Starting Up: How to do it ‘legally’ (Part 4)

This is the fourth piece in a series of articles about the legal issues that entrepreneurs need to consider when they ‘start up’. You can read Part 1, Part 2 and Part 3 of Starting Up: How to do it ‘legally’ by clicking here, here and here, respectively.

Certificate of Incorporation

The company’s life commences from the date mentioned in the certificate of incorporation, and the date appearing on it is conclusive even if wrong. From the date of incorporation, such of the subscribers of the memorandum and other persons, as may from time to time be members of the company, shall be a body, capable forthwith of exercising all the functions of an incorporated company, along with such liability as to contribute to the assets of the company in case of winding up.

Conclusiveness of the Certificate of Incorporation

The certificate is conclusive evidence that all the requirements of the Companies Act have been complied with in respect of registration and matters precedent and incidental thereto, and that the association is a company authorized to be registered and duly registered under the Act. In other words, the validity of the certificate cannot be disputed on any ground whatsoever. If a company is born, the only method to get it extinguished is not by assailing its incorporation, but by resorting to the provisions of enactments, which provide for the winding up of companies.

Effect of Pre-Incorporation Contracts

Sometimes contracts are made on behalf of the company even before it is duly incorporated. No such contract can bind the company because the company is a non-entity then and hence incapable of contracting. But this is subject to S. 15 of the Specific Relief Act, 1963, which provides that where the promoters of a company have made such a contract for the purposes of the company, and if the contract is warranted by the terms of incorporation, the company may adopt and enforce it.

Certificate of commencement of business in case of a public companyA public company having a share capital has to issue a prospectus inviting public to subscribe for shares; and the prospectus this issued must be delivered to the Registrar for registration on or before the date of publication.

Where a public company having a share capital has issued a prospectus inviting the public to subscribe for its shares, the company shall not commence any business or exercise any borrowing powers, unless the law relating to obtaining a trade certificate under S.69 and S.149 of the Companies Act has been complied with.

According to S.69 (1) company cannot allot shares unless the amount stated in the prospectus as minimum subscription has been raised and the application money thereon has been received by the company. According to S.149, a company cannot commence business unless:

(a)        shares held subject to the payment of the whole amount thereof in cash has  been allotted to an amount not less than the minimum subscription;

(b)        every director of the company has paid to the company for the shares taken or contracted to be taken by him for which he is liable to pay in cash;

(c)        no money is, or may become, liable to be paid to the applicants by reason of any failure to apply for or to obtain permission for listing on any recognized stock exchange; and

(d)        a duly verified declaration has been filed with the Registrar by one of the directors or the secretary or, where the company has not appointed a secretary, a secretary in whole-time practice, in the prescribed form, that aforesaid clauses have been complied with.

A company not requiring to call for public subscription is required to issue a statement in lieu of prospectus, and the statement in lieu of prospectus is required to be registered with the Registrar in the same manner as the prospectus is required to be registered.

Thus, a public limited company has to file a declaration in Form 20 and attach the statement in lieu of the prospectus (Schedule III) or file a declaration in Form 19 and attach the prospectus (Schedule II) to it and obtain the Certificate of Commencement of Business.

When the above provisions have been complied with, the Registrar shall, certify that the company is entitled to commence business, and that certificate shall be conclusive evidence that the company is so entitled. Any contract made by a company before the date at which it is entitled to commence business shall be provisional only, and shall not be binding on the company until that date, and on that date it shall become binding.

Penalty for contravention

If any company commences business or exercises borrowing powers in contravention of the provisions above, every person who is responsible for the contravention shall, without prejudice to any other liability, be punishable with fine, which may extend to five thousand rupees for every day during which the contravention continues.

Commencement of business included in the ‘Other Objects’

The objects clause of a company, post Amendment Act of 1965, is divided into Main Objects clause i.e. main objects of the company and objects incidental and ancillary thereto, and Other Objects clause i.e. objects not mentioned in the main object clause.

If a company wishes to start a business included in the ‘other objects’ clause, it shall have to obtain the authority of a special resolution of its shareholders. Similarly, when an existing company wants to commence any new business, which though included in its objects is not germane to the business, which it has been carrying on at the commencement of the Amendment Act, it shall have to obtain the authority of a special resolution. Where a special resolution has not been passed, but the votes cast in favour of the resolution exceed the votes cast against it, the Central Government may, on an application by the Board of Directors, allow the company to commence such business. In both the cases, the resolution must be filed with the Registrar, a declaration by the secretary or a director that the requirements as to the resolution have been complied with.

This is the fourth piece in a series of guest articles being authored by Ritambhara Agrawal, Managing Partner, Intelligere. You can get in touch with her by writing to ritambhara[at]intelligere[dot]in. Also, do share with us your thoughts and views on this story by writing to us at [email protected].