"Understanding the Memorandum and Articles of Association under the Companies Act, 2013"
Memorandum and Articles of Association under Companies Act 2013
Memorandum
of Association and Articles of Association under Companies Act, 2013
Memorandum of Association Section 2(56) of the Companies Act 2013 defines a memorandum of association. It provides that a “companies act 2013 ” has two meanings: - The constitutive act as originally drafted;
-
The companies act as originally drafted refers to the companies act as it was
when the company was incorporated.
-
The Companies Act as amended from time to time;
- This means that all amendments made to the
Memorandum of Association from time to time will also form part of the
Memorandum of Association.
-
This section also states that amendments must be made in accordance with any
previous company law or this law.
Further,
under section 399 of the Companies Act,
2013, any person may inspect any document filed with the Registrar under
the provisions of the Act. So, anyone who wants to deal with the company can
know about its existence through the memorandum of association.
1. The
memorandum of association is a legal document that describes the purpose of
establishing the company. It defines the company's powers and the conditions under which the company
operates.
2. It is the
document that contains all the rules and regulations that govern the company's
relationship with the outside world.
3. It is the
foundation on which society is built. The entire corporate structure is detailed in the memorandum of association.
4. Every
company is required to have a memorandum of association which defines the scope
of its activities. Once prepared, the business cannot operate outside the scope
of the document.
5. If the
company exceeds the scope, the action
will be considered ultra vires and therefore void.
The Memorandum of Association is an essential
document that contains all the details of the company. It governs the
relationships between the company and its stakeholders.
Section 3 of the Companies Act, 2013 describes the importance of a memorandum by providing that for the registration of a company: -
(1)
In the case of a public company, seven or more persons are required;
-
(2) In the case of a private company, two or more persons are required
-
(3) In the case of a one person company, only one person is required.
In all the above cases, the stakeholders must
first register a memorandum before registering the company with the Registrar.
Therefore, a Memorandum of Association is essential for the registration of a
company.
Section 7(1)(a) of the Act provides that for the incorporation of a company, the memorandum and articles of association of the company must be duly signed by the applicant and filed with the Registrar.
In
addition, the memorandum of association has other purposes: -
(1)
It allows shareholders to know about the
company before purchasing shares of the company. This helps the shareholders to
determine the amount of capital they will
invest in the company.
-
(2) It provides information to all interested parties who wish to associate
with the company in any way.
Section 4(5) of the Companies Act provides that a memorandum must be in one of the forms specified in Schedules A, B, C, D and E of Schedule 1.
These
schedules vary depending on the types of companies.
-
Schedule A - Applies to companies limited by shares.
-
Schedule B – Applicable to limited
liability companies with no share capital.
-
Schedule C – Applicable to limited
liability companies with no share capital.
-
Schedule D – Applicable to limited liability companies with no share capital.
-
Schedule E – Applicable to limited liability companies with share capital.
Minutes
must be printed, numbered and divided into sections.
It
must also be signed by the company's registrar.
1.
Name clause: Article
4(1)(a) - This is the first article of the Constitution.
This
article states the name of the proposed company. The name of a private company
must end with the words “PRIVATE LIMITED”. The name of a public company must
end with the words “LIMITED”.
2. Situation Clause: Section 4 - This is the
second clause of the memorandum.
It
contains the name of the state where the registered office of the company is
located.
3.
Purpose Clause:
Section 4(1)(c) - This is the third clause of the memorandum.
It
defines and limits the scope of the society's activities.
It
shows the extent of the company's powers and the scope of its activities.
4. Liability Clause: Article 4(1)(d) - This is the fourth clause of the memorandum. This clause defines the liability of the members.
5.
Capital Clause: This
is the fifth clause of the memorandum.
It states the amount of share capital to be subscribed by the company and
its division into shares.
6.
Clause relating to
association: This is the final clause of the memorandum. It contains a
declaration from the subscribers that they wish to form a company and agree to
receive shares written in their names.
Articles of Association The Companies Act 2013 defines “articles” as “the articles of association of a company as originally drafted or amended from time to time under any previous Companies Act or this Act”.
The
articles of association of a company are
those which provide for the rules, regulations and provisions for the internal
management of the company, the conduct of the affairs of the company and are a
document of paramount importance in the functioning of a company.
The
constitution of a company is often compared to a rule book of the company,
which prescribes the management and powers of the company as well as the
directors of the company.
It
prescribes certain details of the internal workings of the company such as the
manner of appeal, qualifications of directors/officers, powers and duties of
auditors, confiscation of shares, etc.
In
effect, the statutes also establish a contract between the members themselves
and between the members and society.
This
contract establishes and regulates the ordinary rights and obligations inherent
in the members of the company.However, it is to be noted that the articles of
association are subordinate to the memorandum of association, which is the
basic and primary constitutive document of the company.
Further,
as held in Shyam Chand v. Calcutta Stock
Exchange, any article which goes beyond the memorandum of association will
be deemed ultra vires.
Therefore,
no provision in the bylaws should go beyond the memorandum.
In the event
of any conflict between the Memorandum and the Bylaws, the provisions of the
Memorandum shall prevail.
If
there is any ambiguity or uncertainty as to the details of the memorandum, the
memorandum must be read in conjunction with the bylaws.
The
concept of entrenchment has been introduced in the Companies Act 2013 in
section 5(3), implying that certain provisions of the articles cannot be
altered simply by passing a special
resolution and would require a much longer and more complicated process.
The
literal definition of the word “entrenchment” means to establish an attitude,
habit or belief so firmly established that
a change is unlikely to occur.
Therefore,
an entrenchment provision incorporated in the bylaws is one that makes certain
changes or amendments impossible or
difficult to effect.
Provisions
relating to the application of inheritance tax can only be included in the
company's articles of association upon incorporation or by amendment of the
articles of association made by a special resolution in the case of a limited
liability company and by agreement between all
members in the case of a private company.
Section 14 of the Companies Act, 2013 allows
a company to amend its articles of association, subject to the conditions
contained in the memorandum of association, by passing a special resolution.
Public
company to private company: For a company
to convert from a public company
to a private company, passing a special resolution is not enough.
The
company will need to obtain the consent and approval of the Court.
In
addition, a copy of the special resolution must be filed with the Registrar of
Companies within 30 days of its passing.
In
addition, the company must file a copy of
the newly amended articles of association, along with the Court's approval
order, with the Registrar of Companies within 15 days of receipt of the order.
A private company becomes a public company: For a company to convert from private to public status, it can do so by deleting/deleting three provisions under Article 2(68) which prescribes the requisites for a private company.
As
with the conversion of a public company into a private company, a copy of the
resolution and the amended articles of association must be filed with the
Registrar within the prescribed period.
Restrictions
on the power to amend by-laws:
(1)
The amendment must not be contrary to the provisions of the memorandum, as the
memorandum supersedes the by-laws and the memorandum shall prevail in case
of conflict.
(2)
The amendment must not be contrary to the provisions of the Companies Act or
any other company law as it supersedes both the memorandum and the articles of
incorporation of the company.
(3) Must not be
contrary to the rules, amendments or recommendations of the Court.
(4)
The amendment must not be illegal or contrary to public order.
Furthermore,
it must be made for the benefit and
genuine interest of society.
The
amendment cannot constitute an attempt to defraud a minority and must be made for the benefit of
society as a whole.
(5)
Any amendment made to convert a public company into a private company must not
be made before obtaining the necessary approval
from the Court.
(6)
The company must not use the amendment to conceal or remedy a breach of
contract with a third party or use the amendment to evade liability under the
contract.
(7)
The Company shall not amend its charter to expel a member of the Board of
Directors in violation of the law.
Change of Name Clause: In case of change of
name clause, the conditions specified in clauses (2) and (3) of Article 4 shall
be complied with.
It
shall also require the approval of the central government.
A
new certificate of incorporation shall be issued to the company by the
Registrar after the change of name.
In
the case of Malhati Tea Syndicate Ltd.
vs Revenue Officer (1972), a company
filed an application under its old name, even though the new name had been
entered in the Register of Joint Stock Companies.
The
Court held that their application was not admissible on this ground alone.
Amendment
of the registered office clause: The registered office clause of a company can
be amended with the approval of the Central Government.
Such
amendment takes place with the consent of the shareholders of the company which
shall be taken into account before
approval.
In
case of change of registered office from
one state to another, the company shall submit a certified copy of the order of
the Central Government to both the states.
Amendment
of articles of incorporation: In case of filing of amendment of articles of
incorporation, a special resolution has to be passed by holding a general
meeting.
A
copy of the special resolution is filed with the secretary and he has to
certify it within 30 days.
Previously,
the approval of the Company Law Board or the Central Government was required,
but now the procedure has become much more liberal and only a special
resolution is required.
Amendment of liability clause: Section 13(11)
specifically provides that an amendment of the capital is void, if the capital
of the company is limited by a guarantee and by the amendment the company
intends to grant any person (other than the members of the company) the right
to participate in the profits distributed.
Amendment of Articles of Association The
Articles of Association may be amended under section 14 of the Companies Act by
a special resolution.
It
can convert a public company into a private company or vice versa.
In
addition, the conversion of a public company into a private company requires
the approval of the Court.
It
should also be noted that if a private company, by an amendment, excludes
important restrictions and limitations that should be included in the articles
of association, it will no longer be a private company.
Errors
in the status can also be corrected by amending them.
The
following points must be considered during the amendment of the statutes: The board of directors must be notified and a
board meeting must be held.
The
date and time of the meeting is fixed
and notice is sent to the members of the
association.
Under
section 101 of the Companies Act, a general meeting is called by giving 21 days notice to the members.
Notice
is sent to the auditors, directors and all
members of the company.
A
special resolution is passed at the meeting by a two-thirds majority of the
members.
A
copy of the resolution must be submitted to the secretary within 30 days of the
passing of the special resolution.
Any
amendment must not be contrary to law.
It must not be contrary to the provisions of
the Companies Act, 2013 and the Memorandum of Association.
The
amendment must not increase the liability of the company.
Violation : Section 10 of the Companies Act
provides that the memorandum and articles of association are binding on the
company and its members.
However,
this article reflects the contractual force of these two instruments.
Violation of
MoA: Acts
performed outside the scope of the memorandum are void.
The
doctrine of ultra vires in the case of object clauses is a perfect example.
The
directors' acts exceeding their authority make them personally liable.
Furthermore,
the court can issue an injunction to
prohibit the effect of such ultra vires amendments in contracts.
Breach of
statute:
Statutes are instruments for the
internal management of the society, which are binding in the event of an agreement between the
members and between the members and the
society.
In Wood
v.Odessa Waterworks Company (1889), according to the articles of
incorporation, the directors of the company were required to pay dividends to
the members.
Subsequently,
a resolution was passed to grant them
bonds instead of dividends.
This
was considered a breach of the statute
because the statute provided that dividends, i.e., must be paid in cash.
Therefore,
an injunction was issued and the directors were restrained from acting in this
way.
Schedule
F of the Companies Act 2013 covers the format of the articles of association of
a limited liability company.
It
includes the following provisions: • Interpretation, • Share capital and
variations of rights, • Privileges, • Share repurchase, • Share transfer, •
Share repurchase, • Share redemption, • Capital adjustment, • Capitalization of
profits, • Share repurchase, • General meeting of shareholders, • Discussion of
general meeting of shareholders, • Adjournment of general meeting, • Voting
rights, • Proxy, • Board of Directors, • Board of Directors' deliberations, •
General Director, director, company secretary or financial director, • Seal, •
Dividends and reserves, • Accounts, • Liquidation, and • Compensation.
The
following points reflect the main differences between the two instruments:
•
The articles of incorporation contain the necessary conditions for registration
of the company.
On
the other hand, the bylaws contain the internal regulations of the company.
•
The companies act has superiority over the statutes.
Therefore,
in case of conflict between the two, the constituent act will take precedence
over the statutes.
•
The memorandum must be drafted in accordance with section 4 of the Companies
Act, but there are some restrictions on the drafting of the articles of
association of a company.
•
The memorandum must be registered at the
time of incorporation of the company, whereas there is no such obligation in
case of statute.
• The doctrine
of ultra vires applies in case a company acts outside the scope of the
memorandum.
This
makes the said acts void.
However,
any act outside the scope of the statute can be done with the consent of the
shareholders.
Bibliography
Companies
Act 2013, India.
Shyam
Chand v. Calcutta Stock Exchange.
Malhati
Tea Syndicate Ltd. vs Revenue Officer (1972).
Wood
v. Odessa Waterworks Company (1889).
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