Unit-3: Company law [MoA, AoA & Prospectus] -Radhika Gohel Shri J.H. Bhalodiya Women‟s College
Memorandum of Association Introduction Memorandum of association is one of the documents which has to filed with the registrar of companies at the time of incorporation of a company. Section 2(28)defines a memorandum to mean “the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this act.” The memorandum of association is an extremely important document in relation to the affairs of the company. It contains the fundamental conditions upon which alone the company is allowed to be incorporated. The purpose of the memorandum is to enable shareholders, creditors and those who deal with the company to know what is the permitted range of the enterprise. It defines as well as confines the powers of the company; it not only shows the object of its formation, but also the utmost possible scope of its operation beyond which its action cannot go. Lord Cairns in Ashbury Railway Carriage Co. V. Riche pointed out, “The memorandum is as it were, the area beyond which the action of the company cannot go; inside that area the shareholders may make such regulations for their own government as they think fit.”
Purpose of memorandum: The purpose of the memorandum is two fold. 1. To let the share holder who contemplates the investment of his capital know within what field it is to be put at risk. 2. Anyone who will deal with the company will know without reasonable doubt whether the contractual relation into which he decides entering with the company is one relating to a matter within its corporate objects.
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At least seven persons in the case of public company and at least two in the case of a private company must subscribe to the memorandum. The memorandum shall be printed, divided into consecutively numbered paragraphs, and shall be signed by each subscriber, with his address, description and occupation added, the presence of at least one witness who will attest the same.
Contents of Memorandum: According to section 13, the memorandum of association of every company must contain the following clauses: 1. The name of the company with „limited‟ as the last word of the name in the case of a public limited company and with „private limited‟ as the last word in the case of a private limited company. 2. The state in which the registered office of the company is to be situated. 3. The objects of the company to be classified as: a. The main objects of the company to be pursued by the company on its incorporation and objects incidental to the attainments of the main objects, and b. Other objects not included above 4. In the case of companies with object not confined to one state, the states to whose territories the objects extend. 5. The liability of members is limited if the company is limited by shares or by guarantee. 6. In the case of a company having a share capital, the amount of share capital with which the company proposes to be registered and its division into shares of a fixed amount. An unlimited company need not include items 5 and 6 in its memorandum. Every subscriber to the memorandum shall take at least one share and shall write opposite to his name the number of shares taken by him.
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Different clauses: A brief discussion of the various clauses are as follows:
1. Name clause: A company may be registered with any name it likes. But no company shall be registered by a name which in the opinion of the central government is undesirable and in particular which is identical or which too nearly resembles the name of an existing company. Where a company is registered by a name so similar to that of another company, that the public are likely to be deceived, the court will grant an injunction restraining it from using that name. Every public company must write the word „limited‟ after its name and every private limited company must write the word „private limited‟ after its name. The use of the word „company‟ is however, not compulsory. Companies, whose liabilities are not limited, are prohibited from using the word „limited‟. A company cannot adopt a name which violates the provisions of the emblems and names act 1950. This act prohibits the use of the name and emblems of the united nation, and the world health organization, the official seal and emblem of the central and the state governments, the Indian National Flag, the name and pictorial representation of Mahatma Gandhi and the prime minister of India. Every company is required to publish its name outside its registered office, and outside every place where it carries on business, to have its name engraved on its seal and to have its name on all business letters, bill heads, notices and other official publications of the company.
2. Registered office clause: [DOMICLE CLAUSE] This clause states the name of the state where the registered office of the company is to situate. The registered office clause is important for two reasons. Firstly, it ascertains the domicile and nationality of a company. This domicile clings to it throughout its existence. Secondly, it is the place where various registers relating to the company must be kept and to which all communications and notices must be sent. A company need not carry on its business at its registered office. A company shall have its registered office. Such office must be in existence from the date on which the company begins to carry on business or within 30 days after incorporation, whichever is earlier. Notice of situation of the registered office and every change therein must be given
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within 30 days from the date of incorporation of the company of after the date of change, as the case may be.
3. Objects clause: The objects clause is the most important clause in the memorandum of association of a company. It is not merely a record of what is contemplated by the subscribers, but it serves a two-told purpose: (a) It gives an idea to the prospective shareholders the purposes for which their money will be utilized. (b) It enables the persons dealing with the company to ascertain its powers. The objects clause must state separately: (a) Main objects. This sub-clause has to state the main objects to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of the main objects. (b) Other objects. This sub-clause shall state other objects which are not included in the above clause.
4. Liability clause: This clause states that the liability of the members of the company is limited. In the company is limited. In the case of a company limited by shares, the member is liable only to the amount unpaid on the shares taken by him. In the case of a company limited by guarantee the members are liable to the amount undertaken to be contributed by them to the assets of the company in the event of its being wound up. However, this clause is omitted from the memorandum of association of unlimited companies. If a company carries on business for more than six months, while the number of members is less than 7, in the case of public company and less than 2 in case of a private company each member aware of this fact, is liable for all the debts contracted by the company after the period of six months has elapsed.
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5. Capital clause: The capital clause in the memorandum of a co., having a share capital, states the amount of capital with which it is registered, divided into shares of a certain amount. This capital called the “registered” , “nominal” , or “authorized” capital. The effect of this clause is that the co. cannot issue more shares than the authorized for the memorandum for the time being. A public co. can issue only kinds of shares – preference and equity and the shares must not give disproportionate voting rights. A pvt. Co. may however, issue any kinds of share & with disproportional voting rights.
6. Association or subscription clause: This clause provides that those who have agreed to subscribe to the memorandum must signify their willingness to associate and form a company. According to section 12 of the act, at least two persons in the case of a private company. The memorandum has to be signed by each subscriber in the presence of at least one witness who must attest the signatures. Each subscriber must write opposite his name the number of shares he shall take. No subscriber of the memorandum shall take less than one share. This clause need not be numbered.
Alteration of memorandum of association: For the purpose of alteration, the provisions contained in the memorandum are classified into two heads. i. Condition Conditions are those provisions which are compulsory clauses, namely, the name, the registered office, objects, limited liability & share capital. ii.
Other provisions The other provisions, such as the terms of appointment of MD of manager contained in the MOA can be altered by a special resolution with the approval of the Central Govt., or a clause in the memorandum fixing limit of dividends to be paid on a particular class of shares can be altered by a sp. Resolution.
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Alteration Conditions: 1. Change of name: The name of the co. can be changed any time by a sp. Resolution and with the written approval of the central government. If the change merely involves the addition or deletion of the word “PRIVATE” on the conversion of a public co.
into pvt. Co. or vice versa, no approval of the central govt. is necessary. The change must be communicated to the registrar by filing a printed or type written copy of sp. Resolution within 30 days of the passing thereof. The registrar will then issue a fresh certificate of incorporation, and the change of name will be effective only there after. The changed name should be noted in each copy of the memorandum and articles. The change of name will not affect any rights and obligations of the company, or legal proceedings commenced under the old name.
2. Change in registered office: (a) Change within the local limits of same town -Simply by a Board resolution and then giving a notice of the change to the Registrar in e-Form No. 18 within 30 days of such change. There is no need to alter memorandum. (b) Change from one city to another within the same State -By passing a special resolution in the general meeting of the company and filing e-Form 23 with a copy of the resolution to ROC within 30 days – Also a notice to ROC of the new location of the office in e-Form No. 18 – No need to alter memorandum.
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(c) Change within the same State from the jurisdiction of one Registrar of Companies to the jurisdiction of another Registrar of Companies -As per Section 17A confirmation by the Regional Director is necessary - The company is required to make an application in e-Form No. 1AD to RD. – RD to pass order within 4 weeks and the company to file the copy of the order with ROC within 2 months from date of confirmation by RD (d) Change of Registered office from one State to another -As per Section 17, the company to pass a special resolution and it must be confirmed by the Company Law Board/Central Government -According to Section 17(1), such change is possible only for certain reasons like: (a) to carry on its business more economically and more efficiently; (b) to attain its main objects by new or improved means; (c) to enlarge or change the local area of its operations; (d) to sell or dispose of the whole, or any part of the undertaking, or of the undertakings, of the company; (e) amalgamate with any other company or body of persons etc -Before confirming the alteration, the Company Law Board/Central Government must be satisfied that proper notice has been given to every debenture holder or creditor, his objections are considered and either he is satisfied or is paid off – CLB/CG shall arrange to serve notice to ROC for his objections also, if any. – Notice may also be served on the State Government concerned for its objections or suggestions.
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3. Alteration Of Objects Clause Of The Company -By passing a special resolution for the reasons specified under Section 17(1) (Refer the grounds for shifting from one state to another) REGISTRATION OF ALTERATION -No alteration regarding shifting of registered office to another state or regarding objects clause) shall have effect until it is registered with the concerned ROC in accordance with the provisions of Section 18 If the relevant documents are not filed with ROC within the time allowed under Section 18, the alteration and the order of Central Government made shall become void though CLB/CG, may on sufficient cause shown, revive the order on application made within a further period of one month. -The certificate shall be conclusive evidence -As per Section 17(4) CLB/CG can extend the time for registration beyond three months by such period as it thinks proper – Under 637B(b), CG has powers to condone delay in filing any document with ROC but not the delay in filing order of CLB/CG with ROC
4. Alteration Of Liability Clause -Ordinarily, the limited liability clause of a company cannot be altered so as to make the liability unlimited, unless permitted by the articles and consented by the person like manager or director concerned who is likely to be affected by the same -Section 32 permits an unlimited company to register as a limited company but it shall not affect any debts or liabilities incurred before the conversion. -The whole procedure for forming a new company will have to be followed in respect of the above sections.
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5. Alteration Of Capital Clause (a) A company can make the certain alterations by an ordinary resolution, if authorised by its articles to do so (Section 94): -increase its share capital or consolidate existing shares or subdividing existing shares or converting fully paid shares into stock and vice versa or cancelling unissued shares. -The above alterations do not need the confirmation of CLB but notice of the resolution to be filed with ROC within 30 days (b) Increase in Share Capital is possible if permitted by AOA and by passing an ordinary resolution – Notice of resolution to be filed with ROC within 30 – This procedure is not necessary if it is ordered by CG to convert any debentures into shares or where any PFI converts any debentures issued by company based on options attached (c) Reduction of capital: Share capital of a company can be reduced by extinguishing liability on share capital not paid up or by writing off lost capital etc -A company can reduce its share capital by any of the above mentioned methods, only if permitted by AOA and by passing a special resolution and also after obtaining confirmation by Court (to safeguard the interest of creditors) -However, the above mentioned procedure is not necessary if redeemable preference shares are redeemed or when shares are forfeited for non payment of calls.
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Articles Of Association NATURE OF ARTICLES -As per Section 2(2), „articles‟ means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act. It also includes the regulations contained in Table A in Schedule I of the Act, in so far as they apply to the company.
-The articles of association of a company are its bye-law or rules and regulations that govern the management of its internal affairs and the conduct of its business. They are subordinate to and are controlled by the memorandum of association.
-The memorandum lays down the scope and powers of the company, and the articles govern the ways in which the objects of the company are to be carried out.
-The following companies must have their own articles viz. unlimited companies, companies limited by guarantee and private companies limited by shares under the Companies Act.
REGISTRATION OF ARTICLES -According to Section 26, a public company limited by shares – may at its option register its articles of association or alternatively it may adopt all or any of the regulations contained in Table A of First Schedule of the Act. If articles are not registered, automatically Table A applies.
-The articles of a private company must contain the four restrictions as contained in Section 3(1)(iii).
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-The articles of association of an unlimited company should state the number of members with which the company is to be registered and if the company has a share capital, the amount of share capital with which it is to be registered.
-A company limited by guarantee or a private company limited by shares or an unlimited company must register their articles.
STATUTORY REQUIREMENTS
-As per Section 30, articles must be printed, divided into paragraphs, numbered consecutively, stamped adequately, signed by each subscriber to the memorandum and duly witnessed and filed along with the memorandum.
CONTENTS OF ARTICLES -It generally contains matters like number and value of shares, allotment of shares, calls, lien, transfer and transmission of shares, alteration of capital, voting rights, meetings, directors, seal, borrowing powers, dividends, accounts, audit, winding up etc.
-Articles cannot contain any provision for expulsion of a member though Stock Exchanges incorporated under the Companies Act may have such provisions.
ALTERATION OF ARTICLES OF ASSOCIATION -A company has a statutory right to alter its articles of association subject to the provisions of MOA and the Act.
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-Company to pass a special resolution and if it is to convert a public company into private company, then it should also be approved by Central Govt.
-The right to alter the article is subject to certain conditions like; it should not exceed the powers given in MOA and the Act, it should not lead to illegality, it should not liberalise the provisions of MOA or the Act, it should not constitute a fraud on minority, it should not relieve the company from any existing liability and it cannot have retrospective effect.
Effect of Altered Articles -Alteration binds members in the same way as original articles.
DISTINCTION
BETWEEN
MEMORANDUM
AND
ARTICLES 1. MOA defines the basic objects for which the company is granted incorporation. Articles of association are the rules and regulations framed to govern this internal management of the company.
2. Clauses of the memorandum cannot be easily altered and in some cases, it requires the approval of CLB/CG. In the case of articles of association, members have a right to alter the articles by a special resolution.
3. Memorandum of association is not subordinate to AOA while AOA is subordinate to both Companies Act and the memorandum of association.
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4. The memorandum generally defines the relation between the company and the outsiders, while the articles regulate the relationship between thecompany and its members and between the members inter se.
5. Acts done by a company beyond the scope of the memorandum are absolutely void and ultra vires and cannot be ratified even by unanimous vote of all the shareholders. But the acts of the directors beyond the articles can be ratified by the shareholders.
LEGAL EFFECT OF THE MEMORANDUM AND ARTICLES -The memorandum and articles, when registered, bind the company and its members to the same extent as if they have been signed by the company and by each member -Therefore, each member is bound to the Company and vice versa on the basis of the conditions of MOA – However a member is not bound to another member directly on the basis of MOA – Similarly the company is not bound to outsiders (non-members) even if their names are mentioned in MOA – If directors contravene any provisions of AOA, if it is not ratified by members, the directors are liable to members
DOCTRINE OF ULTRA VIRES “Ultra” means “beyond”, & “vires” means “powers”. MoA of a Co. defines the powers of the co. Any act done contrary to or in excess of the scope of the activity as laid down by its MoA is ultra vires the company, i.e beyond the legal powers and authority of the co. & will be wholly void & not binding on the co. In the case of a company whatever is not stated in the memorandum as the objects or powers is prohibited by the doctrine of ultra vires (ultra means beyond and vires means powers) As a result, an act which is ultra vires the company is void, and does not bind the company.
Neither the company nor the other contracting party can sue on it. The company cannot make it valid, even if every member assents to it. 13
-If the act is ultra vires the directors only, it can be ratified by the company -The rule is meant to protect shareholders and the creditors of the company. -A shareholder can get back his money under ultra vires allotment of shares -Where money is borrowed intra vires but is afterwards misapplied by a director, the lender‟s right to recover from the company is not affected -If a third party has knowledge of ultra vires nature of the transaction, he cannot enforce such a transaction .
DOCTRINE OF CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES -The memorandum and articles, when registered, become public documents and can be inspected by anyone on payment of nominal fee. Therefore, every person who contemplates entering into a contract with a company has the means of ascertaining and is consequently presumed to know, the exact powers of the company and how they are delegated to the directors. Every person dealing with the company is thus deemed to have a “constructive notice” of the contents of its memorandum and articles.
-The doctrine of indoor management was propounded in ROYAL BRITISH BANK V TURQUAND. It means the outsiders can presume that all legal formalities as provided in the AOA have been complied with by the company in its internal management.
-Thus, under the Doctrine of Constructive Notice, the outsiders are not protected while they are protected under the Doctrine of Indoor Management.
-According to Section 290, all acts done by a director shall be valid if his appointment is valid; this protects the outsiders who deal with the company.
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DOCTRINE OF INDOOR MANAGEMENT Memorandum of Association and articles of association are two most important documents needed for the incorporation of a company. The memorandum of a company is the constitution of that company. It sets out the (a) object clause, (b) name clause, (c) registered office clause, (d) liability clause and (e) capital clause; whereas the articles of association enumerate the internal rules of the company under which it will be governed.
The doctrine of indoor management is an exception to the rule of constructive notice. It imposes an important limitation on the doctrine of constructive notice. According to this doctrine "persons dealing with the company are entitled to presume that internal requirements prescribed in memorandum and articles have been properly observed". A transaction has two aspects, namely, substantive and procedural. An outsider dealing with the company can only find out the substantive aspect by reading the memorandum and articles.
The doctrine of indoor management is also known as the TURQUAND rule after Royal British Bank v. Turquand. In this case, the directors of a company had issued a bond to Turquand. They had the power under the articles to issue such bond provided they were authorized by a resolution passed by the shareholders at a general meeting of the company. But no such resolution was passed by the company. It was held that Turquand could recover the amount of the bond from the company on the ground that he was entitled to assume that the resolution was passed.
EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT 1. Where the outsider had knowledge of irregularity 2. No knowledge of memorandum and articles 3. Transactions involving Forgery 4. Negligence of the outsider
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