THE COMPANIES

Bulls Eye: ACT, 2013

[Link] & It's Content
2 AOA & Its Features PART 3
[Link]

MEMORANDUM OF ASSOCIATION-

AN INTRODUCTION
Statutory Definition:
‘Memorandum‛ means the memorandum of association of a
company as original framed or as altered from time to time in
pursuance of provision companies law or of this act.

Meaning
Memorandum contains the objects for which the company is
formed and therefore, identifies the possible scope of its
operations beyond which its actions cannot go. It defines as
well as confines the powers of the company.

Objective
i) It enables the shareholders, creditors and those who deal
with the company to know what its powers are and what is the
range of its activities.
ii) It contains the object for which the company is formed
and therefore identifies the possible scope of its operations
beyond which its actions cannot go. NOTE DOWN

Public Document:
Memorandum is a public document, i.e. any person (whether a
member of the company or not) can inspect it in the office of
Registrar.

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Every company must have its own memorandum: PART 3
No Company can be registered without a memorandum. It is
one of the main documents that are required to be filed with
the Registrar at the time of registration of the company.
NOTE DOWN
Specified formats for MOA based on nature of co.

Table Nature of Liability Nature of Raising

A Limited With share capital

B Limited With Guarantee

C Limited With shares & Guarantee

D Unlimited No share capital

E Unlimited With Share capital

CONTENTS OF MEMORANDUM
(CLAUSES CONTAINED IN MEMORANDUM)

Name Clause
The ‘name clause‛ of memorandum shall state the name of the
company.
In the case of a public company, the word ‘limited shall be the
last word ofthe name of its company. Explnation
In the ease of a private company, the words 'private limited'
For the Companies under
shall be the last words of the name of the company.
section 8 of the Act, the
The requirement to use the word 'limited' or the words
name shall include the words
'private limited',as the case may be, shall not apply to a
foundation, Forum,
company registered u/s 8.
Association, Federation,
Government company‛s name must end with the word “Limited”.
Chambers, Confederation,
In the case of One Person Company, the words “One Person
council, Electoral trust and
Company”, should be included below its name.
the like etc..

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Situation Clause: Observation

The 'situation clause' of memorandum shall mention the name Only state needs to be
of the State in which the registered office of the company is mentioned not the address
proposed to be situated. of registered office.

Objects Clause "Jaisa naam waisa kaam"

The 'objects clause' of memorandum shall state the objects Observation
for which the company is proposed to be incorporated and any If any company has
matter considered necessary in furtherance thereof. changed its activities
which are not reflected
Liability Clause: in its name, it shall
The 'liability clause' of memorandum shall state as to whether change its name in line
the liability of members of the clause company is limited or with its activities within
unlimited. a period of six months
from the change of
In case of a company limited by shares, the memorandum shall activities.
state that liability of every member shall be limited to the
amount unpaid on the shares held by him.
Observation
In case of a company limited by guarantee, the memorandum Guarantor continues to
shall state that liability of every member shall be limited to be liable for one year
the amount that he has undertaken to pay to the company, in after he ceases to be a
the event of winding up of the company. member for payment
of the debts and liabil-
ities of the company
NOTE DOWN
contracted before he
ceases to be a member.

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Capital Clause:
In case of a company having a share capital, the memorandum
shall contain the 'capital clause'. Observation
The 'capital clause' of memorandum shall state — A company not having
the amount of share capital with which the company is share capital need not
registered (viz the authorised share capital); and have this clause i.e
the division of the authorised share capital into shares guarantee co.
of a fixed amount.

Subscription (Association) Clause: Observation

In case of a company having a share capital, -
Subscribers are become
The 'subscription clause' of memorandum shall state the
member of the company
number of shares that each subscriber has agreed to
as soon as company is
subscribe;
formed. They are the
Every subscriber shall agree to subscribe for at least 1 share;
1st member‛s of the
The number of shares subscribed by each subscriber shall be
company.
indicated opposite to his name.

Nomination clause: Observation

In the case of OPC, the memorandum shall state the name of a
Minor cannot be a
person, who, in the event of death or incapacity of the
signatory to the
subscriber, shall become the member of the company.
memorandum as he is
not competent to
contract. The guardian
NOTE DOWN of a minor, who
subscribes to the
memorandum on his
behalf, will be deemed
to have subscribed in
his personal capacity.

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ARTICLES OF ASSOCIATION

Definition:
Explanation
‘Articles‛ means the articles of association of a company as
MOA “States us what
originally framed or as altered from time to time or applied
to do” and AOA
in pursuance of any previous companies law or of this Act.
“States us how to do”.

Meaning
Articles are the regulations framed by a company for its own
governance.
The articles of association of a company are its rules and
regulations, which are framed to manage its internal affairs.
Just as the memorandum contains the fundamental
conditions upon which the company is allowed to be
incorporated, so also the articles are the internal
regulations of the company

Contents of articles.
Contains regulations:
The articles of a company shall contain the regulations for
management of the company.

Inclusion of matters:
However, a company may also include such additional matters
in its articles as may be considered necessary for its
management.

Contain provisions for entrenchment:

The articles may contain provisions for entrenchment (to
protect something) to the effect as that are more
restrictive than those applicable in the case of a special
resolution, are met or complied with.

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Manner of inclusion of the entrenchment provision:
The provisions for entrenchment shall only be made either on NOTE DOWN
formation of a company, or by an amendment in the articles
agreed to by all the members of the company in the case of a
private company and by a special resolution in the case of a
public company.

Notice to the registrar of the entrenchment provision:

Where the articles contain provisions for entrenchment, the
company shall give notice to the Registrar.

Model articles
A company may adopt all or any of the regulations contained in
the model articles applicable to such company.

DOCTRINE OF ULTRA VIRES

Meaning and effect of the doctrine:

Ultra means 'beyond' or 'in excess of and vires means
'powers'. Thus, ultra vires means an act or transaction beyond
or in excess of the powers of the company.
An act or transaction shall he ultra vires if
It is not permitted or authorised by the Companies Act,
2013;
It falls outside the object clause of memorandum; and
Its attainment is not incidental or ancillary to the
attainment of main objects.

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CASE STUDY.
Ashbury Railway carriage & Iron Company
Ltd. V Richie:
Facts:
Extract of object clause.
The object clause of an industrial company contained the NOTE DOWN
following objects besides some other objects:
To make, sell or lend on hire, railway carriages and
wagons.
To carry on the business of mechanical engineers and
general contractors.
To purchase, lease, work and sell mine, minerals, land and
buildings.

The company entered into a contract with Richie, for the

financing of a construction of a railway tine in Belgium.

Issue
Will financing of construction contract be part of object
clause of the company?
Decision of the Court.
The Court held that the company could not finance the
construction of a railway line by alleging that such a business
falls under the business of general contractors. Financing
agreement would purely be beyond the scope of business and
cannot be considered as part of general contracts.

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Effects of ultra vires transactions.
The transaction is void ab initio:
An act which is ultra vires the company is void and
is of no legal effect.

Neither the company nor the other contracting

NOTE DOWN
party derives any right under an ultra vires contract.

No ratification.
Even ratification of an ultra vires contract by the whole body
of shareholders does not make an ultra vires contract valid or
enforceable.

Injunction against the company:

Any member may obtain an injunction order from the Court. i.e.
an order of the court restraining the company from proceeding
with the ultra vires contract.

Personal liability of directors:

If funds of the company are misapplied or wasted by entering
into ultra vires transactions, the directors shall be personally
liable to the company for breach of trust.

Used to pay Creditors

If ultra vires transaction is used to pay creditors, in such case
based on the principles of equity,the contracting party under
ultra vires transaction would step into shoes of creditor.

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DOCTRINE OF INDOOR MANAGE-
MENT OR TURQUAND'S RULE PART 3

NOTE DOWN
Purpose of doctrine.
The doctrine of indoor management operates in favour of the
outsiders. i.e. this doctrine creates a presumption in favour of
the outsiders

Meaning of the doctrine.

As per this doctrine, outsiders dealing with the company are
not required to enquire into the internal management of the
company.
Outsiders dealing with the company are entitled to assume
that as far as internal proceedings of the company are con-
cerned, everything has been done regularly.
Thus, the doctrine protects an innocent outsider from any
irregularity present in the working of the company).

Effect of the doctrine

If a contract is entered into on behalf of the company by any
director or officer of the company, it is enforceable against
the company,
If provisions contained in the memorandum and articles have
been complied with, and there was some internal irregularity
had arisen of which the outsider was unaware.

CASE STUDY.
Royal British Bank vs Turquand Rule.
Facts
The articles of a company stated that the directors
could borrow money on behalf of the company, if they are so
authorised by a resolution passed by the shareholders in GM.

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The directors borrowed money from Bank without PART 3
obtaining any authorisation from shareholders.
Issue NOTE DOWN
T had lent the money to the company assuming that the
shareholders had authorised the directors to borrow
money as per the requirement of the articles.
Conclusion
It was held that borrowing of money by the directors
without any authorisation from the shareholders
amounted to a mere internal irregularity, and since T had
no knowledge of such internal irregularity, he would
entitled to recover the loan from the co.

Exceptions to the doctrine of indoor

management
Knowledge of irregularity:
Where the persons dealing with the company have knowledge
of an internal irregularity, obviously the presumption that
every internal proceeding has been conducted regularly shall
stand rebutted, i.e. they cannot assume that everything has
been done regularly.

Haward v Patent Ivory Manufacturing Company•

The directors of a company could borrow upto £1,000 without
the sanction of members in GM.
The consent of the shareholders was required to borrow in
excess of £1,000.
The directors themselves lent £3,500 to the company without
approval of members.
It was held that the directors had the notice of the internal
irregularity and therefore the company was liable to them only
for £1,000.

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Negligence
Suspicious circumstances or unusual magnitude of transactions
NOTE DOWN
If there are suspicious grounds surrounding a transaction, but
the person dealing with the company fails to make reasonable
inquiry, the benefit of doctrine of indoor management will not
be available.

CASE REFERENCE
Anand Bihari Lal v Dinshaw & Company
Facts
An accountant of the company entered into a contract on
behalf of the company with a third party to sell the property
of the company.
Dispute
The contention of [Link] that accountant was not authorized
to sell the property and no enquiry was made by plantiff to
ascertain the eligibility of such person to sell the property.
Conclusion
It was held that the third party cannot take benefit of indoor
management and assume that the accountant was authorised
by the company to sell the property of the company.
Therefore, the third party could not enforce such a contract
against the company even though the third party had acted
bonafide.

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Forgery
The doctrine of indoor management applies only in case of
NOTE DOWN
irregularity which might otherwise affect a transaction but it
cannot apply to forgery which must me regarded as nullity.

CASE REFERENCE
Ruben vs Great Fingall Consolidated
Facts
- A share Certificate was issued under the common seal of
the company.
- The secretary of the company had signed on the share
certificate.
- However, the signatures of two directors were also
required on it, which were forged by secretary.

Dispute
The holder of the share certificate contended that he was not
aware of the fact of forged was not possible for him to deter-
mine whether the signatures were genuine or forged there-
fore, the certificate issued to him should be held as valid.

Conclusion
The Court held that in case of forgery, there is not a defect
is consent, but absence of company and therefore the
certificate issued by way of forgery is void. The rule of indoor
management is never being made to cover such complete
forgery.

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Difference between
MOA & AOA

MOA AOA
Objectives It Delimits the objectives It Lays down rules and
of the company. regulations for the internal
management of the co.

Relationship MOA defines the AOA defines the

relationship of the company relationship between the
with the outside world company And its members.

Alteration It can be altered under It can be altered simply by

certain circumstances and passing a special resolution.
in the manner provided for
in the act

Ultra Vires Acts done by the company The acts ultra-vires the
beyond the scope of the articles can be ratified by a
memorandum are special resolution of the
ultra-vires and void. These shareholders, provided
cannot be ratified even by they are not beyond the
the unanimous consent of provisions of the
all the shareholders. memorandum.

PROF. CA DHWANIK SHAH