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INCORPORATION OF COMPANIES; MEMORANDUM OF ASSOCIATION
AND ARTICLES OF ASSOCIATION
STRUCTURE
2.0 Objective
2.1 Introduction
2.2 Incorporation
2.2.1 Promotion
2.2.2 Incorporation
2.2.3 Capital Subscription
2.2.4 Commencement of Business
2.3 Memorandum of Association
2.4 Articles of Association
2.5 Difference between Memorandum of Association and Articles of Association
2.6 Constructive Notice of Memorandum and Articles of Association
2.7 Summary
2.8 Keywords
2.9 Self Assessment Questions
2.10 Suggested Readings
2.0 OBJECTIVE
After reading this lesson, you should be able to (a) Describe the process of formation of a company.
(b) Explain the different clauses of memorandum of association and the alterations thereof. (c) Discuss the contents of articles of association. (d) highlight the importance of constructive notice of memorandum and articles of association.
2.1 INTRODUCTION
We know that a company is a separate legal entity which is formed and registered under the Companies Act. It may be noted that before a company is actually formed (i.e., formed and registered under the Companies Act), certain persons, who wish to form a company, come together with a view to carry on some business for the purpose of earning profits. Such persons have to decide various questions such as (a) which business they should start, (b) whether they should form a new company or take over he business of some existing company, (c) if new company is to be started, whether they should start a private company or pubic company, (d) what should be the capital of the company etc. After deciding about the formation of the company, the desirous persons take necessary steps, and the company is actually formed. Thereafter, they start their business. Thus, there are various stage in the formation of a company from thinking of starting a business to the actual starting of the business.
2.2 INCORPORATION OF COMPANIES
Company is an artificial person created by following a legal procedure. Before a company is formed, a lot of preliminary work is to be performed. The lengthy process of formation of a company can be divided into four distinct stages : (I) Promotion; (ii) Incorporation or Registration; (iii) Capital subscription; and (iv) Commencement of business. However, a private company can start business as soon as it obtains the certificate of incorporation. It needs to go through first two stages only. The reason is that a private company cannot invite public to subscribe to its share capital. But a public company having a share capital, has to pass through all the four stages mentioned above before it can commence business or exercise any borrowing powers (Section 149). These four stages are discussed as follow :
2.2.1 Promotion
The term ‘promotion’ is a term of business and not of law. It is frequently used in business. Haney defines promotion as “ the process of organizing and planning the finances of a business enterprise under the corporate form”. Gerstenberg has defined promotion as “the discovery of business opportunities and the subsequent organization of funds, property and managerial ability into a business concern for the purpose of
incorporated. Following are some of the effects of such contracts;
- The company, when it comes into existence, is not bound by any contract made on its behalf before its incorporation. A company has no status prior to its incorporation.
- The company cannot ratify a pre-incorporation contract and hold the other party liable. Like the company, the other party to the contract is also not bound by such a contract.
- The agents of a proposed company may sometimes incur personal liability under a contract made on behalf of the company yet to be formed. Kelner v Bexter (1886) L.R. 2 C.P.174. A hotel company was about to be formed and promoters signed an agreement for the purchase of stock on behalf of the proposed company. The company came into existence but, before paying the price, went into liquidation. The promoters were held personally liable to the plaintiff. Further, an agent himself may not be able to enforce the contract against the other party. So far as ratification of a pre-incorporation contract is concerned, a company cannot ratify a contract entered into by the promoters on its behalf before its incorporation. The reason is simple, ratification can be done only if an agent contracts for a principal who is in existence and who is competent to contract at the time of the contract by the agent.
2.2.2 Incorporation
This is the second stage of the company formation. It is the registration that brings a company into existence. A company is legally constituted on being duly registered under the Act and after the issue of Certificate of Incorporation by the Registrar of Companies. For the incorporation of a company the promoters take the following preparatory steps: i) To find out form the Registrar of companies whether the name by which the new company is to be stareted is available or not. To take approval of the name, an application has to be made in the prescribed form along with requisite fee; ii) To get a letter of Intent under Industries (Development and Regulation) Act, 1951, if the company’s business comes within the purview of the Act. iii) To get necessary documents i.e. Memorandum and Articles of Association prepared and printed. iv) to prepare preliminary contracts and a prospectus or statement in lieu of a prospectus. Registration of a company is obtained by filing an application with the Registrar of Companies of the State in which the registered office of the comapany is to be situated. The application should be accompanied by the following documents:
- Memorandum of association properly stamped, duly signed by the signatories of the memorandum and witnessed.
- Ariticles of Association, if necessary.
- A copy of the agreement, if any, which the company proposes to enter into with
any individual for his appointment as managing or whole-time director or manager.
- A written consent of the directors to act in that capacity, if necessary.
- A statutory declaration stating that all the legal requirements of the Act prior to incorporation have been complied with. The Registrar will scrutinize these documents. If the Registrar finds the document to be satisfactory, he registers them and enters the name of the company in the Register of Companies and issues a certificate called the certificate of incorporation (Section34). The certificate of incorporation is the birth certificate of a company. The company comes into existence from the date mentioned in the certificate of incorporation and the date appearing in it is conclusive, even if wrong. Further, the certificate is ‘conclusive evidence that all the requirements of this Act in respect of registration and matters precedent and related thereto have been fulfilled and that the association is a company authorized to be registered and duly registered under this Act. Once the company is created it cannot be got rid off except by resorting to provisions of the Act which provide for the winding up of company. The certificate of incorporation, even if it contains irregularities, cannot be cancelled.
2.2.3 Capital Subscription
A private company can start business immediately after the grant of certificate of incorporation but public limited company has to further go through ‘capital subscription stage’ and ‘commencement of business stage’. In the capital subscription stage, the company makes necessary arrangements for raising the capital of the company. With a view to ensure protection on investors, Securities and Exchange Boar of India (SEBI) has issued ‘guidelines for the disclosure and investor protection’. The company making a public issue of share capital must comply with these guidelines before making a public offer for sale of shares and debentures. If the capital has to be said through a public offer of shares, the directors of the public company will first file a copy of the prospectus with the Registrar of Companies. On the scheduled date the prospectus will be issued to the public. Investors are required to forward their applications for shares along with application money to the company’s bankers mentioned in the prospectus. The bankers will then forward all applications to the company and the directors will consider the allotment of shares. If the subscribed capital is at least equal to 90 percent of the capital issue, and other requirements of a valid allotment are fulfilled the directors pass a formal resolution of allotment. However, if the company does not receive applications which can cover the minimum subscription within 120 days of the issue of prospectus, no allotment can be made and all money received will be refunded. If a public company having share capital decides to make private placement of shares, then, instead of a ‘prospectus’ it has to file with the Registrar of Companies a ‘ statement in lieu of prospectus’ at least three days before the directors proceed to pass the first share allotment resolution. The contents of a prospectus and a statement in lieu of a prospectus are almost alike.
a share capital Table D Memorandum of company limited by guarantee and having share capital. Table E Memorandum of an unlimited company Every company is required to adopt one of these forms or any other form as near there to as circumstances admit.
Printing and signing of Memorandum (Sec. 15).
The memorandum of Association of a company shall be (a) printed, (b) divided into paragraphs numbered consecutively, and (c) signed by prescribed number of subscribers (7 or more in the case of public company, two or more in the case of private company respectively). Each subscriber must sign for his/her name, address, description and occupation in the presence of at least one witness who shall attest the signature and shall likewise add his address, description and occupation, if any.
Contents of Memorandum
- (^) Name clause
Promoters of the company have to make an application to the registrar of Companies for the availability of name. The company can adopt any name if : i) There is no other company registered under the same or under an identical name; ii) The name should not be considered undesirable and prohibited by the Central Government (Sec. 20). A name which misrepresents the public is prohibited by the Government under the Emblems & Names (Prevention of Improper use) Act, 1950 for example, Indian National Flag, name pictorial representation of Mahatma Gandhi and the Prime Minister of India, name and emblems of the U.N.O., and W.H.O., the official seal and Emblems of the Central Government and State Governments. Where the name of the company closely resembles the name of the company already registered, the Court may direct the change of the name of the company. iii) Once the name has been approved and the company has been registered, then a) the name of the company with registered office shall be affixed on outside of the business premises; b) if the liability of the members is limited the words “Limited” or “Private Limited” as the case may be, shall be added to the name; [Sec 13(1) (1)]: Omission of the word ‘Limited’ makes the name incorrect. Where the word’ Limited” forms part of a company’s name, omission of this word shall make the name incorrect. If the company makes a contract without the use of the word “Limited”, the officers of the company who make the contract would be deemed to be personally liable [Atkins & Co v Wardle, (1889) 61 LT 23] The omission to use the word ‘Limited’ as part of the name of a company must have been deliberate and not merely accidental. Note the following case in this regard: Dermatine Co. Ltd. v Ashworth, (1905) 21 T.L.R. 510. A bill of exchange drawn
upon a limited company in its proper name was duly accepted by 2 directors of the company. The rubber stamp by which the word of acceptance were impressed on the bill was longer that the paper of the bill and hence the word ‘Limited’ was missed. Held, the company was liable to pay and the directors were not personally liable. (c) the name and address of the registered office shall be mentioned in all letterheads, business letters, notices and Common Seal of the Company, etc. (Sec. 147). In Osborn v The Bank of U. A. E., [9 Wheat (22 US), 738]; it was held that the name of a company is the symbol of its personal existence. The name should be properly and correctly mentioned. The Central Government may allow a company to drop the word “Limited” from its name.
- Registered Office Clause
Memorandum of Association must state the name of the State in which the registered office of the companmy is to be situated. It will fix up the domicile of the company. Further, every company must have a registered office either from the day it begins to carry on business or within 30 days of its incorporation, whichever is earlier, to which all communications and notices may be addressed. Registered Office of a company is the place of its residence for the purpose of delivering or addressing any communication, service of any notice or process of court of law and for determining question of jurisdiction of courts in any action against the company. It is also the place for keeping statutory books of the company. Notice of the situation of the registered office and every change shall be given to the Registrar within 30 days after the date of incorporation of the company or after the date of change. If default is made in complying with these requirements, the company and every officer of the company who is default shall be punishable with fine which may extend to Rs. 50 per during which the default continues.
- Object Clause
This is the most important clause in the memorandum because it not only shows the object or objects for which the company is formed but also determines the extent of the powers which the comapany can exercise in order to achieve the object or objects. Stating the objects of the company in the Memorandum of Association is not a mere legal technicality but it is a necessity of great practical importance. It is essential that the public who purchase its shares should know clearly what are the objects for which they are paying. In the case of companies which were in existence immediately before the commencement of the Companies (Amendment) Act. 1965, the object clause has simply to state the objects of the company. But in the case of a company to be registered after be amendment, the objects clause must state separately.
i) Main Objects : This sub-clause has to state the main objects to be pursued by the company on its incorporation and objects incidental or ancillary to the
each member to be contributed by them in case of the winding up of the company is to be mentioned. No subscriber to the memorandum shall take less than one share. Each subscriber of the Memorandum shall write against his name the number of shares he takes.
- Liability Clause
In the case of company limited by shares or by guarantee, Memorandum of Association must have a clause to the effect that the liability of the members is limited. It implies that a shareholder cannot be called upon to pay any time amount more then the unpaid portion on the shares held by him. He will no more be liable if once he has paid the full nominal value of the share. The Memorandum of Association of a company limited by guarantee must further state that each member undertakes to contribute to the assets of the company if wound up, while he is a member or within one year after he ceased to be so, towards the debts and liabilities of the company as well as the costs and expenses of winding up and for the adjustment of the rights of the contributories among themselves not exceeding a specified amount. Any alteration in the memorandum of association compelling a member to take up more shares, or which increases his liability, would be null and void. (Sec 38). If a company carries on business for more than 6 months while the number of members is less than seven in the case of public company, and less than two in case of a private company, each member aware of this fact, is liable for all the debts contracted by the company after the period of 6 months has elapsed. (Sec. 45).
- Association or Subscription Clause
In this clause, the subscribers declare that they desire to be formed into company and agree to take shares stated against their names. No subscriber will take less than one share. The memorandum has to be subscribed to by at least seven persons in the case of a public company and by at least two persons in the case of a private company. The signature of each subscriber must be attested by at least one witness who cannot be any of the subscribers. Each subscriber and his witness shall add his address, description and occupation, if any. This clause generally runs in this form : “we, the several person whose names and addresses are subscribed, are desirous of being formed into a company in pursuance of the number of shares in the capital of the company, set opposite of our respective name”. After registration, no subscriber to the memorandum can withdraw his subscription on any ground.
Alteration of Memorandum of Association
Alteration of Memorandum of association involves compliance with detailed formalities and prescribed procedure. Alternations 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 comapany and should not have the effect of increasing the liability of the members and the creditors. Contents of the Memorandum of association can be altered as under :
- Change of name
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. (Sec.21) By ordinary resolution. If through inadvertence or otherwise, a company is registered by a name which, in the opinion of the Central Government, is identical with or too nearly resembles the name of an existing comapany, it may change its name by an ordinary resolution and with the previous approval of the Central Government signified in writing. [Sec. 22(1) (a)]. Registration of change of name. Within 30 days passing of the resolution, a copy of the order of the Central Government’s approval shall also be field with the Registrar within 3 months of the order. The Registrar shall enter the new name in the Register of Companies in place of the former name and shall issue a fresh certificate of incorporation with the necessary alterations. The change of name shall be complete and effective only on the issue of such certificate. The Registrar shall also make the necessary alteration in the company’s memorandum of association (Sec. 23) The change of name shall not affect any right or obligations of the company or render defective any legal proceeding by or against it. (Sec. 23).
- Change of Registered Office
This may involve : a) Change of registered office from one place to another place in the same city, town or village. In this case, a notices is to be give within 30 days after the date of change to the Registrar who shall record the same. b) Change of registered office from one town to another town in the same State. In this case, 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. The within 30 days of the removal of the office. A notice has to be given to the Registrar of the new location of the office. c) Change of Registered Office from one State to another State to another State. Section 17 of the Act deals with the change of place of registered office form one State to another State. According to it, a company may alter the provision of its memorandum so as to change the place of its registered office from one State to another State for certain purposes referred to in Sec 17(1) of the Act. In addition the following steps will be taken.
Special Resolution
to be filed with the Registrar are not filed within one month, such alteration and the order of the Central Government and all proceedings connected therewith shall at the expiry of such period become void and inoperative. The Central Government may, on sufficient cause show, revive the order on application made within a further period of one month [Sec. 19]
- Alteration of Capital Clause
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 Associational, the company must change the articles of association by passing a special resolution. If the alteration is authorized by the Articles, the following changes in share capital may take place :
- Alteration of share capital [Section 94-95]
- Reduction of capital [Section 100-105]
- Reserve share capital or reserve liability [Section 99]
- Variation of the rights of shareholders [Section 106-107]
- Reorganization of capital [Section 390-391]
- Alteration of Liability Clause
Ordinarily the liability clause cannot be altered so as to make the liability of members unlimited. Section 38 states that the liability of the members cannot be increased without their consent. It lays down that a member cannot by changing the memorandum or articles, be made to take more shares or to pay more the shares already taken unless he agrees to do so in writing either before or after the change. A company, if authorized by its Articles, may alter its memorandum to make the liability of its directors or manager unlimited by passing a special resolution. This rule applies to future appointees only. Such alteration will not effect the existing directors and manager unless they have accorded their consent in writing. [Section 323]. Section 32 provides that a company registered as unlimited may register under this Act as a limited company. The registration of an unlimited company as a limited company under this section shall not affect any debts, liabilities, obligations or contracts incurred or entered into by the company before such registration.
2.4 ARTICLES OF ASSOCIATION
Every company is required to file Articles of Association along with the Memorandum of Association with the Registrar at the time of its registration. Companies Act defines ‘Articles as Articles of Association of a company as originally framed or as altered from time to time in pursuance of any previous companies Acts. They also include, so far as they apply to the company, those in the Table A in Schedule I annexed to the Act or corresponding provisions in earlier Acts. Articles of Association are the rules, regulations and bye-laws for governing the internal affairs 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. 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 it self 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. Article of Association are to be printed, divided into paragraphs, serially numbered and signed by each subscriber to Memorandum with the address, description and occupation. Each subscriber shall sign in the presence of at least one witness who shall attest the signatures and also mention his own address and occupation.
Contents of Articles of Association
Articles generally contain provision relating to the following matters; (1) the exclusion, whole or in part of Table A; (ii) share capital different classes of shares of shareholders and variations of these rights (iii) execution or adoption of preliminary agreements, if any; (iv) allotment of shares; (v) lien on shares (vi) calls on shares; (vii) forfeiture of shares; (viii) issue of share certificates; (ix) issue of share warrants; (x) transfer of shares; (xi) transmission of shares; (xii) alteration of share capital; (xiii) borrowing power of the company; (xiv) rules regarding meetings; (xv) voting rights of members; (xvi) notice to members; (xvii) dividends and reserves; (xviii) accounts and audit; (xix) arbitration provision, if any; (xx) directors, their appointment and remuneration; (xxi) the appointment and reappointment of the managing director, manager and secretary; (xxii) fixing limits of the number of directors (xxiii) payment of interest out of capital; (xxiv) common seal; and (xxv) winding up.
Model form of Articles
Different model forms of memorandum of association and Articles of Association of various types of companies are specified in Schedule I to the Act. The schedule is divided into following tables. Table A deals with regulations for management of a company limited by shares. Table B contains a model form of Memorandum of Association of a company limited by shares. Table C gives model forms of Memorandum and Articles of Association of a company limited by guarantee and not having a share capital. Table D gives model forms of Memorandum and Articles of Association of a company limited by guarantee and having a share capital. The Articles of such a company contain in addition to the information about the number of members with which the company proposes to be registered, all other provisions of Table A. Table E contains the model forms of memorandum and Articles of Association of an unlimited company.
Memorandum of Association Articles of Association
- It is character of company indicating 1. They are the regulation nature of business & capital. for the internal management It also defines the company’s rela- of the company and tionship with outside world are subsidiary to the memorandum.
- It defines the scope of the 2. They are the rules for activities of the company, or carrying out the objects of the area beyond which the the company as set out in actions of the company cannot the Memorandum.
- It, being the charter of the 3. They are subordinate to company, is the supreme the Memorandum. If there document. is a conflict between the Articles and the Memorandum, the act of the company
- Any act of the company which 4. Any act of the company is ultra vires the Memorandum which is ultra vires the is wholly void and cannot be articles can be ratified even by the whole body confirmed by the shareof shareholders. holders if it is intra vires the memorandum.
- Every company must have its 5. A company limited by own Memorandum Shares need not have Articles of its own. In such A case, Table A Applies.
- There are strict restrictions 6. They can be altered by a on its alteration. Some of the special resolution, to any conditions of incorporation extent, provided they do contained in it cannot be altered not conflict with the except with the sanction of the Memorandum and the Central Government. Companies Act.
2.6 CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES OF ASSOCIATION The Memorandum and Articles of a company are registered with the Registrar. These are the public documents and open to public inspection,. Every person contracting with the company must acquaint himself with their contents and must make sure that his contract is in accordance with them, otherwise he cannot sue the company. On registration the memorandum and articles of association 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 one rupee for each inspection and can be copied (Sec. 610). Every person who deals with the company, whether shareholder or an outsider is presumed to have read the memorandum and articles of association of the
company and is deemed to know the contents of these document. Therefore, the knowledge of these documents and their contents is known as the constructive notice of memorandum and articles of association. It is presumed that persons dealing with the company have not only read these documents but they have also understood their proper meaning. Where a person deals with the company in a manner, which is inconsistent with the provisions of memorandum or articles, or enters into a transaction which is beyond the powers of the company, shall be personally liable to bear the consequences regarding such dealings.
2.7 SUMMARY The whole process of formation of a company can be divided into four distinct stages namely promotion incorporation, capital subscription and commencement of business. However, a private company can start business as soon as it obtains the certificate of information. The memorandum of Association of a company tells us the objects of the company's formation and the utmost possible scope of its operations beyond which its actions cannot go. The memorandum of association of every clause, objects clause, liability clause, Memorandum of association cannot be altered by the sweet will of the members of the 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. The company may alter its articles of association any time by following the procedure as prescribed in the Companies Act. Every person dealing with the company is presumed to have read the memorandum and articles of association and understood them in their time perspective. This is known as doctrine of constructive notice.
2.8 KEYWORDS Promotion : Promotion means the discovery of business opportunities and the subsequent organization of funds, property and managerial ability into a business concern for the purpose of making profits therefrom. Promoter : A promoter is a person who undertakes to form a company with reference to a given object and brings it into actual existence. Preliminary Contract : Preliminary contract refers to those agreements or contracts entered into between different parties on behalf and for the benefit of the company prior to its incorporation. Certificate of Commencement of Business : A public company, having a share capital and issuing a prospectus inviting the public to subscribe for shares, will have to file a few documents with the registrar who shall scrutinize them and if satisfied will issue a certificate to commence business. Memorandum of Association : It is the document which defines the objects and lays down the fundamental conditions upon which along the company is allowed to be incorporated. Articles of Association : Articles of association are the rules, regulation and byelaws for governing the internal affairs of the company.
