Memorandom.pptx

1. Part V The Companies Act, 2013
Chapter 18
Memorandum & Articles of Association
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Memorandum of Association
The Memorandum of Association or say just ‘Memorandum’ is
the most important document to be filed by any proposed
company.
It sets out the constitution of the company and specifies
its relationship with the outside world.
It also states the authorized share capital of the
proposed company and the names of its first/permanent
directors.
Contd.
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Substance of the Memorandum
The substance of the Memorandum can be explained as follows:
It defines the scope and limitations of the projected company.
It is considered as an unalterable charter of the company. It is hard to
change or amend the Memorandum of the company because it defines certain
powers, the company cannot go beyond.
It assumes the character of a public document as soon as the company gets
registered.
Memorandum forms the outer framework within which the company
operates
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Memorandum of Association: Contents
The Memorandum of a limited company can be divided into six distinct
clauses:
1. Name Clause
2. Registered office (Domicile) Clause
3. Objects Clause
4. Liability Clause
5. Capital Clause
6. Subscription Clause
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Name Clause
 The name clause contains the name of the company.
 It is of considerable importance as it establishes a company’s identity.
 A public company limited by shares or by guarantee must end with the
word 'Limited' and a private limited company must end with the words 'Private
Limited'.
 The company cannot have a name, which in the opinion of the Central
Government is undesirable.
 A name which is identical with or nearly resembles the name of another
company in existence will not be allowed.
 A company cannot also use a name which is prohibited under the Names
and Emblems (Prevention of Misuse) Act, 1950 or use a name reflective of
connection to government or state patronage.
 A company can , however, change its name by a special resolution.
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Registered Office/Domicile Clause
 The state in which the registered office of a company will be situated is
mentioned in this clause.
 Registered office of the company is the official address of the company
where the statutory books & records must normally be kept.
The notice of exact location in Form 18 must be given to the ROC within
30 days from the date of incorporation of the company.
 Any change in the address of the registered office, situated earlier, must
also be intimated to the ROC within 30 days of incorporation.
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Objects Clause
Object clause is the most important clause of a company. It defines the
activities which a company can carry on and those, it cannot. This
clause must state:
(i) The object(s) to be pursued by the company upon its
incorporation.
(ii) Matters which are necessary for the furtherance of the
objects
In case of companies other than trading corporations whose objects are
not confined to one state, the states to whose territories the objects of
the company extend must be specified. Contd.
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Liability Clause
Liability clause contains the nature of the liability of the
members.
A declaration that the liability of the members is limited; in case
the company is limited by shares or guarantee, must be given
under this clause.
 The memorandum of a company limited by guarantee must
also state the amount that each member undertakes to contribute
to the assets of the company in the event of its being wound-up.
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Capital Clause
 Capital clause states the amount of share capital with which
the company is to be registered
 Share capital is divided into different shares of a fixed
amount.
 A company cannot issue share capital greater than the
maximum amount of share capital stated in this clause without
altering the memorandum.
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Association Clause
 Subscription clause contains a declaration by the persons for
subscribing to the memorandum
 The above declaration states that they are desirous to form a
company and
 Through the said declaration they also agree to take the shares
placed against their respective names.
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Articles of Association
The Articles of Association or say just ‘Articles’ is the chief instrument which
contains the rules and regulations for the internal administration of the company.
Articles govern the conduct of a company’s business by specifying the rights
and duties of its members and directors.
Contents: The items usually covered by the ‘Articles’ include/concern the
following:
1. Powers, duties, rights & liabilities of directors 8. Calls on shares
2. Rights, duties, & liabilities of members 9. Transfer/Transmission of shares
3. Rules for meetings of the company 10. Forfeiture of shares
4. Dividends and reserves 11. Surrender of shares
5. Borrowing powers of the company 12. Voting powers of members
6. Share warrants; 13. Accounts and Audit
7. Alteration of capital 14. Winding up, etc.
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Model Form of Articles
Normally, every company drafts its own articles.
However, a company may adopt any one of the model forms of articles, with or
without modifications, specified in Tables F, G, H, I and J of Schedule I to the Act,
as applicable.
 If a company limited by shares does not have its own articles, the model set of
99 articles given in Table F can be adopted.
 Table G is applicable to the companies limited by guarantee and not having a
share capital, and
Table H gives model form of articles to a company limited by guarantee and
having a share capital.
Table I is applicable to unlimited company hare capital and Table J shall be
applicable to an unlimited company and not having share capital.
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Alteration of Articles
A company can alter or amend any of the provisions of its articles subject to
provisions of the Act and subject to the conditions contained in its
Memorandum.
A company by special resolution can alter its articles provided the said
resolution is passed bona fide for the benefit of the company.
An alteration of articles can be effected by a 3/4th majority of the shareholders
but can be challenged on the ground that the alteration was not in the interest
of the company.
 However, such alteration should not have the effect of converting a public co.
into a private one without approval of Central Government.
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Doctrine of Ultra-Vires
The Latin term ultra-vires means to describe an act which is beyond
the powers.
Any transaction, which is not set out in the object clause of the
company’s memorandum and is not necessarily or reasonably incidental to
the attainment of the object(s), is ultra-vires the company and therefore void
(i.e., of no legal effect).
Consequences of an ultra-vires Act
As stated earlier since an ultra-vires act is devoid of any legal effect:
The company cannot sue any person for enforcement of any of its rights and
vice versa.
The directors of the company may be held personally liable to outsiders for an
ultra-vires act.
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Doctrine of Ultra-Vires: Exceptions
The doctrine of ultra-vires does not apply in the following cases:
1. If an act is ultra-vires of directors’ but intra-vires of company, the company is
liable.
2. If an act is ultra-vires the articles of the company but intra-vires of the
memorandum, the articles can be altered to rectify the error.
3. If an act is within the powers of the company but is irregularly done, consent
of the members will validate it.
4. Where there is ultra-vires borrowing by the company or it obtains delivery
of the property under an ultra-vires contract then the third party has no
claim against the company on the basis of the loan but it has a right to
follow its money or property if it exists as it is and obtains an injunction
from the court restraining the company from parting with it.
5. The lender of the money to a company under the ultra-vires contract has a
right to make directors personally liable.
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Doctrine of Indoor Management
 The doctrine of indoor management or internal management of company’s
affairs is an exception to the rule of constructive notice and imposes an important
limitation on it.
 According to this doctrine ‘persons dealing with the company are entitled to
presume that internal requirements prescribed in the ‘Memorandum’ and ‘Articles’ have
been properly observed’.
 The Doctrine is partly dictated by practical necessity - persons contracting with
a company are not expected to spend their time checking that any required resolution
has properly been passed, that meetings have been duly convened by directors whose
appointments have been duly made.
 They can presume that all that is being done regularly and in keeping with the
Memorandum and Articles.
Implications of the Doctrine of Indoor Management: Indian courts have been applying
the doctrine of indoor management quite frequently and interpreting it according to
cases in hand. The object being the same i.e., to protect the 3rd party transacting with
the company in good faith and being unaware of their complex internal management.
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Exceptions to the Doctrine if Indoor
Management
1. Knowledge of irregularity If a person dealing with a company has actual or constructive
notice of the irregularity as regards internal management, he cannot seek benefit under
the doctrine.
2. Negligence The protection under the doctrine is also not available when the
circumstances surrounding the contract are so suspicious as to warrant inquiry, and the
outsider dealing with the company does not make proper inquiry.
3. Forgery The doctrine does not apply where a person relies upon a document that turns
out to be forged since nothing can validate forgery. A company can never be held bound
for forgeries committed by its officers.
4. Acts outside the scope of apparent authority If an officer of a company enters into a
contract with a third party and if the act of the officer is beyond the scope of his
authority, the company is not bound.
It is important to note that the doctrine of constructive notice can be invoked by the company
and it does not operate against the company. It operates against the person who has failed to inquire but
does not operate in his favour. But the doctrine of ‘indoor management’, on the other hand, can be
invoked by the person dealing with the company and cannot be invoked by the company.
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