LAW. CORPORATE LAW Objects, powers of companies and their internal management

Transcription

1 LAW CORPORATE LAW Objects, powers of companies and their internal management

2 Q1: E-TEXT Module ID 3: Objects, powers of companies and their internal administration Module Overview: As discussed in earlier module that the most important step in the formation or establishment of a company is incorporation and registration of a company and for the same the promoters of a company has to prepare and file number of documents to register the company which include are memorandum of association, articles of association, registered office, statutory declaration, list of Directors, written consent (approval) of directors, declaration of the qualifying shares etc. As observed by Palmer: These are the documents of great importance in relation to the proposed company. The module explains in details the memorandum of association and articles of association, their purpose, contents and registration. The memorandum of association and articles of association are now known as Memorandum and Articles respectively under the new Companies Act, 2013 in view of the fact that now One Person Company can also be incorporated. These documents are considered to be very important, as they contain some fundamental clauses which describe conditions of a company s incorporation. It also discusses the alteration that can be done in memorandum and articles of association and effects of such alteration. The module also tries to explain the difference between memorandum and articles of association and the legal effects of such documents. Subject Name: Law Paper Name: Corporate Law Module ID: 3 Pre-requisites: For understanding the module, basic understanding of incorporation of company under Indian law is required

3 Objectives: To explain the different clauses of memorandum of association and the alterations thereof. To discuss the contents of articles of association. To discuss the importance of memorandum of association and articles of association for a company Learning outcomes: Following going through this unit, students will be able to: Understand the meaning of memorandum of association Give explanation to the clauses / content of memorandum of association Know about Articles and their content Understand the procedure for alternation of memorandum Understand the limitations on power of alteration Keywords: Incorporation of company, Business Law, companies, Registration, Memorandum of Association, Association of Articles, object clause, name clause, documents required for registration INTRODUCTION Following two documents are required for registration of a company: (a) Memorandum of Association (b) Articles of Association These documents are listed in Companies Act, As we know, these are the documents which make up the constitution of the company. In the Companies Act, 2013 memorandum of association and articles of association are referred as memorandum and articles respectively.

4 MEMORANDUM OF ASSOCIATION Preparation of Memorandum of Association (now memorandum) is the first step in the formation of a company. This can be seen in section 12 of the Companies Act, 1956 and section 3 of Companies Act 2013 which provides the mode for forming an incorporated company and states that in the case of public company, any seven or more persons, and in case of private company, any two or more persons, associated for any lawful purpose, may by subscribing their names to a memorandum and complying with other requirements of this Act in respect of registration, may form an incorporated company, with or without limited liability. According to section 2(28) of the Companies Act," 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. Although this definition does not state the nature of this document nor is indicative of its importance, section 13 of the Act lays down the contents of the important document. Memorandum of Association enable the parties dealing with the company to know with certainty as whether the contractual relation to which they intend to enter with the company is within the objects of the company. It is the main document of the company which defines its objects and lays down the fundamental conditions upon which alone the company is allowed to be formed. It governs the relationship of the company with the outside world and defines the scope of its activities. Memorandum of Association enable the parties dealing with the company to know with certainty as whether the contractual relation to which they intend to enter with the company is within the objects of the company. In Ashbury Railway Carriage & Iron Co. Ltd v. Riche 1 and Egyptian Salt and Soda Co. Ltd v. Port Said Salt Association Ltd 2, it was held that memorandum of association of a company is the main charter of a company and it defines the limitation on the powers of a company. It states negatively that nothing shall be done beyond that ambit which a memorandum of a company prescribes. 1 (1875) L.R. 7 H.L (1931) A.C. 677

5 CONTENTS OF MEMORANDUM 1. Name clause The first clause of the memorandum has to state the name of the proposed company, as company being a legal person should have a name because name of a corporation is the symbol of its existence. There are certain things which should be kept in mind while deciding on a company s name like no company can be registered with a name which in the opinion of a Central Government is undesirable and it should not be identical with the name of another registered company. Secondly, whatever be the name of the company, if the liability of the members is limited, the last word of the name must be Limited and in the case of a private company Private Limited. 3 If a company desires to change its name, then it can be done by passing a special resolution and with the approval of the Central Government signified in writing Registered Office The second clause of the memorandum must specify the State in which the registered office of the company is to be situated and this should be done within thirty days of incorporation or commencement of business, whichever is earlier. 5 And if a company desires to shift its registered office from one place to another within the same city, town or village they can do it without passing a special resolution but if they want to shift it from one city to a different city altogether then a special resolution has to be passed. 6 Section 12(1)(5) states that no company 3 Section 4(1)(a) of the Companies Act, 2013; Corresponds to Section 13(1)(a) of the Companies Act, Section 21 of the Companies Act 5 Section 51 of the Companies Act; Corresponds to section 4(1)(b) of the Companies Act, Section 17-A of the Companies Act

6 shall change the place of its registered office from the jurisdiction of one Registrar to the jurisdiction of another Registrar within the same state unless such changes are confirmed by the Regional Director on an application made by the company regarding the same in the prescribed manner. Section 12 of the Companies Act, 2013 lays down the provision regarding registered office of company- it states that on and from fifteenth day of the incorporation of a company, the company should be capable of receiving and acknowledging all communication and notices as may be addressed to it. It also lays down the manner in which the name of the company should be affixed or engraved. 3. Objects and powers The third and the most important clause of a memorandum must state the objects for which a company is proposed to be established. It is essential that the public who subscribes for its shares should know clearly what the objects are for which they are investing. In the case of companies which were in existence immediately before the commencement of the Companies (Amendment) Act. 1965, the object clause had simply to state the objects of the company. But in the case of a company to be registered after the amendment, the objects clause was required to state separately: Main Objects- under this clause, the company had to state their main objects and objects incidental to the attainment of the main objects. Other Objects- under this, other objects had to be stated by the company which is not included in the above. States to which objects extend- under this, the companies whose objects were not confined to one State, this clause had to mention the states to whose territories the objects extended. Under the Companies Act, 2013 section 4(1)(c) states the object clause of the memorandum does not contain categories of main objects and other objects, it only specifies that the memorandum of a company should specify the objects for which a company is proposed to be incorporated and any matter considered necessary in furtherance thereof. 4. Capital Clause The last clause states the amount of nominal capital of the company and the number and value of the shares into which it is divided. Section 3 of the Act prescribes the requirement that a public company must have a minimum paid up share capital of five

7 lakh rupees or such higher amount as may be prescribed; and a private company is required to have a minimum paid up share capital of one lakh rupees or such higher amount as may be prescribed by its articles. Whereas, section 4(1) (e) of the Companies Act, 2013 lays down no amount of minimum paid up share capital in case of both public or private company, it just says that amount of share capital with which a company is to be registered and division of the same into shares which the subscribers to the memorandum agrees to subscribe shall not be less than one share and the number of shares each subscriber to the memorandum intends to take should be indicated opposite his name. This means no separate subscription clause is laid down in 2013 Act as it was laid down in 1956 Act. ALTERATION OF MEMORANDUM Alteration of Memorandum involves compliance with detailed formalities and prescribed procedure. Alterations to the extent necessary for simple and fair working of the company would be permitted. Alterations should not be prejudicial to the members or creditors of the company and should not have the effect of increasing the liability of the members and the creditors. Contents of the Memorandum can be altered under the Companies Act, 1956 as under: A company may change its name by special resolution and with the approval of the Central Government signified in writing. However, no such approval shall be required where the only change in the name of the company is the addition there to or the deletion there from, of the word Private, consequent on the conversion of a public company into a private company or of a private company into a public company. 7 Change of registered office from one place to another place in the same city, town or village. In this case, a notice is to be given within 30 days after the date of change to the Registrar who shall record the same. Whereas, in case of change of registered office from one town to another town in the same State a special resolution is required to be passed at a general meeting of the shareholders and a copy of it is to be filed with the Registrar within 30 days of the change of the office. A notice has to be 7 Section 21 of the Companies Act

8 given to the Registrar of the new location of the office. 8 The alteration shall not take effect unless the resolution is confirmed by the Central Government. The Company may alter its objects on any of the grounds (i) to (vii) mentioned in Section 17 of the Act. The alteration shall be effective only after it is approved by special resolution of the members in general meeting. The Companies (Amendment) Act, 1996, has dispensed with sanction of Central Government for alteration of the objects clause in Memorandum of Associations. The procedure for the alteration of share capital and the power to make such alteration are generally provided in the Articles of Association. If the procedure and power are not given in the Articles of Association, the company must change the articles of association by passing a special resolution. ALTERATION OF MEMORANDUM UNDER THE COMPANIES ACT, 2013 Corresponding to sections 16, 17, 18, 19, 21, 23 and 37 of the Companies Act, 1956, section 13 of the Companies Act, 2013 lays down the criteria for alteration of memorandum. It states that as provided in section 61 a company by special resolution and after complying with the procedures specified may alter their provisions of memorandum. Regarding the alteration of name clause, the company can alter its name after the approval of the Central Government in writing; therefore, when any change in the name of the company is made the Registrar shall enter the new name in the register of companies in place of the old name and issues a fresh certificate of incorporation. The alteration regarding the registered office of the company as mentioned earlier shall not have any effect unless it is approved by the Central Government. Regarding any alteration of object clause of the memorandum of company the registrar should certify registration within a period of thirty days from the date of filing of the special resolution in accordance with clause (a) of sub-section (6) of this section. PURPOSE OF MEMORANDUM Main reasons which make the memorandum such an important document for a company are: firstly, shareholders before making investment in the company come to know the purpose for which their money will be used and what risk they are going to face by making an investment; and the second main purpose of memorandum is that anyone dealing with company will know about the permitted range of activities of the company. 8 Section 17 of the Companies Act

9 ARTICLES OF ASSOCIATION 9 Articles of association are the second document which has to be registered along with the memorandum of articles of a company in case of some companies. Companies which must have articles of association are: Unlimited Companies Companies limited by guarantee and Private Companies limited by shares This document contains rules, regulations and bye-laws for the general administration of the company. They may be described as the internal regulation of the company governing its management and embodying the powers of the directors and officers of the company as well as the powers of the shareholders. 10 They lay down the mode and the manner in which the business of the company is to be conducted. In framing Articles of Association care must be taken to see that regulations framed do not go beyond the powers of the company itself as contemplated by the Memorandum of Association nor should they be such as would violate any of the requirements of the Companies Act, itself. All clauses in the Articles ultra vires the Memorandum or the Act shall be null and void. Contents of Articles of Association (1) share capital, different classes of shares of shareholders and variations of their rights (2) allotment of shares (3) calls on shares (4) issue of share certificates (5) issue of share warrants (6) transfer of shares (7) transmission of shares(8) alteration of share capital (9) borrowing power of the company (10) rules regarding meetings (11) voting rights of members (12) accounts and audit (13) directors, their appointment and remuneration (14) payment of interest out of capital (15) common seal (16) Winding Up. 9 Section 26 of the Companies Act, Section 5 of the Companies Act,2013

10 Articles generally contain provision relating to the following matters: (1) share capital, different classes of shares of shareholders and variations of their rights (2) allotment of shares (3) calls on shares (4) issue of share certificates (5) issue of share warrants (6) transfer of shares (7) transmission of shares (8) alteration of share capital (9) borrowing power of the company (10) rules regarding meetings (11) voting rights of members (12) accounts and audit (13) directors, their appointment and remuneration (14) payment of interest out of capital (15) common seal (16) Winding Up. 11 According to section 5 of the Companies Act, 2013, articles of a company contain the regulations for management of a company. They contain prescribed content but additional content may be added if necessary for management of a company. The articles may provide for entrenchment which means that entrenched regulations or entrenched clauses of articles can be altered only under conditions which are more restrictive then the special resolution which is generally required for alteration of articles. Provisions for entrenchment may be made at the time of formation of a company or later on by an ordinary resolution in case of a private company and by a special resolution in case of a public company. ALTERATION OF ARTICLES 12 Section 31 of the Companies Act, 1956 grants power to every company to alter its articles whenever it desires by passing a special resolution and filing a copy of altered Articles with the Registrar. Alteration of articles is considered to be much easier than memorandum as they can be altered by special resolution. In case of conversion of a public company into a private company, alteration in the articles would only be effective after approval of the Central Government. 13 The power is now vested with the Registrar of Companies. Alteration of the articles shall not violate provisions of the Memorandum. It must be made bona fide for the benefit of the company. Alteration must not contain anything illegal and shall not constitute fraud on the minority. Alteration in the articles increasing the liability of the members can be done only with the consent of the members The Companies Act, ibid 13 Section 31 of the Companies Act 14 assessed on 2nd September,2014

11 After passing a special resolution for altering the articles of a company and the alteration is approved by the Central Government, the company is required to submit a printed copy of the articles so altered to the Registrar of Companies within one month of the date of the passing of special resolution. 15 ALTERATION OF ASSOCIATION UNDER THE COMPANIES ACT, 2013 The Companies Act, 2013 lays down that according to the provisions of this Act and the conditions contained in the memorandum of a company, a company can alter its articles by special resolution. Every alteration of the articles under section 14 of the Companies Act, 2013 and a copy of the order of the tribunal approving the alteration shall be filed with the Registrar, together with the printed copy of the altered articles. The 2013 Act, lays down a very important point regarding the alteration of the articles of a company and that is that any alteration of the articles registered under the sub-section (2) of the section 14 should be valid as if it were originally present in the articles. DISTINCTION BETWEEN ARTICLES AND MEMORANDUM Memorandum 1. It is charter of a company indicating nature of its business & capital. It also defines the company s relationship with outside world 2. It defines the scope of the activities of the company, or the area beyond which the actions of the company cannot go. 3. It, being the charter of the company, is the supreme document. 4. Every company must have its own Memorandum 5. Any act of the company which is ultra vires the Memorandum is wholly void and cannot be ratified even by the whole body of shareholders. Articles 1. Articles are regulations for the internal management of the company and are subsidiary to the memorandum. 2. They are the rules for carrying out the objects of the company as set out in the Memorandum. 3. They are subordinate to the Memorandum. If there is a conflict between the Articles and the Memorandum, provisions of Memorandum will always prevail. 4. Now under the Companies Act, it is necessary for all types of companies to have articles. 5. Any act of the company which is ultra vires the articles can be confirmed by the shareholders if it is intra vires the memorandum. DOCTRIN OF CONSTRUCTIVE NOTICE 15 Ibid

12 As we all know by now that memorandum of association cannot be altered by the sweet will of the members of a company, it can be altered only by following the procedure prescribed in the Companies Act. Articles of association contain the rules and regulations which are granted for the internal management of the company and articles of association can be altered any time by the procedure as prescribed in the Companies Act. It is generally presumed that every person dealing with the company is presumed to have read the memorandum and articles of association and understood them in their true perspective. This is known as doctrine of constructive notice. LEGAL EFFECT OF MEMORANDUM AND ARTICLES Memorandum and Articles, when registered bind the company and its members to the same extent as if they have been signed by the company and by each member to observe and be bound by all the provisions of the memorandum and of the articles. Also, all moneys payable by any member to the company under the memorandum or articles shall be a debt due from him to the company. 16 Doctrine of Indoor Management The Doctrine of indoor management is a presumption on the part of the people dealing with the company that the internal requirements with regard to the articles of association and memorandum of association have been complied with. The outsiders dealing with the company are entitled to assume that as far as the internal proceedings of the company are concerned, everything has been regularly done. They are presumed to have read incorporation or public documents of the company which are submitted to ROC and to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more; they need not inquire into the regularity of the internal proceedings as required by the Memorandum and the Articles. They can presume that everything is being done regularly. This limitation of the doctrine of constructive notice is known as the doctrine of indoor management, or the rule in Royal British Bank v. Turquand 17, or just Turquand Rule 18. Thus, whereas the doctrine of constructive notice protects the company against outsiders, the doctrine of indoor management seeks to protect outsiders against the company. 16 Section 36 of the Companies Act 17 (1856) 6 E&B Turquand case served to qualify the harsh implications of the 'constructive notice' doctrine, under which all persons conducting business with a corporation were deemed (or construed) to have knowledge of any restriction on the authority of an agent contained in the corporation's articles and bylaws.

13 The basic principle behind this rule is that outsiders are not bound to inquire into the regularity of the internal proceedings and will not be affected by irregularities of which they had no notice. Exceptions to the Doctrine of Indoor Management Knowledge of irregularity: When a person dealing with a company has actual or constructive notice of the irregularity as regards internal management, then he cannot claim the benefit under the rule of indoor management. He may in some cases be himself a part of the internal procedure. 2. Negligence: Where a person dealing with a company could discover the irregularity if he had made proper inquiries, he cannot claim the benefit of the rule of indoor management. The protection of the rule is also not available where the circumstances surrounding the contract are so suspicious as to invite inquiry, and the outsider dealing with the company does not make proper inquiry. 3. Forgery: The rule in Turquand s case does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery. A company can never be held bound for forgeries committed by its officers. 4. Acts outside the scope of apparent authority: If an officer of a company enters into a contract with a third party and if the act of the officer is beyond the scope of his authority, the company is not bound last asscced on 25 th September,2014