Professional Documents
Culture Documents
Corporate
Constitution
Balkrishna Parab
balkrishnaparab@jbims.edu
Introduction
The constitution is a set of formal documents, drawn up by those applying to
register the company, which sets out the rules for running the company. The
constitution of a company comprises of two documents: memorandum of
association and articles of association. A company's memorandum of
association defines what its purpose and line of business is, whilst the articles
of association contain regulations regarding the way in which the company
conducts its internal affairs.
Memorandum of Association
The memorandum of association of a company contains the fundamental
conditions upon which alone the company has been incorporated. The
memorandum, along with the articles of association, is the constitution or
charter of the company and contains the powers of the company.
The memorandum of association of a company is of great importance. It
defines as well as confines the powers of the company. It contains the objects
for which the company is formed and therefore identifies the possible scope of
its operations beyond which its actions cannot go. The memorandum of
association defines and formulates the principal conditions of the companys
incorporation.
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The memorandum enables the shareholders, creditors and all those who deal
with the company to know what its powers are and what is the range of its
activities. An intending shareholder can find out the purpose for which his
money is going to be used and what risk he is taking in making the investment.
A company has wide discretion about what to include in the memorandum of
association. However, the memorandum of association of every company must
contain the following clauses:
Name Clause
A company being a distinct legal entity must have a name of its own to
establish its separate identity. The name of a public limited company must
end with the word 'Limited' and that of a private limited company must end
with the words 'Private Limited'1. The company cannot have a name, which in
the opinion of the Central Government is undesirable. A name that is identical
to or closely resembles the name of another existing company is not allowed.
A company cannot use a name that is prohibited under the Names and
Emblems (Prevention of Misuse Act), 1950, or use a name suggesting a
connection to the Government.
Situation Clause
The state in which the registered office of company is to be situated is
mentioned in this clause2. Every company must have a registered office that
establishes its domicile.
The registered office of the company is the official address of the company
where the statutory books and records must be normally be kept. Every
company must affix or paint its name and address of its registered office
outside every office or place at which its activities are carried on in. The name
must be written in one of the local languages and in English.
Objects Clause
This clause is the most important clause of the company. It specifies the
activities which a company can carry on and which activities it cannot carry
on3. The company cannot carry on any activity, which is not authorized by its
memorandum. This clause must specify: (i) main objects of the company and
1
Section 4 (1) (a) of the Companies Act, 2013.
2
Section 4 (1) (b) of the Companies Act, 2013.
3
Section 4 (1) (c) of the Companies Act, 2013.
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objects incidental or ancillary to the attainment of the main objects; and (ii)
other objects of the company not included in (i) above.
In case of the companies other than trading corporations whose objects are not
confined to one state, the states to whose territories the objects of the company
extend must be specified.
Liability Clause
This clause contains a declaration that the liability of the members is limited in
case of the company limited by the shares or a company limited by guarantee4.
The memorandum of a company limited by guarantee must also state that each
member undertakes to contribute to the assets of the company such amount
(not exceeding specified amounts) as may be required in the event of the
liquidation of the company.
A declaration that the liability of the members is unlimited in case of the
unlimited companies must be given. The effect of this clause is that in a
company limited by shares, no member can be called upon to pay more than
the uncalled amount on her shares. If her shares are already fully paid up, she
has no further liability towards the company.
Capital Clause
The amount of share capital with which the company is to be registered must
be specified giving details of the number of shares and types of shares5. A
company cannot issue share capital greater than the maximum amount of share
capital mentioned in this clause. This is known as the authorized capital of the
company.
Association Clause
This is a declaration given by the persons subscribing to the memorandum of
association that they desire to form into a company and agree to take the
shares. It states the names, addresses, identification and occupations of the
subscribers and the number of shares each subscriber has agreed to take. The
law requires that:
the memorandum must be signed be each subscriber6;
each subscriber must take at least one share;
4
Section 4 (1) (d) of the Companies Act, 2013.
5
Section 4 (1) (e) of the Companies Act, 2013.
6
Section 3 (1) of the Companies Act, 2013.
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each subscriber must write opposite his name the number of shares she
has agreed to subscribe.
Alteration of Memorandum
A company cannot change its memorandum except in the circumstances and
manner expressly provided for in the Companies Act, 2013. The provisions in
the Act regarding amendment of various clauses of the memorandum are
discussed below:
ALTERATION OF NAME CLAUSE
The name of a company can be changed anytime by passing a special
resolution7 at a general meeting of the company and with the written approval
of the Central Government8. The changed name should be intimated to the
Registrar and the company should obtain a new certificate of incorporation
signifying a change in name. When a company has been inadvertently
registered with a name that is identical to an existing company, the company
can change its name by passing an ordinary resolution9 and obtaining the
approval of the Central Government.
The change of name of the company does not affect any rights and obligations
of the company or render the same defective in legal proceedings by or against
it.
If the Registrar has registered the change of name, the commencement of the
legal proceeding in the former name is not valid. However, legal proceedings
that might have been continued or commenced by or against the company by
its former name may be continued. By the change of name of the company the
constitution of the company does not change. All the rights and obligations
under the law of the company remain same.
ALTERATION OF SITUATION CLAUSE
A change in the registered office of the company can take three forms:
Change of registered office from one premise to another in the same
city, town or village. This change does not amount to alteration of the
memorandum of association and as such can be brought about by
passing a resolution of the Board of Directors.
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Section 13 (1) of the Companies Act, 2013. A special resolution is one that is passed by
three-fourths majority in a general meeting of the members or shareholders.
8
Section 13 (2) of the Companies Act, 2013.
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An ordinary resolution is one that is passed by a simple majority in a general meeting of the
members.
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Sections 13 (1) and 13 (4) of the Companies Act, 2013.
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Convert all or any of its fully paid up shares into stock, and reconvert
that stock into fully paid-up shares of any denomination;
Sub-divide its shares, or any of them, into shares of smaller amount
than is fixed by the memorandum, so, however, that in the sub-division
the proportion between the amount paid and the amount, if any, unpaid
on each reduced share shall be the same as it was in the case of the
share from which the reduced share is derived;
Cancel shares which, at the date of the passing of the resolution in that
behalf have not been taken or agreed to be taken by any person, and
diminish the amount of its share capital by the amount of the shares so
cancelled.
Articles of Association
Articles of association contain the rules or byelaws and regulations relating to
the internal management and administration of the company. The relationship
between the company and its members and the relationship between one
member and the other is based on the provisions made in the articles of
association of the company. It is an important document of the company and
along with the memorandum of association constitutes the constitution of the
company.
The articles of association are subordinate to the memorandum of association.
The memorandum of association states the objects of the company, defines
and formulates the principal conditions of the companys incorporation, the
articles merely set out the composition and mode by which the company
desires to attain those objects. The articles are secondary to the memorandum.
The provisions of the articles must not be in conflict with the provisions of the
memorandum of association. In case such a conflict arises, the memorandum
will prevail.
The articles of association constitute a contract between the company and its
members. They are binding on the company as well as on its members. The
outsiders are not concerned or connected with the articles of the company.
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is given an option. It can prepare and file its own articles of association or may
adopt Table F as its articles11.
The law provides that the articles of association of every company must be: (i)
printed; (ii) divided into paragraphs, numbered consequently; (iii) signed by
each subscriber to the memorandum who shall add her address, description
and occupation, if any, in the presence of at least one witness who will attest
the signature and shall likewise add her address, description and occupation, if
any; (iv) must be properly stamped as required under the Indian Stamp Act;
and (v) should be registered with the ROC along with the memorandum of
association and other necessary documents.
Entrenched Provisions
The articles may contain such provisions which may be altered only if certain
conditions or procedures which are more restrictive than those applicable in
the case of a special resolution, are met or complied with. The provisions for
entrenchment shall only be made by a private company on formation, or by an
amendment in the articles agreed to by all the members of the company. A
public company may be made by passing a special resolution.
11
Table F of Schedule I of the Companies Act, 2013 contains the model articles of association
for a public company limited by shares.
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Alteration of Articles
A company can alter any of the provisions of its articles of association, subject
to provisions of the Act and subject to the conditions contained in the
memorandum of association of the company. The articles of association can be
amended by passing a special resolution in the general meeting. Thus, the
company can alter or add to its articles and such alteration or addition shall be
valid as is originally contained in the articles. The procedure for any alteration
or addition is not lengthy and time consuming as in case of memorandum of
association. The procedure is as follows:
SPECIAL RESOLUTION. The alteration in the articles can be made by
passing a special resolution in the general meeting;
FILING OF RESOLUTION. A copy of the special resolution authorizing
the alteration must be filed with the ROC within 30 days of passing the
said resolution.
FILING OF ALTERED ARTICLES. A copy of the new (altered) articles of
association needs to be filed with the registrar within three months of
passing the special resolution. The alteration will be effective from the
date of registration with the ROC. Every copy of the articles issued
after the date of alteration must be per the alteration made.
SANCTION OF GOVERNMENT. A company must obtain a sanction from
the Central Government for certain alterations in the articles. For
example, alteration for conversion of a public limited company into a
private limited company, or alteration, which results in the increase in
the remuneration to a director, managing director, or whole time
director.
12
Form INC.2 or Form INC.7.
13
Companies (Registration Offices and Fees) Rules, 2014.
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Form MGT.14.
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Memorandum Vs Articles
Memorandum of association is a fundamental document that states about the
objects and powers of the company. The articles of association are a
subordinate document that contains regulations regarding the internal
management and administration of the company.
Memorandum of association is the primary, basic and principal document of a
company. It is subordinate to the Act only.
The articles of association are secondary, subsidiary and subordinate
document of the company. It is subordinate to the memorandum.
Memorandum of association governs external relations of the organization and
indicates the permitted range of its activities. The articles of association
govern relations between company and its members and between the members
inter se.
It is compulsory for every company to prepare and file their memorandum of
association at the time of incorporation. The preparation of articles of
association is optional for public company limited by shares, as it can adopt
the model articles of association contained in Schedule I Table A of the Act.
The memorandum of association is practically unalterable charter of the
company except to the extent Act provides. Such alterations also need sanction
of the Central Government. On the other hand, articles can be altered merely
by passing a special resolution.
Any transaction that is outside the limits prescribed by the memorandum of
association is void and even if all the members desire, it cannot be ratified. On
the other hand, any transaction that is outside the limits of the articles can be
ratified by the company passing a special resolution.
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36.
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610.
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observed by the officers of the company. In other words, the persons dealing
with the company are not bound to inquire into the regularity of internal
proceedings.
However, there are some exceptions to this doctrine. An outsider dealing with
the company in the following circumstances cannot claim relief under the
indoor management rule.
KNOWLEDGE OF IRREGULARITY. Where the outsider had the knowledge
of the irregularity. The rule does not protect any person who has actual
or even an implied notice of lack of authority of the person acting on
behalf of the company.
IGNORANCE OF ARTICLES. Relief under the doctrine of indoor
management is not available to the outsider if she had no knowledge of
articles.
FORGERY. The doctrine of indoor management does not extend to
transactions involving forgery or otherwise void or illegal. Forgery
includes forgery of signatures, unauthorized use of company seal,
execution of a document towards personal discharge of a company
officers liability instead of the liability of the company.
NEGLIGENCE. In cases where an officer of a company does something
that is not ordinarily within his powers, the person dealing with him
must make proper enquiries. For example, in a transaction involving
sale of land, the Accountant of the company signed the papers on
behalf of the company. The Court observed that the buyer cannot get
relief under this doctrine as any reasonable person could have realized
with the most basic inquiries that an accountant does not have
authority to sell land belonging to the company
BALKRISHNA PARAB
Jamnalal Bajaj Institute of Management Studies,
University of Mumbai. Contact: E-Mail:
balkrishnaparab@jbims.edu; Cell: 9833528351;
Address: JBIMS, 164, DN House, HT Parekh
Marg, Backbay Reclamation, Mumbai 400 020.
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