Matters Incidental to Incorporation (MOA & AOA) – CA Inter Law Notes

Matters Incidental to Incorporation (MOA & AOA) – CA Inter Law Notes is designed strictly as per the latest syllabus and exam pattern.

Matters Incidental to Incorporation (MOA & AOA) – CA Inter Law Notes

Memorandum of Association
Definition – Section 2(56)
‘Memorandum’ means the Memorandum of Association of a company as originally framed or as altered from time to time as per provisions of the Act.

Importance of MOA

• Memorandum of Association (MOA) is the most important document of the company.
• It contains the fundamental conditions upon which company can be incorporated.
• It regulates the relationship of the company with the outside world.
• It lays down the powers and objects of a company.
• In Ashbury Carriage Co. vs. Riche, it was held that the Memorandum of company is its charter and defines the limitations and powers of a company.
• Memorandum not only defines the powers of the company but also confines them. In fact, it is the foundation on which the structure of a company is based.

Purpose or Objec-tives of MOA

• MOA enables the shareholders, creditors and those who deal with the company to know its permitted range of enterprise.
• It enables the shareholders to know for what purpose their money is going to be utilized and the risks involved in it.

Memorandum – Requirements And Form
Requirements of MOA
The Memorandum of Association must be:

• printed,
• divided into paragraphs,
• paragraph numbered consecutively,
• Signed by each subscriber in the presence of at least one witness who shall attest the signature.

Form or Format of MOA – Section 4
The Memorandum of a company shall be in such one of the Forms in Tables A, B, C, D and E in Schedule I as may be applicable to the case of the company or in a Form as near thereto as circumstances admit.

The prescribed Forms are as follows:

• Table A – Company limited by shares.
• Table B – Company limited by guarantee and not having a share capital.
• Table C – Company limited by guarantee and having a share capital.
• Table D – Unlimited company not har ing share capital.
• Table E – Unlimited company having share capital.

Public Document

• MOA is a public document open for inspection by any member of the public.
• Every person who deals with the company is presumed to have the knowledge of its contents.

Content of Memorandum
Content – Section 4
Memorandum of Association of every company shall contain the following clauses:

• The Name Clause
• The Registered Office Clause
• The Objects Clause
• The Liability Clause
• The Capital Clause
• The Association Clause

Name Clause

• The Memorandum must state the name of the company with ‘Limited’ as the last word in case of a public limited company and with ‘Private Limited’ in the case of a private limited company.
• Section 8 company is not required to use words ‘Private Limited’ or ‘Limited’ after its name.
• Nidhi company shall have last words ‘Nidhi Limited’ as part of its name.
• In case of Government Company, last word shall be ‘Limited’ even if incorporated as private company. – MCA notification dated 5-6-2015
• Specified IFSC public company and IFSC private company shall use suffix ‘International Financial Service Company’ or ‘IFSC’ as part of its name.

Registered Office Clause (Situation Clause) Provisions

• The Memorandum must mention the name of the State in which the registered office of the company is to be situated.
• Complete address need not to be given in Registered Office Clause.
• Specified IFSC public company and IFSC private company shall have its Registered Office at place approved under SEZ Act, 2005.

Importance

• All communication and notices are sent to its Registered Office.
• Registered Office determines the domicile of the company
• It determines the jurisdiction of the Courts for taking legal action.
• Registers and records are maintained at Registered Office.
• Right of inspection of registers is to be exercised at Registered Office,
• Proxy for meeting is deposited at Registered Office. – Regulation 57 of Table F

Object Clause Provisions

• Objects clause should indicate objects for which company is incorporated.
• Specified IFSC public company and IFSC private company shall state its object to do financial services activities as per Special Economic Zones Act, 2005.

Requirements

• This is the most important clause in the Memorandum.
• The company cannot do anything, which is not mentioned in the Objects clause.
• Obj ects must not be unlawful or against the provisions of the Companies Act or against the public policy.

Liability Clause

• This clause states the nature of liability of the members of the company.
• In case of a company limited by shares or by guarantee, the fact that the liability of its members is limited must be made absolutely clear.
• In case of a company limited by shares, the liability of a member is limited to the nominal value of shares held by him. If the shares are fully paid up, his liability is nil But in case of partly paid-up shares, the liability is limited to the amount which is unpaid.
• In case of a company limited by guarantee, the liability clause must state the amount which every member undertakes to contribute to the assets of the company in the event of its winding up.

Capital Clause

• This clause states the amount of the capital with which the company is to be registered.
• This clause should also state the number and nominal value of shares into which the capital of the company is divided.
• The capital with which the company is registered is variously described as ‘registered capital’ or ‘nominal capital’ or ‘authorised capital’.

Association Clause or Subscription Clause

• In this clause the subscribers declare that they desire to form a company and agree to take shares stated against their names.
• Any natural person capable to enter into contract and any artificial person having separate legal entity can be subscriber.
• The names, addresses, occupation of the subscribers must be given.
• Each subscriber must sign in the presence of at least one witness who shall attest his signature.
• Every subscriber must take at least one share.
• In case of a public company, the Memorandum must be signed by at least seven subscribers, while in a private company two subscribers must sign.
• After the registration, no subscriber to the Memorandum can withdraw his subscription on any ground whatsoever.

Important Note:

• In the case of OPC, the MOA must also state the name of the person who in the event of death of the subscriber, shall become the member of the company.
• If a company publishes its authorised capital in any notice, advertisement or official publication or bill head or letter head, it shall also mention with equal prominence the amount subscribed and paid up. – Section 60
• Different clauses of MOA can be altered as per provisions contained in the Act.

Alteration of Memorandum – Nameclausechange
Alteration of name clause is possible due to following two reasons:

• Change of name by shareholders
• Change of name due to order of Central Government

Change of Name by Shareholders – Section 13
Not allowed
As per Rule 29 of Companies (Incorporation) Rules, 2014, change in name is not allowed, if company has defaulted in:

• Filing its Annual Returns or Financial Statements
• Document due for filing with ROC
• Repayment of due deposit or debenture or interest thereon.
• The change of name will be allowed after necessary documents are filed or payment or repayment of matured deposits or debentures or interest thereon is made.

Procedure or steps

• To change name of company following steps shall be taken:
  • Make an application to ROC in order to find out the availability of the name
  • Convey the Board Meeting to decide date, day and time of holding General Meeting
  • Dispatch notice of General Meeting to shareholders at least 21 days before meeting
  • Pass Special Resolution at General Meeting
  • Apply to Central Government and get its approval
  • File approval of Central Government with ROC
• On change in name of company, ROC shall enter new name in the register in place of old name and issue fresh certificate of incorporation.
• Change in name becomes effective when ROC issues fresh certificate of incorporation in new name.

Important Note:
No approval of the Central Government is necessary, if the change of the name involves only the addition or deletion of the word ‘Private’ due to conversion of public to private or private to public.

Effect of change

• Change in name of company will not affect rights or liability of company or its member.
• Change in name will not render any legal proceeding defective by or against it.

Change of Name pursuant to CG’s Order-Section 16 Applicability

• Company is required to change its name, if a company has been registered with a name which is identical with or too closely resembles with the name of:
  • An existing company; or
  • Existing trade mark, and application is made to Central Government.
• Central Government may direct company to change its name within period of 3 months in case of name of company is identical with existing company.
• Central Government shall direct company to change name within period of 6 months in case, if it is identical with existing trade mark.

Procedure or steps

• Same procedure is followed as it is followed in case of section 13.
• It is also known as ratification ol name of company.
• Here, an Ordinary Resolution is passed at shareholders meeting. No need to obtain the approval of the Central Government.

Important Note:
If the name of company has changed, the former name should also be painted, affixed or printed for a period of 2 years after such change in letterheads, bills or other official publication of company and outside every office or place of business of company. – Section 12(3)

Alteration Of Memorandum – Registered Office Clause Change

• Change in Registered Office is possible by following methods:
  • Change within local limits of same city, town or village
  • Change from one city to another city but within same state
  • Change from jurisdiction of one ROC to another but within same state
  • Change from one state to another state
• Company cannot shift its registered office outside India.

Change of RO within Same City or Town

• A company can change its registered office from one place to another within the local limits of the same town, village or city without much difficulty.
• Following steps should be taken:
  • Hold a Board Meeting and pass a resolution.
  • Notice of the change in Form INC 22 should be given to the ROC in 15 days.
• This change does not involve alteration of MOA.

Change of RO from One City to Another (within state)

• Company can change its registered office from one city to another city but within same state by taking following steps:
  • Hold a Board Meeting and pass a resolution. Fix day, time and place for General Meeting.
  • Dispatch notice for conducting General Meeting to members.
  • Pass Special Resolution at General Meeting for shifting of RO from one city to another. This resolution shall be passed by postal ballot in case of company having more than 200 members.
  • A notice of the change in Form INC 22 should be given to the ROC within 15 days.
  • File a certified true copy of the resolution along with Form MGT 14 to the Registrar within 30 days of passing of resolution.
• This change does not involve alteration of MOA.

Change of RO from Jurisdiction of one ROC to Another ROC – Section 12

• To change registered office from jurisdiction of ROC to another ROC, following steps should be taken:
  • Hold General Meeting and pass Special Resolution for shifting Registered Office. This resolution shall be passed by postal ballot in case of company having more than 200 members.
  • File a certified true copy of the resolution along with Form MGT 14 to the Registrar
  • Apply to Regional Director in Form INC 23 for confirmation of change of place of RO with following documents:
• Special Resolution approving shifting of registered office.
• Declaration by KMP or two directors authorised by Board that company has not defaulted in payment of dues to its workmen and has either the consent of its creditor for proposed shifting or has made necessary provision for payment thereof
• Declaration that company will not seek change in jurisdiction of court where cases for prosecution are pending
• Acknowledged copy of intimation to the Chief Secretary of State as to proposed shifting and that employee’s interest is not adversely affected.
  • Regional Director hears parties and makes necessary orders within period of 30 days of application.
  • Confirmation order of Regional Director shall be filed with ROC within period of 60 days.
  • Certified copy of the altered Memorandum shall be filed with ROC within one month from the date of filing of such document.

Change of RO from One State to Another State – Section 13

• To change registered of hce from one State to another State, following steps should be taken:
  • A Special Resolution should be passed and a copy thereof filed with the Registrar within 30 days in Form MGT 14.
  • This resolution shall be passed by postal ballot in case of company having more than 200 members.
  • Company need to apply to CG in Form INC 23. Application should be supported by:
• List of creditors and debenture holders with their respective amount due
• Declaration by directors that as result of shifting, no employee will be retrenched and application shall be filed by company to the Chief Secretary of State.
  • List of creditors is kept open for inspection at Registered office. Any person can inspect it and get extract on payment of fees during business hours.
  • Company shall take following steps not more than 30 days before filing application in Form INC 23 :
• Publish advertisement in Form INC 26 in vernacular and English newspapers. Copy of advertisement shall be served to CG immediately.
• Serve individual notice to each debenture holders and creditors
• Serve by registered AD post notice with copy of application to Registrar and SEBI (if it is listed company)
  • If no obj ection has received from any person in response of advertisement, order approving or rej ecting application is passed within 15 days.
  • CG shall hold hearing and decide matter within 60 days, if objection is received from any person.
  • Certified copy of order of CG is filed in Form INC 28 with ROC in 30 days.
  • Company is provided new Certificate of Registration.
  • Company should file notice of situation of registered office in Form INC 22.

Important Note:

• In case of specified IFSC public and IFSC private company, notice of change in situation of registered office should be given in 60 days instead of 15 days.
• Specified IFSC public and IFSC private company shall not change its registered office to any other place outside International Financial Service Centre.

Alteration Of Memorandum – Object Clause

• The objects clause of Memorandum is the most important clause.
• A Special Resolution authorizing the alteration must be passed. This resolution shall be passed by postal ballot in case of company having more than 200 members.
• A copy of Special Resolution should be filed with the Registrar within 30 days of passing the resolution.
• ROC will register alteration within period of 30 days. Thereafter, the Registrar shall issue fresh Certificate of Registration.

Important Note:
To delete any part of objects under objects clause, company needs to follow procedure suggested as above.

In case of Unutilised IPO Money

• Company which has unutilized money from initial public offer (IPO) cannot change object without giving exit offer to dissenting shareholders in addition to compliance with above provisions.
• Company is also required to publish in newspaper (one English daily and one 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.

Doctrine of Ultra Vires
Meaning

• The word ‘ultra’ means ‘beyond’ and the word ‘vires’ means ‘powers’. Thus, ultra vires means doing an act bevond the powers.
• Any activity done contrary to or in excess of the scope of activity of directors, Articles, Memorandum of companies will be ultra vires.

Landmark Case: Ashbury Railway Carriage Co. vs. Riche

• The doctrine of ultra vires was first applied in case of Ashbury Railway Carriage Co. vs. Riche.
• In this case the company was formed ‘to make and sell, or lend or hire, railways carriages and w agons and to carry on the business of the mechanical engineers and general contractors.’
• The company enters into contract with Riche to finance the construction of railway line in Belgium.
• Later, the company repudiated the contract on the ground that it w’as ultra vires.
• Riche filed a suit against the company for breach of contract and claimed damages. His plea was that the contract was within the powers of the company as it was covered under the general contractor’s business.
• The Court held that the contract w7as ultra vires the company and therefore void ab initio.
• It was further held that it cannot be made valid by ratification on the part of the shareholder, and so the company was not liable for breach of contract.

Types of Ultra vires Acts Ultra vires to Directors
Ultra vires to Directors means any act done beyond the power or authority granted to director.

Ultra vires to Articles

• Ultra vires to Articles means any act done beyond the power of Articles.
• These acts can be ratified by company by altering AOA.
• These acts shall be void, if it is not ratified.

Ultra vires to Memorandum

• Ultra vires to Memorandum means act done beyond the power of Memorandum.
• These acts shall be void.

Ultra vires to Companies Act

• Ultra vires to the Companies Act, means act done beyond the power granted under the Companies Act, 2013.
• Any act ultra vires to Companies Act shall be void.

Effect of Ultra vires Act Act null and void
A contract which is ultra vires the company is wholly void ab initio and of no legal effect.

Cannot sue or be sued

• Outsider cannot enforce ultra vires transactions against the company.
• Company cannot enforce such transactions against outsiders.
• The Memorandum being a public document, it is deemed that persons dealing with the company have the knowledge of the same and if he enters into transactions ultra vires the company, he cannot enforce it.

Injunction

• Members of a company are entitled to hold a company to its registered obj ects.
• Hence, whenever, an ultra vires act has been committed or is likely to be committed, any member of the company can restrain it by getting an injunction against it.

Personal Liability

• It is the duty of directors to see that the funds of the company are used only for legitimate business of the company. If directors make an ultra vires payment, then they can be compelled to make good the funds used.
• The directors are the agents of the company and should act within their powers.
• If the directors have induced the third party to make a new contract for which the company has no power, the directors shall be liable to third parties provided the third party was not aware of the lack of authority.

Ultra vires ac-quired property
If company’s funds were used in acquir¬ing some ultra vires property, the company has the right to hold the property and protect it against damage by other persons. – National Telephone Co. vs. St. Peter Constables

Ultra vires Torts
Company is not liable for any torts com¬mitted by its employees during course of ultra vires transactions.

Alteration Of Memorandum – Liability Clause

• Company can change liability clause of its MOA by passing Special Resolution.
• A copy of Special Resolution should be Hied with the Registrar within 30 days in Form MGT 14.

Articles Of Association
Definition – Section 2(5)
‘Articles’ means the Articles of Association of a company as originally framed or as altered from time to time in accordance with Act.

Nature & Purpose of AOA

• The Articles of Association are the rules and regulations which govern the internal management of the company.
• It is second most important document.
• It suggests the powers of directors, officers and of the shareholders as to voting, etc., the mode and the form in which the business of the company is to be carried out and the mode and the form in which the changes in the internal regulations can be made.
• Articles is subordinate to the Memorandum of the company.
• The Memorandum lays down what is to be done and Articles lay down how it is to be done.
• The Articles of Association of a company is contractual force between company and its members and also between the members inter sein relation to their rights as such members.

Articles Of Association – Provisions, Form & Contents
Provisions or Statutory Requirements
Articles shall be printed, divided into paragraphs, numbered consecutively and signed by each subscriber of the
Memorandum of Association in the presence of at least one witness who shall attest the signatures and shall likewise add his address and occupation.

Form of AOA Adopt Table F or own AOA

• It is not obligatory for public company limited by shares to have its own Articles.
• A public company limited by shares may either frame its ‘Articles’ or adopt the rules and regulations contained in Table F of Schedule I of the Companies Act.

Own AOA
Every private limited company, a company limited by guarantee and an unlimited company must have its Articles of Association which must be registered along with the Memorandum.

Contents of AOA
It contain the following matters:

• the exclusion, whole or in part, of Table F
• share capital B rights of different classes of shareholders
• allotment of shares
• calls on shares lien on shares
• forfeiture of shares
• transfer of shares
• surrender of shares
• share certificate
• issue of share warrants
• increase or decrease of share capital
• conversion of shares into stock
• consolidation and sub-division of shares
• borrowing powers
• general meetings, proceedings thereof and votes, proxies and polls
• appointment of managerial personnel, e.g., directors, their remuneration, qualifications, powers and proceedings of Board meetings
• appointment and remuneration of auditors
• dividends and reserves
• accounts and audit
• adoption or execution of preliminary contracts, if any
• capitalization of profits
• notices
• common seal
• winding up

Entrenchment Provisions
What is En-trenchment?

• As per the Oxford Dictionary ‘Entrenchment’ means ‘to apply additional legal safeguards’.
• In legal sense, it means addition of provision which makes certain amendments either more difficult or cumbersome by way of procedure or checks and safeguards.

When Company can Add En-trenchment Pro-visions?
A company can add entrenchment provisions to AOA: « At the time of formation of company; or a By amendment in Articles

Procedure In case of Private Company
In the case of private company, amendment has to be agreed to by all members of company.

In case of Public Company
In the case of public company, Special Resolution should be passed.

Common Procedure for all company:

• Where the Articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to ROC regarding entrenchment provision as follow:
• At the time of incorporation of company, notice to ROC in Form INC 7 or INC 32; or
• In the case of existing company, file Form MGT-14 within 30 days.

Alteration Of Articles Of Association
Provision

• Articles of company can be altered subject to provision in Memorandum of Company.
• In addition, company needs to follow provisions of Companies Act, 2013.

Procedure for Alteration of AOA
A company has wide powers to alter its Articles to meet the requirements from time to time.

Following steps should be taken to alter AOA:

• Hold Board Meeting and fix day, time, place and agenda for the General Meeting.
• A notice calling the General Meeting should be sent to every member at least 21 days before the meeting.
• Pass Special Resolution in the General Meeting.
• A copy of the special resolution along with explanatory statement in Form MGT 14 must be filed with the Registrar within 30 days after passing of the resolution.
• Necessary changes must be made in all the copies of Articles.
• Once an alteration is made in accordance with provisions, then altered Articles shall be binding on the members in the same way as original Articles.

Restrictions on Alteration of AOA
Right to alter the Articles is subject to the following limitations or restrictions:

• Not against the Companies Act or any other Act
• The alteration must not be inconsistent with any provisions of the Companies Act or any other statute.
• For example, where a resolution was passed expelling a member and authorizing the directors to register the transfer of his shares without an instrument of transfer, the resolution was held to be invalid as being against the provisions of the Act. – Madhav Ram Chandra Kamath vs. Canara Banking Corporation.
• However, Articles may impose on the company conditions stricter than those provided under the law, for example, they may provide that a resolution should be passed by a special majority when the Act requires it to be passed by an ordinary majority.

Not Ultra vires to MOA
If the alteration in Articles are ultra vires the Memorandum then it is void and inoperative. – Allen vs. Gold Reefs of West Africa Ltd.

Not illegal or Against public policy
The alteration must not contain anything illegal or against public policy.

Not inconsistence with order of CG or Tribunal
The alteration must not be inconsistent with an order of the Central Governm ent or Tribunal.

Bona fide

• The alteration must be bona fide and for the benefit of the company as a whole.
• The alteration made shall be valid even if it is likely to affect adversely the interest of some of the members.

Not constitute fraud on minority
If the alteration is for the benefit of majority and it constitutes a fraud on the minority or inflicts hardship on the minority without any corresponding benefit to the company as a whole, it shall be invalid. – Brown vs. British Abrasive Wheels Co.

Not increase lia-bility of member
An alteration in the Articles, which has the effect of increasing the liability of the members to contribute to share capital, is not binding on the present member, unless he has given his consent in writing.

Effect of Alteration

• The amended regulation in the Articles cannot operate retrospectively, but only from the date of amendment.
• Any alteration made must be duly incorporated in every copy of the same and every copy of the Articles issued after the date of such alteration must be in accordance with such alteration.

Difference Between Memorandum And Articles

Matter	Memorandum of Association	Articles of Association
Meaning	Memorandum of Association is a document that contains all the fundamental information which are required for the incorporation of the company.	Articles of Association is a document containing all the rules and regulations that governs the company.
Defined in	Section 2(56)	Section 2(5)
Type of Information contained	It contains powers and objects of the company.	It contains rules of the company.
Status	It is subordinate to the Companies Act.	It is subordinate to the Memorandum.
Major contents	It must contain six clauses.	It can be drafted as per the choice of the company.
Obligatory	Every company shall have its own Memorandum.	A public company limited by shares can adopt Table F in place of the Articles.
Compulsory filing at the time of Registration?	Required	Not required.
Alteration	Alteration can be done, after passing Special Resolution (SR) in General Meeting and previous approval of Central Government (CG) is required.	Alteration can be done in the Articles by passing Special Resolution (SR) at General Meeting.

Binding Effect 0f Moa & Aoa – Section 10
Binding Effect
The MOA & AOA, when registered, bind the company and its members and also members inter se. These binding effects are explained as under:

Members Bound to the Company
Provision

• Every member of the company is bound to observe the provisions of the Memorandum and the Articles as if each member had signed the same.
• A company can sue its members for the enforcement of these provisions and the members may also be restrained by Court from committing the breach of provisions of these documents.

Case law
Boreland Trustees vs. Steel Brothers & Co. Ltd.

• The Articles of the company provided that the shares of any member who became bankrupt should be sold to some other persons at a price to be fixed by directors.
• B became bankrupt and his trustee in bankruptcy claimed that he was not bound by the Articles of Association and could, therefore, sell the shares as he liked.
• It was held that the trustee in bankruptcy was bound by the Articles of Association and could not claim the shares against the company.
• The company is also bound to its members by the provisions of the Articles of Association.
• Any member is entitled to issue the company or obtain an injunction restraining the company from committing am breach of the Articles or from doing an illegal act.
• The company is bound to each member in respect of their rights as members.

Example:
Where a right is conferred by the Articles on a shareholder to record his vote at a company meeting, the Chairman of the meeting cannot deprive him of this right.

Company Bound to the Members
Provision Case law Wood vs. Odessa Water Works Co.

• The Articles empowered the company to declare a dividend to the shareholders with the sanction of the company at General Meeting.
• Instead of paying the dividend in cash, a resolution was passed whereby the dividend was to be paid by issue of debenture bonds.
• A member filed a suit restraining the company from acting on the resolution.
• The Court granted an injunction restraining the company from acting on the resolution.

Members Bound Other Members
Provision

• As between the members themselves, they are bound by the provisions of the Articles.
• The Memorandum and Articles do not constitute express agreement among the members of the company, but each member is bound by these documents on the basis of the implied contract. The Articles regulate their right interse. But such rights can be enforced only through the company.

Case law
Rayfiled vs. Hands and Others

• The Articles provided that every member who intends to transfer shares shall inform the directors who will take the said shares equally between them at a fair value.
• On their refusal to take the shares, it was held that the directors as members were bound to take shares.

Company not bound to Out-siders Provision

• ‘Outsider’ means a person who is not a member of the company.
• Articles creates no contract between the company and outsiders, even though outsiders are named in the Articles in some capacity other than that of a member.
• An outsider is not entitled to enforce the Articles against the company for any breach of rights that are conferred on him by the Articles.

Case law
Eley vs. the Positive Government Life Assurance Company Ltd.

• The Articles provided that Eley should be the solicitor for life of the company and that he would not be removed from office except for misconduct.
• He was also a member of the company.
• Elevacted as solicitor to the company for some years but he was removed from service without any charge of misconduct.
• He sued the company for damages for breach of contract.
• It was held that he had no cause of action because the Articles did not constitute any contract between the company and himself.
• Thus, to succeed, the party suing must prove a contract outside and independent of the Articles.

Doctrine Of Constructive Notice
Principles

• The Memorandum and Articles of Association of every company are required to be registered with the Registrar of Companies.
• On registration, these documents become public documents.
• These documents are available for public inspection either in the office of the company or in the office of the Registrar of Companies on payment of fee.
• Every person who deals with the company is presumed to have read these documents and understood them in their true perspective.
• Every person dealing with the company must inspect these documents and make sure that his contract is in conformity with their provisions. Whether he actually reads them or not, he is presumed to have read and understood them.
• This deemed knowledge of MO A and AO A and their contents is known as Doctrine of Constructive Notice.
• Doctrine of Constructive Notice is negative because it operates against the outsiders and not against company.

Kotla Venkatswamy vs. Ram Murthi

• In this case, the Articles provided that all deeds, etc., were to be signed by the Managing Director, Secretary and a Working Director.
• A deed signed by the Working Director and Secretary was held to be inoperative and the party -was not allowed to seek exemption on the plea that he had not read the Articles.
• Accordingly, if a person deals with a company and the transaction turns out to the beyond the powers of the company or its officers as contained in these documents, he cannot enforce it against the company and he shall be personally liable to bear the consequences of such dealings.

Exception
The doctrine of indoor management is an exception to Doctrine of Constructive Notice.

Doctrine of Indoor Management
Principles

• Persons dealing with the company should read these documents and satisfy themselves that the company has the power to enter into the contract, and they are required to do no more.
• Outsiders are not required to examine whether the internal proceedings have been complied with or not. The details of internal procedure are not open to public inspection.
• Thus, every person dealing with the company is entitled to assume that everything has been done regularly so far as the internal proceedings of the company are concerned.
• In other words, outsiders can safely assume that provisions of the Articles have been complied with by the company in its internal working.
• This doctrine seeks to protect the outsiders against the company.

Example

• If the Articles of the company gives powers to borrow with the sanction of an Ordinary Resolution in a General Meeting, a lender need not enquire whether the General Meeting was convened on proper notice, or whether a proper quorum was present at the meeting, or whether the necessary resolution was properly passed. He is entitled to assume that what has been done, has been done regularly and can hold the company liable even if internal formalities are found not to have been completed.
• In other words, if the internal formalities have not been complied with, the contract shall be binding on the company and it shall be liable to outsiders. This rule is known as the doctrine of indoor management.

Case Laws for Doctrine of Indore Management
Royal British Bank vs. Tarquand

• Doctrine of Indoor Management was first laid down in the case of Royal British Bank vs. Tarquand.
• In this case, the directors of a company issued a bond to Tarquand. They had the power to issue such bonds but only subject to the resolution passed at a General Meeting of the company.
• In this case no such resolution had been passed.
• It was held that Tarquand could recover the amount of the bond from the company on the ground that he was entitled to assume that the resolution had been passed.
• It was observed that ‘outsiders are bound to know the external position of the company, but are not bound to know its indoor management’.

Mahony vs. East Holyford Mining Co.

• In the case of Mahony vs. East Holyford Mining Co., Articles of company suggesting that cheques were to be signed by two named directors and countersigned by the named secretary.
• The secretary of company sent to their banker what purported to be copy of the board resolution naming the directors and secretary.
• The banker accordingly honoured the cheques.
• Subsequently, it was found that the directors and the secretary were never appointed. No Board Meeting was ever held.
• It was held that bankers were bound to inspect the Articles which they did. Beyond that they were neither bound nor entitled to look into the regularity of appointment of the directors and the secretary.

Favour

• This rule is based on business convenience and justice.
• The Doctrine of indoor management is an exception to the rule of constructive notice.
• The Doctrine of indoor management imposes an important limitation on the Doctrine of constructive notice.

Exception To Rule of Doctrine of Indoor Management
In the following situation, Doctrine of indoor management is not applicable:
Knowledge of Irregularity:

• The protection under the Doctrine of indoor management regularity cannot be claimed by a person who has the knowledge of the irregularity or constructive notice of irregularity. Howard vs. Patent Ivory Manufacturing Co.
• The directors had the power under the Articles to borrow’ on behalf of the company up to £ 1,000.
• For any amount exceeding this sum, the sanction of the shareholders in the General Meeting was required.
• ♦ The directors themselves lent £ 3,500 to the company without the sanction of the shareholders in the General Meeting. It w’as held that the company was liable for £ 1,000 only.

Negligence

• Where the circumstances are of a suspicious nat ure which invite further inquiry and the person has failed to enquire into it, he shall not be entitled to protection under this rule.
• Similarly, where the transaction is of an unusual nature, the outsider must make detailed inquires.

Underwood vs. Bank of Liverpool

• Certain cheques drawn in favour of company were deposited by director in his personal account.
• The bank credited the cheques in the account of director instead of company’s account.
• The bank argued that they acted on direction of director of company.
• The Court held that cheque of company could not be given credit to personal account of director. Its case of gross negligence on part of banker.

Forgery

• The protection under this doctrine shall not be available where the outsiders have relied upon a forged document, because nothing can validate forgery. A company is not liable for forgeries committed by its officer.
• But a company may be held liable for fraudulent acts of its officers acting under their ostensible authority on its behalf.

Ruben vs. Great Fingall Consolidated Co.

• Share certificate was issued under common seal of company.
• However, signature of two directors thereon was forged.
• Shareholder argued that he cannot determine forgery but on the ground of forgery is nullity, certificate was held to be invalid.

No Knowledge of Article

• The Doctrine of indoor management cannot be applied in favour of a person who had no knowledge of the Articles of the company.
• However, if the contract is within the ostensible authority to bind the company, a company shall be liable for contracts made by him even if he had no knowledge of the Articles of company.

Act Outside Authority
An outsider will not be protected if the act of an officer of a company is one which would not ordinarily be within his powers simply because, under the Articles power to do the act could have been delegated to him.

Anand Bihari Lai vs. Dinshaw & Co.

• The plaintiff accepted a transfer of the company’s property from its accountant, the transfer was held void.
• The plaintiff should have seen the power of attorney executed in favour of the accountant by the company.

Void or Illegal Transactions
The Doctrine of indoor management shall not apply to those transactions, which are void or illegal ab initio.

Miscellaneous Topics
Act Override MOA-AOA – Section 6
Act is having overriding effect in case if anything is contained contrary in Articles of Association, Memorandum or any resolution passed at meeting or any agreement entered into.

Service of Docu-ments – Section 20

• A document may be served to company or any of its officer by sending it to companv or at registered office of company by:
  • Registered post; or
  • Speed post; or
  • Courier; or
  • Hand delivery; or
  • Prescribed electronic mode
• Document may be served on Registrar or on member by serving by:
  • Post, registered post, speed post; or
  • Courier; or
  • Delivery at his office; or
  • By electronic mode
• However, member may request company to deliver document by specific mode on payment of fees.

Practice Questions

Question 1.
Whether the State Government can object to the transfer of registered office on the ground of loss of revenue to or employment of citizen of ‘ the state? Comment in the light of judicial pronouncements.
Answer:
State Government cannot object shifting of registered office from one state to another on ground of loss of revenue. Loss of revenue to one state means increase of revenue to the state where registered office of company will be shifted. Similar view was expressed in case of Minerva Mills vs. Govt, of Maharashtra.

Question 2.
Comment on the following: A company does not have unlimited power to alter its Articles of association.
Answer:
Statement is correct. Alteration to Article should not be inconsistence with the Companies Act, Memorandum or any other statute. It should not be illegal or against public policy.

Question 3.
With the approval of the Board, am amount of ₹ 50 crore was spent by Speed Jet Ltd., in producing a commercial film, not covered under its objects clause. The film was a complete flop and the company lost an amount of₹ 40 crore. Some of the members of the company objected to such investments not covered by the objects clause of the company. They filed a suit in the Court of law making the directors personally responsible and to make good the loss. Will they succeed? Support your answer with reasons.
Answer:
Board of Directors of company has invested an amount of t 50 crores in producing commercial film not covered under its object clause. The act of the directors is ultra vires and the persons responsible for entering into this project is personally liable. Members will succeed in suit.

Question 4.
Carefree is an officer of Cosy Ltd., who is authorised to sign behalf of the company any contract bill of exchange, hundi, promissory note, cheque, or order for money or goods. In these circumstances, Carefree sign cheque on behalf of the company without mentioning the name of the company. Who is liable to the holder in such a case?
Answer:
When officer of company sign or execute am negotiable instrument on behalf of company but do not mention name of company, person signing the instrument is personally liable to holder.

Question 5.
A registered office was shifted from one State to another. A labour litigation was pending before the Court. So, the employees objected to transfer, whether the objection of the employees is sustainable?
Answer:
Objection of employees is sustainable. Employees has legal right to appear before authority and to oppose application of shifting of registered office from one state to another on the ground that their interests would be likely to be adversely affected. Once objection is raised, it is upto Central Government to examine the reasons and decide that whether it would be just and equitable to confirm such shifting. – Bharat Commerce and Industries Ltd.

Question 6.
Abha Ltd., was incorporated on 15th March, 2012. A company with identical name and similar objects was incorporated on 5th August, 2013. On account of similarity of name, Abha Ltd. i.e., the company which was previously registered, filed a petition on 15th April, 2014 with the Central Government seeking issue of direction for change of name by later company so that its business interest is protected. On 16th August, 2014, the Central Government sent an order to the later company to change its name. Examine the aforesaid case and the validity of the order of the Central Government.
Answer:
As per section 16, Central Government can direct company registered later
with similar or identical with name of existence company to change its name. If direction is given by Central Government, company shall change its name within period of 3 months by following procedure prescribed under Act. If order of Central Government is not complied with, company and every officer in default is liable to pay fine not less than ₹ 5000 but which may extend to ₹ 1 lakh.

Question 7.
Surprise Ltd. was incorporated under the Companies Act, 2013. 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.
Answer:
Contract is ultra vires to Memorandum of company. Prominent Ltd. will not succeed against Surprise Ltd. Please refer the case of Ashbury Railway Carriage Co. vs.

Question 8.
M/s ABC Ltd. A company registered in the State of West Bengal desires to shift its registered office to the State of Maharashtra. Explain briefly the steps to be taken to achieve the purpose. Would it make any difference, if the registered office is transferred from the Jurisdiction of one Registrar of Companies to the Jurisdiction of another Registrar of Companies within the same State?
Answer:

Question 9.
The principal business of XYZ Company Ltd. was the acquisition of vacant plots of land and to erect the houses. In the course of transacting the business, the Chairman of the Company acquired the knowledge of arranging finance for the development of land. The XYZ Company introduced a financier to another company ABC Ltd. and received an agreed fee of t 2 lakhs for arranging the finance. The Memorandum ‘ of Association of the company authorises the company to carry on any other trade or business which can in the opinion of the board of directors, 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 XYZ Company Ltd. with ABC Ltd.
Answer:
Acquisition of vacant plots of land and erect house is different object from providing consultancy in finance matter. Activity of arranging finance for others are outside object clause of company. It is ultra vires to Memorandum. Contract is not valid.

Question 10.
P the secretary of a XYZ Limited issues a share certificate in favour of A purporting to be signed by the directors and the secretary and the seal of the company affixed to it. In fact the secretary forged the signature of the directors and has affixed the seal without authority. Can A hold the company liable for the shares covered by the share certificate, under the provisions of the Companies Act, 2013?
Answer:
Facts given in the problem are based on the facts of Rubben vs. Great Fingall Consolidated Co. In this case, it was held that the company is liable if an officer of the company, who has no authority to issue a certificate, issues a forged certificate. Hence, A can hold the company liable for the shares covered by the forged share certificate issued by P, the secretary of XYZ Limited.

Question 11.
The object clause of the Memorandum of Association of RST limited authorizes it to publish and sell text-books for students. The company however entered into an agreement with 0 to supply 100 laptops of worth ₹ 5 lakh for resale purposes. Subsequently, the company refused to make payment on the ground that the transaction was ultra vires the company. Examine the validity of company’s refusal for payment to Q under the provisions of the Companies Act.
Answer:
Agreement to supply laptop by Q is outside scope of object clause of RST Limited. It is ultra vires agreement and therefore void ab initio. For ultra vires transaction, no party to agreement has right to sue. Q cannot enforce the agreement against RST Limited. If the laptops are still in possession of the company, the Court on application, may order RST Limited to deliver it back to Q based on rule of equity.

Question 12.
Under the Articles of Association of Sunshine Ltd. Company directors had power to borrow up to ? 10,000 without the consent of the general meeting. The directors themselves lent ? 35,000 to the company without such consent and took debentures of the Company. Decide under the provisions of the Companies Act, whether the company is liable? If so, what is the extent of liability of the company in this case?
Answer:
Directors were having knowledge of the fact that the limit of borrowing specified under Articles was 10,000. If company wants borrow more than ₹ 10,000, it needs to obtain consent of General Meeting. Directors lent ₹ 35,000 without consent of General Meeting. Now, directors cannot take benefit of Doctrine of indoor management. The benefit of Doctrine of indoor management is not available to outsider when person has knowledge of irregularity in the internal management of company. Therefore, company is liable to extend of ₹ 10,000.

Past Examination Questions

Question 1.
The objects clause of the Memorandum of Association of the XYZ (P.) Ltd., New Delhi, authorized to do trading in mangoes. The company, however, entered into partnership with Mr. A and traded in mangoes and incurred liabilities to Mr. A. The company, subsequently to A on the ground of ultra vires the company. Advice whether stand of the company is legal valid and if so, gives reasons in support of your answer. (CA November 1997)
Answer:
Company can enter into partnership if authorised by its object clause of Memorandum of Association. If company is not authorised, company cannot enter into partnership. Trading in mango by way of partnership is ultra vires. It is void and not binding to company. The company is not liable to A.

Question 2.
Explain the limitations in relation to alteration of Articles of Association of a company. (CA November 2002)
Or
What restrictions are applicable under the Companies Act, 2013 when Articles of Association of a company are altered? (CA May 2014)
Answer:

Question 3.
Briefly explain the doctrine of ‘Constructive Notice’ under the Companies Act, 2013. Are there any exceptions to the said doctrine? (CA May 2003)
Answer:

Question 4.
The directors of a company registered and incorporated in the name ‘Mars Textile Ltd.’ desire to change the name of the company to ‘National Textiles and Industries Ltd.’ advice as to what procedure is required to be followed under the Companies Act, 2013? (CA May 2003)
Answer:

Question 5.
The Articles of Association of a limited company provided that Mr. X shall be the law officer for the company, and that he shall not be removed except on the ground of proved misconduct. Company removed him even though he was not guilty of misconduct. Decide whether company’s action is valid? (CA May 2004)
Or
Articles of a public company clearly stated that Mr. L will be the Solicitor of the company. The company in its General Meeting of the shareholders / resolved unanimously to appoint Mr. L as the solicitor of company by altering the articles of association. State with reasons, whether the company can do so? If L files a case against the company for removal as a solicitor, will he succeed? (CA November 2007, 2008, May 2013)
Answer:
Yes, company can remove Mr. X from the position of solicitor even though he is not guilty of misconduct. Person cannot be considered as member of company by inserting or stating his name in Article of company. Articles of company is binding contract between company and its member.

Question 6.
What are the purposes for which ‘objects’ can be altered by a company under the Companies Act, 2013? Briefly explain the procedure to be applied to such matters. (CA May 2005)
Or
Explain the provisions of law and procedure relating to alteration of object clause stated in the memorandum of association of a Company under Indian Companies Act, 2013. (CA November 2012)
Answer:

Question 7.
Rishi Pharmacy Ltd. decided to take up the business of food processing because of the downward trend in pharmacy. There is no provision in the object clause of the Memorandum of Association to enable the company to carry on such business. State whether its object clause can be amended. Mention briefly the procedure to be adopted for change in the object clause. (CA May 2005, 2016)
Or
The management of Ambitious Properties Limited has decided to take up the business of food processing activity because of the downward trend in real estate business. There is no provision in the object clause of the memorandum to enable the company to carry on such a business.
State with reason whether its object clause can be amended. State the procedure to be followed for the same. (CA May 2005)
Or
The objects clause of the Memorandum of a company empowers it to carry on distillery business and any other business that is allied to it. The company wants to alter Memorandum so as to include the cinema business in its objects clause. Advise the company.
Or
The object clause of the Memorandum of Vardhman Industries Ltd., empowers it to carry on real-estate business and any other business that is allied to it. Due to a downward trend in real-estate business the management of the company has decided to take up the business of Food Processing activity. The company wants to alter its Memorandum, so / as to include the Food Processing Business in its objects clause. State whether the company can make such change as per the provisions of the Companies Act, 2013? (CA May 2017)
Answer:
Company is required to follow procedure for change in object clause.

Question 8.
M/s India Computers Ltd. was registered as a Public Company on 1st July, 2015 in the State of Maharashtra. Another company by name M/s All India Computers Ltd. was registered in Delhi on 15th July, 2015. The promoters of India Computers Ltd. have failed to persuade the management of All India Computers Ltd. to change the company’s name, as it closely resembles with the name of the first registered company.
Advise the Management of India Computers Ltd. about the remedies available to them under the provisions of the Companies Act, 2013. (CA November 2005)
Answer:
Since the name of M/s India Computer Ltd., was registered earlier, on 1 st July, 2015, the promoters have a right to ask the management of M/s All India Computers Ltd. to change its name suitably as the said name closely resembles with that of the first registered company.
Since the management of M /s All India Computers Ltd. has not agreed, the promoters of India computers Ltd. can approach the Central Government under section 16 of the Companies Act, 2013 for rectification of the name of the company registered subsequently. The Central Government can direct the second registered company for correction.

Question 9.
The Articles of Association of a private limited company contain provisions restricting the right to transfer shares and limiting the number of members to fifty. What restrictions are generally incorporated in the Articles in restricting the right to transfer shares? (CA November 2005)
Answer:
Articles of Association of private company may insert any reasonable restriction on transfer of shares. It cannot insert any restriction which is absolute in nature.

Question 10.
XY Ltd. has its registered office at Mumbai in the State of Maharashtra. For better administrative conveniences the company wants to shift its registered office from Mumbai to Pune (State of Maharashtra). What formalities the company has to comply with under the provisions of the Companies Act, 2013 for shifting its registered office as stated above? Explain. (CA November 2006)
Answer:

Question 11.
The object clause of the Memorandum of Association of LSR Private Limited, Lucknow, authorised to do trading in fruits and vegetables. The company, however, entered into a Partnership with Mr. J and traded in , steel and incurred liabilities to Mr. J. The company, subsequently, refused to admit the liability to J on the ground that the deal was ‘Ultra Vires’ the company. Examine the validity of the company’s refusal to admit the liability to J. Give reasons in support of your answer. (CA May 2007)
Answer:
Company cannot enter into business which is not supported or authorised by its Memorandum. If it enters into, it will be ultra vires act to Memorandum. For ultra vires transaction, company is not liable. At the same time, Mr. J who entered into partnership is deemed to be aware of the lack of authority on part of Company.

Question 12.
X Ltd., a chemical manufacturing company distributed ₹ 20 lakhs to scientific institutions for furtherance of scientific education and research. Referring to the Companies Act, decide whether the said distribution of money was ‘Ultra vires’ the company? (CA November 2007)
Answer:
Any activity which is incidental or ancillary to main objective of company is permissible activity and it is considered as intra vires. For, chemical manufacturing company, donation of ₹ 20 lakh for furtherance of scientific education and research is incidental to its main objective and hence it is permissible.

Question 13.
Explain the doctrine of ‘ultra vires’. What are the legal effects of ultra vires transactions under the Companies Act, 2013? (CA May 2008)
Answer:

Question 14.
India Cosmetics Limited was registered under the Companies Act, 2013. Later on, another company ‘India Cosmetics and Accessories Limited’ was formed and registered. As both the names were similar, India Cosmetics Limited lodged the complaint against India Cosmetics and Accessories Limited to the registrar of companies stating that there is sufficient similarity between these two names which may mislead or defraud the public. ‘India Cosmetics and Accessories Limited’ is intending to alter its name. Advise. ‘India Cosmetics and Accessories Limited’ according to the provisions of Companies Act, 2013. (CA June 2009)
Answer:
India Cosmetic Accessories Ltd. shall change or ratify its name if Central Government has issued direction under section 16 pursuant to application made by India Cosmetics Ltd. Central Government can issue order to this effect if the name of company is identical or closely resemble with name of existing company. India Cosmetics and Accessories Ltd. should follow steps as per paragraph no. 4 to change its name.

Question 15.
What is important of registered office of a company? State the procedure for shifting of registered office of the company from one State to another State under the provisions of the Companies Act, 2013. (CA May 2011, November 2015)
Answer:

Question 16.
Explain the doctrine of ‘Indoor Management’. Also the circumstances in which an outsider dealing with company cannot claim any relief on the basis of doctrine of ‘Indoor management’. (CA May 2012)
Or
‘The doctrine of indoor management always protects the persons (outsiders) dealing with company’. Explain above statement. Also state the exceptions to the above rule. (CA May 2015)
Answer:

Question 17.
The Articles of Association of XYZ Ltd. provides the Board of Directors has authority to issue bonds provided such issue is authorised by the shareholders by a necessary resolution in the General Meeting of the company. The company was in dire need of such of funds and therefore, it issued the bonds to Mr. X without passing any such resolution in General Meeting. Can Mr. X recover the money from the company? Decide referring the relevant provisions of the Companies Act, 2013. (CA November 2016)
Answer:
Facts of this case are similar to case of Royal British Bank vs. Tarquand. Applying decision of Royal British Bank, Mr. X can recover money from the company applying the doctrine of indoor management.