Incorporation of the Company and Matters Incidental thereto
Q. 7. What formalities are required for the formation of a company? When can it commence its business?
Or
Explain in brief the procedure of incorporation of a company. What are the effects of non-registration?
Ans. Formation of Company
The Companies Act, 2013 prohibits the company to commence its business without incorporation. Thus to commence of business of a company the registration should precede the commencement of business. Incorporation and registration is one and the same thing. Chapter 2 (Sections 3-22) of the Companies Act, 2013 deals with formation, incorporation of a company and other matters incidental thereto.
Formation of company [Section 3].- Section 3 (1) of the Act provides for the formation of a company. It provides:
“A company may be formed for any lawful purpose by –
(a) seven or more persons, where the company to be formed is to be a public company;
(b) two or more persons, where the company to be formed is to be a private company; or
(c) one person, where the company to be formed is to be One Person Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of the Act in respect of registration”
But in case of One Person Company, the memorandum must indicate the name of the other person, with his prior written consent in the prescribed form, who shall, in the event of the subscriber’s death or his incapacity to contract become the member of the company. The written consent of such person shall also be filed along with memorandum and articles with the Registrar at the time of incorporation of the One Person Company. Such other person may withdraw his consent in a prescribed manner. The name of such other person may also be changed by member of the One Person Company by giving him notice in a prescribed manner and such change of name of the person shall not be deemed to be an alternation of the memorandum. The member of the One Person Company shall be duty bound to intimate the change in the name of the other person nominated by him to the company by indicating in the memorandum or otherwise and the company shall intimate the Registrar any such change.
According to Section 3(2), a company formed under Section 3(1) may be either (a) a company limited by shares, or (b) a company limited by guarantee, or (c) an unlimited company.
Incorporation of Company (Section 7)
After getting Certificate of Incorporation from Registrar a company become a legal person and a body corporate. For that purpose the formalities provided under Section 7 of the Companies Act. 2013 must have got to be fulfilled.
Incorporation is the second important stage of the formation of Company. In the leading case in Raoji v. Devi Chand. AIR 1951 Kutch 55. it was clearly held that mere adding of the word ‘Company’ in a firm’s name would not convert it into an Incorporated Company as it would depend on the number of members of the firm whether the firm could be incorporated as a Company or not.
According to Section 7(1) of the Act, following documents and information of registration shall be filed with the Registrar within whose jurisdiction the registered office of the company is proposed to be situated namely:
(a) The Memorandum and Articles of the Company duly signed by all the subscribers to the memorandum in such manner as may be prescribed.
(b) A declaration in the prescribed form by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of the company, and by a person named in the articles as a director, manager or secretary of the company, that all the requirements of this Act and rules made thereunder in respect of registration and matters precedent or incidental thereto have been complied with.
(c) An declaration from each of the subscribers to the memorandum and from persons named as the first directors, if any, in the articles that he is not convicted of any offence in connection with the promotion, formation or management of any company. or that he has not been found guilty of any fraud or misfeasance or of any breach of duty to any company under this Act or any previous company law during the preceding five years and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of his knowledge and belief.
(d) The address for correspondence till its registered office is established.
(e) The particulars of name, including surname or family name. residential address, nationality and such other particulars of every subscriber to the memorandum along with proof of identity, as may be prescribed, and in the case of a subscriber being a company, such particulars as may be prescribed;
(f) The particulars of the persons mentioned in the articles as the first directors of the company, their names, including surnames or family names, the Director Identification Number, residential address, nationality and such other particulars including proof of identity as may be prescribed; and
(g) The particulars of the interests of the persons mentioned in the articles as the first director of the company in other firms or bodies corporate along with their consent to act as directors of the company in such form and manner as may be prescribed.
Issue of Certificate of Incorporation [Section 7 (2)] -Section 7 (2) of the Act, provides that the Registrar on the basis of documents and information filed under Section 7 (1) shall register all the documents and information in the register and issue “certificate of incorporation” in the prescribed form to the effect that the proposed company is incorporated under this Act.
Allotment of ‘Corporate Identity Number (CIN) to the Company (Section 7 (3)). According to Section 7 (3), on and from the date mentioned in the Certificate of Incorporation the Registrar shall allot to the company a corporate identity number, which shall be a distinct identity for the company and which shall also be included in the certificate.
Under Section 7(4) it is mandatory for the company to maintain and preserve at its registered office copies of all documents and information as originally filed till its dissolution under this Act.
Effect of filing false or incorrect particulars [Sections 7(5), 7(6) and 7(7)) -There shall be following consequences if a person files false or incorrect particulars:-
1. If any person furnishes any false or incorrect particulars of any information or suppresses any material information, of which he is aware in any of the documents filed with the Registrar in relation to the registration of a company, he shall be liable for action under Section 447. [Section 7 (5)
2. Where, at any time after the incorporation of a company, it is proved that the company has been got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company, or by any fraudulent action, the promoters, the persons named as the first director of the company and the persons making declaration under Section 7 (1) (b) shall each be liable for action under Section 447. [Section 7 (6))
3. Where a company has been got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal may, on an application made to it, on being satisfied that the situation so warrants-
(a) pass such orders, as it may think fit, for regulation of the management of the company including changes, if any, in its memorandum and articles, in public interest or in the interest of the company and its members and creditors; or
(b) direct that liability of the members shall be unlimited; or
(c) direct removal of the name of the company from the register of the companies; or
(d) pass an order for the winding-up of the company; or
(e) pass such other orders as it may deem fit; But, before making any such order.
(i) the company shall be given a reasonable opportunity of being heard in the matter, and
(ii) the Tribunal shall take into consideration the transactions entered into by the company, including the obligations, if any, contracted or payment of any liability. [Section 7 (7)1
Effect of Registration or Incorporation [Section 9].- Section 9 of the Act provides that from the date of incorporation mentioned in the Certificate of Incorporation, such subscribers of the memorandum and all other persons, as may from time to time become members of the company. shall be a body corporate by the name contained in the memorandum. capable of exercising all the functions of an incorporated company, and having perpetual succession with power to acquire, acqui hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name.
Effect of non-registration. There may be following serious consequences of non-registration of a company:-(1) In absence of the incorporation,
(a) It cannot enter into a contract,
(b) It cannot sue any third person. if illegality is apparent nor to any member.
(c) Third person cannot sue it, because it cannot contract for loans.
(d) Winding-up cannot be made by a member or creditor. or demanded by the company itself, or
(2) Such unregistered establishment is undoubtedly illegal but not totally unlawful. So no suit can be filed against its members for a crime relating to conspiracy.
(3) For such an illegal undertaking the liability will be of those of share-holders and not that of the undertaking. Hence, suit can be filed not against the undertaking but against the share-holders.
(4) Every company, partnership or association and every member thereof doing business in contravention of the provision of Section 11 shall be punishable with fine which may extend to ten thousand rupees.
Suit for specific performance can be filed by Managing Director of Registered Company without obtaining authorisation from Board of Directors. [Mohammed Abdul Azeem v. M/s. South India Prime Tennary Pvt. Ltd., AIR 2016 Hyd. 170].
Now, Section 11 of the Companies Act, 2013 has been omitted by Section 4 of the Companies (Amendment) Act, 2015.
Commencement of Business etc.
Before the Companies (Amendment) Act, 2015, Section 11 dealt with commencement of business etc. was omitted by Section 4 of the Companies (Amendment) Act, 2015.
Now Section 10-A, which has been inserted by the Companies (Amendment) Act, 2019, deals with commencement of the business etc. of a company. This section lays down as follows-
“Section 10-A. Government of business, etc.-(1) A company incorporated after the commencement of the Companies (Amendment) Act, 2019 and having a share capital shall not commence any business or exercise any borrowing powers unless-
(a) a declaration is filed by a director within a period of one hundred and eighty days of the date of incorporation of the company in such form and verified in such manner as may be prescribed, with the Registrar that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such declaration; and
(b) the company has filed with the Registrar a verification of its registered office as provided in sub-section (2) of Section 12.
(2) If any default is made in complying with the requirements of this section, the company shall be liable to a penalty of fifty thousand rupees and every officer who is in default shall be liable to a penalty of one thousand rupees for each day during which such default continues but not exceeding an amount of one lakh rupees.
(3) Where no declaration has been filed with the Registrar under clause (a) of sub-section (1) within a period of one hundred and eighty days of the date of incorporation of the company and the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may, without prejudice to the provisions of sub-section (2), initiate action for the removal of the name of the company from the register of Companies under Chapter XVIIL”
Advantages of Registration or Incorporation
There are following advantages of Incorporation of a Company-
(1) Legal advantages. Company obtains legal personality and thus is empowered to sue and be sued, to enter into contracts, to sell and purchase property, or borrow money. The most important advantage it gets is that inspite of a large number of members and share-holders, officers, company remains intact into existence.
(2) Professional advantages. The share-holders after purchasing the shares have not to bother for carrying out the business management. It is the directors and managers who manage the company, earn profit and divide the dividends among the share-holders. It is none of the business and botheration of share-holders, how the company is run. They may express their views in the general meetings only. Expenses, taxes, correspondences, with Government and Registrar, sale and purchase, payment to the company’s employees, maintenance of discipline and property all those come under the domain of the directors.
Incorporation brings the company into existence as a legal person different from its members. Company’s liability is different from those of the share-holders. The death or insolvency of the individual share-holder does not have any adverse impact on the existence of the company the position of which remains as usual. It is easy to earn profit by investment in a company without any physical labour or mental pain. It gives facility to carry on business collectively. It is the company’s goodwill which matters.
Disadvantages of Registrations or Incorporation
There are following main disadvantages of Incorporation of a Company: –
(1) A lot of formalities are to be fulfilled for incorporation and is even thereafter, there is no end to the formalities to be complied with many a rules and regulations are to be observed and followed in running the business of company.
(2) On incorporation, the State and Court are entitled to interfere in the affairs of company’s management in the interest of the public, but sometimes there is misuse thereof.
(3) It is not possible for the company or the share-holders collectively to work together. The work of incorporation is handed over to a few of the hands and they have the prime control on the administration of the company and sometimes, they are found to misuse it.
Lifting of Corporate Veil
Q. 8. What is Doctrine of Lifting the corporate veil and its consequences?
Or
What are the circumstances under which the corporate veil of a company may be lifted to know its real character? Explain.
Ans. Doctrine of lifting or piercing the corporate veil
An incorporated company is clothed with a distinct personality from its share-holders by fiction of law. Being an artificial person, company cannot work itself. It needs human agency through which it carries on its business. In reality, it is the association of persons who are the beneficial owners of the property of the body corporate. In cases of frauds and misuse, it becomes necessary to know the reality of the corporate personality by lifting or piercing the corporate veil. The Court will not allow the individual concerned to take shelter of the corporate personality.
Undoubtedly, the theory of corporate entity of a company is the basic principle on which the whole law of corporation is based. But the separate personality of the company, being a statutory privilege, it must always be used for legitimate business purposes only. Where the legal entity of a corporate body is misused for fraudulent and dishonest purposes, the individuals concerned will not be allowed to take shelter behind the corporate personality. In such cases, the Court will break through the corporate veil and apply the principle of “Lifting or piercing the corporate veil” that is, the Court will look behind the corporate entity. Thus, in New Horizons Ltd. v. Union of India and others, (1995) 1 SCC 478, the Coun observed that in case of a joint venture corporation, the Court can see through the corporate veil to ascertain the true nature of a company. The doctrine of lifting the corporate veil is invoked when the corporate personality is found to be opposed to justice, convenience or interest of revenue.
The principle of ‘lifting the corporate veil’ has found statutory recognition in certain provisions of the Company Law. Relevant sections are Sections 12, 129, 216 and 339 of the Companies Act, 2013.
Leading cases:
Daimler Co. Ltd. v. Continental Tyre & Rubber Co., (1916) 2 AC 307. In a company which was incorporated in England for the purpose of selling tyres manufactured in Germany by a German Company, all the shares except one were held by the German subjects residing in Germany. The remaining one share was held by a British subject who was the Secretary of the company. Thus the real control of the English Company was in the German hands. During the World War-1, the company commenced an action to recover trade debts. The question was whether company had become an enemy company consequent to the World War-1. The House of Lords, inter alia observed:
“A company incorporated in U.K. is a legal entity, a creation of law with the status and capacity which the law confers. It is not a natural person with mind or conscience. It can neither be loyal or disloyal. It can be neither friend nor enemy. But it can assume enemy character when person in de- facto control of its affairs are residents in any enemy country or, wherever residents are acting under the control of enemies.”
Their Lordships therefore held that the company was an enemy company for the purpose of trading and therefore, it was barred from maintaining the action.
State of U.P. v. Renusagar Power Company, AIR 1988 SC 1732.- The Supreme Court observed that lifting the corporate veil is becc.ning more and more transparent in modern company jurisprudence.
Doctrine of lifting veil is to be applied to give effect to law which is sought to be circumvented. [State of Rajasthan v. Gotan Lime Stone Khanji Udyog Pvt. Ltd., AIR 2016 SC 510].
Central Inland Water Transport Corp. Ltd. v. BrojoNath Ganguly. (1986) 3 SCC 156. The Supreme Court while considering the question whether the appellant company was an agency or instrumentality of the state for the purpose of Article 12 of the Constitution of India, inter-alia observed that for the purpose of Article 12, one must necessarily see through the corporate veil to ascertain whether behind that veil is the face of an agency or instrumentality of the State.
Efficient administration of tax laws also at times necessitates lifting the corporate veil of an incorporated company. The courts have made inroads on the principle of separte legal personality of corporate bodies in order to prevent tax evasion.
Cases in which Corporate Veil should be lifted. The discretion of the court in the matter of lifting the corporate veil depends on the underlying socio-economic policies and moral factors operating in or through the corporations. The courts have found it necessary to disregard the separate personality of a company in the following situations:
(1) To determine the real character of the company in the public interest.- In-times of war it becomes necessary to know the enemy character of the company. The best way to know is to find out in whose hands the real control of the company is.
In Daimler Co. Ltd. v. Continental Tyre and Rubber Co.. (1916) 2 AC 307, the House of Lords held that the company can assume every character when persons in defacto control of its affairs are residents in enemy country, or wherever residents, are acting under the control of the enemies.
Smilarly, for punishing a company for contempt of Court, the public interest demands that company’s corporate veil should be lifted to find out the real persons who are guilty of disobedience. Jyoti Ltd. v. Kanwaljit Kaur Bhasin, (1987) 62 Comp. Cas. 626].
But Court may refuse to pierce the corporate veil where there is no danger to public interest. [People’s Pleasure Park Co. v. Rohledger. (1908) 109 Va 439].
The Supreme Court in L.I.C. of India v. Escorts Ltd., (1986) 1 SCC 264, held that veil may be lifted where there is involvement of the element of public interest, or in cases of fraud, or improper conduct, evasion of beneficient or taxing statute, adverse effect on the parties.
The doctrine of lifting the veil was invoked to decide the true nature of Hotel Corporation of India in the case of Balwant Rai Saluja v. Air India Lid and others, AIR 2015 SC 375.
(2) To prevent fraud and improper conduct. Where the corporate entity has been used for fraud or improper conduct or to defeat or circumvent law, Courts may pierce the corporate veil to look into the realities of the situation.
Gilford Motor Co. v. Horne, (1933) 1 Ch. 935. In this case Horne after termination, started a new company and started to entice or solicit the customers of the company of which he was the managing director. Horne (defendant) was restrained from carrying on such business.
In P.N.B. Finance Ltd. v. Shri Sital Prasad Jain, (1983) 53 Com. Cas. 66, Delhi High Court held that this doctrine may be used in exigencies of situation and for the ends of justice to prevent the corporate entity from being used as an instrument of fraud.
Again in Subhra Mukherji and another v. M/s. Bharat Coking Coal Ltd. (B.C.C.L.) and others, AIR 2000 SC 1203, held that in order to as- certain the true nature of the transactions as to who were the real parties to sale (husband and wives) behind the facade, Court will be justified in piercing the veil of corporate personality.
In Singer India Ltd. v. C.M. Chaddha, AIR 2004 SC 4368, the scheme of amalgamation was sanctioned whereby undertaking in India of American Company was amalgamated with Indian Company. The Corporate veil was lifted in order to ascertain whether corporate personality was being blatantly used as a cloak for fraud or improper conduct. The Apex Court, however, observed that it was not open to a company to ask for unveiling its own cloak for the purpose of determining whether there was no subletting or parting with possession by American Company.
(3) Avoidance of welfare legislation. If a new company is formed to evade liability under any welfare legislation the Court may lift the veil to look at the real transactions and purpose behind it.
Where principal company transferred some assets to its newly formed company with an intention as a device to reduce the amount of bonus payable to its workmen of the principal company, it is logical and justified to go behind the smoke screen and discover the true state of affairs. [Workmen of Associated Rubber Industry Ltd. v. The Associated Rubber Industry Ltd., Bhavnagar, AIR 1986 SC 1]. In this case, the Apex Court made it clear that it is the duty of the Court, in every case where ingenuity is expected to avoid taxing and welfare legislations, to go behind the smoke screen and discover the true state of affairs. The Court is not to be satisfied with form and leave well alone the substance of a transaction.
(4) Where corporate facade is really an agency or trust.- No company or person can be allowed to take advantage of a situation where this is to be determined whether it works through an agency or trust.
In Heavy Engineering Mazdoor Union v. State of Bihar, AIR 1970 SC 82, it has been decided once for all that employees of Government company are not civil servants and prerogative writs cannot issue against them, and government company is neither an extension of the State nor its agent.
In Som Prakash Rekhi v. Union of India, (1981) 1 SCC 449, Justice Krishna lyer rejected the contention that a writ against a private company could not rise. Claim of Burmah Shell employees that the company worked as a unit of the Government, was held valid and justified because that company has vested in the Central Government.
(5) To prevent abuse of process of law. The Court can pierce the veil to find out and look into the mis-deeds, fraudulent acts of company’s officials who are guilty of deliberate defiance of Court’s orders.
In D.D.A. v. Skipper Construction Co. (Pvt.) Ltd., AIR 1996 SC 2005, the Supreme Court has observed that imposition of punishment for contempt would not denude the Court of its power to issue directions and make appropriate orders to grant relief to the persons aggrieved in order to do complete justice. For this purpose, the Court can lift the corporate veil of the company to look into the misdeeds of its officials and punish them i.e. the contemners. That apart, the Court may also order the contemners to restore the illegally derived benefit to the persons who are defrauded so that the contemners are not able to retain the fruits of the contempt.
Consequences of lifting the Corporate Veil. As a body corporate company cannot act itself. It needs a human agency through which it can do its business. The Board of Directors, Managers, Managing Directors and Secretaries are appointed by the company and it is they who perform the works and duties of the company. The management and control lies in their hands. They decide the policy to run the company. Directors are the mind, soul and will of the company. They work for the benefits and in the interest of the share-holders. The Supreme Court has rightly observed in State of U.P. v. Renusagar Power Company, AIR 1988 SC 1732, that “lifting the corporate veil is becoming more and more transparent in modern company jurisprudence”.
Lifting the veil becomes necessary to finds out as to how business is carried out, and who are doing it. In any fraud, misconduct or misdeed done in shelter of this corporate veil because directors are after all human beings and can do something in their own interest and for their personal gain and thereby adversely affecting the interests of the share-holders and putting them to loss. If corporale veil is not pierced by the Court, they will remain as if they are not in default, not guilty and not liable. By lifting the veil the Court will find out the reality and will restrain the officials to misuse the assets of the company and if found misused, misdirected, they may be made personally liable to pay damages to those whom they have deprived of their due profits. Thus the paramount interest of the company may be safeguarded by the Court through taking recourse to the lifting the veil. This is necessary sanction which compels the officers to work, honestly diligently. in the interest of the company and share-holders.
Memorandum of Association
Q. 9. What is the Memorandum of Association? What are its contents and importance?
Or
How can contents/clauses of the memorandum be altered?
Ans. Definitions of Memorandam of Association
The First and foremost requirement for incorporation of a company is the preparation and filing of a memorandum with the Registrar. It is the foundation of the company. It is the most important document as it sets out the Constitution of the company.
Lord Cairns has rightly observed “The memorandum is that domain out of which the company cannot go and function”. [Asbury Co. v. Riche, (1875) LR 7 HL 653].
According to Palmer “Memorandum is a very important document in relation to a proposed company”. On the foundation of the memorandum the structure of the company is based.
Lord Macmillan’s view is that “the Memorandum of Association sets out the Constitution of the company or Charter of the company. It defines the scope of the activities of the company, its relation with the outside world. Its purpose is to enable share-holders, creditors and dealers with the company to know what is the permitted range of its enterprise”.
Section 2 (56) of the Companies Act, 2013, defines it as-
“Memorandum means the Memorandum of Association of a Company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act.”
This definition is not complete as it does neither give an idea as to nature of this document nor it is indicative of its importance.
A private limited company cannot exceed the powers conferred on it under the Memorandum of Association: Turner Morrison and Co. Ltd. v. Hungerford Investment Trust Ltd., (1972) 42 Comp. Cas. 512: AIR 1972 SC 1311.
Object of Memorandum. It basically serves the two main purposes:
(1) The prospective share-holders can know the field in which their funds are going to be used by the Company.
(2) Outsiders can know exactly the objects of the Company.
Form of Memorandum of Association [Section 4(6)].- According to Section 4(6) of the Companies Act, 2013, the Memorandum of a Company shall be in respective forms specified in Tables A, B, C, D and E in Schedule I as may be applicable to such company.
Contents of the Memorandum [Section 4(1)].-According to Section 4(1) of the Companies Act, 2013, the Memorandum of a Company shall state following facts:
(1) The name of the company [Section 4(1)(a)].-The Memorandum of a Company must state the name of the company with the last word “Limited” in the case of a public limited company, or the last words “Private Limited” in the case of a private limited company. But where the company is a company with charitable objects as provided under Section 8 of the Act, the above provisions shall not apply.
A company being a legal personality must have a name of its own. In Osborn v. Bank of U.S., 9 Wheat, (22 US) 738, Johnson J. has opined that “the name of an incorporation is the symbol of its personal existence”. Although a company is free to adopt a name of its choice but it can not be registered with a name which, in the opinion of the Central Government, is undesirable.
In the case of Mis. Vardhaman Crop Nutrients Private Limited v. Union of India, AIR 2016 NOC 242 (P.&H.), plaintiff Company having had registered trade mark ‘VARDHAMAN’ since year 2007. Defendant used the same trade mark. Plea was taken that there were 401 different companies. Defendant Company was however dealing in same field and business with same trade name. Trade mark of defendant company was doing held to be undesirable trade mark and was directed to be deleted.
(2) The name of State [Section 4(1)(b)]. The memorandum must state the State in which the registered office of the company is to be situated.
(3) The objects of the company [Section 4(1)(c)].-The memo- randum of a company must state the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof.
(4) The liability of members of the company [Section 4(1) (d)].- The memorandum must state the liability of members of the company, whether limited or unlimited and also state, –
(a) in the case of company limited by shares, the liability of its members is limited to the amount unpaid, if any, on the shares held by them; and
(b) in the case of a company limited by guarantee, the amount upto which each member undertakes to contribute.
(i) to the assets of the company in the event of its being wound-up while he is a member or within one year after he ceases to be a member, for payment of the depts and liabilities of the company or of such debts and liabilities as may have been contracted before he ceases to be a member, as the case may be; and
(ii) to the costs, charges and expenses of winding-up and for adjustment of the rights of the contributories among themselves.
(5) Amount of share capital and number of shares [Section 4 (1) (e)].- In the case of a company having a share capital, the memorandum of the company must state:-
(i) the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to subscribe which shall not be less than one share; and
(ii) the number of shares of each subscriber to the memorandum intends to take, indicated opposite his name.
(6) The name of the person (in the case of One Person Company) [Section 4(1) (f)].-In the case of One Person Company, the memorandum must state the name of the person who, in the event of death of the subscriber, shall become the member of the company.
But, according to Section 4(2) of the Act, the name stated in the memorandum:
(a) shall not be identical with or resemble too nearly to the name of an existing company registered under this Act or any previous company law; or
(b) shall not be such that its use by the company-
(i) will constitute an offence under any law for the time being in force; or
(ii) is undesirable in the opinion of the Central Government.
Similarly, according to Section 4(3), a company shall not be registered with a name which contains-
(a) any word or expression which is likely to give the impression that the company is in any way connected with, or having the patronage of, the Central Government, any State Government, or any local authority, corporation or body constituted by the Central Government or any State Government under any law for the time being in force; or
(b) such word or expression, as may be prescribed,
unless the previous approval of the Central Government has been obtained for the use of any such word or expression.
Explaining the reasons for not allowing an identical name to a new- comer Company, Lord Lawrence J., in Society of Motor Manufacturers & Traders Ltd. v. Motor Manufacturer & Traders Mutual Insurance Co. Ltd., (1925) 1 Ch. 675 observed, “no other company can be registered under a name identical with it or so nearly resembling it as to be calculated to deceive; since the name of a company is a part of its business reputation and that would definitely be injured if a new company could adopt an allied name.
In Asiatic Government Security Life Insurance Company Ltd. v. New Asiatic Life Insurance Co. Ltd., (1939) 3 Comp. Cas. 208 (Mad.) the suit of the plaintiff company for an injunction against the use of the defendant’s name was dismissed on the ground that the word New’ and absence of the words ‘Government Security’ was sufficient to establish different identity of the two companies.
But in Exxon Corporation v. Exxon Insurance Consultants Ltd., (1981) 2 All ER 495, the plaintiff corporation was granted an injunction restraining the defendant company from using the word ‘Exxon’ as a part of its name as the same had been initially coined by the plaintiff who had exclusive claim to use it to the exclusion of all others.
Reservation of name [Section 4(4)].-According to Section 4 (4), a person may make an application to the Registrar for the reservation of a name set out in the application as:
(a) the name of the proposed company; or
(b) the name to which the company proposes to change its name.
According to Section 4(5), on the basis of information and documents furnished along with the application, the Registrar may reserve the name for a period of twenty days from the date of approval or such other period as may be prescribed [Substituted by the Companies (Amendment) Act, 2017]. But, where after reservation of name it is found that name was applied by furnishing wrong or incorrect information, then, –
(a) if the company has not been incorporated, the reserved name shall be cancelled and the person making application shall be liable to a penalty which may extend to one lakh rupees;
(b) if the company has been incorporated, the Registrar may, after giving the company an opportunity of being heard-
(i) either direct the company to change its name within a period of three months, after passing an ordinary resolution;
(ii) take action for striking off the name of the company from the register of companies, or
(iii) make a petition for winding-up of the company.
Section 4(7) of the Act provides that in the case of a company limited by guarantee and not having a share capital where any provision made in the memorandum or articles purports to give any person a right to participate in the divisible profits of the company otherwise than as a member, shall be void.
Importance of the Memorandum
It assumes a gigantic importance since it is statutory document. It 1 reveals the company’s range of business, capital, liability etc. The persons desirous of investing money into the company come to know the real legal, financial, managerial and administrative position of the company. How the company is to be run and who are the directors thereof whether qualified and experienced hands or otherwise? One can know the purpose and the capacity of the company besides its sphere of activities. It is a mirror, which reflects the real position, structure of the company whether it is limited or unlimited, private or public or any other type of company. The memorandum of a company filed with the Registrar is subject to inspection not only by the share-holders but even by the outsiders.
Q. 10. Discuss the provisions relating to alteration in memorandum.
Ans. Alteration of Memorandum
The term “alter” or “alteration” has been defined under Section 2(3) of the Companies Act, 2013. According to this section the term ‘alter’ or “alteration” includes the making ing of additions, omissions and substitutions. Therefore, alteration of memorandum means making any addition or omission, or substitution in it.
Section 13 of the Companies Act, 2013 permits companies to alter their memorandum. Section 13(1) of the Act provides:
“Save as otherwise provided in Section 61, a company may, by a special resolution and after complying with the procedure specified in this section, alter the provisions of its memorandum.”
Therefore, a company by a special resolution and after complying with the procedure specified in Section 13 of the Act, may alter the provisions of its memorandum.
Change in name of the company [Section 13(2)].-According to Section 13(2), any change in the name of a company shall be subject to provisions of Sections 4(2) and 4(3) and shall not have effect except with the approval of the Central Government in writing:
Provided that no such approval shall be necessary where the only change in the name of the company is the deletion therefrom, or addition thereto, of the word “Private”, consequent on the conversion of any one class of companies to another class in accordance with the provisions of this Act.
According to Section 13(3), when any change in the name of a company is made the Registrar shall enter the new name in the register of companies in place of the old name and issue a fresh certificate of incorporation with the new name and the change in the old name shall be complete and effective only on the issue of such a certificate.
When a company has changed its name, the Registrar shall substitute the new name in the Register of Companies and issue a Certificate of Incorporation in the new name the change of old name shall become effective only on the issue of such a certificate [Prasad Technology Park Pvt. Ltd. v. Sub-Registrar and others, 2006 (37) AIC 98 (SC)].
A change of name does not affect any rights or obligations of the company or any legal proceedings by or against it M/s Economic Investment Corp. Ltd. v. Commissioner of Income-tax, AIR 1970 Cal 385. Once a company has acquired its new name, legal proceedings against it can not be initiated by its old name [Malhati Tea Syndicate Ltd. v. Revenue Officer, Jalpaiguri, AIR 1973 Cal. 78].
Alteration relating to place of registered office [Section 13(4)]. Section 13(4) provides in this regard that an alteration of the memorandum relating to the place of the registered office from one State to another shall not have any effect unless it is approved by the Central Government on an application in such form and manner as may be prescribed.
According to Section 13(5) the Central Government shall dispose of the application within a period of sixty days and before passing its order may satisfy itself that the alteration has the consent of the creditors, debenture- holders and other persons concerned with the company or that the sufficient provision has been made by the company either for the due discharge of all its debts and obligations or that adequate security has been provided for such discharge.
Other rules regarding alteration of memorandum. Such rules are as follows:-
According to Section 13(6) a company shall, in relation to any alteration of its memorandum, file with Registrar-
(a) the special resolution passed by the company under Section 13 (1);
(b) the approval of the Central Government under Section 13(2), if the alteration involves any change in the name of the company.
According to Section 13(7) where an alteration of the memorandum results in the transfer of the registered office of a company from one State to another, a certified copy of the order of the Central Government approving the alteration shall be filed by the company with the Registrar of each of the States within such time and in such manner as may be prescribed, who shall register the same, and Registrar of the State where the registered office is being shifted to, shall issue a fresh certificate of incorporation indicating the alteration.
According to Section 13 (8) a company, which has raised money from public through prospectus and still has any unutilized amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and-
(i) the details, as may be prescribed, in respect of such resolution shall also be published in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, if any, indicating therein the justification for such change;
(ii) the dissenting share-holders shall be given an opportunity to exit by the promoters and share-holders having control in accordance with regulations to be specified by the Securities and Exchange Board.
According to Section 13(9), the Registrar shall register any alteration of the memorandum with respect to the objects of the company and certify the registration within a period of thirty days from the date of filing of the special resolution.
According to Section 13(10) no alteration made under Section 13 shall have any effect until, it has been registered in accordance with the provisions of this section.
Section 13(11) of the Act lays down that in the case of a company limited by guarantee and not having share capital any alteration in memorandum purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member shall be void.
Articles of Association
Q. 11. What do you understand by the Article of Association? What are the contents of it? Distinguish between Memorandum and Article of Association.
Ans. Article of Association of a company. The “Articles of Association” of a company is a important document. It contains internal regulations of the company which govern the management of the internal affairs of the company. The articles of association being meant for regulating the internal affairs of a company, the members of a company have full control over it. It may be altered by members of a company by a resolution as they think fit so long as it does not exceed the limits defined by the memorandum of the company.
Definition and nature of articles. Section 2(5) of the Companies Act, 2013 defines the term “articles”. According to this section “articles” means:-
“The articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act.”
Thus, the ‘articles of association’ of a company contains its bye-laws or rules and regulations which govern its internal affairs and the conduct of its business. It is of vital importance to the company in as much as it deals with the rights of the members of the company inter se. It is subordinate to and controlled by memorandum.
While the memorandum lays down the scope and powers of the company, the articles govern the ways in which the objects of the company are to be carried out. In Re Duncan Gilmore & Co. Ltd., (1952) 2 All ER 871 it was held that wherever there is a conflict between the contents of memorandum and articles, the provisions of memorandum must prevail. However, where the memorandum is ambiguous or silent on a particular issue, the articles may be referred to in resolve the difficulty.
The nature and functions of ‘Articles of Association’ of a company have been described by Lord Cairns L.C in the following words:
“The articles plays a part subsidiary to the Memorandum of Association. They accept the memorandum as the Charter of incorporation of the company, and so accepting it the articles proceed to define the duties, rights and powers of governing body as between themselves and the company at large, and the mode and form in which business of the company is to be carried on, and the mode and form in which changes in internal regulations of company, may from time to time be made.” [Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1875) LR 711 (653)]
Provisions regarding “Articles of Association” under the Companies Act, 2013. Under the Companies Act, 2013, Section 5 of the Act deals with contents and other related matters of Articles of Association. Section 10 deals with effect of articles and memorandum. Section 14 deals with alteration of Articles and Section 15 provides for noting of alteration in memorandum or articles.
Contents of Articles of Association (Section 5).-Section 5(1) provides that the articles of a company shall contain the regulations for management of the company. According to Section 5 (2), it shall also contain such matters as may be prescribed. But a company may include such additional matters in its articles as may be considered necessary for its management.
The articles may contain, according to Section 5(3), provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of special resolution, are met or complied with.
But as provided under Sections 5(4) and 5(5), such provisions for entrenchment shall only be made either on formation of a company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company, and the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed.
Form of Article of Association [Sections 5(6), 5(7) and 5(8)].-The articles of a company shall be in respective forms specified in Tables F, G, H, I and J in Schedule I as may be applicable to such company. A company may adopt all or any of the regulations contained in the model articles applicable to such company.
But where any company is registered after the commencement of this Act, in so far as the registered articles of such company do not exclude or modify the regulations contained in the model articles applicable to such company, those regulations shall, so far as applicable, be the regulations of that company in the same manner and to the extent as if they were contained in the duly registered articles of the company.
Thus, according to format given under Schedule I of the Act, the articles of a company may contain following provisions, namely-share capital and variation of rights, lien held by company upon shares in respect of unpaid amount thereon, calls on shares, transfer of shares, transmission of shares, forfeiture of shares, alteration of capital, capitalization of profits, buy-back of shares, general meetings proceedings of general meetings, adjournment of meetings, voting rights, proxy, Board of Directors, proceedings of the Board, Chief Executive Officer, Manager, Company Secretary, Dividends and reserves, accounts, winding-up, indemnity etc. The articles must be signed by each subscriber of the memorandum and his address, description and occupation, must also be added in presence of at least one witness who shall attest the signature and shall also add his address, description and occupation.
Legal effect of Articles and Memorandum (Section 10).-Section 10 (1) of the Companies Act, 2013 provides that the memorandum and articles bind, subject to the provisions of this Act, the company and the members thereof the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles, and Section 10(2) further provides that all the money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company.
Copies of articles to be given to members (Section 17).-Section 17 provides that members may obtain copies of memorandum, articles, agreements and resolution referred to in Section 117(1). The company is bound to supply such copies within a period of seven days from the date of request subject to payment of such fee as may be prescribed.
If company makes any default, the company and every officer of the company who is in default shall be liable for each default, to a penalty of one thousand rupees for each day during which such default continues or one lakh rupees whichever is less.
The articles of association should not contain anything which goes against the spirit and sphere of the memorandum and which contravenes the provisions of the Act or of the general law for the time being in force.
Distinction between Memorandum of Association and Articles of Association
The main points of distinction between the two are as follows:
Memorandum of Association
(1) It is not the internal but external rule of the company.
(2) It is the most important document of the company.
(3) It is main backbone and foundation of the incorporation of the company.
(4) It is the charter of the company and enumerates the objects, purpose of the incorporation and also the conditions.
(5) It is supreme and paramount document and not subordinate to articles. It prevails over them.
(6) The memorandum can be altered by a special resolution. But if the alteration involves any change in the name of the company or transfer of its registered office from one State to another, it needs approval of the Central Government.
(7) Act done beyond the area or ambit of the memorandum cannot be ratified, as it is treated ultra vires, void and inoperative.
(8) Memorandum is for the knowledge of the share- holders, debenture-holders, persons wishing to deal with the company, outsiders and public at large.
(9) It is treated as an express notice to the outsiders.
(10) Company is deemed to be bound to the outsiders by the provisions of the memorandum.
Articles of Association
(1) It is bye-law of the company, viz. internal regulations to control the affairs of the company.
(2) It is less important document as compared memorandum. to the
(3) It is not so important for the registration of the company.
(4) It is only the body of rules for the internal management of the company. It does not mention objects and conditions of incorporation.
(5) Articles are held subordinate to the memorandum. It follows the object of memorandum and in no way claims to prevail over the memorandum.
(6) The articles may also be altered by a special resolution. But if the alterations have the effect of conversion of a public company into a private company, the approval of the Tribunal is necessary.
(7) The act done beyond the articles by the directors can be ratified.
(8) It is not necessarily for the benefit of the outsiders. They are internal regulations and limited to the conduct and affairs of the company.
(9) They are the constructive notice to the outsiders.
(10) The company is not bound to the outsiders by the provisions of the articles.