Chapter :-2

Memorandum of Association & Articles of Association 1

Memorandum of Association

The first step is the formation of a company is to prepare memorandum of association. This is also known as constitution of the company.

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What is Memorandum of Association of a company?

• Is the constitution or charter of the company and contains the powers of the company. No company can be registered under the Companies Act, 1956 without the memorandum of association. Under Section 2(28) of the Companies Act, 1956 the “Memorandum means the memorandum of association of the company as originally framed or as altered from time to time in pursuance with any of the previous companies law or the Companies Act, 1956.” 3

CONTENTS OF MEMORANDUM OF ASSOCIATION

Six Clauses

Name Objects Registered office Liability Capital Association or subscription

1. Name Clause[ section 13(1)(a)]

• The memorandum must state the name of the company with ‘limited ‘ as the word ,in case of a public limited company and with ‘private limited', in the case of a private limited company .the company is free to choose any name but it must not be undesirable or must not resemble the name of any other registered company.

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2.Registered office clause [section 13(1)(b)]

• The state in which the registered office of a company will be situated is mentioned in this clause .the registered office of the company is the official address of the company where the statutory books and records must normally be kept 6

3. Object Clause[section 13(1)(c)&(b)]

 This clause is quite important and must be very carefully drafted as it determines the activities of the company. In the object clause each and every detail of activities of the business to be carried out must be laid down. Main object:- this sub-clause contains the main objects of the company to the pursued on its incorporation  Objects incidental or ancillary :- it covers the objects which are incidental or ancillary to the attainment of the main object  Other objects :- this sub-clause will cover any objects which are not included in the ‘main objects ‘ 7

4. Liability Clause[section 13(2)]

 This clause states the nature of liability of the members of the company .in the case of a company limited by share or by guarantee the fact that the liability of its members is limited must be made absolutely clear . In case of a company limited by shares the liability of a member is limited to the nominal value of the share held by him .if the share are fully paid up his liability is nil. But in case of partly paid-up shares the liability is limited to the amount which is unpaid.

 In case of a company limited by guarantee ,the liability clause must state the amount which every member undertakes to contribute to the assets of the company in the event of its winding up 8

5. Capital Clause[section 13(4)(a)]

• • This clause states that amount of the capital with which the company is to be registered .this clause should also state the number and face value of shares into which the capital of the company is divided The capital with which the company is ‘registered’ or ‘nominal’ or ‘authorized’ 9

6. Association clause [section 13(4)(c)]

• The association clause states – in this cause , the subscribes declare that they desire to be formed into a company and agree to take the shares stated against their names .the names ,address and occupation of the subscribers must be given each subscriber must sign in the presence of at least 10

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Case: Company for Restaurant

• Husband and wife, Niraj and Seema Mishra, based in Mumbai, are forming a company. They want a short name for the company with their surname in it. The company is being formed to run a restaurant. They project they would need 20 lakhs as the capital of the company. Immediately, the husband would contribute Rs.

2,00,000 to the share capital of the company and wife Rs.

10. Mr. Mishra hopes to find others, after the company is formed, to take the shares of the company. They also contemplate occasionally hiring out the car they would buy for the company. Develop a Memorandum of Association for the Company.

Memorandum of Association of the Mishra private limited

I . The name of the company is Mishra Private Limited II. The registered office of the company will be situated in the state of Maharashtra.

III. The objective for which the company is begin established are as follows: a. Main object: running of restaurants b.Ancillary object : opening bank accounts, hiring premises an running of bakery c. Other objects: Hiring out of vechicles 12

IV. The liability of the members is limited v. The authorized share capital of the company is RS.20,00,000,divided into 2,00,000

S.NO

Name & Addresses description & occupation of subscribers No . Of equity shares taken by each subscriber Signature of subscriber Name / address descripti on and occupati on of witness

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ALTERATION OF NAME CLAUSE

• Special Resolution.

• Written Approval of Central Government.

• No Approval of Central Government is necessary if the change of name involves only the addition or deletion of the word “Private”.

• Change by ordinary resolution and approval of Central Government when name is identical or too closely resembles the name of an existing company.

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CHANGE OF REGISTERED OFFICE

From one premises to another premises in the same city, town or village • By passing a resolution of Board of Directors 15

CHANGE OF REGISTERED OFFICE

From one town or city or village to another town or city or village in the same state 1. Special Resolution.

2. Confirmation of Regional Director — when jurisdiction of Registrar of companies is changed.

3. Copy of (i) & (ii) to be filed with ROC.

4. Notice of new location to ROC within 30 days.

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CHANGE OF REGISTERED OFFICE From one state to another state

1. Special Resolution 2. Confirmation of Central Govt.

3. For certain Purposes only (As given in section 17) 17

ALTERATION OF OBJECTS CLAUSE

A.

Special Resolution

B.

Alteration is sought on any of these grounds:

• To carry on its business more economically & more efficiently • To attain its main purpose by new or improved means • To enlarge or change the local area of its operations • To carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company • To restrict or abandon any of the objects specified in the memorandum • To sell or dispose off the whole or any part of the undertaking • To amalgamate with any other company C.

Copy of (A) is filed with ROC within 30 days

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ALTERATION OF LIABILITY CLAUSE

• The liability of a member of a company cannot be increased unless the member agrees in writing.

• From unlimited liability, it can be made limited by re-registration of the company.

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ALTERATION OF CAPITAL CLAUSE

• Increase of authorized share capital.

• Consolidation and subdivision of shares.

• Conversion of shares into stock & vice versa.

• Diminution of share capital.

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DOCTRINE OF ‘ULTRA VIRES’ The words :

• Ultra means beyond • Vires means the powers • Ultra Vires means beyond the powers A company which owes its incorporation to statutory authority cannot effectively do anything beyond the powers expressly or impliedly conferred upon it by the statute or Memorandum of Association.

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Articles Of Association

• A document that specifies the regulations for a company's operations. The articles of association define the company's purpose and lays out how tasks are to be accomplished within the organization, including the process for appointing directors and how financial records will be handled.

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Items covered by the Articles of Association include :-

• • • • • • • • • • The important Powers, duties, rights and liabilities of Directors Powers, duties, rights and liabilities of members Rules for Meetings of the Company Dividends Borrowing powers of the company Calls on shares Transfer & transmission of shares Forfeiture of shares Voting powers of members 23

Companies which must have Articles

• •

Unlimited Companies:

– The Articles of such a company must state: • Total number of members; and • Share capital.

Companies limited by Guarantee:

– Articles of such company must state total number of members.

Companies which must have Articles …contd.

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Private Companies limited by shares:

– must include requirements of Section 3(1)(iii).

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No Article Company

A public limited company having share capital may be registered without Articles.

Doctrine Of Ultra Vires

• • • Ultra vires to the articles of association Ultra vires the memorandum of Association EXAMPLE :- Ashbury Railway carrige co. vs Riche 26

Alteration of Articles

• • Articles may be altered by a company by passing special resolution at a general body meeting of shareholders.

However, where alteration has the effect of converting a public company into a private company (i.e., introduction of restrictive clauses of Section 3(1)(iii), approval of Central Government must be obtained.

Doctrine of Constructive Notice

• • • • According to Section 610, every person dealing with the company is deemed to have read M/A and A/A and understood the contents thereof in the correct perspective.

Doctrine of Indoor Management

The rule was first laid down in Royal British Bank v. Turquand. Rule of Indoor Management is an exception to the Doctrine of Constructive notice.

Exceptions of Indoor Management

1. Knowledge

of irregularity : Case: Howard v.

Patent Ivory Co.

2. Negligence : Case: Anand Behari Lal v.

Dinshaw & Co. (Bankers) Ltd.

3. Forgery : Case: Ruben v. Great Fingal Consolidated [Secy. Forged signatures of two directors] 4. No knowledge of articles : Case: Rama Corporation v. Proved Tin & General

Investment Co.

Memorandum of Association

Charter of Company

Articles of Association

Regulations for interal management Defines the scope of the activities Rules for carrying out the objects of company.

Supreme document Must for every company Strict restrictions, alteration only with sanction of central govt./ tribunal.

Act, ‘Ultra Vires’ is wholly void & cannot be ratified.

Subordinate to the memorandum.

Company limited by shares need not have it (Table ‘A’ applies) Can be altered by special resolution.

Act ‘Ultra Vires’ (but intra vires the memorandum) can be ratified.