Page 143 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Corporate Legal Framework

Notes Introduction

In earlier unit you have studied about partnership and different types of company. A corporation
is basically a group of people who have filed for a special status with their state’s corporation

commission. A partnership is a group of people who merely decide to go into business together.
Their liability is based on their investment many times. The Companies Act, 1956 defi nes the
word ‘company’ as a company formed and registered under the Act or an existing company
formed and registered under any of the previous company law. In this unit we will study the
formation of company and the process of formation of company. The whole process of formation
of a company may be roughly divided, for convenience, into three parts. These are: (i) Promotion;
(ii) Registration and (iii) Floatation.

8.1 Formation of a Company

The whole process of formation of a company may be roughly divided, for convenience, into
three parts. These are: (i) Promotion; (ii) Registration and (iii) Floatation.

8.1.1 Promotion

Promotion is a term of wide import denoting the preliminary steps taken for the purpose of
registration and fl oatation of the company. The persons who assume the task of promotion are
called promoters. The promoter may be an individual, syndicate, association, partnership or
company.

Who is a Promoter?

This term has not been defined under the Act, although the term is used expressly in Ss. 62, 69,
76, 478 and 519.
Perhaps, the true test of whether a person is a promoter is whether he has a desire that the
company be formed and is prepared to take some steps, which may or may not involve other
persons, to implement it. However, persons assisting the promoters by acting in a professional
capacity do not thereby become promoters themselves. The solicitor who drafts the Articles, or
the accountant who values assets of a business to be purchased, are merely giving professional
assistance to the promoters. If, however, he goes further than this, e.g., by introducing his client
to a person who may be interested in purchasing shares in the proposed company, he would be
regarded as promoter.

Duties and Liabilities of Promoters

Promoters have been described to be in fiduciary relationship (relationship of trust and confi dence)

with the company. This relationship of trust and confidence requires the promoter to make a full
disclosure of all material facts relating to the formation of the company. He should not make any
secret profit at the expense of the company he promotes, without the knowledge and consent of

the company and if he does so, the company can compel him to account for it.

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