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Articles of association

 Introduction

Articles of Association is the second document which has to be registered along with the memorandum.

Articles as defined in Sec.2(5) means the articles of association of a company as originally framed or as
altered from time to time or applied in pursuance of any previous company law or of this Act.

Articles are internal regulations and bye-laws. Articles are to contain regulations for management of the
company. Deals with rights of the members of Company inter se.

 Articles in relation to memorandum

Articles have always been held to be subordinate to the memorandum. If, therefore, the memorandum
and articles are inconsistent, the articles must give way. In other words, Articles must not contain anything
the effect of which is to alter a condition contained in the memorandum .

This is because the object of the memorandum is to state the purposes for which the company has been
established, while the articles provide the manner in which the company is to be carried on and its
proceedings disposed of.

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 thinks fit.

Any clause in the Articles beyond Memorandum is ultra-vires, they are inoperative /void / no
ratification. In case of ambiguity between Memorandum and Articles memorandum prevails.

The document must not conflict with the provisions of the Act. Any clause which is contrary to the
provisions of the Act or of any other law for the time being in force, is simply inoperative and void.

Sec.272, Companies Act 2013, for example, confers the right on a shareholder to petition for winding up
of the company in certain circumstances. This right cannot be excluded or limited by the articles.

 Similarly the articles cannot sanction something which is forbidden by the Act. Sec.123, for
example, declares that no dividend shall be paid by a company except out of profits. The force of
this section cannot be undone by any provision in the articles of association.

 Registration of Articles

Sec.7 of Companies Act 2013 provides that :

A public company limited by shares may register its articles of association signed by the same subscribers
as those of the memorandum in the presence of at least one attesting witness.

If articles are proposed to be registered they must be printed. They should be divided into paragraphs,
each consisting generally of one regulation and numbered consequently .

Articles of private company must incorporate the three restrictions ---

i) Restrict the right to transfer its shares, if any


ii) Except in case OPC limit the number of its members to two hundred

iii) Prohibit invitation to public to subscribe for any securities of the company.

 Contents

a) Share capital, rights of share holders, variation of these rights, payment of commissions, share
certificates

b) Lien on shares

c) Calls on shares

d) Transfer of shares

e) Transmission of shares

f) Forfeiture of shares

g) Conversion of shares into stock

h) Share warrants

i) Alteration of capital

j) General meetings & proceedings.

k) Voting rights of members, voting & poll, proxies

l) Directors, their appointment, remuneration, qualifications, powers & proceedings of board of


directors.

m) Dividends & reserves.

n) Accounts, audit & borrowing powers.

o) Winding up.

 Alteration of Articles

1. First of all, the proposal has to be approved by the Board of directors .

2. Special resolution should be passed in the general meeting held on the appointed date.

3. Within thirty days of the passing of the resolution the company has to file form no.23 duly filled
with the registrar of companies.

Limitations on Power to alter Articles

1. The alteration must not exceed the powers conferred by the memorandum

2. It must be bonafide

 Difference

 Memorandum
a) It is the charter of the company indicating the nature of its capital. It also defines the company’s
relationship with outside world.

b) It defines the scope of the activities of the company, or the area beyond which the actions of the
company cannot go.

 Articles

a) They are the regulations for the internal management of the company & are subsidiary to the
memorandum

b) They are the rules for carrying out the objects of the company as set out in the memorandum

 Difference –cont.

 Memorandum

c) It, being the charter of the company, is the supreme document

d) Every company must have its own memorandum

e) Any act of the company which is ultra vires the memorandum is wholly void & cannot be ratified even
by the whole body of shareholders

 Articles

c) They are subordinate to the memorandum. If there is a conflict between the articles & the
memorandum, the latter prevails.

d) A public company may adopt the model specified in Table A of Schedule I.

e) Any act of the company which is ultra vires the articles (but in intra vires the memorandum) can be
confirmed by the shareholders

 Doctrine of Constructive Notice

It protects the company against outsiders.

The Memorandum and Articles are registered with the Registrar hence they become public documents.
They are open and accessible to all.

It is therefore, the duty of every person dealing with a company to inspect these documents.

Law presumes that every one dealing with a company knows the contents of those documents( whether
he actually reads them or not) .

This is known as constructive notice of Memorandum and Articles.

Another effect of this rule is that a person dealing with the company is “taken not only to have read
those documents but to have understood them according to their proper meaning.”

 Doctrine of Indoor Management

Protects outsider against the co.


There is one limitation to the doctrine of constructive notice of the Memorandum & the Articles of
company.

The outsiders dealing with the company are entitled to assume that as far as the internal proceedings
of the company are concerned, everything has been regularly done.

They are presumed to have read MOA/AOA documents & to see that the proposed dealing is not
inconsistent therewith, but they are not bound to do more;

They need not inquire into the regularity of the internal proceedings as required by the memorandum
& the Articles.

They can presume that all in being done regularly.

This limitation of the doctrine of constructive notice is known as the “doctrine of indoor management”.

Royal British Bank v Turquand

The directors of a company borrowed a sum of money from the plaintiff. The company’s articles provided
that the directors might borrow on bonds such as sums as may from time to time be authorized by a
resolution passed at a general meeting of the company.

The shareholders claimed that there had been no such resolution authorizing the loan and therefore it
was taken without their authority. The company was, however, held bound by the loan. Once it was found
that the directors could borrow subject to a resolution, the plaintiff had the right to infer that the
necessary resolution must have been passed.

 Exceptions to Indoor Management

Exceptions to Indoor management

i) Where the outsider has knowledge of irregularity (Prior knowledge)

ii) Forgery by directors or secretary etc.

iii) Acts outside the authority of official of Co.

 Differences

 Doctrine of constructive notice

 Protects Company from outsiders

 Deemed notice to public/members

 Doctrine of indoor management

 Protects outsiders against Company

 Outsiders need not ask internal irregularities of Co.

 MOA & AOA are public documents

 Assumption that all is being done regularly.


MOA
 Memorandum of Association
Introduction

An important step in the formation of a company is to prepare a document called


the memorandum of association.
Define the scope of the company’s activities and relation with outside world. It
define & confine the powers of the Company.

 Memorandum of Association
Meaning
Memorandum means memorandum of association of a company as
originally formed or as altered from time to time in pursuance of any previous
company law or of the present Act.

 Purpose of Memorandum
It serves two main purposes.

Firstly, the prospective shareholders can know the field in which their
funds are going to be used by the company.
Secondly, the outsiders dealing with the company can know exactly the
objects of the company, and whether the contractual which they intend to enter
into with the company is within the objects of the company.
 Contents of Memorandum
Its importance lies in the fact that it contains the following fundamental clauses
which have often been described as the conditions of the company’s incorporation.
a) Name clause
b) Registered office clause
c) Object clause
d) Liability clause
e) Capital clause
 a) Name Clause
Although a company is free to adopt a name of its choice but it cannot be
registered with a name which, in the opinion of the Central Government, is
undesirable.
It should not contravene the provisions of the Emblems and Names (Prevention
of improper use) Act, 1950, nor should it be suggestive of any Government’s
patronage or protection to the company.

A company may not adopt a name which is identical, with or too nearly resembles
the name of any existing company.
Use of the word ‘Limited’
A public company with limited liability must use the word ‘Limited 'as the last
word of its name while private limited company should use the words “Private
Limited” in the end of its name. In case of One Person Company the words One
Person Company shall be mentioned in brackets below the name of the company.
 Name Clause—cont.
Sec.8 provides that the Central Government may by licence permit the
registration of a company with limited liability without the word ‘limited’ if it is for
the promotion of commerce, art, science, religion, charity, protection of
environment or any other useful object and prohibit distribution of its income by
way of dividend to its members.

 Change of Name by Company


 A company may change its name only by passing a special resolution and
with the written approval of the Central Government.
 However, if the change pertains to only the addition or deletion of the
word ‘Private’ or the name , the approval of Central Government shall not
be necessary.
 b) Registered Office Clause
A company is required to state in the memorandum of association the name of
the State in which the registered office of the company is to be situated.
A company must have a registered officer within thirty days of its
incorporation or on the day when it commences business whichever is earlier.

The purpose is to enable persons dealing with the company including Registrar to
serve notices, documents, communications etc. on the company.
 Change of Registered Office
A company can change its registered office---
a) Within the same city or town or village.
b) From one city to another city within the same State– Special resolution
required and notice to registrar within thirty days.

c) From one place to another within the State from the jurisdiction of one registrar
to another registrar– confirmation by the Regional Director shall be mandatory
d)From one State to another State ---- passing a special resolution and
Confirmation of Central Government is mandatory.
 c) Objects Clause

The most important clause of the memorandum is the objects clause because it
sets out the purpose for which the company is formed and the kind of activities or
business it intends to carry on.

Purpose—
This clause serves three distinct purposes:
i) It enables the subscribers to know the use to which their investment money put
and thus extends protection to shareholders.
ii) It also extends certain degree of protection to creditors also inasmuch as the
company cannot spend its capital on any activities which are not within the purview
of the objects clause.
iii) It also serves the public interest as the company cannot diversify its activities
beyond those specified in the objects clause.
The subscribers to the memorandum enjoy almost unrestricted freedom to
choose the objects. The only restriction is that the objects should not be illegal or
against the provisions of the Companies Act.
Giving loan by a company for purchase of its own share is also restricted under
Sec.67 of the Companies Act 2013.
 Alteration of Objects Clause
Sec.13 of the Act allowed alteration of objects clause within certain defined limits.
These limits are of two kinds.
i) Substantive limits
ii) Procedural limits

Substantive Limits
a) To carry on its business more economically and efficiently.
But it cannot make substantive alterations in its original activities.
b) In order to enable the company to carry on its main purpose with new and
improved means.
c) The company may alter its object clause to enlarge the local area of its operation.
d) The company may carry on some business which under the existing
circumstances may be conveniently or advantageously be combined with the
existing business of the company.

e) Alteration of objects may also be allowed to restrict or abandon any of the


objects specified in the memorandum.
f) To sell or dispose of the whole, or any part of the undertaking of the company.
g) An alteration is permissible for the purpose of amalgamation of a company with
other company or body corporate.

Procedural limits
A special resolution and confirmation by the Central Government is required.
Central Government before confirming the alteration
i) Sufficient notice has been given to every debenture holder of the company
and to persons whose interests are likely to be affected by the alteration ;
The objections to the proposed alteration of objects, if any, have been properly
disposed to the satisfaction of the Central Government.
Such alteration has to be registered.
 Doctrine of Ultra Vires
The doctrine of ultra vires implies that the company should confine its activities
within its stated objects.
An act which is ultra vires (beyond powers) is void and does not bind the
company. An act otherwise ultra vires, cannot be made valid even if all the
members of the company assent to it.
Ashbury Railway Carriage &Iron Co. v Riche
The objects of the company in this case as defined in the memorandum
stated that the company was established to sell, or lend on hire, railway carriage
and wagons and all kinds of railway plants etc. and to carry on business of
mechanical engineers and general contractors.
The company entered into a contract with Riche, a firm of railway contractors, to
finance the construction of a railway line in Belgium. The however repudiated the
contract on the ground that it was ultra vires the company. Riche brought a suit for
damages and breach of contract against the company.
His contention was that the said contract was well within the term general
contractors used in the memorandum . That apart, the said contract had been
ratified by a majority of shareholders.
But court ruled that the contract was ultra vires and therefore, null and void .
Evans v. Brunner Mond & Co.Ltd
A company manufacturing chemicals by a resolution authorized its directors to
distribute one lakh pounds to Universities and Scientific Institutions for the
research and education. One of the members challenged this act of the company
on the ground that it was ultra vires.
The court held that the distribution of money for scientific research was
conducive to the progress of the company as chemical manufacturers and
therefore incidental to the company’s main objects, hence intra vires and valid.
 Exceptions to the Doctrine of Ultra Vires
A brief analysis of the doctrine of ultra vires with regard to its consequences
would reveal that only those activities of the company shall be valid i.e., intra vires,
which are
i) Essential for the fulfillment of the objects stated in the main object clause of
the memorandum
ii) Incidental and consequential are reasonably within its permissible limits of
business and
iii) Which the company is authorized to do by the Companies Act in course of its
business.
All other activities are ultra vires.
However certain exception to this doctrine which are as follows-
i) An act which is intra vires the company but outside the authority of the directors
may be ratified by the shareholders in proper form.
ii) An act which is intra vires the company but done in an irregular manner, may be
validated by the consent of the shareholders.
 Consequences of Ultra Vires transactions
i) Injunction– The members can get an injunction to restrain the company
where an ultra vires act has been or is about to be undertaken.
ii) Directors may be held personally liable.
iii) If the company acquired any property through an investment which is ultra vires
the company’s right over such a property shall still be secured.
iv) It has been stated earlier that ultra vires contracts are void ab initio and
therefore cannot become valid by ratification or by estoppel.
 d) Liability Clause
In case of a company whose liability of members is limited by members shares or
guarantee, the memorandum must contain a clause stating that the liability of the
members is limited.
A company cannot alter its liability clause so as to enhance the liability of its
members or compelling them to take further shares.

 e) Capital Clause
This clause in the memorandum states the amount of the nominal or authorised
capital with which the company proposes to be registered, and the value of the
shares into which it is divided.
There is no limit to the amount of capital which the company may have or to the
fixed value of each individual share.

 The capital may be divided into two different categories namely a) Equity
share capital b) Preference share capital.
 Alteration of Share Capital
Sec.61 of the Companies Act 2013 provides that a Limited Company can make the
following types of alterations by an ordinary resolution, if authorized by its articles
to do so:--
a) Alteration of Capital clause
i) Increase its share capital by issue of new shares
ii) Consolidate existing shares into shares of larger denomination etc.
These alterations do not require the confirmation by the Company Law
Board . However it should to notified to registrar.
b) Increase in share capital
A limited company having a share capital can increase its share capital if the
articles of the company should contain powers authorizing the company, by passing
a resolution in a general meeting and notice to registrar .
c) Reduction of capital
Subject to the confirmation by the Tribunal .