11125_MOA and AOA

8/13/2019 11125_MOA and AOA

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8/13/2019 11125_MOA and AOA


The requirements are as follows• Application for availability of name• Preparation of MOA and AOA• Selection and finalization of MOA and AOA- Its

printing, stamping and signing• Preparation of other necessary documents• Filling of the required documents for Registration to

obtain certificate of incorporation and Certificateof commencement of business

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Memorandum of Association• It is the charter of the company• It contains the fundamental conditions upon

which the company can be incorporated•

It contains the objects of the company’sformation

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Conditions of the MOA• It should be printed• Divided into paragraph and numbers

consecutively• Signed by at least seven persons or two

in case of public and private company

respectively.• The signature should be in the presence

of a witness, who will have to attestthe signature

•

Members have to take shares and writethe number of shares taken with fulladdress

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The MOA of the Limited Company• The name of the company with ‘limited’ asthe last word• The name of the state where the

registered office of the company is to besituated

•

The objects of the company stating the‘Main objects’ and the ‘other objects’ • The declaration about the liability of the

members is limited ( limited by shares orguarantee)

•

The amount of the authorized sharecapital, divided into shares of fixedamounts.

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“Doctrine of Ultra Vires”

• Ultra- beyond• vires- powers•

MOA is the area beyond which a companycannot travel. Any activities not authorised bythe memorandum are ultra vires the company.

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Purpose

• It protects the share holders- by it they areassured that their investment is not spent onactivities which they did not have in mindwhen they invested in the company.

• It safeguards the interests of the creditors asthe property of the company cannot bediverted to unauthorized objects.

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Effects of ultra-vires transactions

• Injunction- restrain the company from doingultra vires acts

• Personal liability of directors• Contracts void• Ultra-vires trots

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Exceptions

• If the company acquires some property byultra vires expenditure, the company’s rightover the property will be protected.

• If the company acquires some property byultra vires contract, the same can berecovered from the company if it exists and istraceable in the hands of the company.

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• If the company takes an ultra vires loan anduses it to pay of its own debts, can berecovered

• If any person borrows money from thecompany under an ultra-vires contract, thecompany has the right to sue and recover themoney from him

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• If a director of a company makes payment ofcertain money, which is ultra vires thecompany, he can compelled by company torefund it.

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• The company may be held liable for the ultra-vires torts (civil wrongs) of its employees. If

• The tort was committed in the course of anactivity which falls within the scope ofcompany’s memorandum and

• The employee committed the tort within thecourse of his employment.

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The Compulsory Clausesin MOA

• The Name Clause – it decides on the name ofthe company based on the capital involved

• The Registered Office Clause- where it hasregistered its head office and other branchoffice ( The registered office can be changedwith the permission of the ROC)

• The Object Clause- Main object, ancillaryobject and the other objects of the companyare clearly specified ( Ashbury RailwayCarriage Co V. Riche). The applicable doctrinehere is the “ Doctrine of Ultra Vires” beyondthe powers of the company (opposed to IntraVires)

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Ultra vires

• Ashbury Railway Carriage and Iron Co. Ltd VRiche 1875

• Point decided are• If an act is ultravires the memo, it is not

binging upon the company• A contract ultravires a company is void and

incapable of ratification, even if everymember wishes to ratify it

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Facts of the case are

• The MOA gave the company power to makeand sell, or lend on hire railway carriages andwagons and to carry on the business of

mechanical engineers and generalcontractors.• The company entered into a contract with

Riche for the financing of the construction ofthe railway line in Belgium

• The company repudiated the contract

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A Lakshmanaswami Madaliar v LIC

• Company was engaged in the business of lifeinsurance.

• Directors denoted two lakhs (by specialresolution) to a trust

• Held void

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• The Liability Clause- What is the liability of itsmembers.. limited by shares or guarantee orunlimited, there can be alteration in theliability clause

• The Capital Clause - The amount of thenominal capital of the company, number ofshares in which it is to be divided… alterationof the capital clause etc

• The Association or Subscription clause- Wherethe subscribers to the MOA declare that theyrespectively agree to take the number of theshares in the capital. It has to have thefollowing:

a) They have to sign in the presence of two

witnesses, who attest the signatures,b) The subscriber to take at least one share.c) After the name the subscriber has to writethe number of shares taken

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Effects/ consequences of UVC

a. Void ab initio – even if all the shareholdersagree

b. Injunction

c. Directors’ personal liability. d. If a property has been purchased and it is anultra vires act, the company can have a rightover that property.

e. The doctrine to be used exclusively for thecompanies’ interest.

f. But the others cannot use this doctrine as atool to attack the company

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“Doctrine of Ultra Vires” • The powers exercisable by the company are to be

confined to the objects specified in the MOA.• So it is better to define and include the provisions

regarding the acquiring of business, sharing ofprofits, promoting company and other financial,gifts , political party funds etc

• If the company acts beyond the powers or the

objects of the company that is specified in theMOA, the acts are considered to be of ultra vires .Even if it is ratified by the all the members, theaction is considered to be ineffective.

• Even the charitable contributions have to bebased on the object clause. ( A Lakshmanaswami

Mudaliar V. LIC of India)

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AOA• AOA plays a subsidiary part to the MOA• Any thing done beyond the AOA will beconsidered to be irregular and may be ratified

by the shareholders.• The content of the AOA may differ from

company to company as the Act has notspecified any specific provisions

• Flexibility is allowed to the persons who formthe company to adopt the AOA within therequirements of the company law

• The AOA will have to be conversant with theMOA, as they are contemporaneous

documents to be read together.• Any ambiguity and uncertainty in one of themmay be removed by reference to the other.

C f h AOA b

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Contents of the AOA may beas follows:

Share capital

Lien on sharesCalls on sharesTransfer and transmission of sharesForfeiture of the sharesSurrender of the shares

General meetingsAlteration of the capitalDirectors etc..Dividends and reservesAccount and auditBorrowing powersWinding upAdoption of the preliminary contracts etc….

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Doctrine of Constructive notice

• MOA and AOA are public documents oncethey are registered with ROC.

• Available for public inspection• Every person dealing with the company is

expected to have the knowledge of thecontents of the MOA and AOA and also tohave understood them according to theirproper meaning. This presumed knowledge ---------------------------

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Doctrine of Indoor Management

• Persons dealing with the company have tosatisfy themselves. But need not know theinternal irregularity.

• Constitution of board, quorum, voting,internal resolutions and regulations

• To investigate into compliance of all therules of internal management.

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Royal British Bank V. Turquand

• Turquand Rule• Directors had issued a bond to T. they had

power under the Articles to issue such bonds

provided they were authorized by aresolution of the company.

• No such resolution however passed by the

company.

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Decision

• T could recover the amount of the bond fromthe company on the ground that he wasentitled to assume that the resolution hadbeen passed

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• The doctrine of Constructive notice can beinvoked by the company to operate againstthe persons dealing with the company.

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Exceptions to the Doctrine of Where theoutsider cannot claim the relief on the

grounds of“Indoor management”

• Knowledge of irregularity• No knowledge of articles• Negligence• Forgery• Non- Existent authority of the

company

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Exceptions to rule in Solomon's case

• Non-statutory exceptions- where c is used fortax evasion or to avoid tax obligation, forsome fraudulent purposes (defeating the

creditors or circumventing the law), merecloak or sham, to determine whether thecharacter, acting as an agent

• Statutory exceptions-reduction ofmembership, misdescription of name,fraudulent conduct of business

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Can an object clause in MoAs bealtered, if so, how?

• Legal personality of a company exists only forthe particular purposes

• Interest of shareholders and creditors• Two limits• i) substantive or physical limit and•

ii) procedural limit

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substantive or physical limit

• Sec.17- special resolution and with sanctionof the court of petition after due notice to allconcerned, alter its objects if such alteration

is necessary• To carry on its business more economically or

more efficiently(In Re Scientific PoultryBreeders Associations- A company forbiddenfrom paying remuneration to its managers----)

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Cont.

• To obtain its main purpose by new orimproved means

• To enlarge or change the location of its

operation• To carry on some business which under

existing circumstances may conveniently oradvantageously be combined with theobjects in the MoAs.(general insurance- lifeinsurance)

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• To respect or abandon any objects specifiedin the MoAs

• To sell or dispose of the whole ,or any part ofthe undertaking, of the company

• To amalgamate with any other company orbody of persons

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Procedure of Alteration

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Diff. b/w MOA & AOAs

MoA• Charter of the company

• Defines the scope of the

company• Supreme document

• Must for every company

• Strict restrictions, somealterations may require sanctionof CG

• Act ultra-vires is wholly void andcannot be ratified.

AoA• Regulations for internal Mgt.• Rules fro carrying out the

objects of the company.• subordinate to thememorandum• company limited by shares

need not have it. (table A ofSch. 1 may be taken)

• Can be altered by specialresolution.

• Act ultra-vires but intra-viresthe memorandum can beratified.

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Constructive Notice• Constructive notice of memorandum and

articles• Every outsider dealing with a company is

deemed to have notice of the contents of the M& A as these documents assume the character ofpublic documents.

• Duty of every person dealing with the company

to inspect its public documents and make surethat his contract is in conformity with theirprovisions.

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DCN

• Whether a person actually reads them or not,he is to be in the same position as if he hadread them and will be presumed to know thecontents of these documents.

• This kind of presumed notice is known as• Ook Bank Oil Co. v Crum (1882)- not only

have read the memorandum and the articlesbut to have understood them properly.

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DIM

• The rule CN proved too incontinent for businesstransactions, particularly where the directors orother officers of the company were empoweredunder the articles to exercise certain powerssubject only to certain prior approvals orsanctions of the shareholders.

• Whether those sanctions and approvals had

actually been obtained or not could not beascertained.• This is DIM

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DIM

• Persons dealings with the company in goodfaith have a right to assume that the internalrequirements prescribed in public documents(memorandum and articles) have beenobserved.

• IOW. Persons are not bound to enquire into

regularity of internal proceedings.

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Royal British Bank Vs Turquand

• In this case the directors of a company wereauthorized by the articles to borrow onbonds, as authorized by the shareholders.The directors gave a bound without theauthority of any resolution. It was held thatthe company was liable on the bond, as T

was entitled to assume that the resolution ofthe company in general meeting had beenpassed .

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Doctrine of Indoor Mgt• The DCN, however has one limitation, that is, so

far as the internal proceedings of the companyare concerned, the stranger dealing with thecompany are entitled to assume that everything

has been done regularly and was laid down inthe Tarquand case.• Not to enquire into the regularity of the internal

proceedings• He is entitled to assume that they have beenproperly complied with although, in fact, they

have not been compiled with at all.

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Cont.

• DIM is based on public convenience and justice

• M&A are public documents, open to public

inspection, but the details of internalprocedure are not open to public inspection.• Hence the outsider is presumed to know the

constitution of a company, but not what mayor may not have taken place within the doorsthat are closed to him

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DIM/RIM

• Secondly, the lot of creditors of a Limitedcompany are not happy one, it would beunhappier still if the company could escape

liability by denying the authority of theofficials to act on its behalf.

• DIM is of great practical utility. It has been

applied to secure justice.

Doctrine of Constructive notice and Indoor

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Doctrine of Constructive notice and IndoorManagement

• Persons dealing with the company have to satisfythemselves. But need not know the internal irregularity.Royal British Bank V. Turquand (Turquand Rule) Directorsissuing a bond.

•

The doctrine of Constructive notice can be invoked by thecompany to operate against the persons dealing with thecompany.

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Exceptions to the Doctrine of Where theoutsider cannot claim the relief on the

grounds of“Indoor management”

• Knowledge of irregularity•

No knowledge of articles• Negligence• Forgery•

Non- Existent authority of thecompany (act outside theapparent authority)

Documents

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