"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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