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Registration & Incorporation of a Company
Prof. .S. D. Bhosale
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(..2..)
REGISTRATION AND INCORPORATION OF A COMPANY
QUESTION BANK
1.
2.
3.
Explain the procedure regarding "registration" and "incorporation" of a
company.
Explain the term "memorandum of association" and "articles of association"
of a company.
How is a company formed under the Companies Act 1956? Enumerate the
various documents to be filed with the Registrar.
4.
5.
Doctrine of indoor management and Doctrine of constructive notice.
What is meant by incorporation of a Company? Explain the procedure for
registration of a Company.
6. Explain different types of companies which may be incorporated under the
Companies Act. 2013.
7. Write a detailed note on the procedure for the Company's formation emphasizing
the role of Promoters.
8. Write a detailed note on the significance of the Memorandum of Association and
the procedure for its alteration.
SHORT NOTES
1.
2.
3.
4.
Memorandum
Articles of Association.
Doctrine of Ultra-Vires
Ultra-Vires
Table of content
INTRODUCTION:-..............................................................................................27
Number of Persons Required:-.............................................................................28
Promoters:- ..........................................................................................................28
Pre-incorporation Contracts:-...............................................................................28
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Registration & Incorporation of a Company
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APPLICATION:- ..................................................................................................30
REQUISITE DOCUMENTS:-..............................................................................30
Article of Association:- ...................................................................................30
Agreements:-........................................................................................................30
(4) Declaration:-......................................................................................................30
(5) A List of Persons:-............................................................................................31
(6) Consent in Writing:-.........................................................................................31
Date of Incorporation:- ....................................................................................31
Legal Person:-..................................................................................................31
(2) Advantages and Disadvantages of Incorporation:-................................................31
a) Advantages of Incorporation:- ........................................................................32
Legal Personality:-.....................................................................................32
Separate Property:-...................................................................................32
Perpetual Succession:-...............................................................................32
Transfer of Share:-....................................................................................32
Suing and Being Sued:- .............................................................................32
Limited Liability:- ....................................................................................32
Conclusive Evidence:-...............................................................................32
viii) Efficient Management:-.............................................................................32
Disadvantages of Incorporation:-.........................................................................33
Abuse of Legal Personality:-..........................................................................33
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Conditions:- ....................................................................................................33
Issuance of Certificate:-.................................................................................34
Pre-Certificate Contracts:-..............................................................................34
INTRODUCTION:-...............................................................................................34
Name Clause:-......................................................................................................34
Drop of Word "Limited" (S. 8 (5):-.................................................................35
Penalty (S. 453):- ............................................................................................35
Change in Name (S.13 (2)):-...........................................................................35
Rectification of name of a company (S. 16):-......................................................36
Registered Office Clause (S. 12):- ......................................................................36
Change in Registered Office:-.......................................................................36
Notice of Change:-..........................................................................................36
Grounds for Change:- .....................................................................................36
The Object Clause (S. 4 (1)(b)):-..........................................................................37
Main Object:- .............................................................................................37
Other Objects:-...........................................................................................37
Purpose of Object Clause:-.............................................................................37
To protect Investors:-..................................................................................37
To protect Creditors:- .................................................................................37
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Registration & Incorporation of a Company
Prof. .S. D. Bhosale
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Effects of Ultra-Virus Acts:-.........................................................................38
Injunctions:-................................................................................................38
Directors Personally Liable:- .....................................................................38
Registration of Alteration (S. 13 (9)):-...........................................................................39
Ultra-Virus Civil Wrong:-..............................................................................39
Liability Clause:-..................................................................................................39
Unlimited Company:- .................................................................................39
Capital Clause:- ...................................................................................................40
Subscription Clause:-..........................................................................................40
(2) ARTICLES OF ASSOCIATION (S. 5) ...................................................................40
Contents of Article of Association (S. 5):-...........................................................40
Provisions for Entrenchment:-........................................................................................41
Form of Articles of Association (S. 5 (6)):-........................................................41
Alteration of Article of Association (S. 14):-......................................................41
1) A company cease to be a Private Company:- ............................................................42
2) Alteration to convert Public into Private company:- .................................................42
Status:-..................................................................................................................42
Importance:- ........................................................................................................42
Nature:- ................................................................................................................43
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Ultra-Virus:-........................................................................................................43
Alteration:- ..............................................................................................................43
In Browne V/s La Trinidad...............................................................................43
4) Binding between Members:-......................................................................................43
In Layfield V/s Hands......................................................................................44
Exceptions to the Doctrine of Indoor Management:-.....................................................45
Knowledge of Irregularity:-.......................................................................45
Apparent Irregularity:-..............................................................................45
Ignorance of Articles:-..............................................................................45
Forgery:- ...................................................................................................46
I]
INTRODUCTION:-
The provisions relating to the registration of a company are provided in S. 7 of
the Companies Act. 2013. The company comes into existence through its registration.
After satisfying himself that the company's promoters have fulfilled all the necessary
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Registration & Incorporation of a Company
Prof. .S. D. Bhosale
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requirements, the Registrar issues a certificate of incorporation, and thus, the company
comes into existence. In other words, a company comes into existence by registration.
II]
ESSENTIAL ELEMENTS OF REGISTRATION:-
Following are the essential elements which are very important for the
registration of a company-
A)
Number of Persons Required:-
Seven or more persons are required to register a public limited company, and
they should be associated for lawful purposes.
Whereas for the registration of the private limited company, any two or more
persons shall be associated for lawful purposes. However, the maximum number of
members should not exceed 200.
B)
Promoters:-
The persons who take the initiative to form a company are called ‘promoters’.
The promoters should arrange all the necessary documents and documents for
the registration of a company.
C)
1)
Pre-incorporation Contracts:-
Meaning:-
Contracts made on behalf of the company that have not yet been incorporated
are called ‘pre-incorporation contracts’.
2)
Who can make Pre-incorporation Contracts?
Pre-incorporation contracts may be made by
(i) Promoters of the company, or
(ii) By a person acting as an agent or trustee of the company (not incorporated)
Liability of company for Pre-incorporation contracts:-
Does the important question arise regarding whether the company can sue or be
3)
sued for pre-incorporation contracts? This question can be answered from the
following points...
a) The Company cannot be sued for pre-incorporation contracts:-
A company comes into existence on incorporation or registration; hence, the
company cannot be sued or made liable for contracts made before its registration.
The court held that the solicitor whose services the company received before
its registration is not entitled to recover charges for his services.
1[(1906) 2 Ch. 435]
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Registration & Incorporation of a Company
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i)
No Liability on Ratification of Pre-incorporation contracts:-
For valid ratification, the person ratifying the act should have existed; otherwise,
it cannot be ratified. Therefore, pre-incorporation contracts cannot be rectified. Hence,
the company is not in existence at pre-incorporation contracts and cannot be held liable
for ratifying the contract.
ii)
Liability of a company under the Specific Relief Act:-
S. 15(4) provides an exception to the rule that the company is not liable for
ratification of pre-incorporation contracts. S. 15(4) provides that the company can sue
or be sued for specific performance of contracts when...
(i) Promoters have made a contract for the company,
(ii) terms of incorporation warrant such contracts.
(iii) the company accepts the contract and communicates such acceptance to the
other party,
(iv) other parties then can compel the company for specific performance of such
a contract.
iii)
Liability of Promoters or Agents:-
For contracts entered into on behalf of a company before its incorporation, the
company is not liable even after its incorporation or registration, but promoters or
agents are personally liable for such contracts.
Fact - The promoters of a company agreed to purchase certain goods on behalf
of a company that has yet to be incorporated.
The Court Held that Since the company was not in existence at the time of the
contract, the company cannot be held liable to pay, but promoters are personally liable
for the contracts.
b)
Company cannot sue for pre-incorporation contracts:-
Since pre-incorporation contracts towards the other party do not bind the
company, the other party is also not bound by pre-incorporation contracts made with
the company (i.e. not incorporated).
However, as mentioned above, this rule is subject to S. 15(4) of the Specific
Relief Act.
In Natal Land & Colonisation Co. Ltd. V/s Pauline Colliery & Devp. Syndicate
2[(1886) x C. P. 174]
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Fact—Natal Land Co. Ltd. Had made a contract with Syndicate to grant the
mine lease to Syndicate. After the Syndicate's registration, Natal did not complete the
contract.
Held that -Said contract cannot be enforced.
III] PROCEDURE FOR REGISTRATION:-
A]
APPLICATION:-
First, an application for registration must be made to the company's Registrar.
Promoters or agents may make such applications to the company.
B]
REQUISITE DOCUMENTS:-
As mentioned above, an application should be accompanied by the following
important documents, viz.
(1) Memorandum of Association of the Company:-
This is an important document for a company. It contains the fundamental
conditions upon which a company is allowed to be incorporated. It defines the powers
or scope of activities of the company. It states the name of a company, address of the
registered office of the company, object of the company, liability of members, amount
of share capital, etc. [see below for details]
(2)
Article of Association:-
This is a document that contains rules and regulations for the internal
management of a company's affairs.
In a "private company" or "limited company," the article of association should
be registered along with the Memorandum of Association. Still, in the case of a "public
limited company," it is optional to register it along with the Memorandum.
The article of Association shall be printed and divided into paragraphs. Each
subscriber to the Memorandum of Association also needs to sign it. [see below for
details]
(3)
Agreements:-
The company proposes an agreement with any individual for appointment as its
managing or whole-time director or manager.
(4)
Declaration:-
The above-mentioned documents shall be accompanied by a declaration
declaring that all the requirements of the Companies Act and Rules thereunder are
3[(1904) A C 120]
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Registration & Incorporation of a Company
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complied with in relation to registration. Such declaration shall be made by
(i) An advocate of the Supreme Court or a High Court.
(ii) An attorney or pleader entitled to appear before a High Court.
(iii) A secretary or Chartered Accountant in whole-time practice in India who is
engaged in forming a company.
(iv) A person named in the Articles of Association as the company's director,
manager or secretary.
(5)
A List of Persons:-
A list of persons who have consented to become directors of the company.
Consent in Writing:-
(6)
Consent in writing of each director or proposed director is necessary to act as a
director. However, consent is not required to be filed with the Registrar of companies
if the company is-
(i) a private company or an
(ii) a company has no share capital, or
(iii) a company which was a private company before becoming a public
company.
C]
CERTIFICATE OF INCORPORATION:-
If the Registrar is satisfied that all the requirements mentioned above are
complied with by the company, he shall retain and register the Memorandum, articles,
if any, agreements and shall issue a certificate of incorporation to the company.
(1)
Effect of Certificate of Incorporation:-
Following are the effects of the certificate of incorporation.
Conclusiveness of Certificate of Incorporation:-
a)
A certificate of incorporation given by the Registrar shall be conclusive
evidence that all the requirements of this Act relating to registration have been
complied with, and the validity of the certificate cannot be challenged on any ground.
b)
Date of Incorporation:-
It is also conclusive evidence as to the date on which the company was
incorporated and became corporate. Thus, the company's life commences from the date
mentioned in the certificate of incorporation.
c)
Legal Person:-
From the date of incorporation mentioned in the certificate of incorporation, the
company becomes a legal person, having perpetual succession and a common seal.
(2) Advantages and Disadvantages of Incorporation:-
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a)
i)
Advantages of Incorporation:-
Legal Personality:-
From the date of incorporation, the company becomes a legal entity with
perpetual succession and a common seal.
In the above case, the legal personality of the incorporated company was firmly
recognised.
ii)
Separate Property:-
After becoming a legal person, the company can own, enjoy and dispose of the
property in its own name.
iii)
Perpetual Succession:-
After incorporation, the company becomes a legal entity with perpetual
succession and a common seal. This means that the company's existence is not affected
by the death or insolvency of its members.
iv)
Transfer of Share:-
The incorporation enables a member to transfer shares without the consent of
other members because shares are movable property.
v)
Suing and Being Sued:-
After incorporation, a company becomes a legal person, and hence, the company
can sue or be sued in its own name.
vi)
Limited Liability:-
Under the Indian Companies Act, a company can be registered with limited or
unlimited liability; where the company is registered with unlimited liability, each of
its members is liable to contribute to the debts of the company to the full extent of his
property.
But, if the company is registered with "limited liability", each member is liable
to the extent of his interest in the company. Usually, companies are registered with
limited liability.
vii)
Conclusive Evidence:-
The incorporation of a company is conclusive evidence that all registration
requirements are fully complied with. Thus, registration is conclusive proof of the
company's existence.
viii) Efficient Management:-
A company's management is vested with efficient people, called directors; each
4 (1897) A.C.22
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Prof. .S. D. Bhosale
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member cannot participate in the company's day-to-day activities.
b)
i)
Disadvantages of Incorporation:-
Abuse of Legal Personality:-
A veil of incorporation exists between the company and its members. In order
to protect them from the liability of a company, its members always take shelter from
the corporate veil. This corporate veil is used as a means of fraud or evasion of duty.
In this way, members abuse their legal personality.
ii)
Formalities and Expenses:-
The incorporation of the company involves many formalities and expenses. It
also causes huge expenses throughout its life and also on its dissolution.
iii)
Shareholders are divested of Control:-
The whole management of a company concentrates on directors. Since
shareholders have no control over management, they are not interested in the
company's affairs.
D)
1)
COMMENCEMENT OF BUSINESS:-
Certificate of Commencement of a Business (S. 10-A):-
Public and private companies without share capital may commence business
immediately after getting a certificate of incorporation. However, Public and Private
Companies with share capital can only commence business or exercise any borrowing
power after getting a ‘certificate of commencement’.
2)
Conditions:-
The Registrar can issue such certificate upon fulfilment of the following
conditions by the company, viz.
(i) A duly verified declaration is to be filed by one of the directors in a prescribed form
to the register of companies.
(ii) within the period of 180 days of the date of the incorporation of the company.
(iii) declaration that every subscriber to the Memorandum has paid the value of the
share agreed to be taken by him on the date of making such declaration, and
(iv) the company has filed with the Register a verification of its registered office (as
provided in subsection (2) of S. 12).
Suppose any default is made in the above compliance. In that case, the company
shall be liable to a penalty of fifty thousand rupees, and every officer who is in
default shall be liable to a penalty of one thousand rupees for every day during
which the default continues but not exceeding the amount of one lakh rupees.
Moreover, where no declaration has been filed with the Registrar as mentioned
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above, and the Registrar has reasonable cause to believe that the company is not
carrying out any business or operations, he may initiate action for the removal of
the name of the company from the register of companies.
3)
Issuance of Certificate:-
When all the above requirements are satisfied, the Registrar shall issue the
certificate to commence business.
4)
Pre-Certificate Contracts:-
Contracts made by the company before a certificate of commencement of
business is received are not binding on the company.
NOTES
(1) MEMORANDUM OF ASSOCIATION
INTRODUCTION:-
A Memorandum of Association is a fundamental document for the formation of
I]
a company. It is the charter of a company. It contains fundamental conditions upon
which the company is allowed to be incorporated. It enables the outside world, the
shareholders, the creditors and others who deal with the company to know its object,
status, character or position.
According to S. 2 (56), the expression “Memorandum” means “the
Memorandum of Association of a company as originally framed or as altered from
time to time in pursuance of any previous Company Law or this Act.”
II]
FORM OF MEMORANDUM OF ASSOCIATON:-
The Memorandum shall be -
(i) printed
(ii) divided into paragraphs numbered consequently, and
(iii) signed by each subscriber in the presence of at least one witness.
(iv) it shall be in the form of Table A, B, C, D, and E as prescribed in
Schedule-I.
III]
CONTENTS OF MEMORANDUM OF ASSOCIATION (S. 4):-
The Memorandum of Association shall contain the following six clauses-
(A)
Name Clause:-
As a company is similar to a natural person and has a legal entity, it should bear
its own name. The Memorandum shall state the name of a company. The promoters
shall give the company a specific name, but the following conditions should strictly be
followed...
(i) The last word shall be the word "limited" in the case of a “public limited company”
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and "private limited" in the case of a ‘private limited company’ or ‘one man
company’ in the one-man company.
(ii) The name should not be undesirable. A name is undesirable when it is identical to
or nearly resembles another company's name.
In Atkins & Co. V/s Wordle
Fact - A company's directors made contracts without the word "limited."
The Court held that the directors were personally liable for those contracts.
1)
Publication of the Name of the Company (S.12 (3)):-
Every company is required-
(i) to paint or affix its name outside every office or place in
which business is carried out.
(ii) to engrave its name in visible character on its seal.
(iii) Use the name on every business letter or document.
In Basudev Lal V/s Madan Lal
Held that -Name of a company should be painted outside every place where the
business of the company is being carried out.
2)
Drop of Word "Limited" (S. 8 (5):-
(i) In the following exceptional cases, the Central Government may authorise
companies to omit the words "Limited", "Private Ltd", or “one-person company”
in its name.
(ii) when the company is formed to promote science, commerce, art, religion,
charity, etc.
(iii) when the company intends to apply its profit to its object and not as a dividend
to its members.
3)
Penalty (S. 453):-
If any person, without the company’s registration, carries on trade or business
under any name or title of which the word "Limited", "Private Ltd" or “one person
company" is the last word, that person shall be punished with a fine which shall not be
less than Rs.500/- per day but which may extend to Rs. 2000 per day upon which that
name or title used.
4)
Change in Name (S.13 (2)):-
The company may change its name at any time in the course of business but is
subject to the following conditions...
(i) A special resolution should be passed to that effect.
(ii) Approval from the central government should have been obtained.
(iii) The changed name should be registered with the company's Registrar.
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Rectification of the name of a company (S. 16):-
In a case, due to inadvertence or otherwise, a company, after its first registration
or on its registration by a new name, is registered by a name which-
(a) In the opinion of the Central Government as identical with or too nearly resembles
the name by which a company in existence had been previously registered, the
Central Government may direct the Company to change its name within 3 months
by adopting the ordinary resolution.
(b) The Central Government may also order to change the name of the company on
an application by a registered proprietor of a trade mark, that the name is identical
with or too nearly resembles the registered trade mark of such proprietor.
B)
Registered Office Clause (S. 12):-
The second clause should mention the State in which the company's registered
office is to be situated. Every company should have a registered office from the day of
commencement of its business or within 30 days of its incorporation, whichever date
is earlier, to which communications and notices may be addressed.
In Zenith Silk Mills Private Ltd. V/s Unknown (Company Petition 340/2015)
Gujrat High Court held that the provisions relating to the Registration Office, its
address, etc., are mandatory and should be properly complied with.
1)
Change in Registered Office:-
Changing registered office clauses from one state to another is a complicated
procedure, and it requires an alteration in the Memorandum of Association. The
following conditions are required to be fulfilled for change-
(i) The company shall pass a special resolution to that effect.
(ii) before confirming alteration, the Central Government shall be
satisfied
.
2)
Notice of Change:-
Notice of the place of the registered office shall be communicated to the
Registrar within 30 days after the change date. Notice is to be given to every
shareholder, creditor, etc.
3)
Grounds for Change:-
A company may change the place of registered office from one state to another
on the following grounds-
(i) to carry on business more economically or more efficiently.
(ii) to attain its purpose by new means.
(iii) to enlarge or change the local area of its operation.
(iv) to restrict or abandon any object specified in the Memorandum.
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(v) to amalgamate with any other company or body of persons.
In Re Machinon Machenzie and Company
Fact - The company passed a resolution to shift its registered office from the state of
Bengal to Maharashtra and filed a petition in Court for confirmation.
The Court allowed the petition.
C)
The Object Clause (S. 4 (1)(b)):-
The third clause in the memorandum states the object of the proposed company.
Since the company is funded by other people’s money, those persons shall know its
object.
a)
1)
The company's object clause shall contain three sub-clauses:-
Main Object:-
The main object of a company to be persuaded is to be mentioned. It contains
its incorporation of any object incidental and ancillary to attain the main object.
2)
Other Objects:-
Objects not included in the main object are other objects.
The State to whose Territory Objects Extend:-
In the case of companies with objects not confined to one state, they should
3)
mention the name of the states to which territories the object extends.
b)
Purpose of Object Clause:-
The following are the purposes of the object clause-
To protect Investors:-
1)
The investors should know the object of the company in which their money is
to be invested.
2) To protect Creditors:-
The creditors should ensure that the funds of the company are not to be used for
unlawful or unauthorised activities.
3)
Restrictions on Objects:-
The objects should not be
(i) against public policy or provisions of the constitution of India.
(ii) against provisions of the Companies Act.
(iii) against the provisions of General Law.
Object clause and Doctrine of Ultra-Virus:-
The object clause in the Memorandum indicates the purpose for which the
c)
company’s money is to be used. The company is, therefore, authorised to do only such
act which is authorised to be done by the Memorandum. It cannot do those acts which
are called outside its powers. Acts outside the company's object are ultra-virus and,
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therefore, void.
Ultra-virus acts cannot be validated by ratification by the shareholders later on.
In Ashbury Railway Camage & Iron Co. V/s Riche
Facts-A company was constituted with the following objects-
(i) to make, sell or give on hire railway carriage and wagon,
(ii) to carry on business as a mechanical engineer and general
contractor.
However, the directors made a contract to finance the construction of a railway
line in Belgium. The company passed a special resolution to ratify the contract.
The Court Held that the contract was ultra-virus and, therefore, void.
d)
1)
Effects of Ultra-Virus Acts:-
Injunctions:-
The company may be restrained by a permanent injunction from doing the ultra-
virus act.
House of Lords held that the running of the omnibus is an ultra-virus by the
company, which has not been formed with that object.
2)
Directors Personally Liable:-
If the company does an ultra-virus act, directors are personally liable to the
company to compensate for any loss.
Supreme Court Held that the donation of Rs. 2 Lakh by the company was an ultra-
virus act.
3)
Breach of Warranty of Authority:-
Directors are company agents; if they make any contract on behalf of the
company, they warrant the company's authority. But, if contracts made by them are
ultra-virus, the company can give no authority, and hence, directors are personally
liable for breach of an implied authority.
In Weeks V/s Propers
The Court Held that -Directors are personally liable for the breach of implied
warranty.
4)
Ultra-Virus Contracts as void:-
The contracts entered beyond the powers are Ultra-Virus and are void.
5 (1902) A.C. 165
6 AIR 1963 S. C. 1185
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5)
Alteration of object clause (S. 13 (8)):-
A company which has raised money from the public through a prospectus and
still has any unutilised amount out of the money so raised shall not change the objects
for which it was raised unless the company passes a special resolution and (i) the
details of that resolution are published in newspapers and website of the company, and
(ii) the dissenting shareholders shall be allowed to exit.
Registration of Alteration (S. 13 (9)):-
The Registrar shall register any alteration of the Memorandum with respect to
the objects of the company and certify the registration within a period of thirty days
from the date of filing of special resolution as above.
6)
Ultra-Virus Civil Wrong:-
Ultra-Virus Civil wrong means "tort". The company is liable for ultra-virus civil
wrongs committed by its members.
D)
Liability Clause:-
On the basis of liability, companies can be divided into three clauses-
Companies Limited by Shares:-
1)
In the case of a company limited by shares, the member’s liability is limited to
the extent of the nominal number of shares he holds, not more than that.
But, if a member’s shares are fully paid up, he holds no liability at all.
2)
Company Limited by Guarantee:-
In the case of a company limited by guarantee, each member is liable to
contribute to the company's assets to the extent of his guarantee at the time of the
company's formation or winding-up (as the case may be).
3)
Unlimited Company:-
A company with no limit on its members' liability is termed an ‘unlimited
company’ (S. 2 (92). Members of such a company are similarly liable as "partners" in
a partnership firm. Their liability extends to the payment of all dues of the company.
4)
“One Person Company” (S. 2 (62)):-
“One Person Company” means a company which has only one person as a
member”. Such ‘One Person Company” is a ‘Private Company’.
The Memorandum of ‘one person company’ shall indicate the name of another
person, with his/her prior consent in the prescribed form, who shall, in the event of the
subscriber’s death or his/her incapacity to contract, become the member of the
company and the written consent of such person shall also be filed with the Registrar
of Companies at the time of incorporation of one person company along with its
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Memorandum and Articles.
Such other (nominated) members may withdraw his/her consent in such manner
as may be prescribed. Even the member of One Person Company may at any time
change the name of such other person by giving notice in such manner as may be
prescribed. However, such change shall be intimated to the Company and Registrar.
E)
Capital Clause:-
The mention of the capital clause is compulsory only in cases of a limited
company. In the Memorandum of association of a "company limited by shares", the
capital clause of such company shall state that...
(i) amount of nominal capital.
(ii) the number of shares into which it is divided,
(iii) and the amount of each share.
E.g., The share capital of a company is one crore rupees divided into ten lakh
shares of rupees ten each.
F)
Subscription Clause:-
This clause is also known as the "Association Clause." In it, subscribers declare
that they desire to be formed into the company and agree to take shares mentioned in
their names.
There shall be at least seven subscribers for a limited company and two persons
for a private limited company. They shall hold at least one share each. The full names,
addresses and occupations of such subscribers are also to be stated. Each subscriber
must sign in the presence of at least one witness.
(2) ARTICLES OF ASSOCIATION (S. 5)
Articles of Association are documents containing rules and regulations for the
administration of a company. Articles of Association is the second important
document; this document is to be registered along with the Memorandum of
Association. This document states rules, regulations and bylaws relating to the general
administration of a company. ‘Articles of Association’ for brevity is called ‘Articles’.
Therefore, it is concerned with the internal administration of the company.
I]
Articles of Association Whether Compulsory:-
By virtue of the 2013 Act, it is compulsory for all companies to register ‘Articles
of Association’ along with a Memorandum.
II]
Contents of Article of Association (S. 5):-
The Article of a company shall contain regulations for the management of the
company. The Articles shall also contain such matters as may be prescribed (by the
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Prof. .S. D. Bhosale
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Act). The Company is free to include such additional matters as may be considered
necessary for its management.
Provisions for Entrenchment:-
The Articles may contain provisions for entrenchment. Through the provision
of entrenchment, specific provisions of the articles are allowed to be altered only if
conditions or procedures more stringent than those applicable in the case of a special
resolution are met or complied with. In other words, some provisions shall be altered
to be more stringent than the requirement of special resolution. It means making
amendments to some important provisions so difficult as if they are non-amendable.
Such provisions of entrenchment shall only be made either on the formation of
a company or by an amendment in the articles. However, such an amendment in
articles to insert an entrenchment clause shall be agreed on by
(i) all the members of the company in the case of a private company, and
(ii) by a special resolution in the case of a public company.
Where the articles contain provisions for entrenchment, whether made on the
formation or by amendment, the company shall give notice to the Registrar of such
provisions in such form and manner as may be prescribed.
III]
Form of Articles of Association (S. 5 (6)):-
A company's Articles shall be in respective forms specified in Tables F, G, H, I
and J in Schedule I as may be applicable to such company.
(i) Table F prescribes the form of the Articles of Association of a Company
Limited by Shares
.
(ii) Table G prescribes the form of the Articles of Association of a Company
Limited by Guarantee and having a share capital.
(iii) Table H prescribes the form of the Articles of Association of a Company
Limited by Guarantee and not having a share capital.
(iv) Table I prescribes the form of the Articles of Association of an Unlimited
Company and having a share capital.
(v) Table J prescribes the form of the Articles of Association of an Unlimited
Company and not having a share capital.
IV]
Alteration of Article of Association (S. 14):-
Subject to the previous of the Companies Act and the conditions contained in
its Memorandum, a company may, by special resolution, alter its articles, including
alterations having the effect of conversation of-
(a) a private company into a public company, or
(b) a public company into a private company.
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Prof. .S. D. Bhosale
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1) A company cease to be a Private Company:-
Where a company being a private company, alters its articles in such a manner
that they no longer include the restrictions and limitations which are required to be
included in the articles of a private company under this Act, the company shall, as from
the date of such alteration, cease to be a private company.
2) Alteration to convert Public into Private company:-
Any alteration having the effect of conversion of a public company into a private
company shall not take effect except with the approval of the Tribunal, which shall
make such order as it may deem fit.
Every alteration of the articles and a copy of the order of the Tribunal approving
the alteration shall be filed with the Registrar, together with a printed copy of the
altered articles, within a period of fifteen days in such manner as may be prescribed.
The registration of altered articles makes them valid as if they were originally
in the Articles.
Every alteration made in a company's articles shall be noted in every copy of
the Articles (S. 15).
Kerala High Court Held That -An alteration made in the Article without
observing a special resolution is irregular.
Fact - The article of a private company was altered, enabling the directors to
require shareholders who were running a competing business to sell their shares to
directors at their full value.
Court Held That - Alteration was valid.
V]
1)
Distinction between Memorandum and Articles:-
Status:-
A memorandum is the main document, whereas Articles are subordinate. If
there is a conflict between these two, Memorandums shall prevail.
2)
Importance:-
The Memorandum deals with all the main and external affairs of the company.
However, Articles deal with only internal affairs of the company, such as rules,
regulations, and by-laws regarding management, etc. Therefore, they are a subordinate
7 (1986) 59 Comp Cas 284 Ker
8( 1920) 1 Ch 154
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Registration & Incorporation of a Company
Prof. .S. D. Bhosale
43
document.
3)
Nature:-
The Memorandum contains the object of the company for which the company
is incorporated, whereas articles are the internal regulations of the company.
4)
Define relations with:-
The memorandum defines the company’s relationship with the outside world,
whereas the article determines the relations between the company and its members and
the members among themselves.
5)
Ultra-Virus:-
An act of the company in violation of the Memorandum is ultra-virus which
cannot be ratified subsequently, while the act of the company in violation of the
Articles is just an irregular act, which can be ratified subsequently.
6)
Alteration:-
The memorandum cannot be easily altered. However, Articles of Association
can be altered easily by special resolution.
VI]
Binding Force of Memorandum and Articles (S. 10):-
Registration of Memorandum and Articles carries binding force as follows-
Members Bound to Company:-
1)
Members become bound to the company as if each member has signed the
Memorandum and Articles. All monies payable by any member to the company under
the Memorandum or articles shall be a debt due from him to the company.
2)
Company Bound to Members:-
The company also becomes bound to the members as if the company has signed
the Memorandum and Articles.
3)
Neither the Company Nor its Members are Bound to Outsiders:-
‘Outsider’ means a person who is not a member of the company. The Article
constitutes a contract between the company and its members, and an outsider,
therefore, cannot sue the company to enforce the provisions contained in the Article.
Court Held That - No outsider can enforce Article of Association against the
company.
4) Binding between Members:-
Each member is bound to other members by the terms of the Articles of
9 (1887) 37 Ch D 1
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Registration & Incorporation of a Company
Prof. .S. D. Bhosale
44
Association. Thus, if the Articles provide certain rights of members' interest (among
themselves), a member can enforce such rights against the other member of the
company.
In Layfield V/s Hands
The court held that the members might compel enforcement of the provisions of the
Article of Association against another member.
(3) Doctrine of Constructive Notice -
The Memorandum and Article of Association shall be registered with the Registrar of
Companies. Both these documents are open for inspection by members or outsiders at
the office of the Registrar. A company shall also furnish its members a copy of its
Memorandum and Article at request. Both these documents are deemed to be public
documents. Therefore, every person dealing with the company is deemed to have
notice of the contents of these documents. It is also deemed that persons dealing with
the company have read these documents and also understood them with their proper
meaning. This deemed notice of two documents and their contents is known as a
"Constructive Notice of Memorandum and Articles."
Facts -According to a company's Articles of Association, the deed on behalf of the
company was to be signed by the Managing Director, Secretary, and Working
Directors. But Lady Venkamma accepted a mortgage deed that was signed by only two
officers: the secretary and Working Director.
The court held that the mortgage deed was invalid as it was not in accordance with
the Articles of Association.
(4) Doctrine of Indoor Management-
The "Doctrine of Constructive Notice" provides that the Memorandum and
Articles are public documents, and their contents are presumed to be known to
everyone dealing with the company.
However, the "Indoor Management" doctrine is an exception to the doctrine of
"constructive notice". According to this doctrine, a person dealing with the company
is bound to read only public documents such as Memorandum and Articles. If his
contract is consistent with these documents, the company is bound by such a contract.
However, his contract will not be affected by any irregularity in the company's internal
management because he (the outsider) can presume that the company's internal work
10
AIR 1934 Mad. 579
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Registration & Incorporation of a Company
Prof. .S. D. Bhosale
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is carried out according to these documents. It means if there is an irregularity in
internal management, the contract can still be enforced on the basis of the doctrine of
"Indoor Management."
This doctrine is also known as "Turquand’s Rule" because it was the first time
explained in
Fact -The appellant company was not a banking company as its name indicated.
The appellant company was formed to conduct the mining business and form railways.
The article of the Association stated that directors of the company might borrow on
bond, as authorised from time to time by the general resolution. As no resolution was
passed, directors borrowed £ 2000 from Respondent Turquand. A company failed to
pay the bond amount, and Turquand sued the company’s shareholders. Shareholders
contended that the company did not pass a resolution; therefore, the company was not
liable.
The Court Held That -
Outsider (Turquand) need not enquire whether
internal formalities are followed or not. It was a matter of internal management.
Hence, Court held the company liable.
Exceptions to the Doctrine of Indoor Management:-
The following are exceptions to the Doctrine.
1)
Knowledge of Ir
r
When the person dealing with the company has actual knowledge of irregularity,
this doctrine does not apply.
2)
Where the act done is otherwise void:-
When an act done in the name of a company is void ab-initio, the doctrine does
not apply.
3) Apparent Irregularity:-
When there is an apparent irregularity, which could have been discovered on
due inquiry, the "Indoor Management" doctrine is not applicable.
4)
Ignorance of Articles:-
A person who, at the time of the transaction, had no knowledge of the company's
article cannot rely on those articles subsequently and plead that articles confer an
ostensible authority on an agent with whom he deals.
11 (1856) 6 E.& B. 327
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