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REGISTRATION AND INCORPORATION OF A COMPANY
QUESTION BANK
1. Explain the procedure regarding "registration" and "incorporation" of a company.
2. Explain the term "memorandum of association" and "articles of association" of a company.
3. How is a company formed under the Companies Act 1956? Enumerate the various documents to be filed with the Registrar.
4. Doctrine of indoor management and Doctrine of constructive notice.
5. What is meant by incorporation of a Company? Explain the procedure for registration of a Company.
6. Explain different types of companies which may be incorporated under the Companies Act. 2013.
7. Write a detailed note on the procedure for the Company's formation emphasizing the role of Promoters.
8. Write a detailed note on the significance of the Memorandum of Association and the procedure for its alteration.
SHORT NOTES
1. Memorandum
2. Articles of Association.
3. Doctrine of Ultra-Vires
4. Ultra-Vires
PART I: Company Incorporation and Pre-Incorporation Contracts
1. Introduction (Section 7)
2. Essential Elements of Registration
A. Number of Persons Required (Section 3)
(OPC): Requires only one individual subscriber.
B. Promoters
3. Pre-Incorporation Contracts
A. Legal Nature and Status
i. The Company Cannot Be Sued:
ii. The Company Cannot Ratify:
B. Personal Liability of Promoters
C. The Statutory Exception: Section 15(h) & 19(e) of the Specific Relief Act, 1963
PART II: The Statutory Procedure for Registration
1. The Application and Requisite Documents (Section 7)
a. The Memorandum of Association (MoA):
b. The Articles of Association (AoA):
c. Managerial Agreements:
d. Statutory Declaration of Compliance [Section 7(1)(b)]:
e. Affidavit from Subscribers and First Directors:
f. Address for Communication:
g. Particulars of First Directors:
2. The Certificate of Incorporation and Its Legal Effects
a. Conclusiveness of the Certificate
b. Creation of an Artificial Legal Person
3. Commencement of Business (Section 10A)
a. Declaration of Share Payment:
b. Verification of Registered Office:
Penal consequences of Default:
PART III: Fundamental Corporate Documents
1. The Memorandum of Association (MoA) [Section 4]
a. The Name Clause:
b. The Registered Office Clause:
c. The Object Clause:
d. The Liability Clause:
e. The Capital Clause:
f. The Subscription Clause (Association Clause):
2. The Doctrine of Ultra Vires and the Object Clause
a. No Ratification:
b. Legal Consequences of Ultra Vires Acts:
i. Injunctions:
ii. Personal Liability of Directors:
iii. Breach of Warranty of Authority:
3. The Articles of Association (AoA) [Section 5]
a. Scope:
b. Statutory Forms:
c. Entrenchment Provisions:
4. Comparison: MoA vs. AoA
5. The Legal Binding Force of the Documents (Section 10)
PART IV: Core Governing Doctrines
1. The Doctrine of Constructive Notice
2. The Doctrine of Indoor Management (The Turquand Rule)
3. Established Exceptions to Indoor Management
a. Actual or Constructive Knowledge of the Irregularity:
b. Suspicion of Irregularity (Apparent Negligence):
c. Acts Done Outside Ostensible Authority:
d. Forgery:
f. Ignorance of the Articles:
PART I: Company Incorporation and Pre-Incorporation Contracts
1. Introduction (Section 7)
Under Section 7 of the Companies Act, 2013, a company is a creature of law that comes into legal existence exclusively through the process of registration and statutory incorporation. When the promoters submit the required documents and declarations, the Registrar of Companies (RoC) reviews the application. If satisfied that all statutory prerequisites have been fulfilled, the RoC registers the documents and issues a Certificate of Incorporation (CoI). This certificate serves as the official birth certificate of the legal entity.
2. Essential Elements of Registration
A. Number of Persons Required (Section 3)
i. Public Limited Company: Requires seven or more persons associated for a lawful purpose.
ii. Private Limited Company: Requires two or more persons associated for a lawful purpose, with the maximum membership capped at 200 (excluding employee-members).
iii. One Person Company (OPC): Requires only one individual subscriber.
B. Promoters
Promoters are the individuals or corporate entities who conceive the business idea, take the necessary steps to form the company, arrange the required capital, and execute the structural documentation required for registration.
3. Pre-Incorporation Contracts
A. Legal Nature and Status
A pre-incorporation contract is an agreement entered into by promoters or agents on behalf of a proposed company before it has been granted a Certificate of Incorporation.
Because a company has no legal existence before its incorporation, it lacks the capacity to contract. Consequently, the legal status of these agreements is governed by two strict common law rules:
i. The Company Cannot Be Sued: The company is not bound by, and cannot be held liable for, contracts executed before its official date of incorporation.
Case Law: In re English & Colonial Produce Co. Ltd., [1906] 2 Ch 435
Ruling: A solicitor provided professional services and paid registration fees to facilitate the incorporation of a company. The court held that the newly formed company was not liable to pay the solicitor's pre-incorporation fees, because a company cannot be bound by a contract made when it did not exist.
ii. The Company Cannot Ratify: A principal must exist at the time an agent enters into a contract on its behalf. Because the company did not exist when the pre-incorporation contract was signed, it cannot subsequently ratify the agreement after incorporation.
B. Personal Liability of Promoters
Since the proposed company cannot be bound by pre-incorporation agreements, the law places the entire financial and legal liability on the promoters who signed them.
Case Law: Kelner v. Baxter, (1866) LR 2 CP 174
Facts: Promoters of a proposed hotel company entered into a written contract to purchase a supply of wine. The wine was delivered and consumed by the business. However, the company collapsed after incorporation without paying for the goods. The seller sued the promoters personally.
Ruling: The Court of Appeal held the promoters personally liable. Since the company was not in existence when the contract was executed, the promoters could not act as its agents. Therefore, they were personally bound by the agreement.
C. The Statutory Exception: Section 15(h) & 19(e) of the Specific Relief Act, 1963
The harshness of the common law rule is mitigated in India by Sections 15(h) and 19(e) of the Specific Relief Act, 1963. Under these provisions, a company can enforce—or be sued for the specific performance of—a pre-incorporation contract if it meets four specific conditions:
i. Failure to Meet Statutory Criteria: If these steps are not properly executed, the agreement remains unenforceable.
ii. See: Natal Land & Colonisation Co. Ltd. v. Pauline Colliery & Development Syndicate Ltd., [1904] AC 120, where the Privy Council ruled that a company could not enforce a pre-incorporation mining lease because it had failed to execute a new, legally binding contract or satisfy the required substitution steps after incorporation.
PART II: The Statutory Procedure for Registration
1. The Application and Requisite Documents (Section 7)
To incorporate a company, promoters must submit an electronic application via the SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) portal to the RoC, accompanied by the following statutory documents:
a. The Memorandum of Association (MoA): The core charter of the company, signed by all subscribers.
b. The Articles of Association (AoA): The internal rules and regulations of the company, signed by all subscribers.
c. Managerial Agreements: Any proposed contract appointing individuals as Managing Directors, Whole-time Directors, or Managers.
d. Statutory Declaration of Compliance [Section 7(1)(b)]: A formal declaration affirming that all registration requirements of the Act and Rules have been met. This must be signed by an advocate, an attorney, a practicing Chartered Accountant (CA), a Cost Accountant, or a Company Secretary (CS) engaged in the formation of the company, as well as a person named in the Articles as a director, manager, or secretary.
e. Affidavit from Subscribers and First Directors: A declaration that they have not been convicted of any offense related to the promotion, formation, or management of a company, and have not been found guilty of fraud or breach of duty under any company law during the preceding five years.
f. Address for Communication: A temporary address for official correspondence until a permanent registered office is established.
g. Particulars of First Directors: The full names, residential addresses, nationalities, and Director Identification Numbers (DIN) of the first directors, along with their formal written consent to act in that capacity.
2. The Certificate of Incorporation and Its Legal Effects
a. Conclusiveness of the Certificate
Once issued, a Certificate of Incorporation serves as conclusiveness of evidence under Section 7(7). It proves that all registration requirements have been met and that the company legally exists from the date stated on the certificate. Even if a procedural irregularity or defect occurred during the promotion phase, the legal existence of the corporation cannot be challenged or dismantled collaterally once the certificate is issued.
b. Creation of an Artificial Legal Person
From the date of incorporation, the company becomes a corporate body with an independent personality, separate property rights, the capacity to sue and be sued in its own name, and limited liability for its members.
3. Commencement of Business (Section 10A)
Under Section 10A (re-introduced into the modern Act), a company with a share capital cannot commence commercial business operations or exercise any borrowing powers unless it meets two conditions within 180 days of incorporation:
a. Declaration of Share Payment: A director must file a verified declaration with the RoC affirming that every subscriber to the Memorandum has paid the full value of the shares they agreed to take.
b. Verification of Registered Office: The company must file a permanent physical verification of its registered office address with the RoC under Section 12(2).
Penal consequences of Default: Failure to comply results in a penalty of ₹50,000 for the company, and ₹1,00,000 for defaulting officers. If no declaration is filed within 180 days and the RoC has reasonable cause to believe the company is inactive, they can initiate actions to strike the company's name from the register.
PART III: Fundamental Corporate Documents
1. The Memorandum of Association (MoA) [Section 4]
The Memorandum of Association is the constitutional charter of the company, defining its boundaries and scope of operation. Under Section 4, the MoA must contain six mandatory clauses:
a. The Name Clause: States the registered name of the company. A public company must use the word "Limited" as its suffix, and a private company must use "Private Limited." The name must not be undesirable, identical to, or confusingly similar to an existing registered company or trademark.
i. Name Presentation (Section 12(3)): The name must be painted outside every place of business, engraved on its common seal (if any), and printed on all official business letters and checks. Failing to use the word "Limited" can result in personal liability for the directors who signed the non-compliant contract (Atkins & Co. v. Wordle).
ii. Exemption (Section 8 Companies): Non-profit companies formed to promote art, science, charity, or religion can drop the words "Limited" or "Private Limited" from their names with permission from the Central Government.
b. The Registered Office Clause: Identifies the State in which the company's registered office is located. This establishes the geographic jurisdiction of the High Court and the RoC.
c. The Object Clause: Defines the core purpose for which the company is incorporated. It outlines the main activities the company intends to pursue, as well as any auxiliary activities necessary to achieve those main goals.
d. The Liability Clause: Explicitly states whether the liability of the members is limited by shares, limited by guarantee, or unlimited.
e. The Capital Clause: Mandates the total amount of authorized or nominal share capital with which the company is registered, along with its division into shares of a fixed face value.
f. The Subscription Clause (Association Clause): A formal declaration by the subscribers stating their desire to form a corporate body and promising to take the number of shares listed next to their names. Public companies require at least seven subscribers, while private companies require at least two.
2. The Doctrine of Ultra Vires and the Object Clause
The Object Clause sets the legal boundaries for the company's activities. Any act, contract, or transaction executed by the directors that falls outside the scope of the objects authorized in the MoA is ultra vires (beyond the powers) and completely void ab initio.
a. No Ratification: Because an ultra vires contract is void from the outset, it cannot be validated or resurrected, even if every single shareholder votes to ratify it.
Case Law: Ashbury Railway Carriage & Iron Co. v. Riche, (1875) LR 7 HL 653
Facts: A company’s object clause authorized it to manufacture, sell, or hire railway carriages and wagons, and to act as general contractors. The directors entered into a contract to finance the construction of a railway line in Belgium. The shareholders subsequently passed a special resolution to ratify the transaction.
Ruling: The House of Lords held the contract void. Financed construction fell outside the scope of the company's authorized objects. Because the contract was ultra vires the company's charter, the shareholders lacked the legal capacity to ratify it, and the company could not be held liable for its breach.
b. Legal Consequences of Ultra Vires Acts:
i. Injunctions: Shareholders can approach a court to secure an injunction restraining the company from executing an ultra vires transaction (London County Council v. Attorney General, [1902] AC 165).
ii. Personal Liability of Directors: If corporate funds are spent on an ultra vires activity, the directors are personally liable to replace the funds and compensate the company for any resulting losses (Lakshmanaswami Mudaliar v. Life Insurance Corporation of India, AIR 1963 SC 1185).
iii. Breach of Warranty of Authority: Directors who induce an innocent third party to enter into an ultra vires contract can be held personally liable for damages for breaching an implied warranty of authority (Weeks v. Propert, (1873) LR 8 CP 427).
3. The Articles of Association (AoA) [Section 5]
The Articles of Association serve as the company's internal bylaws, containing the rules, regulations, and systems that govern its day-to-day management and operations.
a. Scope: The AoA covers internal matters, including the issuance and forfeiture of shares, calls on shares, general meetings, voting rights, the appointment and remuneration of directors, and dividend payments.
b. Statutory Forms: Must be structured to match the standard templates provided in Tables F, G, H, I, and J of Schedule I of the Act, depending on the company's capital model.
c. Entrenchment Provisions: Section 5(3) allows companies to include "entrenchment clauses" in their Articles. These state that specific key provisions can only be altered through procedures that are more stringent than a standard special resolution (e.g., requiring a 95% majority or unanimous consent). Inserting an entrenchment clause requires approval from all members in a private company, or a special resolution in a public company.
4. Comparison: MoA vs. AoA
Feature | Memorandum of Association (MoA) | Articles of Association (AoA) |
Legal Status | The primary constitutional charter of the company. | A subordinate document that is subject to the MoA. |
Functional Focus | Defines the company's external boundaries, powers, and purposes. | Governs the company's internal management and operations. |
Target Audience | Regulates the company's relationship with the outside world. | Defines the relationship between the company and its members. |
Breach Status | Acts exceeding the MoA are ultra vires and completely void. | Acts breaching the AoA are merely irregular and can be ratified. |
Alteration | Demands a rigorous amendment procedure under Section 13. | Can be altered by a special resolution under Section 14. |
5. The Legal Binding Force of the Documents (Section 10)
Under Section 10, once the MoA and AoA are registered, they create a binding legal covenant that links the company and its members:
a. Members Bound to the Company: Every member is bound to comply with the rules in the Articles as if they had personally signed and sealed them. Any unpaid money owed to the company under these documents constitutes a recovery debt.
b. Company Bound to the Members: The company is bound to respect the individual statutory rights granted to members under the Articles (such as the right to vote or receive dividends).
c. Members Bound to Members: Creates an implied contract that defines rights and obligations among the shareholders themselves.
d. No Protection for Outsiders: The Articles form an internal contract. Third parties or outsiders who are not members cannot use provisions within the AoA to sue the company or enforce claims.
Precedent: In Browne v. La Trinidad, (1887) 37 Ch D 1, the court held that an outsider could not use an internal clause in the Articles to enforce a claim for a managerial position against the company, as the Articles do not create a contract with external parties.
PART IV: Core Governing Doctrines
1. The Doctrine of Constructive Notice
Because the MoA and AoA are registered with the RoC, they are classified as public documents that are open to inspection by anyone under Section 399.
The Doctrine of Constructive Notice establishes a legal presumption that anyone dealing with a company has read these documents, understood their contents, and familiarized themselves with the company's operational boundaries.
If a third party enters into a contract that conflicts with a restriction outlined in the MoA or AoA, they cannot claim ignorance. The contract is unenforceable, and the third party bears the financial risk.
Case Law: Kotla Venkataswamy v. Chinta Ramamurthy, AIR 1934 Mad 579
Facts: The Articles of a company explicitly mandated that all deeds, bonds, and mortgages executed by the company must be signed concurrently by the Managing Director, the Secretary, and a Working Director. A individual accepted a mortgage deed from the company that was signed by only two officers: the Secretary and a Working Director. The individual later attempted to enforce the mortgage against the company.
Ruling: The Madras High Court held the mortgage invalid. The court ruled that the plaintiff had constructive notice of the company's public Articles. Because the mortgage was executed in direct violation of the mandatory provisions in the AoA, it did not bind the company.
2. The Doctrine of Indoor Management (The Turquand Rule)
The Doctrine of Indoor Management was developed to protect innocent third parties from the harshness of the Constructive Notice rule. It states that while outsiders are responsible for reading and understanding a company's public documents (MoA and AoA), they are not required to investigate its internal administrative procedures.
If a transaction appears consistent with the company's public charter, an outsider is entitled to assume that the company's internal protocols, approvals, and meetings have been properly carried out. The company cannot escape liability by claiming that an internal procedural error occurred.
Origin Case: Royal British Bank v. Turquand, (1856) 6 E&B 327
Facts: The Articles of Association of a company authorized its directors to borrow money on bonds up to an amount authorized by a general resolution of the shareholders. The directors borrowed £2,000 from the bank on a bond signed under the corporate seal, but failed to secure the required shareholder resolution. When the company defaulted, the shareholders argued they were not liable because the directors lacked the specific internal authorization to borrow the funds.
Ruling: The Court of Exchequer Chamber rejected the defense and held the company liable. Chief Justice Jervis ruled that the bank was only obligated to check if the Articles authorized the power to borrow. Since the Articles allowed borrowing subject to a resolution, the bank had a right to assume that the internal resolution had been properly passed. The lack of a resolution was an internal procedural error that could not be used to defeat the claims of an innocent outside lender.
3. Established Exceptions to Indoor Management
A third party cannot rely on the Doctrine of Indoor Management if their claim involves any of the following factors:
a. Actual or Constructive Knowledge of the Irregularity: If the person dealing with the company knew that an internal approval or resolution had not been passed, they cannot claim protection under the rule.
b. Suspicion of Irregularity (Apparent Negligence): If the circumstances surrounding a transaction are unusual enough to invite suspicion, the outsider cannot ignore those signs. If they fail to make reasonable inquiries, they lose the protection of the doctrine.
c. Acts Done Outside Ostensible Authority: If an officer executes an agreement that falls completely outside the scope of duties typically associated with their position, the company is not bound.
d. Forgery: The Doctrine of Indoor Management never applies to cases involving forgery. A company cannot be held liable for documents signed under a forged signature, because a forged document is a legal nullity that cannot create rights or obligations.
See: Ruben v. Great Fingall Consolidated, [1906] AC 409, where the House of Lords ruled that a share certificate issued by a company secretary who had forged the signatures of two directors was completely invalid and could not bind the company under the rule of indoor management.
f. Ignorance of the Articles: A party who did not read or consult the company's Articles at the time of a transaction cannot later cite a clause within those Articles to claim that an officer possessed ostensible authority to bind the company.
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