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B.Com. Part-II B.C. 403 Semester-IV Company Law ________________________________________________________________________ Lesson No. 4 Author- Jasmine Kaur
MEMORANDUM OF ASSOCIATION
4.1 Objectives 4.2 Introduction 4.3 Purpose 4.4 Form of Memorandum 4.4.1Self Check Exercise 1 4.5 Contents of Memorandum 4.5.1 Name Clause 4.5.2 Registered Office Clause 4.5.3 Objects Clause 4.5.4 Liability Clause 4.5.5 Capital Clause 4.5.6 Subscription Clause 4.5.7 Self Check Exercise 2 4.6 Doctrine of ultra vires 4.6.1 Consequences of ultra vires transactions 4.6.2 Self Check Exercise 3 4.7 Summary 4.8 Glossary 4.9 Answers to Self Check Exercises 4.10 Recommended Readings 4.11 Questions for Exercise
4.1 Objectives
- To study the purpose, form and contents of memorandum of association
- To study changes in the contents of memorandum of association
- To study doctrine of ultra vires and consequences of ultra vires transactions
4.2 Introduction According to Section 2(56) of the Companies Act 2013, ‘Memorandum’ means memorandum of association of a company as originally framed or altered from time to time in pursuance of any previous companies law or of this Act. It is an important document which is filed with Registrar of companies when the company is incorporated. It contains five clauses which sets out the constitution on which the structure
of the company is based. At the time of registration of the company, it becomes a public document. According to Palmer, “It is a document of great importance in relation to the proposed company.” According to Lord Macmillan, “It sets out the constitution of the company, it is, so to speak, the charter of the company, and provides foundation on which the structure of company is built. The importance of the memorandum lies in the fact that it defines the scope of companies activities as well as its relation with the outside world. Its purpose is to enable the shareholders, creditors and those who deal with the company to know what is its permitted range of enterprise.”
4.3 Purpose The main purpose of the memorandum is to give information to the intending shareholders that for what purpose company is using it’s capital and the risk involved in the field of investment. The memorandum of association also helps the shareholders, creditors and all other outsiders who deal with the company to have knowledge of the powers of the company and the permitted limits within which company can enter into contract with others. A company cannot act beyond these powers stated in the Memorandum. The Memorandum shall be printed and shall be divided into paragraphs, numbered consecutively and shall be signed by atleast seven persons in case of public company and atleast two persons in case of a private company. In case of minor subscriber, the guardian of the minor should sign and illiterate subscriber should give thumb impression which should be attested by a person. The signatures should be accompanied by the address, description and occupation in the presence of atleast one witness who must attest it.
4.4 Form of Memorandum: The memorandum of association shall be in one of the forms in Tables A, B, C, D, and E in Schedule I to the Indian Companies Act, 2013 as may be applicable to the case of company or in the form as circumstances admit. The prescribed forms are as given below: Table B : Memorandum of association of a guarantee company, not having share capital company. Table C : Memorandum and article of association of a company limited by guarantee and having a share capital. Table D : Memorandum and articles of association of a unlimited company and not having a share capital. Table E : Memorandum and article of association of an unlimited company and having share capital.
members is limited. This word “Limited” ensures all members that their liability is limited. The name of the company including address of the registered office must be painted on the outside of its registered office and outside every place where company carries its business. The company cannot enter into contract without using word ‘Limited’ otherwise the officers of the company shall deemed to be personally liable. However the Central Government can allow any company to drop the word ‘Limited’ from its name. The Department of Company Affairs, vide its Circular dated 7th^ March 1989, has clarified that if a company uses any of the following key words in its name, it must have a minimum authorised capital mentioned against the key words: Key Words: Required Authorised Capital (Rs.)
- Corporation 5crores
- International, Globe, Universal, 1crores Continental, Inter-Continental, Asiatic, Asia, being the first word of the name
- If any of the words at (2) above is 50lakhs used within the name (with or without brackets)
- Hindustan. India, Bharat, being 50lakhs the first word of the name
- If any of the words at (4) above 5lakhs is used within the name (with or without brackets)
- Industries/Udyog 1crore
- Enterprises, Products, Business, 10lakhs Manufacturing
Change of Name Clause : (Sec 16) A company may change its name by following methods:-
- By Special Resolution: Section 16 provides that a company may change its name at any time by passing a special resolution at a general meeting of the company and with the written approval of the Central Government. However, no such approval of the Central Government is necessary if the change of name involves only the addition or deletion of the word “private” consequent on the conversion of a public company into a private company or of a private company into a public company. This change shall be sanctioned by the Registrar in the light of guidelines prescribed by the Central Government in this behalf.
- By Ordinary Resolution - If through inadvertence or otherwise, a company is registered by a name which, in the opinion of the Central Government is identical with or too closely resembles the name if an existing company, the company may change its name by passing an ordinary resolution and by obtaining the approval of the Central Government signified in writing. The rectification of the name must be carried out if the Central Government so
directs within a period of twelve months from the date of registration of the company. In Sidhvi Constructions (India) (P.) Ltd. v. Registrar of companies (1997) 24 CLA 207, it was held that a petition made of the Central Government by the aggrieved company after the lapse of twelve months could not be entertained. Period of 12 months is a statutory limitation to the right of a company to seek change of name of the other company registered with a too similar name. The direction of the Central Government is required to be complied with within a period of three months form the date thereof. Any default in complying with the director of the Central Government renders the company and its officer in default liable for punishment with fine which may extend to Rs.1000 for every day during which the default continues (Sec.16(3)). The Registrar shall enter the new name on the Register in place of the old name and shall issue a fresh certificate of incorporation with necessary alterations.The change of name becomes effective on the issue of fresh certificate of incorporation. The Registrar shall also make the necessary alteration in the memorandum of association of the company. The change shall not affect any rights or obligations of the company or render defective any legal proceedings by or against it. A company changed its name from “Malhati Tea Syndicate Ltd” to “Malhati Tea and Industries Ltd”. The company filed a writ petition in its former name. It was held that the petition was incompetent and the company is not authorized to commence a legal proceeding in its former name after the registration of its new name.
4.5.2 Registered Office Clause (Sec. 12) The company is required to state in its memorandum of association about the name of the state in which registered office of the company is to be situated. The company must have a registered office within thirty days of incorporation and from the day on which it begins to carry on business, whichever is earlier so that all communications may be send to it on its address. If default is made in complying with these regulations, the company and other officers in default shall be punishable with a fine. The registered office clause is an important clause because it establishes the domicile and rationality of a company. The place of the registered office determines the jurisdiction of a court. Secondly, it is a place where various variety of registers and records relating to company must be kept and most of them are open to public inspection. Change of Registered Office Clause : This may include the following :
- Change of registered office within the same city, town or village (Sec.146)- If a company intends to change its registered office from one place to another within the local limits of the city, town or village where it is situated, a resolution of the board of directors shall be passed and a notice of the change is to given to Registrar within 30 days of the change who shall record the same. The notice shall be given in Form No.18. The changes within the same city, town or village does not involve alteration of memorandum.
alteration together with a copy of altered memorandum shall be filed with the registrar within one month from the date of such resolution. Alteration takes effect when it is so registered. A company can its object clause as necessary in following cases: (i) To carry on its business more economically and efficiently - In Re, Scientific Poultry Breeders Association (1933) 3Comp. Cas.89 (CA), a company’s memorandum prohibited payment of remuneration to members of its governing body. It was found that the amendment in the memorandum was required for efficient management of the affairs of the company. It passed a special resolution for payment of remuneration to the members of the governing body. (ii) To attain its main purpose by new or improved means- This clause enable the company to take advantage of the new scientific discoveries. The company is permitted to alter the means of conducting its business to take advantage of new inventions. (iii) To carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company- This clause enables a company to undertake any new business which has no relation with the existing business (iv) To restrict or abandon any of the objects specified in the memorandum- The company may alter the objects clause if it is necessary to restrict or abandon any of the objects specified in the memorandum. (v) To sell or dispose the whole or any part of the undertaking- Where a company feels that it has either grown so big or diversified in various direction as a result management of the company has become difficult or uneconomical, it may alter its objects to sell or dispose of any of its undertakings. The decision of Hindustan Lever to divest itself of oil unit and its consequent sale to Lipton India (now BBL) is an example. (vi) To amalgamate with any other company or body of persons- The company may bring a change in its objects clause of the memorandum if it wishes to amalgamate with any other company.
4.5.4 Liability Clause The fourth clause states the nature of the liability of the members of the company. This clause should be omitted in case of an unlimited company. In case of the company whose liability of members is limited by shares or by guarantee, the memorandum must contain a clause stating that the liability of its members is limited. Hence the members are liable to pay the unpaid amount on the shares held by them or up to the maximum of the amount which they have guaranteed. The exception to this rule is contained in section 45 which states that if a public company carries out its business activities for more than six months with members less than seven and a private company carries out its business activities with less than two members, and each member is aware of this fact, is liable for
all the debts contracted by the company after the period of six months has elapsed (Section 45). Change of Liability Clause - The liability of a members or any class of members of a company cannot be altered unless the members agree to do so in writing before or after alteration. The increase in liability may be by way of subscribing for more shares or to pay more than the number held by him at the date on which the alteration is made or in any other manner. In case the company is a club or any other similar association, can alter its memorandum or articles even if the alteration requires the member to pay recurring or periodical subscription or charges at a high rate without the written consent of the members.
4.5.5 Capital Clause The capital clause in the memorandum of association of a company limited by shares must state the amount of the share capital with which proposed company is to be registered and the value of shares into which it is divided. The usual way to state the capital in the memorandum is : ‘The capital of the company is Rs.10,00,000 divided into 1,00,000 equity shares of Rs.10 each.” This amount lays down the upper limit beyond which the company can not issue shares unless it alters the memorandum of association. Change of Capital Clause - A limited company having a share capital may alter its capital clause subject to the provisions of its articles by an ordinary resolution passed in general meeting. The confirmation of the NCLT is not required if alteration is made for following purposes: (i) To increase its authorised share capital (ii) To consolidate and divide its capital into shares of larger amount (iii) To convert its fully paid shares into stock and reconvert that stock into fully paid up shares of any denomination (iv) To sub-divide its shares into shares of smaller amount (vi) To cancel its shares. However the alteration by way of reduction of share capital can be made only by passing the special resolution and by obtaining the confirmation from the court 4.5.6 Subscription Clause - This clause provides that every person who have agreed to subscribe to the memorandum must signify his willingness to associate and form a company. The association or subscription clause generally runs in following form : “We the several persons whose names and addresses and occupations are subscribed , are desirous of being formed into a company in pursuance of this memorandum of association and we respectively agree to take the number of shares in the capital of the company set opposite our respective names.” The statutory requirements and outcome regarding subscription of memorandum are as follows: (a) The memorandum must be signed by each subscriber in the presence of atleast one witness who must attest the signature;
company was afterwards wound up. The court took decision that the liquidator could compel the directors to repay the money to the company (Sharpe Re (1892) Ch .154) 3) Breach of warranty of authority - The directors being the agents of the company must act within the limits of the company’s powers. They will be personally liable to the third party for breach of warranty of authority if they induce a third party to enter into a transaction which is beyond the power of the company. Example : The directors of railway company had exhausted its borrowing powers. They advertised proposal for a loan of debentures lent $500 and received debentures. It was held that loan was void and the directors were personally liable for the breach of warranty. (Weeks v. Propert. (1873) 8C.P.427). The directors may also be held criminally liable in case of deliberate misrepresentation. Similarly the sale of the property of the company at half of its price to shareholder was held to be ultra vires and beyond ratification.(Availing Barford Ltd. v. Perion Ltd.BCLC 626 Ch.D) 4)Ultra vires contracts - A ultra vires contracts by a company are void ab initio. An ultra vires contract cannot be ratified as no company can validate the past ultra vires acts done by altering its objects clause. In the case of Port Canning and Land Investment Company Ltd.(1871) 7 Bengal L.R., company operated a rice mill which was beyond its power. The company sold rice to certain persons who had paid the price. The buyers had to sell the rice at considerable loss due to its inferior quantity. The directors promised to indemnify the buyers. It was held the buyers could not sue the company for damages as trading in rice was a transaction ultra vires the company. 5) Ultra vires acquired property- In case company has acquired a property under ultra vires transaction then also the company’s right over such property shall remained secured. The property is legally transferred to the company even though the company was not empowered to acquire such property. Example: A company was allowed by the court to sue on a mortgage to recover the money lent, in spite of the fact that the transaction was beyond the powers of the company. (Ad Sait v. Bank of Mysore, (1930) 59 MLJR 28)
6) Ultra vires torts- A civil wrong is called tort in the eyes of law. The company is liable for a tort if the activity falls within the scope of memorandum and the agent or servant committed the tort within the scope of his employment. There is no certainty as to the extent to which a company may be held liable for damages resulting from its ultra vires act. 4.6.2 Self Check Exercise 3 What is Doctrine of Ultra Vires. Discuss the consequences of ultra vires transactions. 4.7 Summary Memorandum of Association is an important document which is filed with Registrar of companies when the company is incorporated. The main purpose of the memorandum is to
give information to the intending shareholders that for what purpose company is using it’s capital and the risk involved in the field of investment. It shall be in one of the forms in Tables B, C, D, and E in Schedule I to the Indian Companies Act, 2013 as may be applicable to the case of company or in the form as circumstances admit. The memorandum of every company shall contain name clause, registered office clause, objects clause, liability clause, capital clause and subscription clause. 4.8 Glossary Register- Record Consequence- Result Ultravires- Beyond the powers of the company 4.9 Answers to Self Check Exercise: Exercise 1 Q1. Refer Para 4. Exercise 2 Q2. Refer Para 4. Exercise 3 Q3. Refer Para 4.6 and 4.6. 4.10 Recommended Readings: Company law: Avtar Singh (Eastern Book Company) Elements of company law: N.D. Kapoor (Sultan Chand & Sons) 4.11 Questions for Exercise: Q1. How a company can alter its name? (Refer Para 4.5.1) Q2. Explain the doctrine of ultra vires? (Refer Para 4.6)
association as a document regulating the rights of the members of the company among themselves and the manner in which the business of the company shall be conducted.
5.3 Model Form of Articles- Schedule I to the Act gives various model forms of memorandum and articles of association of various types of companies. The schedule is divided into tables and each table serves as a model for companies. Table ‘G’ contains a model form of articles of association of a company limited by guarantee shaving share capital. Table ‘H’ contains model form of memorandum of association and articles of association of a company limited by guarantee and not having a share capital. Table ‘I’ contains model form of memorandum and articles of association of a company unlimited and having a share capital. Table ‘J’ contains the model form of memorandum and articles of association of an unlimited company without share capital.
5.4 Companies which must have their own articles The under mentioned companies must have their own articles: a) Unlimited companies. b) Companies limited by guarantee. c) Private companies limited by shares. The articles of association must be signed by the subscribes of the memorandum and shall be registered along with memorandum. Regulations required to be stated in case of above written companies are:
- In case of unlimited company, the articles shall state the numbers of the members with which the company is to be registered.
- In case of company limited by guarantee, the article shall state the number of members with which the company is to be registered.
- In case of private company, the article shall contain provisions which restrict the right to transfer shares, limit the number of its members to 200 excluding past and present employees of the company, prohibits any invitation to the public to subscribe for any shares or debentures of the company and prohibits invitation or acceptance of deposits from a person other than its members, directors or their relatives.
5.5 Adoption and application of Table F The public company limited by shares may either frame its own set of articles or may adopt all or any of the regulations contained in table F of schedule. The articles of company limited by guarantee or an unlimited company shall be in one of the forms in Tables G, H, I and J in schedule I to the Act.
5.6 Printing and signature of articles The article shall be printed, divided into paragraphs, numbered consecutively and signed by the subscriber of the memorandum of association. Therefore all the provisions and conditions which apply to memorandum as regards printing and signing shall also apply in case of articles of association of the company. 5.7 Contents of articles of association Article of association prescribes rules and regulations for the internal management of the company. But they must be consistent with the provisions of the Act or Memorandum of Association. The articles of association generally contain following matters:
- Share capital, right of shareholders, variation of these rights, payments of commission, share certificates.
- Lien on shares.
- Conversion of shares into stock.
- Allotment of shares.
- Issue of share certificates and warrants.
- Calls on shares.
- Transfer and transmission of shares.
- Forfeiture of shares.
- Alteration of share capital.
- General Meetings.
- Appointment and remuneration of managerial personnel.
- Dividends, reserves and capitalization of profits.
- Accounts and audit.
- Common seal of the company.
- Voting rights and proxies.
- Winding up of the company.
- Adoption or execution of preliminary thereof.
- Payment of interest out of capital.
- Arbitration provisions. 5.8 Self Check Exercise 1 Q.1. Write contents of articles of association.
5.9 Alteration of Articles of Association (Sec 14) Every company has given statutory power under Section 14 to alter its articles of association by a special resolution. The altered article will be binding on the members of the company in the same way as did the original articles and no member can object the alteration. Any clause which restricts or prohibits company to alter to articles is invalid on the ground that it is contrary to the Companies Act.
5) Alteration by special resolution only- The rectification of all kinds of mistake in the articles can be made by a special resolution only. Even clerical errors in the articles should be corrected by a special resolution (Scott v. Frank F Scott (London) Lt.(1940)3, AI ER 508) 6) Must not cause a breach of contract- Alteration of the article must not result into breach of a contract with the third party. The affected party can file a suit for damages for the breach of contract if alteration in articles may cause a breach of contract. Example: The secretary of the company was appointed on a salary of Rs. 25,000 per month. Later on the company altered the articles reducing the salary to Rs. 20,000 per month. The company secretary could not succeed in an action against the company as any one dealing with the company must take the risk of the alteration in the articles. It was held that alteration was valid (Chedambaram Chettiar v. Krishna Iynger, I.L.R. 33 Mad. 36) 7) Approval of Central Government for conversion of a public company into a private company - The alteration in articles to convert a public company into private company can be made possible only with the approval by the Central Government. However, such conversion should be in the best interests of the company and the majority of the shareholders should agree to the proposed conversion. The printed copy of above altered article shall be filed by the company with the registrar within one month of the date of receipt of order of the approval. 8) Must not result in expulsion of member- The alteration made in articles to expel a member is illegal and void. Such provision which confers on the Board of Directors the power to expel member is ultra vires the company. 9) Alteration may be with retrospective effect- The articles may be altered with retrospective effect but the alteration should not increase the liability of the members. Example: The insertion of a lien clause so as to give the company a lien on shares of members for debts incurred both before and after the insertion of the clause ( Allen v. Gold keefs of West Africa (1900) J Ch 656 ) 5.12 Self Check Exercise 2 Q1. Discuss alteration of article of association.
5.13 Constructive notice of Memorandum and Articles of Association The term ‘Constructive notice’ means that there is a presumption of notice. The memorandum and article of association become public document after registration. So every outsider dealing with the company is presumed to have read the documents. Example: The articles of a company required that all deeds and documents of the company should be signed by the managing director, the secretary and a working director on behalf of the company. The deed of mortgage was signed by the secretary and the working director only. It was held that the mortgage could not be enforced as
the illegality appeared on the face of deed and the deed was not valid. The court applied the doctrine of constructive notice in favour of the company (Kotla Venktaswamy v. C.Ramamurthy AIR (1934) Mad. 579)
5.14 Doctrine of Indoor Management: The doctrine of indoor management presumes that a person dealing with the company can not have any knowledge about the internal proceedings of the company. The doctrine of indoor management protects the outsiders dealing with the company. Therefore doctrine of indoor management is reverse of doctrine of constructive notice as in case of former, outsider is protected against the company whereas in the latter, company is protected against the outsiders. The doctrine is also known as Turquand Rule and was enunciated in the leading case of Royal British Bank v. Turquand (1856): A company issued a bond to T. They had powers under the articles to issue such bond if authorized by a resolution passed by the shareholders at general meeting of the company. But no such resolution was passed by the company. It was held that T could recover the amount of the bond from the company on the ground that he was entitled to assume that the resolution have been passed.
5.15 Exceptions to the Doctrine of Indoor Management The doctrine of indoor management has its own exception as stated under: 1) Knowledge of irregularity- The person dealing with company cannot claim the benefit of the rule of indoor management where he has actual or constructive notice of the irregularity regarding internal management of the company. Example: According to a provision in the articles the directors were empowered to borrow any amount up to Rs.10,000 without passing any resolution in the general meeting. The directors themselves lent to the company an amount in excess of Rs. 10,000 without passing any resolution in general meeting. It was held that the directors had knowledge of the internal irregularity and the company was liable to the extent of Rs.10,000 only (Howard v. Patent Ivory Manufacturing Co. (1888) Ch.D.156)
2)Negligence – A person cannot claim the benefit of the rule of indoor management in circumstances under which he would have discovered the irregularity if he had made proper inquiries. Not making of inquiry by him may be considered as negligence on his part. In such case he can not take shelter of this doctrine. Example: The accountant of a company agreed to transfer some property of the company to Y. It was held that transfer was beyond the scope of accountant’s authority as a result the transfer was void and was beyond the powers of attorney authorising accountant to transfer company’s property (Anand Bihari v. Dinshaw and Co., A.I.R (1942) Oudh 417).
5.19 Recommended Readings: Company law and auditing :Niti Soni, R.S.Sandhu, Vandana Gautam (Sharma Pub.) Company law: Avtar Singh (Eastern Book Company) Company law :K.C.Garg, Vijay Gupta, Poonam Gupta, R.C. Chawla (Kalyani Pub.) Elements of company law: N.D. Kapoor (Sultan Chand & Sons) 5.20 Questions for Exercise: Q1. Discuss Constructive Notice of Memorandum and Articles of Association. ( Refer Para 5.13 ) Q2. Discuss the Doctrine of Indoor Management and its exceptions. ( Refer Para 5.14)
