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REGISTRATION AND INCORPORATION OF A COMPANY

Table of Contents

QUESTION BANK

Explain the procedure regarding “registration” and “incorporation” of a company.
Explain the term “memorandum of association” and “articles of association” of a company.
How is a company formed under the Companies Act 1956? Enumerate the various documents to be filed with the Registrar.
Doctrine of indoor management and Doctrine of constructive notice.
What is meant by incorporation of a Company? Explain the procedure for registration of a Company.
Explain different types of companies which may be incorporated under the Companies Act. 2013.
Write a detailed note on the procedure for the Company’s formation emphasizing the role of Promoters.
Write a detailed note on the significance of the Memorandum of Association and the procedure for its alteration.

SHORT NOTES

Memorandum
Articles of Association.
Doctrine of Ultra-Vires
Ultra-Vires

I] INTRODUCTION:-

The provisions relating to the registration of a company are provided in S. 7 of the Companies Act. 2013. The company comes into existence through its registration. After satisfying himself that the company’s promoters have fulfilled all the necessary requirements, the Registrar issues a certificate of incorporation, and thus, the company comes into existence. In other words, a company comes into existence by registration.

II] ESSENTIAL ELEMENTS OF REGISTRATION:-

Following are the essential elements which are very important for the registration of a company-

A) Number of Persons Required:-

Seven or more persons are required to register a public limited company, and they should be associated for lawful purposes.

Whereas for the registration of the private limited company, any two or more persons shall be associated for lawful purposes. However, the maximum number of members should not exceed 200.

B) Promoters[1]:-

The persons who take the initiative to form a company are called ‘promoters’.

The promoters should arrange all the necessary documents and documents for the registration of a company.

C) Pre-incorporation Contracts[2]:-

1) Meaning:-

Contracts made on behalf of the company that have not yet been incorporated are called ‘pre-incorporation contracts’.

2) Who can make Pre-incorporation Contracts?

Pre-incorporation contracts may be made by

(i) Promoters of the company, or

(ii) By a person acting as an agent or trustee of the company (not incorporated)

3) Liability of company for Pre-incorporation contracts:-

Does the important question arise regarding whether the company can sue or be sued for pre-incorporation contracts? This question can be answered from the following points…

a) The Company cannot be sued for pre-incorporation contracts:-

A company comes into existence on incorporation or registration; hence, the company cannot be sued or made liable for contracts made before its registration.

In Re- English and Colonial Produce Company Ltd. Case[3]

The court held that the solicitor whose services the company received before its registration is not entitled to recover charges for his services.

i) No Liability on Ratification[4] of Pre-incorporation contracts:-

For valid ratification, the person ratifying the act should have existed; otherwise, it cannot be ratified. Therefore, pre-incorporation contracts cannot be rectified. Hence, the company is not in existence at pre-incorporation contracts and cannot be held liable for ratifying the contract.

ii) Liability of a company under the Specific Relief Act:-

15(4) provides an exception to the rule that the company is not liable for ratification of pre-incorporation contracts. S. 15(4) provides that the company can sue or be sued for specific performance of contracts when…

(i) Promoters have made a contract for the company,

(ii) terms of incorporation warrant such contracts.

(iii) the company accepts the contract and communicates such acceptance to the other party,

(iv) other parties then can compel the company for specific performance of such a contract.

iii) Liability of Promoters or Agents[5]:-

For contracts entered into on behalf of a company before its incorporation, the company is not liable even after its incorporation or registration, but promoters or agents are personally liable for such contracts.

In Kelner V/s Baxter[6]

Fact – The promoters of a company agreed to purchase certain goods on behalf of a company that has yet to be incorporated.

The Court Held that Since the company was not in existence at the time of the contract, the company cannot be held liable to pay, but promoters are personally liable for the contracts.

b) Company cannot sue for pre-incorporation contracts:-

Since pre-incorporation contracts towards the other party do not bind the company, the other party is also not bound by pre-incorporation contracts made with the company (i.e. not incorporated).

However, as mentioned above, this rule is subject to S. 15(4) of the Specific Relief Act.

In Natal Land & Colonisation Co. Ltd. V/s Pauline Colliery & Devp. Syndicate Ltd[7]

Fact—Natal Land Co. Ltd. Had made a contract with Syndicate to grant the mine lease to Syndicate. After the Syndicate’s registration, Natal did not complete the contract.

Held that –Said contract cannot be enforced.

III] PROCEDURE FOR REGISTRATION[8]:-

A] APPLICATION:-

First, an application for registration must be made to the company’s Registrar. Promoters or agents may make such applications to the company.

B] REQUISITE DOCUMENTS:-

As mentioned above, an application should be accompanied by the following important documents, viz.

(1) Memorandum of Association[9] of the Company:-

This is an important document for a company. It contains the fundamental conditions upon which a company is allowed to be incorporated. It defines the powers or scope of activities of the company. It states the name of a company, address of the registered office of the company, object of the company, liability of members, amount of share capital, etc. [see below for details]

(2) Article of Association[10]:-

This is a document that contains rules and regulations for the internal management of a company’s affairs.

In a “private company” or “limited company,” the article of association should be registered along with the Memorandum of Association. Still, in the case of a “public limited company,” it is optional to register it along with the Memorandum.

The article of Association shall be printed and divided into paragraphs. Each subscriber to the Memorandum of Association also needs to sign it. [see below for details]

(3) Agreements:-

The company proposes an agreement with any individual for appointment as its managing or whole-time director or manager.

(4) Declaration:-

The above-mentioned documents shall be accompanied by a declaration declaring that all the requirements of the Companies Act and Rules thereunder are complied with in relation to registration. Such declaration shall be made by

(i) An advocate of the Supreme Court or a High Court.

(ii) An attorney or pleader entitled to appear before a High Court.

(iii) A secretary or Chartered Accountant in whole-time practice in India who is engaged in forming a company.

(iv) A person named in the Articles of Association as the company’s director, manager or secretary.

(5) A List of Persons:-

A list of persons who have consented to become directors of the company.

(6) Consent in Writing:-

Consent in writing of each director or proposed director is necessary to act as a director. However, consent is not required to be filed with the Registrar of companies if the company is-

(i) a private company or an

(ii) a company has no share capital, or

(iii) a company which was a private company before becoming a public company.

C] CERTIFICATE OF INCORPORATION[11]:-

If the Registrar is satisfied that all the requirements mentioned above are complied with by the company, he shall retain and register the Memorandum, articles, if any, agreements and shall issue a certificate of incorporation to the company.

(1) Effect of Certificate of Incorporation:-

Following are the effects of the certificate of incorporation.

a) Conclusiveness of Certificate of Incorporation[12]:-

A certificate of incorporation given by the Registrar shall be conclusive evidence that all the requirements of this Act relating to registration have been complied with, and the validity of the certificate cannot be challenged on any ground.

b) Date of Incorporation:-

It is also conclusive evidence as to the date on which the company was incorporated and became corporate. Thus, the company’s life commences from the date mentioned in the certificate of incorporation.

c) Legal Person[13]:-

From the date of incorporation mentioned in the certificate of incorporation, the company becomes a legal person, having perpetual succession and a common seal.

(2) Advantages and Disadvantages of Incorporation:-

a) Advantages of Incorporation:-

i) Legal Personality:-

From the date of incorporation, the company becomes a legal entity with perpetual succession and a common seal.

In Saloman V/s Saloman[14]

In the above case, the legal personality of the incorporated company was firmly recognised.

ii) Separate Property[15]:-

After becoming a legal person, the company can own, enjoy and dispose of the property in its own name.

iii) Perpetual Succession[16]:-

After incorporation, the company becomes a legal entity with perpetual succession and a common seal. This means that the company’s existence is not affected by the death or insolvency of its members.

iv) Transfer of Share:-

The incorporation enables a member to transfer shares without the consent of other members because shares are movable property.

v) Suing and Being Sued[17]:-

After incorporation, a company becomes a legal person, and hence, the company can sue or be sued in its own name.

vi) Limited Liability[18]:-

Under the Indian Companies Act, a company can be registered with limited or unlimited liability; where the company is registered with unlimited liability, each of its members is liable to contribute to the debts of the company to the full extent of his property.

But, if the company is registered with “limited liability”, each member is liable to the extent of his interest in the company. Usually, companies are registered with limited liability.

vii) Conclusive Evidence[19]:-

The incorporation of a company is conclusive evidence that all registration requirements are fully complied with. Thus, registration is conclusive proof of the company’s existence.

viii) Efficient Management[20]:-

A company’s management is vested with efficient people, called directors; each member cannot participate in the company’s day-to-day activities.

b) Disadvantages of Incorporation:-

i) Abuse of Legal Personality[21]:-

A veil of incorporation exists between the company and its members. In order to protect them from the liability of a company, its members always take shelter from the corporate veil. This corporate veil is used as a means of fraud or evasion of duty. In this way, members abuse their legal personality.

ii) Formalities and Expenses[22]:-

The incorporation of the company involves many formalities and expenses. It also causes huge expenses throughout its life and also on its dissolution.

iii) Shareholders are divested of Control[23]:-

The whole management of a company concentrates on directors. Since shareholders have no control over management, they are not interested in the company’s affairs.

D) COMMENCEMENT OF BUSINESS:-

1) Certificate of Commencement of a Business[24] (S. 10-A)[25]:-

Public and private companies without share capital may commence business immediately after getting a certificate of incorporation. However, Public and Private Companies with share capital can only commence business or exercise any borrowing power after getting a ‘certificate of commencement’.

2) Conditions:-

The Registrar can issue such certificate upon fulfilment of the following conditions by the company, viz.

(i) A duly verified declaration is to be filed by one of the directors in a prescribed form to the register of companies.

(ii) within the period of 180 days of the date of the incorporation of the company.

(iii) declaration that every subscriber to the Memorandum has paid the value of the share agreed to be taken by him on the date of making such declaration, and

(iv) the company has filed with the Register a verification of its registered office (as provided in subsection (2) of S. 12).

Suppose any default is made in the above compliance. In that case, the company shall be liable to a penalty of fifty thousand rupees, and every officer who is in default shall be liable to a penalty of one thousand rupees for every day during which the default continues but not exceeding the amount of one lakh rupees.

Moreover, where no declaration has been filed with the Registrar as mentioned above, and the Registrar has reasonable cause to believe that the company is not carrying out any business or operations, he may initiate action for the removal of the name of the company from the register of companies[26].

3) Issuance of Certificate:-

When all the above requirements are satisfied, the Registrar shall issue the certificate to commence business.

4) Pre-Certificate Contracts:-

Contracts made by the company before a certificate of commencement of business is received are not binding on the company.

NOTES

(1) MEMORANDUM OF ASSOCIATION[27]

I] INTRODUCTION:-

A Memorandum of Association is a fundamental document for the formation of a company. It is the charter of a company. It contains fundamental conditions upon which the company is allowed to be incorporated. It enables the outside world, the shareholders, the creditors and others who deal with the company to know its object, status, character or position.

According to S. 2 (56), the expression “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 this Act.”

II] FORM OF MEMORANDUM OF ASSOCIATON:-

The Memorandum shall be –

(i) printed

(ii) divided into paragraphs numbered consequently, and

(iii) signed by each subscriber in the presence of at least one witness.

(iv) it shall be in the form of Table A, B, C, D, and E as prescribed in Schedule-I.

III] CONTENTS OF MEMORANDUM OF ASSOCIATION (S. 4):-

The Memorandum of Association shall contain the following six clauses-

(A) Name Clause:-

As a company is similar to a natural person and has a legal entity, it should bear its own name. The Memorandum shall state the name of a company. The promoters shall give the company a specific name, but the following conditions should strictly be followed…

(i) The last word shall be the word “limited” in the case of a “public limited company” and “private limited” in the case of a ‘private limited company’ or ‘one man company’ in the one-man company.

(ii) The name should not be undesirable. A name is undesirable when it is identical to or nearly resembles another company’s name.

In Atkins & Co. V/s Wordle

Fact – A company’s directors made contracts without the word “limited.”

The Court held that the directors were personally liable for those contracts.

1) Publication of the Name of the Company (S.12 (3)):-

Every company is required-

(i) to paint or affix its name outside every office or place in

which business is carried out.

(ii) to engrave its name in visible character on its seal.

(iii) Use the name on every business letter or document.

In Basudev Lal V/s Madan Lal

Held that –Name of a company should be painted outside every place where the business of the company is being carried out.

2) Drop of Word “Limited” (S. 8 (5):-

(i) In the following exceptional cases, the Central Government may authorise companies to omit the words “Limited”, “Private Ltd”, or “one-person company” in its name.

(ii) when the company is formed to promote science, commerce, art, religion, charity, etc.

(iii) when the company intends to apply its profit to its object and not as a dividend to its members.

3) Penalty (S. 453):-

If any person, without the company’s registration, carries on trade or business under any name or title of which the word “Limited”, “Private Ltd” or “one person company” is the last word, that person shall be punished with a fine which shall not be less than Rs.500/- per day but which may extend to Rs. 2000 per day upon which that name or title used.

4) Change in Name (S.13 (2)):-

The company may change its name at any time in the course of business but is subject to the following conditions…

(i) A special resolution should be passed to that effect.

(ii) Approval from the central government should have been obtained.

(iii) The changed name should be registered with the company’s Registrar.

Rectification of the name of a company (S. 16):-

In a case, due to inadvertence or otherwise, a company, after its first registration or on its registration by a new name, is registered by a name which-

In the opinion of the Central Government as identical with or too nearly resembles the name by which a company in existence had been previously registered, the Central Government may direct the Company to change its name within 3 months by adopting the ordinary resolution.
The Central Government may also order to change the name of the company on an application by a registered proprietor of a trade mark, that the name is identical with or too nearly resembles the registered trade mark of such proprietor[28].

B) Registered Office Clause (S. 12):-

The second clause should mention the State in which the company’s registered office is to be situated. Every company should have a registered office from the day of commencement of its business or within 30 days of its incorporation, whichever date is earlier, to which communications and notices may be addressed.

In Zenith Silk Mills Private Ltd. V/s Unknown (Company Petition 340/2015)

Gujrat High Court held that the provisions relating to the Registration Office, its address, etc., are mandatory and should be properly complied with.

1) Change in Registered Office:-

Changing registered office clauses from one state to another is a complicated procedure, and it requires an alteration in the Memorandum of Association. The following conditions are required to be fulfilled for change-

(i) The company shall pass a special resolution to that effect.

(ii) before confirming alteration, the Central Government shall be satisfied.

2) Notice of Change:-

Notice of the place of the registered office shall be communicated to the Registrar within 30 days after the change date. Notice is to be given to every shareholder, creditor, etc.

3) Grounds for Change:-

A company may change the place of registered office from one state to another on the following grounds-

(i) to carry on business more economically or more efficiently.

(ii) to attain its purpose by new means.

(iii) to enlarge or change the local area of its operation.

(iv) to restrict or abandon any object specified in the Memorandum.

(v) to amalgamate with any other company or body of persons.

In Re Machinon Machenzie and Company

Fact – The company passed a resolution to shift its registered office from the state of Bengal to Maharashtra and filed a petition in Court for confirmation.

The Court allowed the petition.

C) The Object Clause[29] (S. 4 (1)(b)):-

The third clause in the memorandum states the object of the proposed company. Since the company is funded by other people’s money, those persons shall know its object.

a) The company’s object clause shall contain three sub-clauses:-

1) Main Object:-

The main object of a company to be persuaded is to be mentioned. It contains its incorporation of any object incidental and ancillary to attain the main object.

2) Other Objects:-

Objects not included in the main object are other objects.

3) The State to whose Territory Objects Extend:-

In the case of companies with objects not confined to one state, they should mention the name of the states to which territories the object extends.

b) Purpose of Object Clause:-

The following are the purposes of the object clause-

1) To protect Investors:-

The investors should know the object of the company in which their money is to be invested.

2) To protect Creditors:-

The creditors should ensure that the funds of the company are not to be used for unlawful or unauthorised activities.

3) Restrictions on Objects:-

The objects should not be

(i) against public policy or provisions of the constitution of India.

(ii) against provisions of the Companies Act.

(iii) against the provisions of General Law.

c) Object clause and Doctrine of Ultra-Virus[30]:-

The object clause in the Memorandum indicates the purpose for which the company’s money is to be used. The company is, therefore, authorised to do only such act which is authorised to be done by the Memorandum. It cannot do those acts which are called outside its powers. Acts outside the company’s object are ultra-virus and, therefore, void.

Ultra-virus acts cannot be validated by ratification by the shareholders later on.

In Ashbury Railway Camage & Iron Co. V/s Riche

Facts-A company was constituted with the following objects-

(i) to make, sell or give on hire railway carriage and wagon,

(ii) to carry on business as a mechanical engineer and general contractor.

However, the directors made a contract to finance the construction of a railway line in Belgium. The company passed a special resolution to ratify the contract.

The Court Held that the contract was ultra-virus and, therefore, void.

d) Effects of Ultra-Virus Acts:-

1) Injunctions:-

The company may be restrained by a permanent injunction from doing the ultra-virus act.

In London County Council V/s Attorney General[31]

House of Lords held that the running of the omnibus is an ultra-virus by the company, which has not been formed with that object.

2) Directors Personally Liable:-

If the company does an ultra-virus act, directors are personally liable to the company to compensate for any loss.

In Lakshmanswami Mudliar V/s Life Insurance Corporation[32]

Supreme Court Held that the donation of Rs. 2 Lakh by the company was an ultra-virus act.

3) Breach of Warranty of Authority:-

Directors are company agents; if they make any contract on behalf of the company, they warrant the company’s authority. But, if contracts made by them are ultra-virus, the company can give no authority, and hence, directors are personally liable for breach of an implied authority.

In Weeks V/s Propers

The Court Held that -Directors are personally liable for the breach of implied warranty.

4) Ultra-Virus Contracts as void:-

The contracts entered beyond the powers are Ultra-Virus and are void[33].

5) Alteration of object clause (S. 13 (8)):-

A company which has raised money from the public through a prospectus and still has any unutilised amount out of the money so raised shall not change the objects for which it was raised unless the company passes a special resolution and (i) the details of that resolution are published in newspapers and website of the company, and (ii) the dissenting shareholders shall be allowed to exit.

Registration of Alteration[34] (S. 13 (9)):-

The Registrar shall register any alteration of the Memorandum with respect to the objects of the company and certify the registration within a period of thirty days from the date of filing of special resolution as above.

6) Ultra-Virus Civil Wrong:-

Ultra-Virus Civil wrong means “tort”. The company is liable for ultra-virus civil wrongs committed by its members.

D) Liability Clause[35]:-

On the basis of liability, companies can be divided into three clauses-

1) Companies Limited by Shares:-

In the case of a company limited by shares, the member’s liability is limited to the extent of the nominal number of shares he holds, not more than that.

But, if a member’s shares are fully paid up, he holds no liability at all.

2) Company Limited by Guarantee:-

In the case of a company limited by guarantee, each member is liable to contribute to the company’s assets to the extent of his guarantee at the time of the company’s formation or winding-up (as the case may be).

3) Unlimited Company:-

A company with no limit on its members’ liability is termed an ‘unlimited company’ (S. 2 (92). Members of such a company are similarly liable as “partners” in a partnership firm. Their liability extends to the payment of all dues of the company.

4) “One Person Company” (S. 2 (62)):-

“One Person Company” means a company which has only one person as a member”. Such ‘One Person Company” is a ‘Private Company’.

The Memorandum of ‘one person company’ shall indicate the name of another person, with his/her prior consent in the prescribed form, who shall, in the event of the subscriber’s death or his/her incapacity to contract, become the member of the company and the written consent of such person shall also be filed with the Registrar of Companies at the time of incorporation of one person company along with its Memorandum and Articles.

Such other (nominated) members may withdraw his/her consent in such manner as may be prescribed. Even the member of One Person Company may at any time change the name of such other person by giving notice in such manner as may be prescribed. However, such change shall be intimated to the Company and Registrar.

E) Capital Clause[36]:-

The mention of the capital clause is compulsory only in cases of a limited company. In the Memorandum of association of a “company limited by shares”, the capital clause of such company shall state that…

(i) amount of nominal capital.

(ii) the number of shares into which it is divided,

(iii) and the amount of each share.

E.g., The share capital of a company is one crore rupees divided into ten lakh shares of rupees ten each.

F) Subscription Clause:-

This clause is also known as the “Association Clause.” In it, subscribers declare that they desire to be formed into the company and agree to take shares mentioned in their names.

There shall be at least seven subscribers for a limited company and two persons for a private limited company. They shall hold at least one share each. The full names, addresses and occupations of such subscribers are also to be stated. Each subscriber must sign in the presence of at least one witness.

(2) ARTICLES OF ASSOCIATION (S. 5)

Articles of Association are documents containing rules and regulations for the administration of a company. Articles of Association is the second important document; this document is to be registered along with the Memorandum of Association. This document states rules, regulations and bylaws relating to the general administration of a company. ‘Articles of Association’ for brevity is called ‘Articles’.

Therefore, it is concerned with the internal administration of the company.

I] Articles of Association Whether Compulsory:-

By virtue of the 2013 Act, it is compulsory for all companies to register ‘Articles of Association’ along with a Memorandum.

II] Contents of Article of Association (S. 5):-

The Article of a company shall contain regulations for the management of the company. The Articles shall also contain such matters as may be prescribed (by the Act). The Company is free to include such additional matters as may be considered necessary for its management.

Provisions for Entrenchment[37]:-

The Articles may contain provisions for entrenchment. Through the provision of entrenchment, specific provisions of the articles are allowed to be altered only if conditions or procedures more stringent than those applicable in the case of a special resolution are met or complied with. In other words, some provisions shall be altered to be more stringent than the requirement of special resolution. It means making amendments to some important provisions so difficult as if they are non-amendable.

Such provisions of entrenchment shall only be made either on the formation of a company or by an amendment in the articles. However, such an amendment in articles to insert an entrenchment clause shall be agreed on by

(i) all the members of the company in the case of a private company, and

(ii) by a special resolution in the case of a public company.

Where the articles contain provisions for entrenchment, whether made on the formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed.

III] Form of Articles of Association (S. 5 (6)):-

A company’s Articles shall be in respective forms specified in Tables F, G, H, I and J in Schedule I as may be applicable to such company.

(i) Table F prescribes the form of the Articles of Association of a Company Limited by Shares.

(ii) Table G prescribes the form of the Articles of Association of a Company Limited by Guarantee and having a share capital.

(iii) Table H prescribes the form of the Articles of Association of a Company Limited by Guarantee and not having a share capital.

(iv) Table I prescribes the form of the Articles of Association of an Unlimited Company and having a share capital.

(v) Table J prescribes the form of the Articles of Association of an Unlimited Company and not having a share capital.

IV] Alteration of Article of Association (S. 14):-

Subject to the previous of the Companies Act and the conditions contained in its Memorandum, a company may, by special resolution, alter its articles, including alterations having the effect of conversation of-

a private company into a public company, or
a public company into a private company.

1) A company cease to be a Private Company:-

Where a company being a private company, alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under this Act, the company shall, as from the date of such alteration, cease to be a private company.

2) Alteration to convert Public into Private company:-

Any alteration having the effect of conversion of a public company into a private company shall not take effect except with the approval of the Tribunal, which shall make such order as it may deem fit.

Every alteration of the articles and a copy of the order of the Tribunal approving the alteration shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of fifteen days in such manner as may be prescribed.

The registration of altered articles makes them valid as if they were originally in the Articles.

Every alteration made in a company’s articles shall be noted in every copy of the Articles (S. 15).

In Joseph Michael V/s Travancore Rubbers Tea Co. Ltd[38]

Kerala High Court Held That –An alteration made in the Article without observing a special resolution is irregular.

In Sidebottom V/s Kershaw, Leese and Company[39]

Fact – The article of a private company was altered, enabling the directors to require shareholders who were running a competing business to sell their shares to directors at their full value.

Court Held That – Alteration was valid.

V] Distinction between Memorandum and Articles:-

1) Status:-

A memorandum is the main document, whereas Articles are subordinate. If there is a conflict between these two, Memorandums shall prevail.

2) Importance:-

The Memorandum deals with all the main and external affairs of the company.

However, Articles deal with only internal affairs of the company, such as rules, regulations, and by-laws regarding management, etc. Therefore, they are a subordinate document.

3) Nature:-

The Memorandum contains the object of the company for which the company is incorporated, whereas articles are the internal regulations of the company.

4) Define relations with:-

The memorandum defines the company’s relationship with the outside world, whereas the article determines the relations between the company and its members and the members among themselves.

5) Ultra-Virus:-

An act of the company in violation of the Memorandum is ultra-virus which cannot be ratified subsequently, while the act of the company in violation of the Articles is just an irregular act, which can be ratified subsequently.

6) Alteration:-

The memorandum cannot be easily altered. However, Articles of Association can be altered easily by special resolution.

VI] Binding Force of Memorandum and Articles (S. 10):-

Registration of Memorandum and Articles carries binding force as follows-

1) Members Bound to Company:-

Members become bound to the company as if each member has signed the Memorandum and Articles. All monies payable by any member to the company under the Memorandum or articles shall be a debt due from him to the company.

2) Company Bound to Members:-

The company also becomes bound to the members as if the company has signed the Memorandum and Articles.

3) Neither the Company Nor its Members are Bound to Outsiders:-

‘Outsider’ means a person who is not a member of the company. The Article constitutes a contract between the company and its members, and an outsider, therefore, cannot sue the company to enforce the provisions contained in the Article.

In Browne V/s La Trinidad[40]

Court Held That – No outsider can enforce Article of Association against the company.

4) Binding between Members:-

Each member is bound to other members by the terms of the Articles of Association. Thus, if the Articles provide certain rights of members’ interest (among themselves), a member can enforce such rights against the other member of the company.

In Layfield V/s Hands

The court held that the members might compel enforcement of the provisions of the Article of Association against another member.

(3) Doctrine of Constructive Notice[41] –

The Memorandum and Article of Association shall be registered with the Registrar of Companies. Both these documents are open for inspection by members or outsiders at the office of the Registrar. A company shall also furnish its members a copy of its Memorandum and Article at request. Both these documents are deemed to be public documents. Therefore, every person dealing with the company is deemed to have notice of the contents of these documents. It is also deemed that persons dealing with the company have read these documents and also understood them with their proper meaning. This deemed notice of two documents and their contents is known as a “Constructive Notice of Memorandum and Articles.”

In Kotla Venkatswami V/s Ram Murthy[42]

Facts –According to a company’s Articles of Association, the deed on behalf of the company was to be signed by the Managing Director, Secretary, and Working Directors. But Lady Venkamma accepted a mortgage deed that was signed by only two officers: the secretary and Working Director.

The court held that the mortgage deed was invalid as it was not in accordance with the Articles of Association.

(4) Doctrine of Indoor Management[43]–

The “Doctrine of Constructive Notice” provides that the Memorandum and Articles are public documents, and their contents are presumed to be known to everyone dealing with the company.

However, the “Indoor Management” doctrine is an exception to the doctrine of “constructive notice”. According to this doctrine, a person dealing with the company is bound to read only public documents such as Memorandum and Articles. If his contract is consistent with these documents, the company is bound by such a contract. However, his contract will not be affected by any irregularity in the company’s internal management because he (the outsider) can presume that the company’s internal work is carried out according to these documents. It means if there is an irregularity in internal management, the contract can still be enforced on the basis of the doctrine of “Indoor Management.”

This doctrine is also known as “Turquand’s Rule” because it was the first time explained in

Royal British Bank V/s Turquand[44]

Fact – The appellant company was not a banking company as its name indicated. The appellant company was formed to conduct the mining business and form railways. The article of the Association stated that directors of the company might borrow on bond, as authorised from time to time by the general resolution. As no resolution was passed, directors borrowed £ 2000 from Respondent Turquand. A company failed to pay the bond amount, and Turquand sued the company’s shareholders. Shareholders contended that the company did not pass a resolution; therefore, the company was not liable.

The Court Held That – Outsider (Turquand) need not enquire whether internal formalities are followed or not. It was a matter of internal management. Hence, Court held the company liable.

Exceptions to the Doctrine of Indoor Management:-

The following are exceptions to the Doctrine.

1) Knowledge of Irregularity[45]:-

When the person dealing with the company has actual knowledge of irregularity, this doctrine does not apply.

2) Where the act done is otherwise void[46]:-

When an act done in the name of a company is void ab-initio, the doctrine does not apply.

3) Apparent Irregularity[47]:-

When there is an apparent irregularity, which could have been discovered on due inquiry, the “Indoor Management” doctrine is not applicable.

4) Ignorance of Articles:-

A person who, at the time of the transaction, had no knowledge of the company’s article cannot rely on those articles subsequently and plead that articles confer an ostensible authority on an agent with whom he deals.

5) Forgery[48]:-

The doctrine is not applicable if a document is forged.

****

[1]प्रवतर्क

[2] कंपनी नोदानीपूव्री (कंपनीसाठी)केलेले करार [कंपनी के पंजीकरण (कंपनी के लिए) से पहले किए गए समझौते।]

[3][(1906) 2 Ch. 435]

[4] मागाहुन संम्मती दिल्याने [पूर्वव्यापी सहमति देनेसे]

[5] प्रमोटरों या एजेंटों की देयता

[6][(1886) x C. P. 174]

[7][(1904) A C 120]

[8]पंजीकरण के लिए प्रक्रिया

[9]संस्था के बहिर्नियम /संस्थापन प्रलेख

[10]कंपनी का नियम /कंपनी का विधान

[11]निर्गमन प्रमाणपत्र

[12] निगमन प्रमाणपत्र का निष्कर्ष

[13] कानूनी व्यक्तित्व

[14] (1897) A.C.22

[15] अलग संपत्ति

[16] शाश्वत उत्तराधिकार /चिरउत्तराधिकारी

[17] मुकदमा करना और मुकदमा खिलाप किया जाणा.

[18] सीमित दायित्व

[19] निर्णायक सबूत

[20] कुशलप्रबंधन/ व्यवस्थापन

[21] कानूनी व्यक्तित्व का दुरुपयोग

[22] औपचारिकताएं और खर्चे

[23] शेयर धारकों को नियंत्रण करणे से मुक्त कर दिया जाता है

[24] व्यवसाय शुरू करने का प्रमाणपत्र

[25] Inserted by Companies Amendment Act, 2019.

[26] Earlier 3^rd point is removed by amendment

3) Company having share capital but not issued Prospectus:-

A company having share capital but not issued a prospectus, cannot commence the business and exercise any borrowing power unless following conditions are satisfied.

(a) a statement in lieu of prospectus has been filed with Registrar.

(b) every director of the company has paid in cash, the application and allotment money for shares taken or contracted to be taken by him and also declaration that requirements have been complied with.

[27] संस्था के बहिर्नियम [कंपणीचा मसुदा/घटणा]

[28] S. 16 (3) was providing penalty but the provision is removed by the Amendment Act, 2020.

[29] उद्देश्यधारा [उद्देष् कलम]

[30] अधिकार कक्षे बाहेरील कृत्याचा परीणाम [एक कार्य जो कंपनी के उद्देश्य से बाहर है, अल्ट्रा-वायरस है औ रइसलिए शून्य है]

[31] (1902) A.C. 165

[32] AIR 1963 S. C. 1185

[33]In Ashbery Co. V/S Riche

[34] बदलाची नोंदणी [परिवर्तन का पंजीकरण]

[35] जबाबदारी कलम [दायित्व खंड]

[36] भागभांडवल कलम [पूंजीखंड

[37] नियमावलीत दुरूस्ती करने कठीन करन्यासाठीची तरतुद [कुछ महत् पूर्ण प्रावधानों में संशोधन को इतना कठिन बनाना मानो संशोधन न हो|

[38] (1986) 59 Comp Cas 284 Ker

[39]( 1920) 1 Ch 154

[40] (1887) 37 Ch D 1

[41] [माहीती असल्याबददृलचा तर्क काढने] सूचना परोक्ष मिली है ऐसा समझना

[42] AIR 1934 Mad. 579

[43]आंतरिक प्रबंधनका सिद्धांत [अंतर्गत कामकाजासंबंधी माहीती असण्याचे कारण नसल्याबददृलचा तर्क काढने]

[44] (1856) 6 E.& B. 327

[45]व्यवहार करणारास अनियमिततेची माहीती असल्यास [अगर करार करनेवाली पार्टी को अनियमितता का ज्ञान हो|

[46]जहां किया गया कार्य अन्यथा शून्य है इस्की मालुमती होनेपर|

[47] कराराचे निरर्थक असल्याची माहीती असल्यास [द्रश्य स्वरूपातील अनियमीतता [दृश या स्पष्ट अनियमितता]

[48] बनावट कागदपत्रे [जालसाजी]