Page 214 - DMGT407Corporate and Business Laws

Unit 8: Formation of a Company

whole-time practice in the prescribed form (Form No. 19) that clauses (a), (b) and (c) Notes
(mentioned above) have been complied with.
Where the company has not issued a prospectus. If a public company having a share capital has
not issued a prospectus, s.149 (2) requires that it shall not commence business or exercise its
borrowing powers unless:

(a) It has filed with the registrar a statement in lieu of prospectus;
(b) Every director of the company has paid to the company on each of the shares taken or
contracted to be taken by him and for which he is liable to pay in cash, the same proportion
as is payable on application and allotment on the shares payable in cash;
(c) There has been filed with the registrar duly verified declaration 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 clause (b), as stated above, has been complied
with.
When the company has complied with these conditions, the registrar will issue a certificate to
commence business.

Did u know? Penalty provisions related to certificate to commence business
Penalty: If any public company having a share capital commences business or exercises
borrowing power without obtaining the certificate to commence business, then every
person at fault is liable to a fine up to ` 5000 for every day of default.
The certificate to commence business entitles the company to commence business given in the
main objects clause of the memorandum. No business given in the ‘other objects’ clause can be
commenced without obtaining prior approval of the shareholders by special resolution.
However, the Central Government may, on an application made by the board of directors allow
a company to commence business in the ‘other objects’ clause, even if only ordinary resolution
is passed by the company in general meeting.

Task A company was incorporated on 6 October, 2005. The certificate of incorporation of
the company was issued by the registrar on 15 October, 2005. The company, on 10 October,
2005 entered into a contract which created its contractual liability. The company denies the
said liability on the ground that it is not bound by the contract entered into prior to issue
of certificate of incorporation. Decide, under the provisions of the Companies Act, 1956,
whether the company can be exempted from the said contractual liability?

Self Assessment

Fill in the blanks:
12. Section ………….. exempts a private company from obtaining a certificate to commence
business.
13. In the case of public company having a share capital, it is absolutely necessary to obtain a
……………………………………

14. The certificate to commence business can be obtained only after ……………….. of the
company.

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