MODULE 2

STAGES OF FORMATION OF A COMPANY:

The entire process of the formation of a company can be largely classified into
four stages:

A. Promotion,
B. Registration,
C. Flotation,
D. Commencement of business.

A. PROMOTION STAGE:
 It Involves preliminary steps for company formation
 It is the stage where the promoter walks into the market of potential
investors to collect their investment in an idea, which might be his own
brainchild or that of someone else.
 Promoter convinces investors and gathers resources (labour, materials,
managerial ability, machinery, etc.)

WHO IS A PROMOTER?

 Promoter has been defined under Section 2(69) of the Companies Act,
2013.
 A person who promotes the company idea.
 A promoter of a company is like the parents of the company who gives
birth to the company.
 He has been named in the prospectus issued by the company.
 He has control over company affairs or influences decision-making.
 He has the power to appoint majority of board directors or has authority
over making policies or decisions for the company
 His advices the board of directors is accustomed to acting.
  Promoter analyzes the idea using SWOT (Strength, Weakness, Opportunity,
and Threat) with respect to future prospects and feasibility with respect to
societal dynamics.
 Promoter builds investor confidence and instills confidence in the idea.
 The promoter is neither a trustee nor an agent of the company.

LEGAL STATUS OF A PROMOTER:

The promoter has a fiduciary relationship with the company. He is the one who
conceives the idea of the formation of the company, ensures that the
Memorandum of Association (MOA) and Article of Association (AOA) are
prepared and registered, finds the first directors of the company and arranges
initial capital for the company. It can thus be said that the promoters are the
persons who control the affairs of the company until the formation of the first
Board of Directors.

FUNCTIONS OF PROMOTER:

 Spotting a business demand in the market:

The promoter, before promoting a company idea, first identifies a potential

business opportunity. The potential opportunity may be any new product or a
new service, or it may even be the production or manufacture of an already
established product by new means. The promoter has to evaluate the idea of the
new potential company by using 3 tests:

 Technical conceivability: the ideas of the business may be good, but

sometimes they may be technically difficult to conceive into reality given.
 Budgetary feasibility: Sometimes it may not be possible to gather the large
funds required for the business due to limited means and sometimes
stipulated time.
 Monetary feasibility: A business idea may be technically and financially
feasible, but not monetarily appreciable. It may not be profitable or may
not return enough profits. In such a case, the promoters refrain from
promoting the idea of business.
  Name of the company:

The promoter, after fixing the launch of the idea, intends to give a name to the
company. The application to the registrar contains three names, “X or Y or Z,” in
order of priority, and the promoter adheres to Rule 8 of the Companies
(Incorporation) Rules, 2014.

 Preparation of necessary documents:

The promoters are the ones who are responsible for collecting documents that
are submitted to the Registrar of Companies to get the company registered.
These documents are a MOA and AOA, the consent of directors, etc.

 Hiring professionals:

Promoters are required to appoint certain professionals, such as mercantile

bankers, auditors, lawyers, etc. These professionals aid the promoter in the
preparation of the necessary documents that are to be filed with the Registrar of
Companies (ROC) during the registration of the company.

Erlanger V. New Sombero Phosphate (1878)

It was held that the promoter stands in a fiduciary capacity with the company.
The persons who are responsible for the incorporation of the company are known
as promoters in the common parlance, and they have a quasi-trusteeship
relationship with the company.

DUTIES OF A PROMOTER:

 Duty to disclose secret profit:

The duty of a promoter is to disclose the secret profit made by him, if any, to the
company.

 Duty to keep the company informed about the transactions:

If promoter made a transaction (contract of sale, lease, or rent) without informing

the company, the company may repudiate such transaction.
  Duty to disclose profits gained during promotion:

The promoter stands in a fiduciary relationship with the company, he must

disclose the profits gained during the promotion of a company.

LIABILITIES OF A PROMOTER:

 Liability to justify the transactions to the company:

The promoter stands in a fiduciary relationship with the company; therefore, the
company has all rights to inquire into the transactions made by the promoter
without the consent of the company.

 Liability against the misstatement made in the prospectus:

Section 26 of the Companies Act, 2013 lists the matters that are to be stated in
the prospectus. The promoter may be held liable for not having complied with the
provision

Section 447 of the Companies Act provides the punishment for fraud, and this
provision can be invoked for determining the liability for false statements in the
prospectus. The promoters would be liable to be punished with up to 5 years of
imprisonment or 50 lakh rupees fine, if the fraud does not involve public
interest. The promoters would be liable to be punished with up to 10 years of
imprisonment or a fine of up to 3 times of the fraud, if the fraud involves public
interest.

PRE INCORPORATION CONTRACT:

 The pre-incorporation contracts are the contracts entered into by the
promoter before the company is incorporated, and these are essential for
the successful running of the company in the future.
 The nature of these pre-incorporation contracts is, however, different from
that of an ordinary contract.
 These contracts are bipartite, and their effects are tripartite.
 The instruments of contract are essentially used for quid-pro-quo
transactions between two parties, but here they are remarkably used for
 the benefit of the non-party to the contract, as legally, the company is non-
existent.
 Promoters are responsible for the behind-the-scenes work required to
establish a company.
 The company is essentially the beneficiary of the pre-incorporation
contracts and it is not liable for the pre-incorporation contracts.

When a company is liable for pre-incorporation contract?

The non-liability of the company with respect to the pre-incorporation contracts

was the same as the common law court in India until the passing of the Specific
Relief Act, 1963. The Specific Relief Act, 1963, essentially under Section 15(h) and
Section 19(e), makes the pre-incorporation contracts and agreements valid.

Section 15(h) provides that when a promoter gets into a contract before
incorporation on behalf of the company and the company warrants such contract;
such company must have sent a communication of acceptance to the other party
of the contract.

Section 19(e) provides that if the company’s promoter entered into a contract
before incorporation and the contract was justified at that time. The company
must have accepted the contract and communicated such acceptance to the
other party.

The aforementioned provisions of the Specific Relief Act, 1963, change the course
of action in a case between parties where a contract was made before
incorporation; unlike the regular course of action against the promoter, here the
company can be made liable if it has accepted the contract and has
communicated such acceptance to the other party to the contract.

Weavers Mills vs. Balkis Ammal and Ors (1976)

The promoter had agreed to purchase some properties on behalf of the company.
After incorporation, the company took possession of the properties and also
constructed structures upon it. Madras High Court held that, conveyance of the
property had not taken place through a proper sale deed, Promoters are generally
held personally liable for the pre-incorporation contract, unless the company
ratified the contract.

Kelner vs. Baxter (1866)

The promoter of a company was approached by one Mr. Kelner to purchase his
wine, and the promoter had agreed to purchase the same on behalf of the
company. Later on, the company was unable to pay Mr. Kelner, who sued the
promoter. It was held “the principle of promoter’s liability in a pre-incorporation
contract.” a company cannot take the liability of pre-incorporation contract, the
promoter is held liable.

Newborne v Sensolid Ltd (1954)

Since the company was not existent at the time of the signing of the contract, the
contract was invalid. Promoter is held liable in the case of pre-incorporation
contracts.

B. PROCEDURE FOR REGISTRATION:

The procedure for registration has been clearly stated in Section 7 of the
Companies Act, 2013. This provision clearly lays down the requirements for the
incorporation of the company. The details of the documents, namely:

 Memorandum of Association, the signatories, in case of a public company,

has been fixed to a minimum number of 7 and for a private company, a
minimum number of 2. This document is duly stamped;
 Articles of Association, this is the document filed along with the MOA;
 List of directors, wherein the details regarding their names, occupation, and
address is mentioned;
 Written consent of the directors is to be submitted to the registrar of the
companies;
 Verification document, wherein such document is to be digitally signed by
any recognized chartered accountant, company secretary, advocate.
Memorandum of Association: A Memorandum of Association (MoA) is also
known as a company’s constitution. It states the object of the company’s
formation, the authorised share capital that the company can raise, the extent of
liability that the members undertake and other particulars such as the name of
the company and location of the registered office.

The MoA of a private company has to be signed by at least two people, while the
MoA of a public company needs to be signed by at least seven people. The
signatories to the MoA are known as the subscribers, and each subscriber, has to
take at least one share in the capital of the company.

Articles of Association: Articles of Association (AoA) are the byelaws that govern
the functioning and management of a company. They represent the ethics and
values of the promoters.

All the subscribers to the MoA are required to sign the AoA. If the AoA and MoA
contain inconsistent provisions, then the MoA would prevail over the AoA.

Process of Registering Company:

 On the website of the Ministry of Corporate Affairs, there are options

through which one can register their company online, integrating various
legal steps of incorporation into the same portal.
 By filling Form INC-29, the company can seek integrated incorporation. The
certificate of incorporation can be obtained in a few days by choosing this
method.
 The process then involves filling out the form online; the form is named
“simplified proforma for incorporation”.
 The performa gives a viable option to incorporate a company online, which
starts by filling up the details regarding the information of the promoter of
the company.
 Secondly, the electronic form numbers INC-33 and INC-34 provide the
option of filling up the e-MOA and e-AOA respectively.
  All the documents declared to be necessary under Section 7 of the
Companies Act are supposed to be attached, along with the digital
signatures of all the directors.
 The Ministry of Corporate Affairs has tried to simplify the process of getting
a DIN (Director Identification number) for the directors of the newly
incorporated company by including such a request form along with the PAN
and TAN cards of the proposed entity that is being incorporated.

If a company is found to have been incorporated on the basis of false

information, then the promoters, first directors and any other person would be
liable to be charged with the offence of fraud under Section 447.

C. CERTIFICATE OF INCORPORATION OF A COMPANY:

 The registration of the Memorandum of Association, the Article of
Association and other documents are filed with the registrar.
 Once the documents are enumerated under Section 7 and submitted, they
are scrutinized by the registrar, who checks whether the documents fulfill
all the legal requirements.
 If he is satisfied with the documents, then he registers the name of the
company in the Register of Companies and issues a certificate of
incorporation.
 A certificate of incorporation is the ultimate proof of the existence of a
company. It is the conclusive evidence and attains the status of the
permanent legal entity.

Jubilee Cotton Mills v. Lewis (1924)

A company filed for registration before the Registrar of Companies. The
documents required for registration were submitted to the registrar on January
6th. On January 8, the registrar issued a certificate of incorporation, but he
mentioned the date of incorporation as January 6 on the certificate. The company
had allotted certain shares to Lweis on January 6th itself, and the validity of the
allotment was challenged before the House of Lords. The Court held that the
company came into existence on the date mentioned on the certificate of
incorporation and thus, the allotment was legally valid.

Moosa v. Ibrahim (1912)

A company had been incorporated, but later it was found that there were certain
procedural irregularities as the MoA had been signed by a guardian of five minor
members. However, the Court held that the certificate of incorporation was valid
and conclusive proof of the company’s lawful formation.

D. CERTIFICATE OF COMMENCEMENT OF BUSINESS:

 As soon as a private company gets the certification of incorporation, it can
start its business. Once the certificate of incorporation is received by the
company, a public company issues a prospectus inviting the public to
subscribe to its share capital. It fixes the minimum subscription in the
prospectus. Then, it is required to sell the minimum number of shares
mentioned in the prospectus.
 After completing the sale of the required number of shares, the certificate
is sent to the registrar along with a letter from the bank stating that all the
money has been received.
 The registrar then scrutinizes the documents. If all the legal formalities are
done, then the registrar issues a certificate known as “certificate of
commencement of business”. This is conclusive evidence for the
commencement of business for the public company.

ONLINE REGISTRATION OF A COMPANY:

Step 1: Digital Signature Certificate (DSC)

 As the registration process of the company is completely online, Digital

signatures are required to file the forms on the MCA portal.
 DSC is mandatory for all the proposed directors and the subscribers of the
Memorandum of Association (MoA) and Articles of Association (AoA).
 DSC can also be obtained online in just two days from here.
Step 2: Director Identification Number (DIN)

 The Director Identification Number (DIN) is an identification number for a

director and it has to be obtained by anyone who wants to be a director in
a company.
 The DIN of all the proposed directors of the company along with the name
and the address proof are to be provided in the company registration form.
 DIN can be obtained while filing the SPICe+ form, i.e. company registration
form.
 SPICe+ is a web-based company registration form, through which DIN can
be obtained for a maximum of three directors.
 If there are more directors in the company and they do not have a DIN, the
company can be incorporated with three directors and it has to appoint
new directors later on after incorporation.
 The appointed directors can obtain DIN by filing the DIR-3 form since only
the proposed directors of an existing company can apply for DIN in the
SPICe+ form.

Step 3: Registration on the MCA Portal

 To apply for company registration, the SPICe+ form is to be filled out and
submitted on the MCA portal. After registration, the director can log in and
will obtain access to the MCA portal services which include filing e-forms
and viewing public documents.
 The company must also reserve its name by submitting two proposed
names in the Part-A of the SPICe+ form. The reservation of the name is
essential because if the company name is similar to the name of an
existing/registered company, LLP, trademark or it contains words
prohibited under the Companies (Incorporation Rules) 2014, the SPICe+
form will get rejected.
 If the SPICe+ form gets rejected due to non-approval of the company name,
the applicant has to re-file another SPICe+ form for the reservation of a
new name by paying the prescribed fee. However, after the approval of the
name filed in Part-A of the SPICe+ form, it will be reserved for a period of
 20 days within which the company must fill Part-B of the SPICe+ form and
submit the form online. The applicant must provide the details of the
company and directors in the Part-B of the SPICe+ form, attach documents,
attach DSC, check the form and submit it.

Step 4: Certificate of Incorporation

 Once, the registration application is filled and submitted along with the
required documents, the Registrar of Companies will examine the
application. Upon verification of the application, he will issue the Certificate
of Incorporation of the Company.
 The Certificate of Incorporation is issued with PAN and TAN as allotted by
the Income Tax Department. An electronic mail with a Certificate of
Incorporation as an attachment along with PAN and TAN will also be sent to
the applicant.
 With this, we have covered the basics of how to register a company.

MEMORANDUM OF ASSOCIATION
DEFINITION:
Section 2(56) of the Companies Act, 2013 defines Memorandum of Association.
It states that a “memorandum” means two things:

 Memorandum of Association as originally framed.

 Memorandum as altered from time to time.

MEANING:
 Memorandum of Association is an essential legal document that contains
all the details of the company.
 It defines the powers of the company and the conditions under which it
operates, all the rules and regulations that govern a company’s relations
with the outside world.
 It is mandatory for every company to have a Memorandum of Association
which defines the scope of its operations.
  Once prepared, the company cannot operate beyond the scope of the
document. If the company goes beyond the scope, then the action will be
considered ultra vires and hence will be void.
 It is a public document. Thus, if a person wants to enter into any contracts
with the company, through the Memorandum of Association he will get all
the details of the company. It is the duty of the person who indulges in any
transactions with the company to know about its memorandum.

OBJECT OF REGISTERING A MOA:

Section 3 of the Companies Act, 2013 describes the importance of memorandum
by stating that, for registering a company,

 In case of a public company, seven or more people are required;

 In case of a private company, two or more people are required;
 In case of a one person company, only one person is required.

Section 7(1)(a) of the Act states that for incorporation of a company,

Memorandum of Association and Articles of Association of the company should
be duly signed by the subscribers and filed with the Registrar.

FORMAT OF MOA:
Section 4(5) of the Companies Act states that a memorandum should be in any
form as given in Tables A, B, C, D, and E of Schedule 1. The Tables are of different
kinds because of different kinds of companies.

Table A – It is applicable to a company limited by shares.

Table B – It is applicable to a company limited by guarantee and not having a

share capital.

Table C – It is applicable to a company limited by guarantee and having a share

capital.

Table D – It is applicable to an unlimited company not having a share capital.

Table E – It is applicable to an unlimited company having a share capital.
The memorandum should be printed, numbered and divided into paragraphs. It
should also be signed by the subscribers of the company.

CONTENTS OF MOA:
Section 4 of the Companies Act, 2013 states the contents of the memorandum.

NAME CLAUSE:
The first clause states the name of the company. Any name can be chosen for the
company. But there are certain conditions that need to be complied with.

Section 4(1)(a) states:

 If a company is a public company, then the word ‘Limited’ should be there

in the name.
 If a company is a private company, then ‘Private Limited’ should be there in
the name.
 This condition is not applicable to Section 8 companies.

What kind of names is not allowed?

 Identical to the name of another company;

 Too nearly resembling the name of an existing company.

Example:

 Colors Technology is same as Color Technology. The name would still not be
accepted.
 Greentech Solution is same as GreenTech Solutions. The name would still
not be accepted.

If after making the reservation of a name, it is found that some wrong

information is given. Then two cases arise.
  In case the company has not been incorporated, The Registrar can cancel
the reservation of the name and impose a fine of Rs.1, 00,000/-.
 In case the company has been incorporated, after hearing the reasons of
the company, the Registrar has 3 options. These are,
 On being satisfied, he can give 3 months time to the company to
change the name by passing an ordinary resolution.
 He can strike off the name from the Register of Companies.
 He can file a petition of winding up of the company.

Alteration to the Name Clause: To alter the name of the company, a special
resolution is required. After the resolution is passed, the copy is sent to the
registrar. For changing the name, the application needs to be filed in Form INC-
24 with the prescribed fees. After the name is changed, a new certificate of
incorporation is issued.

REGISTERED CLAUSE:
 The Registered Office of a company determines its nationality and jurisdiction
of courts.
 It is a place of residence and is used for the purpose of all communications
with the company.

Section 12 of the Companies Act, 2013 talks about Registered Office of the
company.

 Before incorporation of the company, it is sufficient to mention only the

name of the state where the company is located.
 But after incorporation, the company has to specify the exact location of
the registered office. The company has to then get the location verified as
well, within 30 days of incorporation.
 It is mandatory for every company to fix its name and address of its
registered office on the outside of every office in which the business of the
company takes place.
  Change in place of Registered Office should be notified to the Registrar within
the prescribed time period.

Alteration to the Registered Office Clause: The application for changing the
place for Registered Office of the company shall be filed with the Central
Government in Form INC- 23 with the prescribed fees. The approval of the
Central Government is required. The Central Government is required to dispose
of the matter within 60 days and should ensure that the change of place has the
consent of all the stakeholders of the company.

OBJECT CLAUSE:
 Section 4(c) of the Act, details the object clause.
 The Object Clause is the most important clause of Memorandum of
Association.
 It states the purpose for which the company is formed. The object clause
contains both, the main objects and matters which are necessary for
achieving the stated objects also known as incidental or ancillary objects.
 By limiting the scope of powers of the company. The object clause provides
protection to:
 Shareholders – The object clause clearly states what operations the
company will perform. This helps the shareholders know their
investment in the company will be used for what purpose.
 Creditors – It ensures the creditors that capital is not at risk and the
company is working within the limits as stated in the clause.
 Public Interest – The object clause limits the number of matters the
company can deal with thus, prohibiting diversification of activities of
the company.

Alteration to the Object Clause: To alter the object clause, a special

resolution is required to be passed. The changes must be confirmed by the
authority. The document which confirms the changes by authority with a printed
copy of the altered memorandum should be filed with the Registrar.
If the company is a public company, then the alteration should be published in
the newspaper where the Registered Office of the company is located. The
changes to the object clause must also mention on the company’s website.

Doctrine of Ultra Vires

If the company operates beyond the scope of the powers stated in the object
clause, then the action of the company will be ultra vires and thus void.

Consequences of Ultra Vires

 Liability of Directors: The directors of the company have a duty to ensure
that company’s capital is used for the right purpose only. If the capital is
diverted for another purpose not stated in the memorandum, then the
directors will be held personally liable.
 Ultra Vires Borrowing by the Company: If a bank lends to the company
for the purpose not stated in the object clause, then the borrowing would
be Ultra Vires and the bank will not be able to recover the amount.
 Ultra Vires Lending by the Company: If the company lends money for an
ultra vires purpose, then the lending would be ultra vires.
 Void ab initio: Ultra Vires acts of the company are considered void from
the beginning.
 Injunction: Any member of the company can use the remedy of injunction
to prevent the company from doing ultra vires acts.

LIABILITY CLAUSE:
The Liability Clause provides legal protection to the shareholders by protecting
them from being held personally liable for the loss of the company.

There are two kinds of limited liabilities:

 Limited By Shares – Section 2(22) of the Companies Act, 2013 defines a

company limited by shares. In a company limited by shares, the
shareholders only have to pay the price of the shares they have subscribed
to. If for some reason they have not paid the full amount for the shares and
 the company winds up then their liability will only be limited to the unpaid
amount.
 Limited By Guarantee – It is defined in Section 2(21) of the Companies Act,
2013. A company limited by guarantee has members instead of
shareholders. These members undertake to contribute to the assets of the
company at the time of winding up. The members give guarantee of a fixed
amount that they will be liable for.

Alteration to the Liability Clause: The Liability Clause can be altered by

passing a special resolution and to change the liability of the members from
limited to unlimited or vice versa.

CAPITAL CLAUSE:
It states the total amount of share capital in the company and how it is divided
into shares. The way the amount of capital is divided into what kind of shares.
The shares can be equity shares or preference shares.

Alteration to the Capital Clause: The capital clause of a company can be

altered by an ordinary resolution. The altered Memorandum of Association
should be submitted to the Registrar within 30 days of passing the resolution.

SUBSCRIPTION CLAUSE:
Subscribers are the first shareholders of the company. The Subscription Clause
states who are signing the memorandum. Each subscriber must state the number
of shares he is subscribing to. The subscribers have to sign the memorandum in
the presence of two witnesses. Each subscriber must subscribe to at least one
share. Different kinds of companies require different number of subscribers for
incorporation.

 Private Company: Minimum 2 subscribers are required.

 Public Company: Minimum 7 or more subscribers are required.
 One-Person-Company: Only one person is required.

Who can subscribe?

  Individuals – An individual or a group of individuals can subscribe to the
memorandum.
 Foreign citizens and Non Resident Indians – Rule 13(5) of the Companies
(Incorporation) Rules, states that for a foreign citizen to subscribe to a
company in India, his signature, address and proof of identity will need to
be notarized.
 Minor – A minor can only be a subscriber through his guardian.

ASSOCIATION CLAUSE:
The subscribers to the memorandum make a declaration that they want to
associate themselves to the company and form an association.

USES OF MOA:
 It defines the scope & powers of a company, beyond which the company
cannot operate.
 It helps anyone who wants to enter into a contractual relationship with the
company to gain knowledge about the company.
 It is also called the charter of the Company, as it contains all the details of
the company, its members and their liabilities.

ALTERNATION OF MOA:
 According to Section 13, the company can alter the clauses in the
memorandum by passing a special resolution.
 A resolution is a formal decision taken in a meeting. There are two kinds of
resolutions, ordinary and special.
 A special resolution is one which requires at least 2/3rd majority to be
effective. The alteration to the clauses also requires the approval of the
Central Government in writing.

The alteration of memorandum can happen for a variety of reasons. The

alteration can be made if,

 Enables the company to carry its business more effectively;

  Helps to achieve the objectives;
 Helps the company to amalgamate with another company;
 Helps the company dispose off any undertaking.

PROCEDURE FOR THE ALTERATION A MOA:

1. Convening a Special or General Meeting: A Special or General meeting
should be convened to obtain the approval of the shareholders for the
proposed alterations to the MOA.
2. Filing of Special Resolution: A special resolution should be filed with the
Registrar of Companies (ROC) within 30 days of the passing of the
resolution.
3. Approval of ROC: The ROC will scrutinize the special resolution and, if
satisfied, will approve the alteration of the memorandum of association.
4. Issuance of Certificate of Incorporation: The ROC will issue a fresh
Certificate of Incorporation reflecting the alterations made to the MOA.

NEPC India Ltd V. Registrar of companies

The court held that a company alleging that a company was indulging activities
not mentioned in the objects clause of the Memorandum of Association had to
filed within six months of the data of knowledge.

Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1875)

This case established the principle that the objects clause of the memorandum of
association is a fundamental document that determines the capacity and powers
of a company. The objects of the company must be clearly stated in the MOA, and
any activity that falls outside the scope of the objects clause is considered ultra
vires (beyond the legal power) of the company.

Rayala Corporation Pvt. Ltd. v. Director of Income Tax

The Supreme Court of India held that the MOA must be interpreted in a manner
that is consistent with the provisions of the Companies Act 2013. The
memorandum of association cannot be used to engage in activities that are
prohibited by law.
Sterling Computers Ltd. v. M/s. M & N Publications Ltd
This case established that the MOA of a company is a public document that can
be inspected by any person upon payment of the prescribed fee. Any alteration or
amendment to the memorandum of association must be filed with the Registrar
of Companies (ROC) and must comply with the provisions of the Companies Act
2013.

Messer Holdings Ltd. v. Shyam Madanmohan Ruia

The Supreme Court of India held that the MOA of a company cannot be used to
avoid statutory obligations. The company cannot cite the memorandum of
association to avoid compliance with statutory requirements or to engage in
activities that are prohibited by law.

ARTICLES OF ASSOCIATION
MEANING:
 The Articles of Association of a company is one of the most essential
documents of a company. It prescribes the rules, regulations and by-laws
according to which the internal matters of the company are conducted.
 An AOA is often compared to a rulebook of a company since it regulates
the internal management of a company while also giving powers and
obligations to its officers and employees.
 It is subordinate to the Memorandum of Association and the Companies
Act.
 The internal management and governance depend completely on the AOA.

Shyam Chand v. Calcutta Stock Exchange

The court observed that if AOA exceeds the scope laid down in the provisions of
the MOA, then it would be considered ultra vires and void.

DEFINTION:
Section 2(5) of Companies Act, 2013, defines Articles of Association.
According to this, AOA contain all the rules and regulations framed by the
Directors of the company to govern the internal management and governance,
which can also be altered from time to time.

OBJECTIVES OF AOA:
 To act as a governing document that regulates the internal affairs and
operations of the company with the rules and regulations framed in its
articles;
 To provide clarity in regards to the procedures and rules that the company
must follow, which should also be accessible by the shareholders of the
company;
 To regulate the relationship between the company and its members
(shareholders, directors, employees, etc.) along with the relationship
among the members;

Hutton V. The Scarborough Cliff Hotel Company Ltd

The Memorandum of Association of the company provided no such power of
alteration in the aforesaid matter; thus, making the altered clause void and
inoperative. The High Court held that the purview of alteration of the Articles,
either expressly or impliedly, depends directly on what is stated in the
Memorandum.

Hari Chandana Joga Deva v. Hindustan Co-Operative Insurance Society Ltd

The Defendant Company had issued insurance to the Plaintiff, promising the
payment of the prescribed amount on the specified date. However, the
Defendant Company altered their AOA on a later date, because of which the fund
the insurance was based on changed. The premise of the fund changed into a
special one, which was declared insolvent by the time the date of the payment
approached. The Calcutta High Court held the case in the favor of the plaintiff,
stating that the alteration was clearly breaching the provisions of the contract
without consulting the other party. Thus, the altered clause was declared to be
inoperative and void. The Defendant Company was further ordered to
compensate Plaintiff for the breach of contract.

FORMS OF AOA:
Schedule I of the Companies Act, 2013 contains the model Articles under the
forms in Tables F, G, H, I and J.

Table F - A company limited by shares.

Table G - A company limited by guarantee and having a share capital.

Table H - A company limited by guarantee and not having a share capital.

Table I - An unlimited company and having share capital.

Table J - An unlimited company and not having a share capital.

SIGNING IN AOA:
 Rule 13 of the Companies Rules, 2014 prescribes both the MOA and the
AOA of a company to be signed in a specific manner.
 It is to be signed by each member of the Memorandum, in the presence of
one or more witnesses.
 In case of a subscriber being illiterate, the subscriber’s thumb impression
can be taken instead of their signature. Any authorized person should also
help the illiterate subscriber in reading or understanding the AOA wherever
required.
 Where a subscriber is a body corporate, the memorandum and articles
must be signed by any director with the mutual consent or resolution of
the board of directors of that corporation.

CONTENTS OF AOA:
 Management decisions
 The rights and duties of different classes of shareholders
 Appointment of Directors
  The powers and rights of Directors
 Borrowing powers of Directors
 The procedure of issuing share certificates and share warrants
 The voting of the Directors and Chairman
 The alteration of share capital
 Issue and transfer of shares
 Accounts and audits of a company
 Forfeiture and surrender of shares
 The procedure for board meetings and for special resolutions that can be
passed

ENTRENCHMENT CLAUSE FOR AOA:

Section 5(3) of the Companies Act, 2013 explicitly talks about entrenchment
clauses in AOA, stating that certain provisions in the Articles of Association cannot
be altered or amended by simply passing a special resolution.

Section 5(5) of the Act provides giving notice to the Registrar of Company if any
Articles in the Articles of Association contain the entrenchment provision.

Section 5(4) further mentions that such entrenchment clauses can be introduced
in the AOA only during:

 The incorporation;
 By bringing an amendment later to the provisions of the AOA.

Section 14 of the Act, states the power of a company to alter its AOA, given that
such alteration is within the bounds of the MOA and is passed by the prescribed
procedure of passing a special resolution.

An agreement between all the members in case it is a private company.

Special resolution if it is a public company.

 A private company into a public company:

  A company can be converted from a private company to a public one
by altering its clauses.
 This alteration is done in the form of removing the three clauses
mentioned under Section 2 (68) which states the characteristics of a
private company.
 Once such alteration is made, a copy of the resolution and the
altered AOA shall be filed with the Registrar within 15 days of
passing a resolution for alteration.
 A public company into a private company:
 For a public company to be converted to a private one, passing a
mere special resolution is not enough.
 The approval of the Tribunal is needed for such alteration and
conversion.
 In addition to that, a copy of the special resolution needs to be filed
with the Registrar within 30 days of passing the resolution.
 Once the altered AOA is approved by the Tribunal, the new, altered
Articles of Association and the order of approval of the Tribunal shall
also be filed with the Registrar within 15 days of such order being
passed.

PROCEDURE FOR AOA:

 As per the steps prescribed in the Articles of Association: If the
company has provided special steps to be followed for alteration in the
AOA itself, then they shall be followed.
 As per the procedure of special resolution: This step of alteration
includes the passing of a resolution of at least 75% of the votes in favor of
the alterations in the general meeting of shareholders, as per Section
114(2) of the Companies Act, 2013.
 As per the votes of the Board of Directors: The Directors also have the
power to alter the Articles of Association as per the clauses given in the
AOA. However, such alteration needs to be ratified by the shareholders in
the next general meeting or else the alteration will lose its legitimacy.
  As per the Order of the Tribunal: The Articles of Association can also be
altered by the National Company Law Tribunal (NCLT). The main power of
alteration is mostly only in the hands of the shareholders and Directors of
the company and the Tribunal can only do so if there are any
contraventions of the clauses with law or if the alteration is necessary for
the functioning of the company or to protect the interests of the
shareholders from unfair exploitation. Even in case of any mistake in the
Articles of Association, be it clerical or otherwise, it can only be rectified by
the shareholders.

Before the initiation of any procedure of alteration in the Articles of Association, a

notice of at least 7 days is required to be given for the Board meeting of Directors
as per Section 173 of the Companies Act.

LIMITATIONS OF AOA:
 The alteration made to the Articles of Association shall not be in
contravention of the Memorandum of Association or the Companies Act,
given that the AOA is subordinate to both of them.
 The alteration made to the Articles cannot have a retrospective effect.
 The alteration in the AOA should not be used by the company to breach any
contract or escape from the liability of a pre-existing contract.

BINDING FORCE OF MOA & AOA:

Once the Memorandum and the Articles of Association of a company are
registered with the Registrar, both documents legally bind the company with its
members.

 Binding the company to its members:

 The first binding effect both the MOA and the AOA have is between the
company and its members.
 The members have the obligation to act and conduct their corporate affairs
within the scope of the MOA and the AOA.
  The members can restrict the company from doing any actions in
contravention of either the MOA or the AOA as an injunction.
 The members can also enforce their own rights mentioned within the
Articles of Association, such as the right to their declared dividends and
shares in the company.

Wood v. Odessa Waterworks Co

The AOA of the Defendant Company stated the Directors can declare the payment
of the dividends to its members and shareholders, with the official approval of the
company at a general meeting. However, a resolution was passed that permitted
the payment of dividends through debenture bonds instead of cash. The Court
held that the term ‘payment’ referred to the payment in cash and thus, such
resolution was held void. In simple terms, the Directors were restricted from
executing the resolution since it went against the provisions of the AOA.

 Members bound to the company:

 It is like a contractual relationship with both parties having their rights and
obligations mentioned in the provisions of the AOA.
 Each member or shareholder of the company shall abide by the provisions
of the MOA and the AOA. This includes when any member has any amount
payable to the company, which shall be considered a debt due.
 Binding between members:
 The second binding effect that the Articles of Association have is on the
members of the company with each other.
 Such powers or rights can only be applied by and against a member of the
company.
 However, it is often noticed that the Courts tend to extend the scope of
such binding effect even to the individual members who are not exactly
members of the company.
 No binding in relation to outsiders:
 Any third party or individual not connected to the company shall not be
bound by the AOA or the MOA of the company.
  Neither the company nor its members are bound to such third parties
within the scope of the Memorandum and the Articles.

Browne v. La Trinidad
It was held that since the plaintiff was an outsider to the company cannot take
undue advantage of the AOA to restrict or enforce any claims against the
company.

DOCTRINE OF CONSTRUCTIVE NOTICE:

 According to Section 399 of the Act, after the registration of the MOA and
the AOA of any company with the Registrar, it becomes a public document
that can be easily accessible by any member of the public at a prescribed
fee for accession.
 In such a case, the doctrine of Constructive notice states that the company
shall deem the party dealing with the company to have read such public
documents or, at least, be aware of its provisions.
 This knowledge is important since the AOA can directly affect the
contractual obligation of the company.
 The individuals or third parties dealing with the company can request to
access the MOA and the AOA just as any other member of the public.
 If the company fails to provide copies of the aforesaid documents, then
every defaulting ‘officer’ of the company who fails to do so may be liable
to a fine of Rs. 1000 for each day of default until it is resolved. Or it can be
extended to one lakh rupees, given whichever is less.
 It is the duty of every person planning to contract with the company to
inspect these aforementioned documents which are easily accessible to
the general public.
 The MOA and the AOA act as a ‘constructive notice’ to the public and
interested parties for the workings of the company.

Kotla Venkataswamy v. Chinta Ramamurthy

A mortgage deed should require the signatures of the Company’s Secretary,
Managing Director and the Working Director is required for AoA of a company.
Without all three signatures, the deed would not be held valid. In this case,
without the signature of the Managing Director, the deed was accepted by the
plaintiff. The Madras High Court held the mortgage deed invalid, stating that the
plaintiff should have practiced due diligence and had knowledge of the provisions
of the AOA of the company, which is publicly available.

DOCTRINE OF INDOOR MANAGEMENT:

The Doctrine of Indoor Management was first laid down in the case of Royal
British Bank v. Turquand (1856), due to which it is also commonly referred to as
the ‘Turquand Rule.’

Royal British Bank v. Turquand

In this case, the Articles of Association of the Appellant Company permitted the
Directors of the company to borrow bonds by passing a resolution in the general
meeting. However, the Directors had given a bond without the passing of such a
resolution, resulting in the present suit. The court held that the company liable,
stating that the individual receiving the bond was entitled to assume that the
prescribed procedure in the AOA was followed and the bond was given in good
faith.

Mahony v. East Holyford Mining Co

The court endorsed the Turquand case and explored the concept of indoor
management, which is quite opposite to the doctrine of constructive notice.

 It is quite opposite to the doctrine of constructive notice. Simply put, while

the Doctrine of Constructive Notice protects the company from the actions
of an outside party, the Doctrine of Indoor Management protects the third
parties not connected to the company from the company.
 The Doctrine of Indoor Management protects the third party from any
default in the inner workings or mechanisms of the company that any
outsiders would not be aware of despite practicing proper due diligence.
  If the contract between the company and any third party is consistent with
the public documents of the company, then it shall not be prejudiced due
to any irregularities arising on the part of the inner workings or ‘indoor’
operations of the company.

Exceptions to this doctrine:

 Where the outsider is aware of the irregularity:

While third parties are not expected to be aware of the internal workings or
actions of a company, if the knowledge of such irregularity is with the party, then
they shall not have the protection of the Doctrine of Indoor Management.

 Lack of knowledge of the AOA:

This Doctrine cannot protect anyone who has not acquainted themselves with the
AOA and the MOA of the company despite both being available in public records.

Rama Corporation v. Proved Tin & General Investment Co

The plaintiff Corporation did not acquaint themselves with the Articles of
Association of the Defendant Company while doing a transaction with them and
held that the company cannot be liable.

 Negligence:
It does not protect third parties who have not practiced proper due diligence.

 Forgery:
Any illegal transactions or transactions involving forgery are not protected under
this doctrine.

Ruben v. Great Fingall Consolidated

It was held that since the Directors had no hand or idea of such forgery, they
could not be held liable for the fraudulent transaction happening due to it.
Furthermore, the forged share certificate was held to be void and hence, would
not invoke the Doctrine of Indoor Management.

DIFFERENCE BETWEEN MEMORANDUM OF ASSOCIATION AND

ARTICLES OF ASSOCIATION:
 Basis of Memorandum of Association
S.No Articles of Association (AOA)
Differentiation (MOA)

Lays down the provisions for internal

On the basis of Lays down the fundamental principles regulations of the company, including
1
Content upon which the company is incorporated. the rights and obligations of its
members.

Acts as a rulebook that regulates the

Acts as an informative document for the
relationship between the company and
2 Objective benefit and clarity of the public, the
its members, as well as amongst the
creditors, and the shareholders.
members themselves.

Establishes the rules, regulations and

Establishes the scope beyond which the
3 Functions by-laws based on which the company
company’s conduct becomes void.
conducts its workings.

Lays down the scope or the parameters Prescribes rules and other details
4 Jurisdiction
within which the AOA is to function. within the parameters set by the MOA.

MOA has a very rigid procedure for

alteration and can only be altered in Can be altered in an easier manner
5 Alteration specific circumstances. Permission of the than MOA, by passing a special
Central Government is also required in resolution.
certain cases.

The MOA cannot be in contravention of AOA cannot include provisions contrary

6 Position or status the Companies Act. It is only a subsidiary to the MOA. It is subsidiary to both the
of the Companies Act. Companies Act and the MOA.

Any conduct or actions beyond the

Any conduct or actions beyond the scope
provisions of the AOA can be ratified by
Ratification when of the MOA will be considered ultra
7 the shareholders as long as such
breached vires and cannot be ratified even by the
conduct/action is not in contravention
shareholders.
of the MOA.