Incorporation of a Company - Part 1
Section 3. Formation of a Company.
3(1).
A company can be formed for any lawful purpose(legal and permitted by law).
The number of people required to start a company depends on the type of company being formed.
The Companies Act, 2013, recognizes three main types of companies based on membership:
Public Company : Requires a minimum of 7 or more persons and can offer its shares to the public and is subject to more regulatory requirements.
Private Company : Requires at least 2 or more persons and cannot offer its shares to the public, and there are restrictions on share transfer.
One Person Company (OPC): Can be formed by a single individual.
It is essentially a private company with only one member (owner), providing the benefits of limited liability to sole entrepreneurs.
One Person Company
The MOA of an OPC must include:
The name of another person (a nominee) who will become a member of the company if the original member dies or becomes mentally incapacitated.
This nominee must give written consent in the prescribed format.
That consent must be filed with the Registrar of Companies (ROC) when the OPC is registered.
The nominee of a One Person Company (OPC) has the right to withdraw their consent at any time.
(Provided they follow the procedure prescribed under the Companies Act, 2013, and related rules.)
The sole member of the OPC also has the right to change the nominee at any time.
This can be done by giving a written notice to the company in the manner prescribed by law.
Whenever a change in the nominee occurs, the member is required to inform the company about the change.
Upon receiving such notice, the company must notify the Registrar of Companies (ROC) about the change in nominee.
The ROC has to be notified within the prescribed period and following the official procedure.
Changing the nominee does not amount to an alteration of the Memorandum of Association (MOA).
It does not require any formal amendment process or approval, as would normally be necessary for altering the memorandum.
3(2). Types of companies that can be formed
A company can be any of these three types:
Company limited by shares: The Member’s liability is limited to the amount unpaid (if any) on their shares.
Company limited by guarantee: The Member’s liability is limited to the amount they promise to contribute if the company is wound up.
Unlimited company: The Member’s liability is unlimited, which means they can be made liable to pay all debts if the company fails.
3A. Members severely liable in certain cases
Every public company must have at least seven members, and every private company must have at least two members.
If, at any time, the number of members falls below these limits, then:
The company is expected to restore the number of members to the required minimum as soon as possible.
When the company falls below the legally required minimum number of members &
Despite this, the company continues to carry on business for more than six months then beyond the six-month limit, a special liability rule gets triggered.
If the company continues to operate with fewer than the minimum required number of members, and a person (or persons) remains a member during this period, is aware that the company is functioning below the minimum membership requirement then:
Once the six-month grace period ends and the company still operates in that condition, any debts the company incurs afterward become the personal and several liability of that member (or members).
Severally liable means that each such member can be individually held responsible for the full amount of the company’s debts, not just for their own share.
Creditors can sue any of those members personally for the entire debt, and it will then be up to the member to recover from the company or other members.
Section 4. Memorandum.
4(1).
The Memorandum of Association (MOA) is the main document of a company that states its basic details and structure.
It must include the following:
The name of the company.
If it is a public company, the name must end with Limited.
If it is a private company, the name must end with Private Limited.
However, companies registered under Section 8 (non-profit companies) are exempt from using Limited or Private Limited at the end of their name.
The State in which the company’s registered office (official address) will be located must be mentioned.
The objects of the company for which the company is being formed must be clearly stated.
It has to be stated along with any activities that support or are connected to those purposes.
The liability of members must be stated whether it is limited or unlimited.
The debts and liabilities that the company owes at the time of winding up, as well as any liabilities incurred before the person ceased to be a member.
The costs and expenses of winding up, along with the adjustment of rights between members.
In the case of a company having share capital:
The MOA must state the:
Total share capital with which the company will be registered.
How it is divided into shares of a fixed value.
The number of shares that the original subscribers agree to take (which must be at least one share each).
The MOA must also show opposite each subscriber’s name the number of shares that person intends to take.
In the case of a One Person Company (OPC):
The memorandum must include the name of the person (nominee) who will become a member of the company if the sole member dies.
4(2).
The name of the company stated in the memorandum must follow certain rules:
It must not be identical or too similar to the name of any existing registered company.
It must not be illegal or offensive, meaning:
(i). It should not be a name whose use would constitute an offence under any law in force.
(ii). It should not be a name considered undesirable by the Central Government.
4(3).
In addition, a company cannot be registered with a name that contains:
Any word or expression that suggests the company is connected with or supported by the government, a State Government, a local authority, or a government-owned corporation.
Any other word or expression that is legally restricted, unless the company has obtained prior approval from the Central Government to use it.
4(4).
Any person who wants to form a company can apply to the Registrar of Companies (ROC) for the reservation of a company name.
The application must be made in the prescribed form and manner, and accompanied by the prescribed fee.
The name applied for can be either:
(a). The name of a new company to be formed.
(b). The new name that an existing company wants to adopt.
4(5).
After receiving the application, the Registrar may, based on the documents and details provided, reserve the name for a period of 20 days from the date of approval.
The period can be different if it is so prescribed.
If the application is for an existing company to change its name, the name can be reserved for 60 days from the date of approval.
If, after reservation, it is discovered that the applicant provided wrong or false information to obtain the name, then :
(a). If the company has not yet been incorporated, the reserved name will be cancelled, and the applicant may be fined up to ₹1 lakh.
(b). If the company has already been incorporated, the Registrar can take action after giving the company a chance to explain by:
(i). Directing the company to change its name within three months through an ordinary resolution.
(ii). Striking off the company’s name from the register of companies.
(iii). Filing a petition to wind up the company.
4(6).
The format and structure of the Memorandum must follow one of the prescribed forms in Tables A, B, C, D, or E in Schedule I of the Companies Act, depending on the type of company.
4(7).
If a company is limited by guarantee and does not have share capital, then:
The memorandum or articles cannot include any clause that gives any person the right to share in the company’s profits unless that person is a member.
Any such provision will be invalid (void)
Section 5. Articles.
5 (1).
The Articles of Association (AOA) of a company are a set of rules and regulations that govern the internal management and day-to-day operations of the company.
They define how the company will be run, how decisions are made, how meetings are conducted, and what powers directors and shareholders have.
5 (2).
The articles must also include certain matters prescribed by law.
However, this does not stop a company from adding any extra provisions in its articles if those provisions are considered necessary or useful for the efficient management of the company.
5 (3).
The articles may include provisions for entrenchment.
This means that certain specific clauses of the articles can be made harder to change than others.
If a company decides that some rules can be changed only if a stricter condition is met, such as:
A higher voting majority & Additional approval requirements instead of the normal special resolution process.
5 (4).
These entrenchment provisions can be introduced in only two ways:
At the time of forming the company or when the company is first incorporated, or
Later, through an amendment to the articles:
In the case of a private company, such an amendment must be agreed to by all members (unanimous consent).
In the case of a public company, it must be passed by a special resolution.
(This generally requires approval by at least 75% of the members present and voting).
5 (5).
If the articles contain entrenchment provisions, whether included at the time of formation or added later, the company must notify the Registrar of Companies (ROC) about these provisions.
This must be done in the prescribed form and manner, as set out in the rules.
5 (6).
The format and structure of the Articles of Association must follow one of the model forms specified in Tables F, G, H, I, and J in Schedule I of the Companies Act, 2013, depending on the type of company.
Table F applies to companies limited by Shares.
Table G applies to companies limited by Guarantee.
Table H applies to companies Limited by Guarantee and not having Share Capital.
Table I applies to companies that are Unlimited and having a Share Capital.
Table J applies to companies that are Unlimited and do not have a Share Capital.
5 (7).
A company may adopt all or only some of the model regulations contained in the model articles (from the relevant table) applicable to its type.
The company can either fully follow the model format or customize it as per its own requirements.
5(8).
For any company registered after the Companies Act, 2013, has come into force:
If its own articles do not specifically exclude or change the provisions of the model articles, the
The relevant model provisions will automatically apply to that company.
Essentially , the model regulations become part of the company’s articles by default, as if they were actually written into the company’s registered articles.
5(9).
This section does not apply to companies that were registered under earlier company laws (such as the Companies Act, 1956).
Unless they amend their articles in accordance with the 2013 Act.
Therefore, older companies continue to operate under their existing articles until they decide to modify them in accordance with the new Act.
Section 6 - Act to override memorandum, articles.
If there is anything in the MOA , articles of association, any agreement, or any resolution passed by the company or its directors that is:
Against the provisions of the Companies Act, then the Act will override those provisions.
This rule applies even if the company made those documents or passed those resolutions before or after the Act came into force. In other words, the law always comes first
If any part of a company’s memorandum, articles, agreement, or resolution is in conflict with the Companies Act, then that specific part will be treated as void (invalid), but the rest of the document will still remain valid.
Doctrine of Severability - When any provision in a company’s memorandum, articles, agreement, or resolution conflicts with the Companies Act, that conflicting provision becomes void to the extent of such inconsistency, but the rest remains valid.
Section 7 - Incorporation of a Company.
7(1).
When a new company is being formed, certain important documents and information must be filed with the Registrar of Companies (ROC).
The ROC should have jurisdiction where the company’s registered office will be situated.
These are required for the company to be officially registered.
(a).
The Memorandum of Association (MOA) and Articles of Association (AOA), both signed by all subscribers (founding members) in the manner prescribed.
(b).
A declaration must be filed in the prescribed form by a professional.
An advocate, chartered accountant, cost accountant, or company secretary in practice who is involved in setting up the company.
It should also be signed by a person named in the articles as a director, manager, or secretary.
This declaration must confirm that all legal requirements of the Companies Act and its rules regarding registration and related matters have been fully complied with.
A declaration from each subscriber and the first directors named in the articles must also be filed, confirming that they have not been convicted of any offence related to the promotion, formation, or management of any company.
The declaration should also state that they have not been found guilty of fraud, misfeasance (misuse of authority), or breach of duty to any company in the last five years.
They must also declare that all documents submitted to the Registrar are true, complete, and correct to the best of their knowledge and belief.
The address for correspondence must be provided until the company establishes its registered office.
The personal details of every subscriber to the memorandum must be filed including full name, surname or family name, residential address, nationality, and proof of identity, as prescribed.
If a subscriber is a body corporate (like another company), then the prescribed details of that entity must be provided.
The details of the first directors (those named in the articles) must also be filed.
These include name, surname, Director Identification Number (DIN), residential address, nationality, and proof of identity, as required by law.
The details of the first directors’ interests in other firms or companies must be submitted, along with their written consent to act as directors of the new company in the prescribed format.
7(2).
Once the Registrar receives all these documents and info, they will verify the information and register the company by entering it into the official records.
The Registrar will then issue a Certificate of Incorporation, which officially declares that the company has been formed under the Companies Act.
7(3).
From the date mentioned in the Certificate of Incorporation, the Registrar will assign the company a Corporate Identity Number (CIN).
This CIN is a unique identification number for the company and is included in the certificate itself.
It serves as the company’s legal identity for all official and legal purposes.
7(4).
The company must keep and preserve copies of all the documents and information originally filed for registration at its registered office.
These records must be maintained until the company is dissolved under the Act.
7(5).
If any person files false or incorrect information or hides important facts in any of the documents submitted to the Registrar during the incorporation process, that person can be punished under Section 447 of the Companies Act, which deals with fraud.
7(6).
If, after the company is incorporated, it is discovered that it was set up using false information, fake documents, or fraudulent means, then the promoters, the first directors, and the professionals who signed the declaration will all be liable for punishment under Section 447.
7(7).
In addition to punishing those responsible, if it is proven that a company was incorporated by fraud, false information, or suppression of facts, the Tribunal (NCLT) can take various actions, depending on the situation.
On receiving an application and being satisfied that such fraud occurred, the Tribunal may:
Regulate the company’s management, including making changes in its memorandum or articles if it is in the public interest or in the interest of the company, its members, or creditors.
Make the liability of the members unlimited.
Remove the company’s name from the register of companies (effectively striking it off).
Order the winding up (closure) of the company.
Pass any other order it considers appropriate in the circumstances.
However, before taking any such action, the Tribunal must give the company a fair opportunity to be heard.
It must also consider the transactions and obligations already entered into by the company, such as debts or contracts, before making its final order.
Section 8 - Formation of Companies with Charitable Objects.
8(1).
When the Central Government is satisfied that a person or group of persons wants to register a company under this Act for charitable or non-profit purposes, it may grant them a special licence.
To qualify for this licence, three main conditions must be met:
The company’s objectives must promote commerce, art, science, sports, education, research, social welfare, religion, charity, environmental protection, or any similar useful purpose.
The company must intend to use its profits or income only for promoting these objectives, not for personal gain.
The company must not pay any dividend to its members.
When all these conditions are fulfilled, the Central Government may, by issuing a licence, allow the company to register without using the words Limited or Private Limited in its name.
Once the licence is granted, the Registrar of Companies (ROC) will register it as a company under this special section.
8(2).
A company registered under this section (often called a Section 8 Company) enjoys all the privileges.
It is also subject to all the obligations of a regular limited company.
8(3).
A partnership firm is also allowed to become a member of a company registered under this section.
8(4).
A company registered under this section cannot alter its Memorandum or Articles of Association without prior approval of the Central Government.
If such a company wants to convert itself into another type of company, it can only do so after meeting the prescribed conditions.
8(5).
If an already existing limited company is found to have charitable or non-profit objects and it also satisfies the conditions of using profits only for its objectives and not paying dividends, then the Central Government may allow it to convert into a Section 8 Company.
For this, a licence will be issued, and the company may remove the words “Limited” or “Private Limited” from its name.
After this change, the Registrar will re-register the company as a Section 8 company, and all the provisions of this section will apply to it.
8(6).
The Central Government has the power to revoke (cancel) the licence of a Section 8 company if:
It violates any requirements or conditions of the licence,
Its affairs are conducted fraudulently,
It acts against its stated charitable objects or public interest.
In such cases, the Government may direct the company to change its name to include “Limited” or “Private Limited,” effectively removing its not-for-profit status.
The Registrar will then re-register the company accordingly.
However, before revoking the licence, the company must be given a fair opportunity to present its case.
A copy of the revocation order must also be sent to the Registrar.
8(7).
If a licence is revoked and the Central Government believes that it is necessary in the public interest:
It may order that the company be wound up (closed down) under the Companies Act.
It may also order the company to be merged (amalgamated) with another Section 8 company.
Before taking such action, the company must be given a reasonable opportunity to be heard.
8(8).
If the Government decides that, in the public interest, the company should be amalgamated with another Section 8 company having similar objects, it may issue an order for such an amalgamation.
This can be done even if other provisions of the Act might say otherwise.
The order will define how the two companies will merge, including their assets, powers, rights, liabilities, and duties to create a single new company.
8(9).
When a Section 8 company is wound up or dissolved, and there are assets remaining after paying all debts and liabilities, those assets cannot be distributed among its members. Instead, they must be either:
Transferred to another Section 8 company with similar objects (as directed by the Tribunal)
Sold, and the sale proceeds must be credited to the Insolvency and Bankruptcy Fund under Section 224 of the Insolvency and Bankruptcy Code, 2016.
8(10).
A Section 8 company can only merge (amalgamate) with another Section 8 company that has similar charitable objectives.
It cannot merge with an ordinary profit-making company.
8(11).
If a Section 8 company fails to comply with any of the rules or requirements of this section, it can face heavy penalties:
The company can be fined not less than ₹10 lakh and up to ₹1 crore.
The directors and officers responsible can be fined between ₹25,000 and ₹25 lakh.
If it is proved that the company’s affairs were conducted fraudulently, then those officers can also be punished under Section 447, which deals with fraud and includes imprisonment and heavier fines.
Section 9 - Effect of Registration.
From the date of incorporation mentioned in the Certificate of Incorporation, the company officially comes into existence as a legal entity (a body corporate).
The subscribers to the memorandum, the people who initially signed the company’s founding document along with anyone who later becomes a member (shareholder), are now collectively recognized as a single legal body under the name stated in the memorandum.
Once incorporated, the company is treated as a separate legal person distinct from its members or owners.
It can perform all the functions that a legal entity can do under the Companies Act.
This includes having perpetual succession, which means the company’s existence does not end even if its members or directors change or pass away. The company continues to exist until it is legally dissolved.
The company also has the power to acquire, own, hold, and sell property, whether movable or immovable, and whether tangible (physical) or intangible (non-physical) like patents or trademarks.
It can also enter into contracts in its own name and can sue or be sued in a court of law through that name.
Section 10 - Effect of Memorandum and Articles.
10(1).
Once a company’s Memorandum of Association and Articles of Association are registered with the Registrar of Companies, then:
They become legally binding documents.
They bind both the company and all its members (shareholders) in the same way as if they had each personally signed a contract.
The company and its members are obliged to obey and act according to the rules and duties set out in the memorandum and articles.
These documents form the constitution of the company, defining its powers, objectives, internal management rules, and the relationship between the company and its members.
10(2).
Any money that a member is required to pay to the company under the memorandum or articles (for example, unpaid share money) is considered a debt owed by that member to the company.
The company can legally recover this amount if it remains unpaid.
Section 10A - Commencement of Business.
10A(1).
This provision applies to all companies incorporated after the Companies (Amendment) Act, 2019 that have share capital.
Such a company cannot start its business operations or use its borrowing powers (like taking loans) unless it fulfils two conditions:
(a).
A declaration must be filed by one of the company’s directors with the Registrar of Companies within 180 days (6 months) from the date of incorporation.
The declaration must confirm that every subscriber (founding member) of the company has paid for the shares they agreed to take.
(b).
The company must also verify its registered office by filing the necessary documents with the Registrar.
10A(2).
If the company fails to comply with these requirements, then:
The company itself must pay a penalty of ₹50,000.
Every officer in default (like directors) will be fined ₹1,000 per day until the default continues, but the total fine for each person cannot exceed ₹1,00,000.
10A(3).
If a company fails to file the required declaration within 180 days of incorporation, the Registrar can review its status.
If the Registrar believes the company is not carrying on any business or operations, they may initiate action.
The action involves removing the company’s name from the register of companies (known as striking off).
Once struck off, the company is deregistered and legally ceases to exist.
Section 11 - Omitted
Section 12 - Registered Office of a Company.
12(1).
Every company must have a registered office within 30 days of its incorporation and must maintain it at all times afterwards.
This office should be capable of receiving and acknowledging all official communications and notices sent to the company.
12(2).
The company must submit proof (verification) of its registered office to the Registrar of Companies within 30 days of incorporation.
This verification must be done in the prescribed format and manner (as specified in the company rules).
12(3).
Every company must follow certain display and printing requirements related to its name and registered office.
The company’s name and registered office address must be painted or affixed on the outside of every office or place of business in a clearly visible position and in legible letters.
If the local language is different, the name and address should also be written in that local language.
The company must have its name engraved on its official seal, if it has one.
The company’s name, registered office address, Corporate Identity Number (CIN), telephone number, fax number (if any), email, and website address (if any) must be printed on all official documents like business letters, letterheads, billheads, and notices.
The company’s name must also appear on financial documents such as promissory notes, bills of exchange, hundies, etc.
Special rules:
If the company changed its name within the last two years, it must also display its former name(s) along with the new one.
For a One Person Company (OPC), the words “One Person Company” must be mentioned in brackets below its name wherever it appears.
12(4).
If a company changes the location of its registered office after incorporation, it must notify the Registrar about the new address within 30 days of the change.
The notice must be properly verified and submitted in the prescribed format.
12(5).
A company cannot change its registered office to a new city, town, or village without first passing a special resolution (i.e., approval from shareholders).
For existing companies (formed before this Act): They need a special resolution to move outside their current local limits.
For new companies, the same rule applies, moving to another city or town requires a special resolution.
Additionally, if the company wishes to change its registered office from one Registrar’s jurisdiction to another within the same state, then:
It must obtain approval from the Regional Director.
12(6).
Once the company applies for approval to change its registered office, then:
The Regional Director must give confirmation within 30 days of receiving the application.
The company must then file this confirmation with the Registrar within 60 days.
The Registrar will register and certify the change within 30 days of receiving the confirmation.
12(7).
Once the certificate of registration of the new office is issued, it becomes conclusive proof that all legal requirements have been met, and the change officially takes effect from the date of that certificate.
12(8).
If a company fails to comply with any of these requirements, it and its officers in default will have to pay a penalty of ₹1,000 per day of default, up to a maximum of ₹1,00,000.
12(9).
If the Registrar has reason to believe that the company is not actually carrying on any business, he can conduct a physical verification of the registered office.
If he finds that the office doesn’t exist or doesn’t comply with having a registered office, he may start action to remove the company’s name from the register of companies,
