eastern Book Company 2022).

[5]. Anurag Sharma,‘Key Highlights of the Companies Act, 2013- Incorporation of the Companies’ (2015) 1 (IJAEMS).

[6]. Avtar Singh, Company Law an Introduction (13th edn, Eastern Book Company 2022).

[7]. Vidyam Shukla, ‘Section 3 of the Companies Act, 2013: Formation of Company’ (2022) 4 Indian JL & Legal Rsch 1.

[8]. Companies Act 2013, s.2(71).

[9]. Companies Act 2013, s.2(68).

[10]. Companies Act 2013, s.2(62).

[11]. Companies Act 2013, s.3(1)(a).

[12]. Companies Act 2013, s.4.

[13]. Companies Act 2013, s.5.

[14]. Companies Act 2013, s.7(1).

[15]. Companies Act 2013, s.7.

[16]. Companies Act 2013, s.7(5).

[17]. Avtar Singh, Company Law an Introduction (13th edn, Eastern Book Company 2022).

[18]. Companies Act 2013, s.2(74).

[19]Link Hire Purchase & Leasing Co (P) Ltd. V. State of Kerala, (2001) 103 Comp Ca 941 (Ker).

[20]. ILR (1913) 40 Cal 1.

[21]. Maluk Mohamed v. Capital Stock Exchange Kerala Ltd, (1991)72 Comp Cas 333 Ker.

[22]. Companies Act 2013, s.8.

[23]. Sunil Dev v. Delhi and District Cricket Assn, (1994) 80 Comp Cas 174 (Del).

[24] Companies Act 2013, s.2(69).

[25]. Dr. Anik Kumar Thakur and Dr. Jyoti Rattan, Company Law (1st edn, Bharat Law House Pvt. Ltd. 2022).

[26]. Companies Act 2013, s.3.

[27]. Companies Act 2013, s.7.