Company Law and Secretarial Practice

Unit 3 – Documents of a Company

Topics covered under this chapter

• Memorandum of Association – (a) Meaning & Contents (b) Alteration (c) Doctrine of ultra vires

• Articles of Association – (a) Meaning & Contents (b) Alteration (c) Doctrine of indoor management

Memorandum of Association - Meaning• It is an extremely important document in relation to the affairs of the

company. • It sets out the constitution of the company and is the foundation on which

the structure of the company is based. • It contains the fundamental conditions upon which alone the company is

allowed to be incorporated. • A company cannot depart/drift away from the provisions contained in its

memorandum. If it does, it would be ultra vires the company and therefore wholly void. • After registration of the company, the memorandum becomes a public

document.

Memorandum of Association - Contents • Name Clause of the Company – The name of the company with Limited as the last word of

the name in case of a public limited company and with Private Limited as the last word in the case of a private limited company. One person company shall also be described as One Person Company.

• Registered Office Clause – Mention the registered office of the company is to be situated.

• Objects Clause of the Company – Objects for which the company is proposed to be incorporated and any matter considered necessary to be mentioned.

• Liability Clause of Members – It is limited if the company is limited by shares.

• Capital Clause – The amount of share capital with which it proposes to be registered and its division into shares.

Memorandum of Association – Alteration

• Change in Name Clause

• Change in Registered Office Clause

• Change in Objects Clause

• Change in Liability Clause

• Change in Capital Clause

Memorandum of Association – Alteration Change in Name Clause

• By Special Resolution – Pass special resolution and obtain approval from Central Govt in writing. • By Ordinary Resolution – Pass an ordinary resolution and proceed.• Govt Direction for changing name – Central Govt may direct the company to

change its name, changing to be done within 3 months of direction.• Defaulting companies prohibited from changing name – Not allowed to

change name due to issues with Annual Returns/Balance Sheet/Repayment.• New Certificate of Incorporation – Fresh Certificate will be issued by Registrar

with new name of the company.• Rights and Obligations to remain unaffected – It will not be affected due to

change in name.

Memorandum of Association – Alteration Change in Registered Office Clause

1. Change of Office within the City2. Change of Office within the State3. Change of Office from one State to another State

• By passing a Special Resolution• Confirmation Letter by Central Govt

Memorandum of Association – Alteration Change in Objects Clause

The power of alteration of objects clause is subject to two limits.1. Substantive Limits• To carry on its business more economically or more efficiently• To attain its main purpose by new or improved means• To enlarge or change the local area of its operations• To carry on some business which under existing circumstances may be conveniently combined

with the business of the company• To restrict any of the objects specified in the MOA• To sell the whole or any part of the undertaking of the company • To amalgamate with any other company or body of persons

2. Procedural Limits – Special Resolution and Copy of the Special Resolution to be filed with the Registrar

Memorandum of Association – Alteration Change in Liability Clause

Important to pass a resolution and file with the registrar of companies if required.

• Limited Company

• Unlimited Company

• Club or Association

Memorandum of Association – Alteration Change in Capital Clause

By passing a resolution in a general meeting. The confirmation of the Court is not required if alteration is made for any of

the following purposes.• To increase its share capital• To consolidate and divide its capital into shares of larger amount• To convert its fully paid shares into stock and reconvert the stock into fully

paid up shares• To sub divide its shares into shares of smaller amount• To cancel its shares

Doctrine of Ultra Vires

• ‘Ultra’ means ‘beyond’ and ‘Vires’ means ‘powers’.

• An action outside the Memorandum is Ultra Vires the Company.

• An act is said to be Ultra Vires when it is performed, though legal in itself, is not authorized by the objects clause in the MOA. Such an act is void and cannot be ratified/challenged even by unanimous resolution of all the shareholders.

• Any activity not expressly or impliedly authorized by the memorandum are Ultra Vires the Company.

Purpose of Ultra Vires• It protects the shareholders. They are assured that their investment is not

spent on activities which they did not have in mind when they invested in the company.

• It safeguards the interests of the creditors as the property of the company cannot be diverted to unauthorized.

• Example – It is to ensure, that an investor in a gold mining company did not find himself holding shares in fried fish shop and to give those who allowed credit to a limited company some assurance that its assets would not be spent in unauthorized enterprises.

Consequences/Effects of Ultra Vires• 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. Ultra vires contracts are void ab initio and hence cannot become intra vires by reason of estoppel or ratification. • Injunction – The members can get an injunction to restrain a company wherein ultra vires

act has been or is about to be undertaken.• 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.• Company’s money – 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.• Borrowing – Ultra vires borrowing does not create the relationship of creditor and debtor.

Articles of Association – Meaning

• Important document to be filed with the Registrar of companies ta the time of the incorporation of the company.• It sets out the regulations for the internal management of the company.• It contains the rules and regulations of a company framed for the purpose

of management of its internal affairs. • It provides the mode and manner in which the business of the company is

to be conducted. • it is subordinate to and controlled by the MOA.• It should not authorize the company to do anything which objects the

provisions of the Companies Act.

Articles of Association – Contents • Preliminary contracts• Allotment of Shares and Calls on

shares• Number and value of shares• Transfer and transmission of

shares• Alteration of capital• Meetings• Borrowing powers

• Accounts and audit• Voting rights• Winding up procedures• Directors and their appointment

procedures• Dividends and reserves

Doctrine of Indoor Management• The principal of indoor management operates to protect the outsiders against the company. It

protects third parties who are entitled to an assurance that all the procedural aspects of a transaction are carried out. It protects innocent parties who are doing business with the Company and are not in a position to know if some internal rule has not been complied with.

• The doctrine of indoor management can be invoked by the person dealing with the company and cannot be invoked by the company.

• While persons contracting with a company are presumed to know the provisions of the contents of the memorandum and articles, they are entitled to assume that the provisions of the articles have been observed by the officers of the company.

• “Outsiders are bound to know the external position of the company, but are not bound to know its indoor management”.

Difference between MOA and AOA

Mem

oran

dumMeaning – MOA defines the

relation of the company with the outside world. Scope – It is the charter of the company and defines the scope of its activities. Contents – Name Clause, Registered Office Clause, Objects Clause, Liability Clause, Capital Clause and Association Clause.

Artic

lesMeaning – AOA deals with rights

of members of company and establishes the relationship of company with members. Scope – It is a document which regulates internal management of company. Rules made by company for carrying out objectives of company as in MOA. Contents – Contains regulations for company management and those that regulate relationship between members.

Difference between MOA and AOA

Mem

oran

dumStatus – It is a supreme document

of the company. Alteration – Can be altered only under certain situations and in manner provided. Approval of Central Govt is required besides approval of shareholders in a general meeting by ordinary or special resolution. Ultra Vires – Company cannot depart from the provisions contained in its MOA and if it does it would be ultra vires the company.

Artic

lesStatus – AOA is subordinate to

the MOA. They cannot alter or control MOA. Alteration – Can be altered by the members by passing a special resolution only. Ultra Vires – Anything done against the provisions of Articles, but which is intra vires the MOA, can be ratified/challenged.