Memorandum of Associations and Articles of Associations

Transcription

1 4.1 Memorandum of Associations and Articles of Associations Applicable Rules - Companies (Incorporation) Rules, 2014 SECTION HEADING EXPLANATION 2(56) Definition of MOA Memorandum means the Memorandum of Association of company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act. MOA is the charter of the company and defines the limitation of powers of the company. 2(5) Definition of AOA Articles means the Articles of Association of the company as originally framed or as altered from time to time in pursuance of any previous law or of this Act. AOA are the rules and regulations or the byelaws which govern the internal management of the company. Model Forms of MOA for various types Companies prescribed in different Tables Tables A B C D E companies Companies limited by Shares Companies limited by guarantee and not having share capital Companies limited by guarantee and having share capital Unlimited companies and not having share capital Unlimited companies and having share capital Note: According to section 4(7), any provision in the memorandum or articles, in the case of a company limited by guarantee and not having a share capital, purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member, shall be void. 4.1

2 4.2 Clauses of MOA {Sec. 4}: Name Clause: The first clause in the MOA is the name clause; the name by which the company is known is stated in the Name Clause. Every public and private company s name should end with limited and private limited respectively but sec. 8 companies are exempted from this provision. Prohibition on use of certain names: Company shall not be registered with a name which is undesirable in the opinion of CG and it should not be such that its use will constitute an offence under any law for the time being in force. A name which is identical and too nearly resembles with the name of the already registered company, deemed to be undesirable. A company is not allowed to use a name, which suggests that Company has any connection with Govt. or has State patronage where there is none. Any other word or expression prohibited by Government. Company can use the prohibited names or expressions but subject to the approval of CG. Situation or Registered Office Clause: This clause states the name of the State in which registered office (RO) of the company is to be situated. Company is not under compulsion to give the full address or exact address of the RO. Company is required to have registered office from the 15 th day of registration of company and verification to ROC shall be given within 30 days of incorporation in the prescribed manner. Objects Clause: This clause contain the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof. The object clause assumes much more importance than any other clause, because it determines the purpose for which the company has been set up and the actual capabilities of the company. The company can choose any object but that should not be illegal and against the provisions of the Companies Act, Q. Good Luck Ltd. of which you are the Secretary wishes to take up a line of business covered under other objects in the memorandum of association. What steps would you take for achieving this? Ans. According to Section 4 of the Companies Act, 2013, Object clause of the company contains the objects for which the company is proposed to be registered and any matter considered necessary in furtherance thereof. So there is no such provision of stating main object or other object. A company can commence business of any object stated in the Memorandum. 4.2

3 4.3 Q. The principal business of Grow Fast Ltd. was the acquisition of vacant plots of land and to build/erect houses. In the course of transacting the business, the Chairman of the Company acquired the knowledge of arranging finance for the development of land. Grow Fast Ltd. introduced a financier to another company Ajay Ltd. and received an agreed fee of Rs. 2 lakh for arranging the finance. The memorandum and association of the company authorizes the company to carry on any other trade or business which in the option of the Board of directors can be advantageously carried on by the company in connection with the company s general business. Referring to the provisions of the Companies Act, 2013, examine the validity of the contract carried out by Grow Fast Ltd. with Ajay Ltd. Ans. According to Section 4 of the Companies Act, 2013, Object clause of the company contains the objects for which the company is proposed to be registered and any matter considered necessary in furtherance thereof. In the given case, memorandum and association of the company authorizes the company to carry on any other trade or business which in the option of the Board of directors can be advantageously carried on by the company in connection with the company s general business. In this context decision of the company is valid. Liability Clause: This fourth clause determines the liability of the members in the following ways: In case of company limited by shares: In this case member is liable only up to unpaid value of the share. In case of guarantee company: In this case member is liable to the amount he contracted to contribute to the assets of the company in the event of its being wound-up while he is a member or within one year after he ceases to be a member, for payment of the debts and liabilities of the company or of such debts and liabilities as may have been contracted before he ceases to be a member, as the case may be; and to the costs, charges and expenses of winding-up and for adjustment of the rights of the contributories among themselves; In case of unlimited company: MOA will state that the liability of the members is unlimited and members are personally liable. Capital Clause: The amount of capital with which company is going to be registered is stated in this clause. The shares into which the capital is divided must be of fixed value, which is commonly known as the nominal value of the share. The capital is variously described as nominal, authorized, or registered. 4.3

4 4.4 Association Clause and Subscription: In this Clause, the persons (including a body corporate) subscribing to the MOA declare their desire to formed into a company and agree to take the shares indicated opposite their respective names. Following are the statutory requirements regarding subscription of memorandum:- (i) At the time of signatures of the subscribers at least one witness should be present who shall attest the signatures. (ii) At least one share must be taken by the each subscriber. (iii) The number of shares agree to take by the subscriber must be written opposite to his name. In the case of One Person Company, the name of the person who in the event of death of the subscriber shall become the member of the company. The above clauses are the conditions, which are required to comply by a company to be a corporate identity. Alteration in the MOA: The clauses of the MOA are altered according to the provisions laid down in the Sec. 13, 61, 66 and 230 to 237. The other provisions, if any, can be altered in the same way as the provisions of the AOA are altered. Alteration in the name clause of the co The name of the company can be changed after passing the SR and with the CG s approval. Approval of CG is not required on insertion or deletion of word Pvt. The listed companies are required to comply with the following conditions: a. At least 1 year have been elapsed from the last name change. b. The new activity suggested by the new name should have been accounted for at least 50% of the total revenue in the preceding 1 year. c. For a continuous period of 1 year from the last name changed the new name along with the old name shall be displayed on the website of the S/E where the company is listed and also on CFDS website. d. If the new name suggesting any new line of business, company shall disclose the net sales or income, expenditure and net profit or loss after tax figures pertaining to the said new line of business separately in the financial results and shall continue to make such disclosures for the 3 years succeeding the date of change in name. Rectification of name suo moto: 1. Company may rectify its name only if it is in the opinion that company is registered with an undesirable name. 2. Rectification can be done with the previous written approval of CG and by passing OR. Rectification on the direction of CG: 4.4

5 CG is empowered to direct company to rectify its name, if in the opinion of the CG the name of the company is undesirable. 2. Company is required to rectify its name within 3 months from the date of direction by passing an OR. Rectification on the application of registered Proprietor of Trademark 1. CG may pass an order for the rectification of name of the company on the application of Registered Proprietor of Trademark, if co s name is too identical or resembles with the Trademark. The company shall rectify its name within 6 months of order by passing an OR. 2. Time limit for making this application is 3 years from the date of registration. Name applied for reservation by furnishing wrong information 1. For reserving the name for the proposed company or to change the name of existing company an application is made to ROC in the prescribed form along with prescribed fee for the reservation of name. 2. Upon receipt of application, ROC on the basis of information provided reserves the name for 60 days from the date of application. 3. If after reservation, ROC come to know that the name got reserved on the basis of wrong information then ROC may cancel the name, if company has not incorporated yet and person in default shall be liable to fine up to Rs. 1 lac; If the company has incorporated, by giving an opportunity of being heard to company ROC may Direct the company to change the name within 3 months by passing OR; Take action for the striking off the name of the company from the register of the companies; Make the petition for the winding of the company. Effect of change of Name 1. Within 15 days of change of name, company shall give a notice to ROC along with order of CG. 2. The Registrar shall enter the new name, issue fresh certificate of incorporation with new name and alter the MOA. 3. The alteration shall become effective as soon as fresh certificate of incorporation is issued. 4. On the alteration of name the rights and obligations of the company shall not be affected. The constitution of the company does not change. The company is neither dissolved nor does any new company come into existence. 5. Existing legal Proceedings shall be continued in the new name. 4.5

6 4.6 Q. Explain the effects of change of name of a company. Q. Indus Ltd. has changed its name. There is no alteration in the constitution or legal status of the company. The fact of alteration of name was not brought to the notice of the court. Has the company power to execute a decree in its old name? Ans. According to Section 13, on the alteration of name the rights and obligations of the company shall not be affected. The constitution of the company does not change. The company is neither dissolved nor does any new company come into existence. Existing legal Proceedings shall be continued in the new name. Where the name of company is changed after a decree is passed, decree can be executed in its new name. Q. Board of directors of Bright Ltd. decides to change the name of the company to Shine Ltd. Certain members of the company object to the Board's decision to change the name of the company on the ground that the change will affect their rights. Examining the provisions of the Companies Act, 2013, state : (i) The implications of change in name. (ii) Whether the objection of the members are tenable? Alteration in the Situation Clause or Change of register Office CHANGE WITHIN LOCAL LIMITS OF SAME CITY: Model Town Ludhiana City Krishna Nagar Requirements 1. Passing of BR: Company can change its RO within local limits of same Town or Village by Passing SR. 2. Notice to ROC: Notice of change is to be given to the ROC within 15 days in Form No. INC 22 CHANGE FROM ONE CITY TO ANOTHER WITHIN THE SAME STATE: 4.6

7 4.7 Ludhiana Punjab Chandigarh Requirements: 1. Company shall pass a SR in the GM and in case of listed companies this SR will be passed by the Postal Ballot. 2. Within 15 days of change of the register office company shall give a notice to ROC in form INC 22 along with Form no MGT 14, as required under Section 117(1), towards special resolution passed. CHANGE WITHIN SAME STATE WITH CHANGE OF JURISDICTION FROM ONE ROC TO ANOTHER. Requirements: 1. SR in the GM shall be passed. 2. Application to RD shall be made in the form no. INC 23 along with prescribed fee. 3. Before filing an application with RD company a. shall publish a notice, at least once in a daily newspaper published in English and in the principal language of that district in which the registered office of the company is situated and circulating in that district; and b. serve individual notice on each debenture holder, depositor and creditor of the company, clearly indicating the matter of application and stating that any person whose interest is likely to be affected by the proposed alteration of the memorandum may intimate his nature of interest and grounds of opposition to the Regional Director with a copy to the company within 21 days of the date of publication of that notice. 4. RD after hearing the parties shall pass necessary order within 30 days of application. 5. Company shall file such order along with form MIG. 14 towards passing of SR to ROC within 60 days of confirmation by RD. Both the ROCs shall record the order made and the previous ROC shall transfer all documents and records to new ROC. CHANGE OF REGISTERED OFFICE FROM ONE STATE TO ANOTHER STATE REQUIREMENTS: SR: SR shall be passed by the company Application to CG: application shall be made in form INC. 23 along with prescribed fee and application shall accompany the following documents: a. Copy of: 4.7

8 4.8 MOA, AOA, notice of GM along with explanatory statement, SR, minutes of GM in which SR authorizing the change of RO is passed, power of attorney or BOD resolution; b. a list of creditors and debenture holders, drawn up to the latest practicable date preceding the date of filing of application by not more than 1 month, with their respective names, address, nature and amount due to them; c. An affidavit: Verifying the application. Signed by CS, if any and by not less than 2 directors one of them shall be MD, where there is one, to the effect that list of creditors and claims ascertained in the list are correct and there is no other debt to the company s knowledge. From the directors that no employee shall be retrenched as a result of shifting of RO. Copy of the same shall also be filed with Chief Secretary of the concerned or present State. Advertisement of application: The company shall at least 14 days before the date of hearing- Advertise the application in Form no. 22 in vernacular newspaper in the principal vernacular language in the district in which the registered office of the company is situated, and at least once in English language in an English newspaper circulating in that district; serve, by registered post with acknowledgement due, individual notice(s), on each debenture-holder and creditor of the company; and serve, by registered post with acknowledgement due, a notice together with the copy of the application to the Registrar and to the SEBI, in the case of listed companies and to the regulatory body, if the company is regulated under any special Act or law for the time being in force. Objections: if any objection is received by company, the copy of the same shall be filed with CG on or before the date of hearing and in case no objection is received the application may be put up for orders without hearing. Confirmation by CG: Before the confirming the order, CG shall ensure that if any objection is received from any creditor or debenture hold, either his consent is obtained or his debt is settled or secured to the satisfaction of CG. The CG may make an order confirming the alteration on such terms and conditions, if any, as it thinks fit, and may make such order as to costs as it thinks proper. Filing requirement and fresh certificate of incorporation: certified copy of order of the CG along with form MIG 14 towards the passing of SR shall be filed with ROC of both states in form no. INC 28 within 30 days of receipt of order of CG and ROC of new State shall issue a new certificate of incorporation. 4.8

9 4.9 The shifting of registered office shall not be allowed if any inquiry, inspection or investigation has been initiated against the company or any prosecution is pending against the company under the Act. Alteration of Object Clause: REQUIREMENTS: Resolution (Sec. 13): SR shall be passed by the company to alter its object clause and in case of listed companies SR shall be passed by postal ballot. Some portion of money raised through prospectus remained unutilized: In this case company shall not alter the objects for which money has raised unless SR in this regard has been passed. The notice for passing special resolution shall contain the following particulars: a. the total money received; b. the total money utilized for the objects stated in the prospectus; c. the unutilized amount out of the money so raised through prospectus, d. the particulars of the proposed alteration or change in the objects; e. the justification for the alteration or change in the objects; f. the amount proposed to be utilised for the new objects; g. the estimated financial impact of the proposed alteration on the earnings and cash flow of the company; h. the other relevant information which is necessary for the members to take an informed decision on the proposed resolution; i. the place from where any interested person may obtain a copy of the notice of resolution to be passed. The advertisement giving details of each resolution to be passed for change in objects which shall be published in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated simultaneously with the dispatch of postal ballot notices to shareholders. Exit opportunity to dissenting shareholders: the dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control in accordance with regulations to be specified by the SEBI. Registration of Alteration: a. Copy of the SR shall be filed with ROC within 30 days from passing SR; b. The ROC register the alteration within 30 days and c. Issue a certificate of registration of alteration which shall be conclusive evidence. d. The alteration shall become effective only if it has been duly register by the ROC Consequences, if Documents not filed: if Documents not filed to ROC within prescribed time, after the expiry of prescribed time i.e. 30 days, such alteration will become inoperative and void. 4.9

10 4.10 Alteration in Liability Clause Liability clause can be altered by passing SR and SR shall be field with ROC within 30 days of passing in prescribed form and along with prescribed fee. Alteration in Capital Clause Covered under the Share Capital Chapter Definition of Article {2(5)}: Articles means the Articles of Association of the company as originally framed or as altered from time to time in pursuance of any previous law or of this Act. [Sec 2(5)] Section 5 - AOA (1) The articles of a company shall contain the regulations for management of the company. (2) The articles shall also contain such matters, as may be prescribed: Provided that nothing prescribed in this sub-section shall be deemed to prevent a company from including such additional matters in its articles as may be considered necessary for its management. (3) The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with. (4) The provisions for entrenchment referred to in sub-section (3) shall only be made either on formation of a company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company. (5) Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed. (6) The articles of a company shall be in respective forms specified in Tables F, G, H, I and J in Schedule I as may be applicable to such company. (7) A company may adopt all or any of the regulations contained in the model articles applicable to such company. (8) In case of any company, which is registered after the commencement of this Act, in so far as the registered articles of such company do not exclude or modify the regulations contained in the model articles applicable to such company, those regulations shall, so far as applicable, be the regulations of that company in the same manner and to the extent as if they were contained in the duly registered articles of the company. (9) Nothing in this section shall apply to the articles of a company registered under any previous company law unless amended under this Act. Q. What is the meaning of Clause of Entrenchment? What are its implications? 4.10

11 4.11 Ans. Meaning - As per section 5(3) of the Companies Act, 2013, The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with. When such provision to be made - The provisions for entrenchment referred to in sub-section (3) shall only be made either on a) formation of a company, or b) by an amendment in the articles agreed to by all the members of the company in the case of a private company and c) by a special resolution in the case of a public company. Notice to ROC - Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed. Contents of Articles: 1. Exclusion wholly or in part of Table F 2. Adoption of preliminary contracts 3. Number and value of shares 4. Issue of preference shares 5. Allotment of shares 6. Calls on shares 7. Lien on shares 8. Transfer and transmission of shares 9. Nomination 10. Forfeiture of shares 11. Alteration of capital 12. Buy back 13. Share certificates 14. Dematerialisation 15. Conversion of shares into stock. 16. Voting rights and proxies. 17. Meetings and rules regarding committees. 18. Directors, their appointment and delegations of powers. 19. Nominee directors. 20. Issue of Debentures and stocks. 21. Audit committee. 22. Managing director, Whole-time director, Manager, Secretary. 23. Additional directors. 24. Seal. 25. Remuneration of directors. 26. General meetings. 27. Directors meetings. 4.11

12 Borrowing powers. 29. Dividends and reserves. 30. Accounts and audit. 31. Winding up. 32. Indemnity. 33. Capitalisation of reserve Sec. 29: Forms of Articles Forms Table F Table G Table H Table I Table J Companies Company Limited by Shares Company limited by guarantee and having share capital Company limited by guarantee and not having share capital Unlimited Company and having a share capital Unlimited company and not having a share capital FORM AND SIGNATURE OF ARTICLES Articles shall- Be printed; Be divided into paragraphs numbered consecutively; and Be signed by each subscriber of the memorandum of association (Who shall add his address, description and occupation, if any,) in the presence of at least one witness who shall attest the signature and shall likewise add his address, description and occupation, if any. Alteration of Articles of Association (Sec. 14) (1) Subject to the provisions of this Act and the conditions contained in its memorandum, if any, a company may, by a special resolution, alter its articles including alterations having the effect of conversion of (a) a private company into a public company; or (b) a public company into a private company: Provided that 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: Provided further that 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. (2) Every alteration of the articles under this section and a copy of the order of the Tribunal approving the alteration as per sub-section (1) shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of 15 days in such manner as may be prescribed, who shall register the same. 4.12

13 4.13 (3) Any alteration of the articles registered under sub-section (2) shall, subject to the provisions of this Act, be valid as if it were originally in the articles. Q. Smart Ltd. wants to include a provision in the articles of association by altering it to limit the company s share capital to a fixed amount. Can it do so? Will your answer be different if 100% shareholders agree for such alteration? Ans. As per section 14 of the Companies Act, 2013, a company may amend its articles but subject to the provisions contained in the MOA and Companies Act, 2013 itself. Capital clause of the MOA provides the maximum amount upto which a company can raise capital. Therefore, any limitation in the authority given in MOA is ultra-vires i.e beyond the power. So decision of the company is not justified. Copy of MOA & AOA to be given to members A company shall, on being so requested by a member, send to him within 7 days of the request and subject to the payment of such fees as may be prescribed, a copy of each of the following documents, namely: (a) the memorandum; (b) the articles; and (c) every agreement and every resolution referred to in subsection (1) of section 117, if and in so far as they have not been embodied in the memorandum or articles. If a company makes any default in complying with the provisions of this section, the company and every officer of the company who is in default shall be liable for each default, to a penalty of 1000 rupees for each day during which such default continues or 1 lakh rupees, whichever is less. Effect or binding Force of MOA and AOA Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles. All money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company. The registration of AOA and MOA shall bind the company and members in the following way: Members bound to the company. Company bound to members Members bound to Members Company not bound to outsiders 4.13

14 4.14 Members bound to company 1. MOA and AOA constitute a binding contract between company and members. 2. MOA and AOA once registered, it is assumed that these are signed by every the member individually. 3. Every member is bound by the provisions of MOA and AOA, 4. Company can sue the member in case of non-compliance by them. Company bound to Members 1. MOA and AOA constitute a binding contract between company and members. As like members are bound by the contract, company is also bound by the provisions of AOA & MOA. 2. Company is bound to give individual rights given under the Act and AOA. 3. If members remain deprived from any right, members can sue the company for the enforcement of right. 4. Any member can obtain injunction from the court thereby restraining the company from committing a breach, if the company is about to commit a breach of any terms and conditions of the contract. 5. Any member can sue the Company, its Directors and person responsible for the breach, if Company has already committed the breach of terms and conditions of the contract. Members bound to Members 1. As between the members inter-se, each member is bound by the articles to the other members. 2. As there is no privity of contract between the members, so any member may enforce his rights against another member through company only. Company is not bound to outsiders There is general rule that a stranger to a contract does not acquire any rights under the contract, so an outsider cannot acquire any enforceable rights by virtue of Article Because articles do not constitute contract between a company and outsider 4.14

15 4.15 DISTINCTION BETWEEN MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION Basis of Distinction Memorandum of association i. Definition "Memorandum" means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act {Sec. 2(56)} ii. Meaning The Memorandum contains the fundamental conditions which alone the company is allowed to be incorporated. iii. iv. Nature of document Contents of the document Memorandum is charter of the company. MOA contains the 6 clauses as specified under sec. 4. v. Alteration Alteration in the 6 clauses of the MOA may be made only as per the provisions of the Act and to such extent & manner given in the Act. The alteration is not an easy task, in most of the cases; the alteration requires the approval CG and other regulatory authorities. Articles of association "Articles" means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act{Sec. 2(5)} The Articles are the rules for the management of the internal affairs of the company. Articles are subordinate to the memorandum. A company may, as per its choice, include any no. of provisions as deem fit. The Act has not prescribed any contents of articles. The alteration of AOA is simple as compared to MOA Alteration in AOA does not require CG s approval, it requires only Special Resolution u/s 14. vi. Hierarchy MOA prevails over the AOA AOA is subordinate to MOA vii. Powers and Rules MOA contains the objects and Powers of the company viii. Scope The memorandum lays the objects for which the company is formed. The memorandum identifies the possible scope of operations of the company, beyond which the company cannot go. AOA contains the rules and regulations for the internal management of the company The articles are famed so as to facilitate the achievements of objects as enshrined in the memorandum. The articles generally define as well as restrict the powers of the directors, officers and employees of the company ix. Retrospective The MOA cannot be amended The articles can be amended 4.15

16 4.16 amendments retrospectively retrospectively x. Effect of contravention Any act done in the contravention of object clause of memorandum is ultra vires the company and is wholly void, as per the doctrine of ultra vires. Any act done in contravention of provisions contained in the articles (but within the scope of the memorandum) can be enforced against the company, if the articles are amended by passing a SR. DOCTRINE OF ULTRA VIRES It means doing an act beyond the powers. An act or transaction shall be ultra vires if it falls outside the object clause of MOA. EFFECTS:- i. All such transactions are wholly null and void. ii. Such transactions can never be rectified even all shareholders give consent for it. iii. Company cannot sue or be sued. CASE :ASHBURY RAILWAY CARRIAGE & IRON COMPANY, LTD V. RICHIE a) All the acts which are outside the scope of the objects clause of MOA are deemed to beyond powers of the company. b) The purposes of this doctrine are to protect the interest of shareholders and creditors. DOCTRINE OF INDOOR MANAGEMENT a) As per this doctrine, an outsider dealing with the company is not required to enquire into the internal management of the company. b) Outsider dealing with the company is presumed to know MOA and AOA of the company but not what may or may not have taken place within the doors that are closed to him. c) The doctrine of indoor management is an exception of rule of constructive notice. EXCEPTIONS:-in following cases the doctrine of indoor management, doesn t apply: i. Knowledge of irregularity ii. Negligence on the part of outsider iii. No knowledge of articles iv. Acts outside apparent authority v. Void or illegal transaction DOCTRINE OF CONSTRUCTIVE NOTICE a) MOA and AOA on registration become public documents. b) These documents are available for public inspection either in the office of the company or in the office of the register of companies on payment of. c) Every person who deals with the company whether the shareholder or an outsider is presumed to have read these documents and understood them in true sense. 4.16

17 4.17 Q. The articles of association of A Ltd. provided that the managing director may, with the previous sanction of the Board of Directors of the company, borrow up to Rs. 10 lakh on behalf of the company. A sum of Rs. 25 lakh was borrowed by the managing director without such sanction and the same was misappropriated by him. Can the lender sue the company for the recovery of the loan? Advise your answer be different if the sum has been used for company s bonafide purposes? Discuss with relevant case law(s), if any? Ans. Memorandum and Articles of Associations are the public documents, any one dealing with the company is deemed to have knowledge about the MOA and AOA. In the given case, AOA specifically mentioned the power of MD to borrow the amount up to Rs. 10 lakh, beside that money was lent beyond his power. So the Act is ulra-vires, so the lender cannot plead ignorance of the AOA and company cannot be held liable. But if the company has utilized the money then the situation shall be different. It was held in Krishan Kumar Rohatagi and others v. State Bank of India and others that if an agent borrowed money without authority of the principal and the principal utilized that money, he cannot deny his liability. Therefore, if the company had utilized the money, the lender may take legal recourse against the company to recover the money from the company. Q. Surprise Ltd. was incorporated under the Companies Act, The memorandum of association of the company in its objects clause stated that the company was established to make and sell or to carry on the business of mechanical engineers and general contractors. The company entered into a contract with Prominent Ltd., a firm of railway contractors to finance the construction of a railway line in Mumbai. The contract was ratified by the shareholders in general meeting. Subsequently, the contract was repudiated by the company on the ground that the contract was ultra vires the objects clause. Prominent Ltd. filed a suit claiming damages for the breach of contract. Explaining the meaning of doctrine of ultra vires, decide whether Prominent Ltd. will succeed. (Dec, 15 4 marks) Ans. In the case of a company whatever is not stated in the memorandum as the objects or powers is prohibited by the doctrine of ultra vires. As a result, an act which is ultra vires is void, and does not bind the company. Neither the company nor the contracting party can sue on it. Also, as stated earlier, the company cannot make it valid, even if every member assents to it. The general rule is that an act which is ultra vires the company is incapable of ratification. An act which is intra vires the company but outside the authority of the directors may be ratified by the company in proper form [Rajendra Nath Dutta v. Shilendra Nath Mukherjee, (1982) 52 Com Cases 293 (Cal.)]. The rule is meant to protect shareholders and the creditors of the company. If the act is ultra vires (beyond the powers of) the directors only, the shareholders can ratify it. If it is ultra vires the articles of association, the company can alter its articles in the proper way. 4.17

18 4.18 The doctrine of ultra vires was first enunciated by the House of Lords in a classic case, Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1878) L.R. 7 H.L The memorandum of the company in the said case defined its objects thus: The objects for which the company is established are to make and sell, or lend or hire, railway plants... to carry on the business of mechanical engineers and general contractors.... The company entered into a contract with M/s. Riche, a firm of railway contractors to finance the construction of a railway line in Belgium. On subsequent repudiation of this contract by the company on the ground of its being ultra vires, Riche brought a case for damages on the ground of breach of contract, as according to him the words general contractors in the objects clause gave power to the company to enter into such a contract and, therefore, it was within the powers of the company. More so because the contract was ratified by a majority of shareholders The House of Lords held that the contract was ultra vires the company and, therefore, null and void. The term general contractor was interpreted to indicate as the making generally of such contracts as are connected with the business of mechanical engineers. The Court held that if every shareholder of the company had been in the room and had said, That is a contract which we desire to make, which we authorise the directors to make, still it would be ultra vires. The shareholders cannot ratify such a contract, as the contract was ultra vires the objects clause, which by Act of Parliament, they were prohibited from doing. In the given case Contract is ultra-vires i.e beyond the powers of company so it is void. Prominent Ltd. will not succeed in its contention. Q. What are the effects of Ultra-vires transactions? Ans. A shareholder can get back the money paid by him to the company under an ultra vires allotment of shares. A transferee of shares from him would not have been so allowed. [Margarate Linz v. Electric Wire Co. of Salestine Ltd. (1948) 18 Com Cases 201, 205 : AIR 1949 PC 51]. Effects of ultra vires Transactions (i) Void ab initio The ultra vires acts are null and void ab initio. The company is not bound by these acts. Even the company cannot sue or be sued upon [Ashbury Railway Carriage and Iron Company v. Riche ]. Ultra vires contracts are void ab initio and hence cannot become intra vires by reason of estoppel or ratification. (ii) Injunction: The members can get an injunction to restrain a company wherein ultra vires act has been or is about to be undertaken [Attorney General v. Gr. Eastern Rly. Co., (1880) 5 A.C. 473]. (iii) Personal liability of Directors: It is one of the duties of directors to ensure that the corporate capital is used only for the legitimate business of the company and hence if such capital is diverted to purposes alien to the company s memorandum, the directors will be personally liable to replace it. In Jehangir R. Modi v. Shamji Ladha, [( ) 4 Bom. HCR 4.18

19 4.19 (1855)], the Bombay High Court held, A shareholder can maintain an action against the directors to compel them to restore to the company the funds of the company that have by them been employed in transactions that they have no authority to enter into, without making the company a party to the suit. In case of deliberate misapplication, criminal action can also be taken for fraud. However, a distinction must be drawn between transactions which are ultra vires the company and the transactions which are ultra vires the directors. Where the directors exceed their authority the same may be ratified by the general body of the shareholders. Provided the company has the capacity to do that transaction as per its memorandum of association. (iv) Where a company s money has been used ultra vires to acquire some property, the company s right over such property is held secure and the company will be the right party to protect the property. This is because, though the property has been acquired for some ultra vires object, it represents the money of the company. (v) Ultra vires borrowing does not create the relationship of creditor and debtor [In Re. Madras Native Permanent Fund Ltd., (1931) 1 Com Cases 256 (Mad.)]. 4.19