INCORPORATION OF COMPANIES; MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION

INCORPORATION OF COMPANIES; MEMORANDUM OF ASSOCIATION
AND ARTICLES OF ASSOCIATION

STRUCTURE
2.0 Objective
2.1 Introduction
2.2 Incorporation
2.2.1 Promotion
2.2.2 Incorporation
2.2.3 Capital Subscription
2.2.4 Commencement of Business
2.3 Memorandum of Association
2.4 Articles of Association
2.5 Difference between Memorandum of Association and Articles of Association
2.6 Constructive Notice of Memorandum and Articles of Association
2.7 Summary
2.8 Keywords
2.9 Self Assessment Questions
2.10 Suggested Readings
2.0 OBJECTIVE
After reading this lesson, you should be able to
(a) Describe the process of formation of a company.
(b) Explain the different clauses of memorandum of association and the alterations
thereof.
(c) Discuss the contents of articles of association.
(d) highlight the importance of constructive notice of memorandum and articles
of association.
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2.1 INTRODUCTION
We know that a company is a separate legal entity which is formed and registered
under the Companies Act. It may be noted that before a company is actually formed
(i.e., formed and registered under the Companies Act), certain persons, who wish to
form a company, come together with a view to carry on some business for the purpose
of earning profits. Such persons have to decide various questions such as (a) which
business they should start, (b) whether they should form a new company or take over
he business of some existing company, (c) if new company is to be started, whether
they should start a private company or pubic company, (d) what should be the capital of
the company etc. After deciding about the formation of the company, the desirous
persons take necessary steps, and the company is actually formed. Thereafter, they
start their business. Thus, there are various stage in the formation of a company from
thinking of starting a business to the actual starting of the business.
2.2 INCORPORATION OF COMPANIES
Company is an artificial person created by following a legal procedure. Before
a company is formed, a lot of preliminary work is to be performed. The lengthy process
of formation of a company can be divided into four distinct stages : (I) Promotion; (ii)
Incorporation or Registration; (iii) Capital subscription; and (iv) Commencement of
business. However, a private company can start business as soon as it obtains the
certificate of incorporation. It needs to go through first two stages only. The reason is
that a private law firm cannot invite public to subscribe to its share capital. But a public
company having a share capital, has to pass through all the four stages mentioned above
before it can commence business or exercise any borrowing powers (Section 149).
These four stages are discussed as follow :
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2.2.1 Promotion
The term ‘promotion’ is a term of business and not of law. It is frequently used
in business. Haney defines promotion as “ the process of organizing and planning the
finances of a business enterprise under the corporate form”. Gerstenberg has defined
promotion as “the discovery of business opportunities and the subsequent organization
of funds, property and managerial ability into a business concern for the purpose of
making profits therefrom.” First of all the idea of carrying on a business is conceived
by promoters. Promoters are persons engaged in, one or the other way; in the formation
of a company. Next, the promoters make detailed study to assess the feasibility of the
business idea and the amount of financial and other resources required. When the
promoters are satisfied about practicability of the business idea , they take necessary
steps for assembling the business elements and making provision of the funds required
to launch the business enterprise. Law does not require any qualification for the
promoters. The promoters stand in a fiduciary position towards the company about to
be formed. From the fiduciary position of promoters, the following important results
follow:
1. A promoter cannot be allowed to make any secret profits. If any secret profit is
made in violation of this rule, the company may, on discovering it, compel the
promoter to account for and surrender such profit.
2. The promoter is not allowed to derive a profit from the sale of his own property
to the company unless all material facts are disclosed. If he contracts to sell his
own property to the company without making a full disclosure, the companmy
may either rescind the sale or affirm the contract and recover the profit made
out of it by the promoter.
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3. The promoter must not make an unfair or unreasonable use of his position and
must take care to avoid anything which has the appearance of undue influence or
fraud.
Promoter’s Remuneration
A promoter has no right to get compensation from the company for his services
in promoting it unless the company, after its incorporation, enters into a contract with
him for this purpose. If allowed, remuneration may be paid in cash or partly in cash
partly in shares and debentures of the company.
Promoter’s Liability
If a promoter does not disclose any profit made out of a transaction to which
the company is a party, then the company may sue the promoter and recover the
undisclosed profit with interest Otherwise, the company may set aside the transaction
i.e., it may restore the property to promoter and recover its money.
Besides, Section 62 (1) holds the promoter liable to pay compensation to every
person who subscribes for any share or debentures on the faith of the prospectus for
any loss or damage sustained by reason of any untrue statement included in it. Section
62 also provides certain grounds on which a promoter can avoid his liability. Similarly
Section 63 provides for criminal liability for misstatement in the prospectus and a
promoter may also become liable under this section.
Promoter’s Contracts
Preliminary contracts are contracts made on behalf of a company yet to be
incorporated. Following are some of the effects of such contracts;
1. The company, when it comes into existence, is not bound by any contract made
on its behalf before its incorporation. A company has no status prior to its
incorporation.
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2. The company cannot ratify a pre-incorporation contract and hold the other party
liable. Like the company, the other party to the contract is also not bound by
such a contract.
3. The agents of a proposed company may sometimes incur personal liability under
a contract made on behalf of the company yet to be formed.
Kelner v Bexter (1886) L.R. 2 C.P.174. A hotel company was about to be formed
and promoters signed an agreement for the purchase of stock on behalf of the proposed
company. The company came into existence but, before paying the price, went into
liquidation. The promoters were held personally liable to the plaintiff.
Further, an agent himself may not be able to enforce the contract against the
other party. So far as ratification of a pre-incorporation contract is concerned, a company
cannot ratify a contract entered into by the promoters on its behalf before its
incorporation. The reason is simple, ratification can be done only if an agent contracts
for a principal who is in existence and who is competent to contract at the time of the
contract by the agent.
2.2.2 Incorporation
This is the second stage of the company formation. It is the registration that
brings a company into existence. A company is legally constituted on being duly
registered under the Act and after the issue of Certificate of Incorporation by the
Registrar of Companies. For the incorporation of a company the promoters take the
following preparatory steps:
i) To find out form the Registrar of companies whether the name by which the
new company is to be stareted is available or not. To take approval of the name,
an application has to be made in the prescribed form along with requisite fee;
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ii) To get a letter of Intent under Industries (Development and Regulation) Act,
1951, if the company’s business comes within the purview of the Act.
iii) To get necessary documents i.e. Memorandum and Articles of Association
prepared and printed.
iv) to prepare preliminary contracts and a prospectus or statement in lieu of a
prospectus.
Registration of a company is obtained by filing an application with the Registrar
of Companies of the State in which the registered office of the comapany is to be
situated. The application should be accompanied by the following documents:
1. Memorandum of association properly stamped, duly signed by the signatories
of the memorandum and witnessed.
2. Ariticles of Association, if necessary.
3. A copy of the agreement, if any, which the company proposes to enter into with
any individual for his appointment as managing or whole-time director or
manager.
4. A written consent of the directors to act in that capacity, if necessary.
5. A statutory declaration stating that all the legal requirements of the Act prior to
incorporation have been complied with.
The Registrar will scrutinize these documents. If the Registrar finds the document
to be satisfactory, he registers them and enters the name of the company in the Register
of Companies and issues a certificate called the certificate of incorporation (Section
34).
The certificate of incorporation is the birth certificate of a company. The
company comes into existence from the date mentioned in the certificate of
incorporation and the date appearing in it is conclusive, even if wrong. Further, the
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certificate is ‘conclusive evidence that all the requirements of this Act in respect of
registration and matters precedent and related thereto have been fulfilled and that the
association is a company authorized to be registered and duly registered under this
Act.
Once the company is created it cannot be got rid off except by resorting to
provisions of the Act which provide for the winding up of company. The certificate of
incorporation, even if it contains irregularities, cannot be cancelled.
2.2.3 Capital Subscription
A private company can start business immediately after the grant of certificate
of incorporation but public limited company has to further go through ‘capital
subscription stage’ and ‘commencement of business stage’. In the capital subscription
stage, the company makes necessary arrangements for raising the capital of the company.
With a view to ensure protection on investors, Securities and Exchange Boar of India
(SEBI) has issued ‘guidelines for the disclosure and investor protection’. The company
making a public issue of share capital must comply with these guidelines before making
a public offer for sale of shares and debentures.
If the capital has to be said through a public offer of shares, the directors of the
public company will first file a copy of the prospectus with the Registrar of Companies.
On the scheduled date the prospectus will be issued to the public. Investors are required
to forward their applications for shares along with application money to the company’s
bankers mentioned in the prospectus. The bankers will then forward all applications to
the company and the directors will consider the allotment of shares. If the subscribed
capital is at least equal to 90 percent of the capital issue, and other requirements of a
valid allotment are fulfilled the directors pass a formal resolution of allotment. However,
if the company does not receive applications which can cover the minimum subscription
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within 120 days of the issue of prospectus, no allotment can be made and all money
received will be refunded.
If a public company having share capital decides to make private placement of
shares, then, instead of a ‘prospectus’ it has to file with the Registrar of Companies a ‘
statement in lieu of prospectus’ at least three days before the directors proceed to pass
the first share allotment resolution.
The contents of a prospectus and a statement in lieu of a prospectus are almost
alike.
2.2.4 Commencement of Business
A private company can commence business immediately after the grant of
certificate of incorporation, but a public limited company will have to undergo some
more formalities before it can start business. The certificate for commencement of
business is issued by Registrar of Companies, subject to the following conditions.
1. Shares payable in cash must have been allotted upto the amount of minimum
subscription
2. Every director of the company had paid the company in cash application and
allotment money on his shares in the same proportion as others.
3. No money should have become refundable for failure to obtain permission for
shares or debentures to be dealt in any recognized stock exchange.
4. A declaration duly verified by one of directors or the secretary that the above
requirements have been complied with which is filed with the Registrar.
The certificate to commence business granted by the Registrar is a conclusive
evidence of the fact that the company has complied with all legal formalities and it is
legally entitled to commence business. It may also be noted that the court has the
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power to wind up a company, if it fails to commence business within a year of its
incorporation [Sec. 433 (3)]
2.3 MEMORANDUM OF ASSOCIATION
The formation of a public company involves preparation and filing of several
essential documents. Two of basic documents are :
1. Memorandum of Association
2. Articles of Association
The preparation of Memorandum of Association is the first step in the formation
of a company. It is the main document of the company which defines its objects and
lays down the fundamental conditions upon which alone the company is allowed to be
formed. It is the charter of the company. It governs the relationship of the company
with the outside world and defines the scope of its activities. Its purpose is to enable
shareholders, creditors and those who deal with the company to know what exactly is
its permitted range of activities. It enables these parties to know the purpose, for which
their money is going to be used by the company and the nature and extent of risk they
are undertaking in making investment. Memorandum of Association enable the parties
dealing with the company to know with certainty as whether the contractual relation to
which they intend to enter with the company is within the objects of the company.
Form of Memorandum (Sec. 14)
Companies Act has given four forms of Memorandum of Association in Schedule
I. These are as follows :
Table B Memorandum of a company limited by shares
Table C Memorandum of a company limited by guarantee and not having
a share capital
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Table D Memorandum of company limited by guarantee and having share
capital.
Table E Memorandum of an unlimited company
Every company is required to adopt one of these forms or any other form as
near there to as circumstances admit.
Printing and signing of Memorandum (Sec. 15).
The memorandum of Association of a company shall be (a) printed, (b) divided
into paragraphs numbered consecutively, and (c) signed by prescribed number of
subscribers (7 or more in the case of public company, two or more in the case of
private company respectively). Each subscriber must sign for his/her name, address,
description and occupation in the presence of at least one witness who shall attest the
signature and shall likewise add his address, description and occupation, if any.
Contents of Memorandum
1. Name clause
Promoters of the company have to make an application to the registrar of
Companies for the availability of name. The company can adopt any name if :
i) There is no other company registered under the same or under an identical name;
ii) The name should not be considered undesirable and prohibited by the Central
Government (Sec. 20). A name which misrepresents the public is prohibited by
the Government under the Emblems & Names (Prevention of Improper use)
Act, 1950 for example, Indian National Flag, name pictorial representation of
Mahatma Gandhi and the Prime Minister of India, name and emblems of the
U.N.O., and W.H.O., the official seal and Emblems of the Central Government
and State Governments.
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Where the name of the company closely resembles the name of the company
already registered, the Court may direct the change of the name of the company.
iii) Once the name has been approved and the company has been registered, then
a) the name of the company with registered office shall be affixed on outside of
the business premises;
b) if the liability of the members is limited the words “Limited” or “Private
Limited” as the case may be, shall be added to the name; [Sec 13(1) (1)]:
Omission of the word ‘Limited’ makes the name incorrect. Where the word’
Limited” forms part of a company’s name, omission of this word shall make the name
incorrect. If the company makes a contract without the use of the word “Limited”, the
officers of the company who make the contract would be deemed to be personally
liable [Atkins & Co v Wardle, (1889) 61 LT 23]
The omission to use the word ‘Limited’ as part of the name of a company must
have been deliberate and not merely accidental. Note the following case in this regard:
Dermatine Co. Ltd. v Ashworth, (1905) 21 T.L.R. 510. A bill of exchange drawn
upon a limited company in its proper name was duly accepted by 2 directors of the
company. The rubber stamp by which the word of acceptance were impressed on the
bill was longer that the paper of the bill and hence the word ‘Limited’ was missed.
Held, the company was liable to pay and the directors were not personally liable.
(c) the name and address of the registered office shall be mentioned in all letterheads, business letters, notices and Common Seal of the Company, etc. (Sec.
147).
In Osborn v The Bank of U. A. E., [9 Wheat (22 US), 738]; it was held that the
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name of a company is the symbol of its personal existence. The name should be properly
and correctly mentioned. The Central Government may allow a company to drop the
word “Limited” from its name.
2. Registered Office Clause
Memorandum of Association must state the name of the State in which the
registered office of the companmy is to be situated. It will fix up the domicile of the
company. Further, every company must have a registered office either from the day it
begins to carry on business or within 30 days of its incorporation, whichever is earlier,
to which all communications and notices may be addressed. Registered Office of a
company is the place of its residence for the purpose of delivering or addressing any
communication, service of any notice or process of court of law and for determining
question of jurisdiction of courts in any action against the company. It is also the place
for keeping statutory books of the company.
Notice of the situation of the registered office and every change shall be given
to the Registrar within 30 days after the date of incorporation of the company or after
the date of change. If default is made in complying with these requirements, the company
and every officer of the company who is default shall be punishable with fine which
may extend to Rs. 50 per during which the default continues.
3. Object Clause
This is the most important clause in the memorandum because it not only shows
the object or objects for which the company is formed but also determines the extent
of the powers which the comapany can exercise in order to achieve the object or objects.
Stating the objects of the company in the Memorandum of Association is not a mere
legal technicality but it is a necessity of great practical importance. It is essential that
the public who purchase its shares should know clearly what are the objects for which
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they are paying.
In the case of companies which were in existence immediately before the
commencement of the Companies (Amendment) Act. 1965, the object clause has simply
to state the objects of the company. But in the case of a company to be registered after
be amendment, the objects clause must state separately.
i) 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 main objects.
ii) Other objects: This sub-clause shall state other objects which are not included
in the above clause.
Further, in case of a non-trading company, whose objects are not confined to
one state, the objects clause must mention specifically the States to whose territories
the objects extend. (Sec. 13)
A company, which has a main object together with a number of subsidiary objects,
cannot continue to pursue the subsidiary objects after the main object has come to an
end.
Crown Bank. Re (1890) 44 Ch D. 634. A company’s objects clause enabled it to
act as a bank and further to invest in securities land to underwrite issue of securities.
The company abandoned its banking business and confined it self to investment and
financial speculation. Held, the company was not entitled to do so.
Incidental acts. The powers specified in the Memorandum must not be construed
strictly. The company may do anything which is fairly incidental to these powers.
Anything reasonable incidental to the attainment or pursuit of any of the express objects
of the company will, unless expressly prohibited, be within the implied powers of the
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company.
While drafting the objects clause of a company the following points should be
kept in mind.
i) The objects of the company must not be illegal, e.g. to carry on lottery business.
ii) The objects of the company must not be against the provisions of the Companies
Act such as buying its own shares (Sec. 77), declaring dividend out of capital
etc.
iii) The objects must not be against public, e.g. to carry on trade with an enemy
country.
iv) The objects must be stated clearly and definitely. An ambiguous statement like
“Company may take up any work which it deems profitable” is meaningless.
v) The objects must be quite elaborate also. Note only the main objects but the
subsidiary or incidental objects too should be stated.
The narrower the objects expressed in the memorandum, the less is the
subscriber’s risk, but the wider such objects the greater is the security of those who
transact business with the company.
4. Capital Clause
In case of a company having a share capital unless the company is an unlimited
company, Memorandum shall also state the amount of share capital with which the
company is to be registered and division there of into shares of a fixed amount [Sec. 13
(4)]. The capital with which the company is registered is called the authorized or nominal
share capital. The nominal capital is divided into classes of shares and their values are
mentioned in the clause. The amount of nominal or authorized capital of the company
would be normally, that which shall be required for the attainment of the main objects
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of the company. IN case of companies limited by guarantee, the amount promised by
each member to be contributed by them in case of the winding up of the company is to
be mentioned. No subscriber to the memorandum shall take less than one share. Each
subscriber of the Memorandum shall write against his name the number of shares he
takes.
5. Liability Clause
In the case of company limited by shares or by guarantee, Memorandum of
Association must have a clause to the effect that the liability of the members is limited.
It implies that a shareholder cannot be called upon to pay any time amount more then
the unpaid portion on the shares held by him. He will no more be liable if once he has
paid the full nominal value of the share.
The Memorandum of Association of a company limited by guarantee must further
state that each member undertakes to contribute to the assets of the company if wound
up, while he is a member or within one year after he ceased to be so, towards the debts
and liabilities of the company as well as the costs and expenses of winding up and for
the adjustment of the rights of the contributories among themselves not exceeding a
specified amount.
Any alteration in the memorandum of association compelling a member to take
up more shares, or which increases his liability, would be null and void. (Sec 38).
If a company carries on business for more than 6 months while the number of
members is less than seven in the case of public company, and less than two 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 6 months has elapsed. (Sec. 45).
6. Association or Subscription Clause
In this clause, the subscribers declare that they desire to be formed into a
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company and agree to take shares stated against their names. No subscriber will take
less than one share. The memorandum has to be subscribed to by at least seven persons
in the case of a public company and by at least two persons in the case of a private
company. The signature of each subscriber must be attested by at least one witness who
cannot be any of the subscribers. Each subscriber and his witness shall add his address,
description and occupation, if any. This clause generally runs in this form : “we, the
several person whose names and addresses are subscribed, are desirous of being formed
into a company in pursuance of the number of shares in the capital of the company, set
opposite of our respective name”.
After registration, no subscriber to the memorandum can withdraw his
subscription on any ground.
Alteration of Memorandum of Association
Alteration of Memorandum of association involves compliance with detailed
formalities and prescribed procedure. Alternations to the extent necessary for simple
and fair working of the company would be permitted. Alterations should not be
prejudicial to the members or creditors of the comapany and should not have the effect
of increasing the liability of the members and the creditors.
Contents of the Memorandum of association can be altered as under :
1. Change of name
A company may change its name by special resolution and with the approval of
the Central Government signified in writing . However, no such approval shall be
required where the only change in the name of the company is the addition there to or
the deletion there from, 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. (Sec.
21)
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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 nearly resembles the name of an existing comapany, it may change its name by
an ordinary resolution and with the previous approval of the Central Government
signified in writing. [Sec. 22(1) (a)].
Registration of change of name. Within 30 days passing of the resolution, a
copy of the order of the Central Government’s approval shall also be field with the
Registrar within 3 months of the order. The Registrar shall enter the new name in the
Register of Companies in place of the former name and shall issue a fresh certificate
of incorporation with the necessary alterations. The change of name shall be complete
and effective only on the issue of such certificate. The Registrar shall also make the
necessary alteration in the company’s memorandum of association (Sec. 23)
The change of name shall not affect any right or obligations of the company or
render defective any legal proceeding by or against it. (Sec. 23).
2. Change of Registered Office
This may involve :
a) Change of registered office from one place to another place in the same city,
town or village. In this case, a notices is to be give within 30 days after the date
of change to the Registrar who shall record the same.
b) Change of registered office from one town to another town in the same State. In
this case, a special resolution is required to be passed at a general meeting of
the shareholders and a copy of it is to be filed with the Registrar within 30 days.
The within 30 days of the removal of the office. A notice has to be given to the
Registrar of the new location of the office.
c) Change of Registered Office from one State to another State to another State.
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Section 17 of the Act deals with the change of place of registered office form
one State to another State. According to it, a company may alter the provision of its
memorandum so as to change the place of its registered office from one State to another
State for certain purposes referred to in Sec 17(1) of the Act. In addition the following
steps will be taken.
Special Resolution
For effecting this change a special resolution must be passed and a copy there
of must be filed with the Registrar within thirty days. Special resolution must be passed
in a duly convened meeting.
Confirmation by Central Government
The alteration shall not take effect unless the resolution is confirmed by the
Central Government.
The Central Government before confirming or refusing to confirm the change
will consider primarily the interests of the company and its shareholders and also
whether the change is bonafide and not against the public interest. The Central
Government may then issue the confirmation order on such terms and conditions as it
may think fit.
3. Alteration of the Object Clause
The Company may alter its objects on any of the grounds (I) to (vii) mentioned
in Section 17 of the Act.
The alteration shall be effective only after it is approved by special resolution
of the members in general meeting with the Companies Amendment Act, 1996, for
alteration of the objects clause in Memorandum of Associations sanction of Central
Government is dispensed with.
Limits of alteration of the Object Clause
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The limits imposed upon the power of alteration are substantive and procedural.
Substantive limits are provided by Section 17 which provides that a company may change
its objects only in so far as the alteration is necessary for any of the following purposes:
i) to enable the company to carry on its business more economically or more
effectively;
ii) to enable the company to attain its main purpose by new or improved means;
iii) to enlarge or change the local area of the company’s operation;
iv) to carry on some business which under existing circumstances may conveniently
or advantageously be combined with the business of the company;
v) to restrict or abandon any of the objects specified in the memorandum
vi) to sell or dispose of the whole, or any part of the undertaking of the company;
vii) to amalgamate with any other company or body of persons.
Alterations in the objects is to be confined within the above limits for otherwise
alteration in excess of the above limitations shall be void.
A company shall file with the registrar a special resolution within one month
from the date of such resolution together with a printed copy of the memorandum as
altered. Registrar shall register the same and certify the registration. [Sec. 18].
Effect of non Registration with Registrar
Any alteration, if not registered shall have no effect. If the documents required
to be filed with the Registrar are not filed within one month, such alteration and the
order of the Central Government and all proceedings connected therewith shall at the
expiry of such period become void and inoperative. The Central Government may, on
sufficient cause show, revive the order on application made within a further period of
one month [Sec. 19]
4. Alteration of Capital Clause
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The procedure for the alteration of share capital and the power to make such
alteration are generally provided in the Articles of Association If the procedure and
power are not given in the Articles of Associational, the company must change the
articles of association by passing a special resolution. If the alteration is authorized by
the Articles, the following changes in share capital may take place :
1. Alteration of share capital [Section 94-95]
2. Reduction of capital [Section 100-105]
3. Reserve share capital or reserve liability [Section 99]
4. Variation of the rights of shareholders [Section 106-107]
5. Reorganization of capital [Section 390-391]
5. Alteration of Liability Clause
Ordinarily the liability clause cannot be altered so as to make the liability of
members unlimited. Section 38 states that the liability of the members cannot be
increased without their consent. It lays down that a member cannot by changing the
memorandum or articles, be made to take more shares or to pay more the shares already
taken unless he agrees to do so in writing either before or after the change.
A company, if authorized by its Articles, may alter its memorandum to make the
liability of its directors or manager unlimited by passing a special resolution. This rule
applies to future appointees only. Such alteration will not effect the existing directors
and manager unless they have accorded their consent in writing. [Section 323].
Section 32 provides that a company registered as unlimited may register under
this Act as a limited company. The registration of an unlimited company as a limited
company under this section shall not affect any debts, liabilities, obligations or contracts
incurred or entered into by the company before such registration.
2.4 ARTICLES OF ASSOCIATION
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Every company is required to file Articles of Association along with the
Memorandum of Association with the Registrar at the time of its registration.
Companies Act defines ‘Articles as Articles of Association of a company as originally
framed or as altered from time to time in pursuance of any previous companies Acts.
They also include, so far as they apply to the company, those in the Table A in Schedule
I annexed to the Act or corresponding provisions in earlier Acts.
Articles of Association are the rules, regulations and bye-laws for governing
the internal affairs of the company. They may be described as the internal regulation of
the company governing its management and embodying the powers of the directors and
officers of the company as well as the powers of the shareholders. They lay down the
mode and the manner in which the business of the company is to be conducted.
In framing Articles of Association care must be taken to see that regulations
framed do not go beyond the powers of the company it self as contemplated by the
Memorandum of Association nor should they be such as would violate any of the
requirements of the companies Act, itself. All clauses in the Articles ultra vires the
Memorandum or the Act shall be null and void.
Article of Association are to be printed, divided into paragraphs, serially
numbered and signed by each subscriber to Memorandum with the address, description
and occupation. Each subscriber shall sign in the presence of at least one witness who
shall attest the signatures and also mention his own address and occupation.
Contents of Articles of Association
Articles generally contain provision relating to the following matters; (1) the
exclusion, whole or in part of Table A; (ii) share capital different classes of shares of
shareholders and variations of these rights (iii) execution or adoption of preliminary
agreements, if any; (iv) allotment of shares; (v) lien on shares (vi) calls on shares; (vii)
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forfeiture of shares; (viii) issue of share certificates; (ix) issue of share warrants; (x)
transfer of shares; (xi) transmission of shares; (xii) alteration of share capital; (xiii)
borrowing power of the company; (xiv) rules regarding meetings; (xv) voting rights of
members; (xvi) notice to members; (xvii) dividends and reserves; (xviii) accounts and
audit; (xix) arbitration provision, if any; (xx) directors, their appointment and
remuneration; (xxi) the appointment and reappointment of the managing director,
manager and secretary; (xxii) fixing limits of the number of directors (xxiii) payment
of interest out of capital; (xxiv) common seal; and (xxv) winding up.
Model form of Articles
Different model forms of memorandum of association and Articles of
Association of various types of companies are specified in Schedule I to the Act. The
schedule is divided into following tables.
Table A deals with regulations for management of a company limited by
shares.
Table B contains a model form of Memorandum of Association of a company
limited by shares.
Table C gives model forms of Memorandum and Articles of Association of
a company limited by guarantee and not having a share capital.
Table D gives model forms of Memorandum and Articles of Association of
a company limited by guarantee and having a share capital. The Articles of such a
company contain in addition to the information about the number of members with
which the company proposes to be registered, all other provisions of Table A.
Table E contains the model forms of memorandum and Articles of
Association of an unlimited company.
A Public Company may have its own Article of Association. If it does not
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have its own Articles, it may adopt Table A given in Schedule I to the Act.
Adoption and application of Table A (Section 28). There are 3 alternative
forms in which a public company may adopt Articles :
1. It may adopt Table A in full
2. It may wholly exclude Table A, and set out its own Articles in full
3. It may frame its own Articles and adopt part of Table A.
In other words, unless the Articles of a public company expressly exclude
any or all provisions of Table A shall automatically apply to it.
Alteration of Articles
Section 31 grant power to every company to alter its articles whenever it
desires by passing a special resolution and filing a copy of altered Articles with the
Registrar. An alteration is not invalid simply because it changes the company’s
constitution. Thus in Andrews v Gas Meter Co., A company was allowed by changing
articles to issue preference shares when its memorandum was silent on the point.
Alteration of articles is much easier than memorandum as it can be altered
by special resolution. However, there are various limitations under the Companies
Act to the powers of the shareholders to alter the articles.
In case of conversion of a public company into a private company, alteration
in the articles would only be effective after approval of the Central Government
[Section 31]. The power are now vested with the Registrar of Companies.
Alteration of the articles shall not violate provisions of the Memorandum. It
must be made bonafide the benefit of the company. All clauses in the articles ultra
vires the Memorandum shall be null and void, and the articles shall be held
inoperative. Alteration must not contain anything illegal and shall not constitute
fraud on the minority.
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Alteration in the articles increasing the liability of the members can be done only
with the consent of the members.
The Court may even restrain an alteration where is likely to cause a damage
which cannot be adequately compensated in terms of money. Similarly, a company
cannot by altering articles, justify a breach of contract. Any alteration so made
shall be valid as if originally contained in the articles.
Where a special resolution has been passed altering the articles or an
alteration has been approved by the Central Government where required, a printed
copy of the articles so altered shall be filed by the company with the Registrar of
Companies within one month of the date of the passing of special resolution.
2.5 DISTINCTION BETWEEN ARTICLES OF ASSOCIATION AND MEMORANDUM OF ASSOCIATION
The difference between memorandum of association and articles of
association is as under:
Memorandum of Association Articles of Association
1. It is character of company indicating 1. They are the regulation
nature of business & capital. for the internal management
It also defines the company’s rela- of the company and
tionship with outside world are subsidiary to the memorandum.
2. It defines the scope of the 2. They are the rules for
activities of the company, or carrying out the objects of
the area beyond which the the company as set out in
actions of the company cannot the Memorandum.
go.
3. It, being the charter of the 3. They are subordinate to
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company, is the supreme the Memorandum. If there
document. is a conflict between the
Articles and the Memorandum, the act of the company
4. Any act of the company which 4. Any act of the company
is ultra vires the Memorandum which is ultra vires the
is wholly void and cannot be articles can be
ratified even by the whole body confirmed by the shareof shareholders. holders if it is intra vires
the memorandum.
5. Every company must have its 5. A company limited by
own Memorandum Shares need not have
Articles of its own. In such
A case, Table A Applies.
6. There are strict restrictions 6. They can be altered by a
on its alteration. Some of the special resolution, to any
conditions of incorporation extent, provided they do
contained in it cannot be altered not conflict with the
except with the sanction of the Memorandum and the
Central Government. Companies Act.
2.6 CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES OF
ASSOCIATION
The Memorandum and Articles of a company are registered with the Registrar.
These are the public documents and open to public inspection,. Every person
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contracting with the company must acquaint himself with their contents and must
make sure that his contract is in accordance with them, otherwise he cannot sue the
company.
On registration the memorandum and articles of association become public
documents. These documents are available for public inspection either in the office
of the company or in the office of the Registrar of Companies on payment of one
rupee for each inspection and can be copied (Sec. 610).
Every person who deals with the company, whether shareholder or an outsider
is presumed to have read the memorandum and articles of association of the
company and is deemed to know the contents of these document. Therefore, the
knowledge of these documents and their contents is known as the constructive notice
of memorandum and articles of association.
It is presumed that persons dealing with the company have not only read
these documents but they have also understood their proper meaning.
Where a person deals with the company in a manner, which is inconsistent
with the provisions of memorandum or articles, or enters into a transaction which
is beyond the powers of the company, shall be personally liable to bear the
consequences regarding such dealings.
2.7 SUMMARY
The whole process of formation of a company can be divided into four distinct
stages namely promotion incorporation, capital subscription and commencement
of business. However, a private company can start business as soon as it obtains the
certificate of information. The memorandum of Association of a company tells us
the objects of the company's formation and the utmost possible scope of its
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operations beyond which its actions cannot go. The memorandum of association of
every clause, objects clause, liability clause, Memorandum of association cannot
be altered by the sweet will of the members of the company. It can be altered only
by following the procedure prescribed in the Companies Act. Articles of association
contain the rules and regulations which are granted for the internal management of
the company. The company may alter its articles of association any time by following
the procedure as prescribed in the Companies Act. Every person dealing with the
company is presumed to have read the memorandum and articles of association and
understood them in their time perspective. This is known as doctrine of constructive
notice.
2.8 KEYWORDS
Promotion: Promotion means the discovery of business opportunities and the
subsequent organization of funds, property and managerial ability into a business
concern for the purpose of making profits therefrom.
Promoter: A promoter is a person who undertakes to form a company with
reference to a given object and brings it into actual existence.
Preliminary Contract: Preliminary contract refers to those agreements or
contracts entered into between different parties on behalf and for the benefit of the
company prior to its incorporation.
Certificate of Commencement of Business: A public company, having a share
capital and issuing a prospectus inviting the public to subscribe for shares, will
have to file a few documents with the registrar who shall scrutinize them and if
satisfied will issue a certificate to commence business.
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Memorandum of Association: It is the document which defines the objects and
lays down the fundamental conditions upon which along the company is allowed to
be incorporated.
Articles of Association: Articles of association are the rules, regulation and byelaws for governing the internal affairs of the company.
2.9 SELF ASSESSMENT QUESTIONS
1. Explain the process of formation of a company under the Companies Act,
1956.
2. “A certificate of in corporation is conclusive evidence that all the
requirements of the Companies Act have been complied with”. Comment.
3. What is a Memorandum of Association ? Discuss its clauses
4. How the alteration in the different clauses of Memorandum of Association
can be made?
5. What is Articles of Association ? What are its contents ?
6. Distinguish between Memorandum of Association and Articles of
Association.
2.10 SUGGESTED READINGS
S.K. Aggarwal, Business Law, Galgotia Publishing Company, New Delhi.
G.K. Varshney, Elements of Business Law, S Chand & Co., New Delhi.
R.H. Pandia, Priciples of Mercantile Law, N.M. Tripathi Pvt. Ltd., Mumbai.
S.R. Davar, Mercantile Law, Progressive Corporation Pvt. Ltd., Mumbai.

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