Memorandum of Association

Memorandum of Association:

The M/A is a document of great importance in relation to the proposed company (Palmer). It is the charter of the Company. It defines its Constitution and the scope of the power with which it has been established under the Companies Act. It is the foundation on which there comes into existence, a covenant between the Company on the one side and the members on the other. This creates a Solemn obligation. It must be divided into paragraphs, numbered consecutively and printed or presented to Registrar for purposes of Registration. It can be made in the forms as in Schedule to Companies Act.

  1. Name Clause: As the Company is a juristic person, it should have a name to establish it identity. It is the symbol of its existence. The name should not be identical with any company and should not be undesirable according to the Central Government. The name is part for the business reputation and is protected by registration.

Liability: If the liability of the Members is limited it should be stated as ‘Limited’ (Ltd.) if

Private Company ‘Private Ltd.’ In case of religious, scientific, charitable companies, the Central Government may permit to drop the use of ‘Ltd’, if the Company has prohibited payment of dividend i.e., it must be nonprofit making company. The name should be used by the company in all its documents and official letters. A painted board should be installed in the place of business.

  1. Registered Officer: The M/A should state the Registered office of the Company, with address (address may be informed within 30 days).
  2. Objects: Three sub clauses are made:
  3. Main objects: The main objects and the identical or ancillary objects are stated.
  4. Other objects: those not included in (i) above may be added here.
  • States to which objects extend: Non-trading companies should state to which of the States in India, the objects extend. The objects should not be illegal, opposed to public policy or to any provision of law. The rationale for stating the objects is to enable the shareholder to know how his contribution is being used. It gives him protection and ensures defined use of the Contributions. The creditors are also protected.
  1. d) Powers:
  • The company should confine to its objects: The leading case is Ashbury Railway Carriage Co. V. Riche. It was held that the contract was ultra vires and hence void. It has no powers to finance railway line. The ambits were prescribed in the M/A. The limits were defined. Hence, even the majority cannot ratify to validate the trans-action, the court observed. The M/A is the area beyond which the action of the company cannot go; inside that any regulation may be made.
  • The company may grant donations to promote the activities stated in the M/A. This is clear from the leading case Laxmanaswami Mudaliar V. L.I.C.

Facts : The business of an Insurance Company was taken over by L.I.C. The Directors of the

Company, as per the resolution of the shareholders, paid Rs.2 lakhs for promotion of education in Commerce and Insurance. The payment was held ultra vires. As the Company’s assets were under acquisition, it had no object to promote and hence, the donation was ultra vires.

  1. Liability Clause :The nature of the liability of the shareholder should be stated, in the M/A. Whether the liability is limited by shares or by guarantee should be specified.
  2. Capital Clauses :The amount of the nominal capital of the Company i.e., Authorised and paid up capital and the number and value of the shares into which it is divided should be stated.
  3. Declaration: The M/A, concludes with a declaration by the shareholder (7 or more in Public Companies and 2 or more in Private Companies) Each subscriber must sign and state the number of shares held by him (mini-mum share one).With this the M/A is complete.

However, it must be noted that the Companies Act over-rides the M/A.

VI] Alteration of MOA :

Amendments or alteration of the provisions may be made, as per Section 17 of Companies Act, 1956.

  1. Alteration or Change of name of the Company: This may be made by passing a special resolution and the approval of the Central Government in writing. Change becomes effective when it is registered with the Registrar.
  2. Change of Regd. Office and Objects Clause: This may be made by passing a resolution in the General Body and by getting the sanction of the Company Law Board. A certified copy of the board’s order and a printed copy of the amended M/A must be filed with the Registrar within 3 months of the Board’s sanction. The change becomes effective on Registration by the Registrar and issue of a copy thereof.
  3. Change of objects: Alteration of objects, capital rights attached to different classes of shares and limited liability of directors. The purposes for which changes are allowed:
  4. i) To run Company on more economic and effective terms. ii) To achieve the objective by new or improved means. iii) To enlarge the area of operation.
  5. Some new business which may be conveniently taken up.
  6. To amalgamate with any Company etc

VII.] Articles of Association:  (S. 26, 27, 28, 29, 31, 36 & 38 of 1956

Companies Act, 1956) 

  1. 1. Nature: This is a document of great importance next only to M/A. It contains the rules, regulations and bye-laws for the general management of the Company. The A/A must be registered along with the M/A by (i) Un-limited Companies ii) Companies Limited by Guarantee and

iii) Private Companies Limited by Shares. A Company limited by shares may frame its own Articles or may adopt Table A of Schedule I of the Companies Act. But, if it does ot register its Articles, then Table A becomes applicable. Table A is advantageous and may be adopted.

  1. Form; The Articles should be printed divided into paragraph and numbered consecutively. Each subscriber should sign the document in the presence of at least one witness. Each should mention his occupation and address.
  2. Contents: The A/A are internal regulation of the Company. It is subordinate to the M/A.

The A/A contains Rules, inter alia:

  1. i) A declaration whether Table A is applicable or not ii) Adoption of preliminary contracts, if any iii) Rules about shares, calls, forfeiture, surrender, transfer etc. iv) Rules about meetings, notice, quorum, proxies, voting etc.
  2. Rules about Directors, their officers, qualifications, appointment etc.
  3. Rules about books of Account, Audit, Appointment of Auditor. vii) Rules about winding up.

viii) Others It may provide for power: a) To have official seal to issue shares. b) To pay dividends. c) To reduce share capital etc.

VIII.]  Alteration of A/A :

By a Special Resolution, the Company may alter its A/A. An application must be made to the Registrar to incorporate the Amendments.

  1. The alteration must not be illegal or not constitute a fraud on the minority, or a breach of contract with an outsider. (The Company becomes liable) There are cases where the Courts have issued an injunction where damages cannot adequately compensate in terms of money.
  2. The alteration of A/A must be subject to the M/A and should be bonafide for the benefit of the Company.

The leading case on alteration is Southern Foundries Ltd. V. Shirlow.

In 1933, P was appointed as Managing Director for 10 years as per the A/A. In 1935, the Company was amalgamated with another Company in which there were powers to remove a director. Using these powers, P was removed. P sued. Held, P had a right to continue as per the articles of association. Held, further, “A Company cannot by altering articles, justify a breach of contract”.

In case British Murac Syndicate V. Alperton Rubber Co there was an agreement to allow P to nominate two directors, as long as P retained 5000 shares in the Company, as per the A/A. An attempt was made to alter the Article. The Court granted an injunction not to alter.

IX.] Indoor Management:

As M/A & A/A of a Company are Public documents, there is a presumption that those who deal with the company are having ‘Constructive notice’ of their contents. This protects the company from outsiders. The doctrine of indoor management is opposed to the rule of constructive notice. It aims at protecting the outsiders against the Company’s irregularities, Commissions and excesses. According to this strangers may assume that the proceedings are and everything is regularly done.

The leading case is Royal British Bank V. Turquand. In this case, the Directors borrowed money from the Plaintiff. The M/A of the Company had provided that the Directors might borrow, on bond, such sums as are authorised by the shareholder’s resolutions. The shareholders contended that there was no such resolution and hence not liable. The Court rejected this and held that the company was liable. This is called the ‘Turquand Rule’. The court held, that when there is a provision to borrow there is a presumption, that the formalities have been observed by the directors, hence, they are acting lawfully (in bonam part em). Though the M/A and A/A are open for inspection by the public, the details of internal procedure are not so open. Hence, an outsider cannot know the day-to-day internal matters as he has no access to them. The doors are closed to him. Hence, the courts have evolved the rule of ‘Indoor Management’. The rule is based on convenience, practical utility and justice.  No Company should be allowed to take advantage of its own commission and Omissions.

Other examples are: Defective appointment of a Director, Defacto exercise of Power, lack of quorum, etc. Outsiders cannot enquire into the regularity or otherwise of internal proceedings. Delegated Power: Power may be delegated expressly or impliedly. The Company is liable when such a power is exercised by a delegated person. The outsider dealing with the Company may rely on the author-ity of such officer of the company as delegate. However;

  • The transaction should be one which normally falls within his authority and
  • The A/A should have allowed such delegation. How the power is delegated, what formalities are observed is within indoor management and hence third party is protected.

In  Freeman V. Buckhurst 

K and H formed a Company to improve an estate and sell. H went abroad. K appointed architects and surveyors, who did their jobs and claimed their fees. The plea that K had no powers was rejected by the Court. K had held out to be a Managing Director having such powers. Hence the Company was held liable.

Exceptions to the Rule: 

i.) Knowledge of irregularity: If the person who contracted with the company was himself a party to the inside procedure, the rule will not apply. In Howard V. Patent Ivory Mfring Co., the debentures required the resolution of a general body. Held, he could not take advantage of indoor management. The court held that the Company was not liable to D. The reason was, he had knowledge of the irregularity.

  1. Suspicion of irregularity: This becomes clear from the circumstances of each case. D, a Director of two Companies transferred money from one to the other to pay off a debt; the court held that this was unusual and bad. Irregularity was patent.
  • Forgery: The rule is not applicable to cases of forgery, committed by the officers of the Company. In Ruben’s Case, two directors to roged the signature of another Director on the share certificate and negotiated the same. Held, Company not liable.
  1. Third Party’s Ignorance of A/A : It is still a controversial issue. But, if the Director had ostensible authority, the company cannot escape liability to third parties (Rama Corporation case).
  2. Acts outside authority: If an officer of the company acts patently beyond his powers, the indoor management rule cannot be invoked. In Anand Bihari V. Dinshaw, the company’s property was transferred by an accountant. Held, this was void. Even a delegation of power, clause could not have saved the position. ] Lifting the Corporation Veil:

The fundamental principle is that an incorporated Company is a legal person and all its actions are that of the Company. The Company is distinct and separate from them in respect of capacity, rights acquired etc (Solomon’s case).Taking advantage of this, the directors or officers may use the company as a mask or cloak for fraudulent or illegal activity. In such a case, the court will pierce through the veil to know the reality. This principle is regarded as a curtain or veil between the company and its members. This is the protection enjoyed by the members for the liability of the company. Thus, when there is abuse or misuse by members, they may escape liability but the company would be liable. Here the Court will pierce or lift the screen (Veil) to see the transactions inside the screen. In such a case the protection given to such Director or Officer is taken away and he becomes liable.

  1. Circumstances to lift the Veil: (Dailmer Co. V. Continental Tyre & Rubber Co.)

To find out the enemy character of the Company. This means, during war the Courts may lift the screen to know the persons inside and their character. If they belong to enemy State, the company also has the enemy character. Hence, it will be banned.

  1. Tax evasion: Firestone Tyre & Ruber Co. V. Llewton & of I.T. V. Sri Meenakshi Mills.

If the objective of formation of the Company is tax evasion, then the Courts may tear the Corporate veil. In Dinshaw Maneckji’s case, the. court held that the four Companies formed by him, were to avoid super tax. In Harald Holdsworth V. Caddies, though there were several subsidiary companies, in reality there was only one Company.

  1. Fraud or improper conduct:

The court may pierce the Veil to find out whether the Company was formed to defraud, or to avoid legal obligations. Such sham Companies have no legal status.

The leading case is Gilford Motor C. V. Home. H was an employee of G. Company, but left the job under an agreement not to solicit the customers of G. Company. H. formed a Company carried on a similar business and solicited the customers of G Company. G company sued and the House of Lords granted an injunction against H Company. Though H was bound under an agreement and H Company was separate, still in reality, i.e., by lifting the veil, the court said H Company was a sham or a cloak to engage in business and to solicit the customers of G Company.

  1. Agency or trust:

When the company is used as an agency or trust the veil may be lifted. A govt. Company discharging Sovereign functions is a trustee and hence, courts may lift the screen, to know the functions. If the Company is acting as an agent of the shareholders, the shareholders become liable (Smith Stone etc. V. Brimingham Corporation).

Personal liability of persons: This liability is fixed on the persons in charge of the management by Statutes. These persons are personally liable. Hence the screen can be lifted, to know the persons responsible.

XI.] Prospectus:

The term ‘Prospectus‘ means any document described or is-sued as a prospectus and includes any notice, circular, advertisement or other document inviting offers from the public for subscription to purchase any share in or debenture of a company. Every prospectus must disclose all the matters set out in part I of the schedule to Companies Act and also the reports specified in parts II and III. It is essential that the information requiring disclosure is stated fully and precisely so that the investing public may get all the information that is likely to affect their mind in taking a decision.

  1. b) Contents : The following are matters to be set out
  2. i) The main objects of the Company ii) The No. of shares, if any, fixed by the A/A as the qualification shares of the Directors.
  • The name, address, occupation, etc., of the Directors or the proposed Directors, the Managing Directors, Manager.
  1. Subscribed Capital.
  2. Minimum subscription required.
  3. The time of opening and the closing of the subscription list. vii) The amount payable on application and on allotment of each share. viii) The number, description and amount of shares and debentures issued.
  4. The estimated amount of preliminary expenses,
  5. The names and addresses of auditors etc .As the prospectus is the means to know the soundness of the Company, certain rules are imposed.
  6. Every prospectus is to be dated.
  7. It must be registered, with the Registrar of Companies, filing the required documents.
  8. It must be issued within 90 days of its Registration.

c.) Deemed Prospectus :  Sec. 4 

This is a document which may not be a prospectus but the Company offers for sale to the public, its shares or debentures and is signed by at least two Directors. All provisions relating to prospectus will apply.

 

 

  1. Mis-Statement in the Prospectus :

It gives rise to both tortious and criminal liability. Under S. 65 an untrue or mis-statement is one which is misleading in form and contents. An omission in a prospectus which is material and calculated to mislead, amounts to untrue statement. The liability arises under the principle that the Directors and other persons who issue hold out to the public. Hence they are estopped from denying the contents of the prospectus. The shareholders are entitled to proceed against both the Company and the Directors. The misrepresentation must be material. The nature, extent and quality of the advantages the prospectus holds out, are inducements to take shares and hence everything should have been stated with accuracy, otherwise liability arises. The inducement must be factual.

  1. The Rights:

The subscribers to the shares have a right to file a suit against the Company and may ask for rescission of contract i.e., to cancel. The subscribers may bring a suit for damages against the Directors and others for misstatements.

The liability is (i) under Sec. 62 of the companies Act or (ii) for deceit under tortious liability. The statement in prospectus should have been actually relied upon by the subscriber. He must start the legal proceedings within a reasonable time or before the Company goes into liquidation and claim or rescission of the contract.

  1. Leading cases :

i)  Derry Vs. Peek

Directors issued a prospectus stating that the Company, had powers to use steam for propelling their tram cars. In fact such a grant was subject to the consent of the Board of trade. The Company had believed that the consent of the Board was a mere formality. The board refused to give its consent. In consequence, the Company was wound up. P as shareholder sued for deceit. Held no Deceit. There was an honest mistake in stating that the consent of Board was a formal procedure. The false statement made carelessly and without reason to believe to be true was not fraud. This decision criticised by Jurists and Judges, is no longer good law today. Apart from the liability to compensate the shareholders who have suffered a loss, every person who had authorised the issue of such prospectus will be liable to prosecution for a criminal offence, extending to imprisonment or fine or both.

 

  • Green-wood Vs. leather Shod Wheel Co.:

The prospectus said that orders have already been received from the House of Commons. In reality, no such order had been received. Held that this was a false statement. Though there was bonafide intention, the Directors were held liable.

  • A prospectus stated that more than half of the shares have already been subscribed. The truth was that the promoter had signed the documents applying for the shares.

Held: Liable (Ross Vs. Estates Investment Co.).

iv.) King Vs. Lord Kylsant

Here the prospectus gave a table mentioning the dividends given for a number of years. This created a good impression about the company. The truth was that there were losses during many years, hence it was held that it was a misstatement. Hence a false representation and liable.

v.) Metropolitan Coal consumers Association Case

A prospectus stated that two big business people X and Y have become Directors. The truth was that they had only assured some co-operation if the Co., is formed.

vi.) Edgington Vs. Fitzmaurice

Directors of a Company issued a prospectus inviting debentures from the public, stating that the money would be used to put up buildings, to buy horses and vans and to develop business. But, in reality the amounts were used to pay off liabilities. The company became insolvent, held, the Directors were liable.

g.) Criminal liability :

The Companies Act has made provisions making every Director and every person who is authorised to issue the prospectus liable to pay compensation to every person who has subscribed for shares or damage resulting from such untrue statements. The criminal liability is imprisonment for two years or fine up to Rs.5,000/-or both.

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