Memorandum of Association & Articles of Association

Memorandum of Association & Articles of Association

INTRODUCTION

1. At last the long wait is over - a wait that is almost 2 decades old, if one considers the Companies Bill, 1993 as the earliest harbinger. The Companies Act, 2013 ("the Act") has been passed by both the Houses of the Indian Parliament and assented to by the President of India. It has also got notified as Act No. 18 of 2013 on 29 August, 2013. As such, it is now a part of the Statute book.

An attempt is made in this article to analyse the provisions in the Act pertaining to the charter documents of the company - the Memorandum of Association and Articles of Association (MoA)/(AoA). The same has also been juxtaposed, as appropriate, with the law as prevailing in England.

The MoA and AoA are the charter documents of the company. While the MoA is the constitution or the basic document of the company and lays down the broadest contours within which the company is to perform and function, the AoA deals more with the internal management of the affairs of the company.

MEMORANDUM OF ASSOCIATION

2. Section 2(56) of the Act defines memorandum as follows:

"memorandum" means the memorandum of association of a company as originally framed or as altered from time-to-time in pursuance of any previous company law or of this Act;

Section 4 of the Act reads as follows:

"4. (1) The memorandum of a company shall state—

(a)		the name of the company with the last word "Limited" in the case of a public limited company, or the last words "Private Limited" in the case of a private limited company:
		Provided that nothing in this clause shall apply to a company registered under section 8;
(b)		the State in which the registered office of the company is to be situated;
(c)		the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof;
(d)		the liability of members of the company, whether limited or unlimited, and also state,—
(i)		in the case of a company limited by shares, that liability of its members is limited to the amount unpaid, if any, on the shares held by them; and
(ii)		in the case of a company limited by guarantee, the amount up to which each member undertakes to contribute—
(A)		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
(B)		to the costs, charges and expenses of winding-up and for adjustment of the rights of the contributories among themselves;
(e)			in the case of a company having a share capital,—
(i)		the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to subscribe which shall not be less than one share; and
(ii)		the number of shares each subscriber to the memorandum intends to take, indicated opposite his name;
(f)		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.

(2) The name stated in the memorandum shall not—

(a)		be identical with or resemble too nearly to the name of an existing company registered under this Act or any previous company law; or
(b)		be such that its use by the company—
(i)			will constitute an offence under any law for the time being in force; or
(ii)			is undesirable in the opinion of the Central Government.

(3) Without prejudice to the provisions of sub-section (2), a company shall not be registered with a name which contains—

(a)		any word or expression which is likely to give the impression that the company is in any way connected with, or having the patronage of, the Central Government, any State Government, or any local authority, corporation or body constituted by the Central Government or any State Government under any law for the time being in force; or
(b)		such word or expression, as may be prescribed, unless the previous approval of the Central Government has been obtained for the use of any such word or expression.

(4) A person may make an application, in such form and manner and accompanied by such fee, as may be prescribed, to the Registrar for the reservation of a name set out in the application as—

(a)		the name of the proposed company; or
(b)		the name to which the company proposes to change its name.

(5) (i) Upon receipt of an application under sub-section (4), the Registrar may, on the basis of information and documents furnished along with the application, reserve the name for a period of sixty days from the date of the application.

(ii) Where after reservation of name under clause (i), it is found that name was applied by furnishing wrong or incorrect information, then,—

(a)		if the company has not been incorporated, the reserved name shall be cancelled and the person making application under sub-section (4) shall be liable to a penalty which may extend to one lakh rupees;
(b)		if the company has been incorporated, the Registrar may, after giving the company an opportunity of being heard—
(i)		either direct the company to change its name within a period of three months, after passing an ordinary resolution;
(ii)		take action for striking off the name of the company from the register of companies; or
(iii)		make a petition for winding up of the company.

(6) The memorandum of a company shall be in respective forms specified in Tables A, B, C, D and E in Schedule I as may be applicable to such company.

(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."

As per section 5(6) of the Act, the memorandum of a company shall be in respective forms specified in Tables A, B, C, D and E in Schedule I as may be applicable to such company. Table A provides the format for a company limited by shares; Table B is for companies limited by guarantee and not having a share capital; Table C is for companies limited by guarantee and having a share capital; Table D is for companies with unlimited liability and not having share capital and Table E is for companies with unlimited liability and having a share capital.

The Act requires that in case of one person company, the MoA shall include the name of the person who, in the event of death of the subscriber, shall become the member of the company.

Under the Act, the company must have a registered office on and from the fifteenth day of its incorporation.

Section 4(1) of the Act deals with the mandatory contents of the MoA. These include the name clause, situation or registered office clause, objects clause, liability clause, capital clause and association or subscription clause. This is the same as in the Act of 1956. However, the Act does not require the objects clause in the MoA to be classified as: (i) main objects of the company, (ii) objects incidental or ancillary to the attainment of the main objects, and (iii) other objects of the company. However, section 4(1)(c) states the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof (emphasis supplied). While the Act does away with objects incidental or ancillary to the attainment of the main objects and other objects of the company, it nonetheless leaves sufficient leeway with the words "any other matter considered necessary in furtherance thereof."

Section 149(2A) of the Act of 1956 required companies to commence any business listed in the other objects (not being incidental or ancillary to the main objects) only upon passing of a special resolution in a general meeting and a declaration being filed by the company. Given that the Act of 2013 has done away with "other objects" and "objects incidental or ancillary to the attainment of the main objects", there are no equivalent provisions therein analogous to erstwhile section 149(2A).

However, under the provisions of the Act, a company, after its incorporation can commence any business or exercise any borrowing powers only after filing two documents with the ROC concerned, i.e., (i) a declaration by a director of the company to the effect that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him and paid-up share capital is not less than rupees 5 lakhs and rupees 1 lakh in case of public and private company, respectively, and (ii) a verification of its registered office.

Under the Act of 1956, it was required that the certificate of commencement be obtained only by public companies, while as in the Act it is required that all the companies should obtain the commencement certificate from the Registrar.

Section 4(4) and (5) of the Act deals with the procedural aspects of application for availability of name of a proposed company or proposed new name of an existing company. The procedural aspects of the same are also detailed in the Act, unlike in the Act of 1956. The Act now provides for reservation of a name.

2.1 Alteration of MoA - Section 13 of the Act deals with alteration of the MoA. It is noteworthy that the provisions for the alteration of the clauses of the MoA have been simplified.

		Approval of the Central Government is necessary for shifting of registered office from one State to another.
		In terms of sub-section (5) of the Act, a time period of sixty days is fixed for the Central Government to dispose of the application for shifting the registered office from one State to another.
		The specific provision for giving notice of the petition for confirmation of the alteration to Registrar to appear and state his objections and suggestions, if any, with respect to the confirmation of the alteration is dropped. However, this aspect may be covered by sub-section (5) which provides that the Central Government shall satisfy itself that consent of all concerned with the company is available.
		The Registrar of the State where the registered office is being shifted shall issue a fresh Certificate of Incorporation indicating the alteration.
		Alteration of objects clause requires only passing of a special resolution and filing of the same with the Registrar. No other approvals are required.
		However, a company that has raised money from public through prospectus and still has any unutilised amount out of the money so raised, shall not change its objects for which it raised the money through prospectus, unless a special resolution is passed by the company and: (i) the details, as may be prescribed, in respect of such resolution shall also 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 and shall also be placed on the Website of the company, if any, indicating therein the justification for such change; (ii) 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 Securities and Exchange Board of India.

2.2 Doctrine of ultra vires - A rudimentary rule under the Act of 1956 was that a company could never enter into any contract or transaction that was not covered under the objects clause of the MoA. Any transaction that was beyond the purview of the same was said to be ultra vires or beyond the powers of the company and, as such, not binding on the company. Any attempt at departure will be invalid and cannot be validated even if assented to by all the members of the company. By ultra vires is meant an act or transaction of a company, which, though it may not be illegal, yet is beyond the company's powers by reason of not being within the objects of the MoA. The memorandum is the area beyond which the company cannot travel. This is the ratio of the judgment of the celebrated English case Asbhury Railway Carriage Co. v. Riche (1875) LR 7 HL 653 and upheld with authority in several Indian cases including Dr. A. Lakshmanaswami Mudaliar v. LIC (1963) 33 Comp. Cas. 420.

It is interesting to note that the doctrine was given a decent burial in England even in 1985, when it was substantially diluted by virtue of section 35 of the Companies Act, 1985 of England. Further, even section 40 of the English Companies Act, 2006 which is similar to the section 35 of the 1985 Act of England reads as follows:

Power of directors to bind the company

(1)		In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company's constitution.
(2)		For this purpose—
(a)		a person "deals with" a company if he is a party to any transaction or other act to which the company is a party,
(b)		a person dealing with a company—
(i)		is not bound to enquire as to any limitation on the powers of the directors to bind the company or authorise others to do so,
(ii)		is presumed to have acted in good faith unless the contrary is proved, and
(iii)		is not to be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the company's constitution.

It may be noted that the section will apply only in favour of a third party and not to the company. Secondly, the person must be dealing with the company and in good faith. Also, section 31(1) of the English Act of 2006 provides that unless company's articles specifically restrict the objects of the company, its objects are unrestricted.

Clearly, a fair distance needs to be covered in the Indian context as far as the doctrine of ultra vires is concerned. There does not appear to be any indication in this regard, at least as of now.

ARTICLES OF ASSOCIATION

3. Section 2(5) of the Act defines articles as follows:

"articles" means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act;

Section 5 of the Act reads as follows:

(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, insofar 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.

The AoA are the regulations for the internal working of the company. The Act upfront reiterates that the articles shall contain the regulations for the management of the company and shall contain such matters as may be prescribed. Tables F, G, H, I and J contain model articles for companies limited by shares; companies limited by guarantee and having a share capital; companies limited by guarantee and not having a share capital; companies with unlimited liability and having a share capital and companies with unlimited liability and not having a share capital respectively. A company may adopt all or any of the regulations contained in the model articles applicable to such company.

The section also provides that articles may contain provisions for entrenchment. Provisions for entrenchment may provide for more restrictive procedures than passing a special resolution.

3.1 Alteration of Articles of Association - Section 14 of the Act provides that a special resolution shall be required for alteration of the articles, including for converting a private company into a public company or a public company into a private company. Conversion of a public company into private company, as per provision of the Act, requires approval of National Company Law Tribunal. The Act of 1956 required approval of the Central Government. Further, the Act requires companies to file with the registrar every alteration of articles within a period of fifteen days instead of one month as per the existing law.

Section 15 of the Act requires the alterations of the MoA and AoA to be noted in every copy. This is similar to section 40 of the Act of 1956.

EFFECTS OF MoA AND AoA

4. Section 10 of the Act reads as follows:

10. (1) 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.

(2) All monies payable by any member to the company under the memorandum or articles shall be a debt due from him to the company.

This is almost similar to section 36 of the Act of 1956 and corresponds to section 33 of the English Companies Act, 2006. The substance of the section is that the MoA and AoA are binding upon the company and the members and bind them inter se.

The position of law will remain the same as held by the Supreme Court in V.B. Rangaraj v. V.B. Gopalakrishnan [1992] 73 Comp. Cas. 201 effect cannot be given to a shareholders' agreement even in the matters of management, unless the agreement has been incorporated in the company's AoA.

CONCLUDING REMARK

5. While as the Act itself has a lot of new things to offer, the provisions pertaining to MoA and AoA are almost in status quo position, subject to a few exceptions as analysed above.

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CA SANJAY DEWAN

B.COM (H),FCA

FCMA,LCS,MIMA