- Documents of Formation of a Company
- I) Memorandum of Association
- II) Articles of Association
- III) Prospectus
- IV) Distinction between Memorandum of Association and Articles of Association
Documents of Formation of a Company
At the time of Incorporation of a company, the following documents of Formation of a Company have to be submitted to the Registrar of Companies :
I) Memorandum of Association
II) Articles of Association
A public company, if it is collecting capital from the public must issue a prospectus to invite the public to buy its shares, debentures, etc.
I) Memorandum of Association
It is a primary document of a corporation because it states the aim that the corporate is formed. It describes the range of activities a corporation can undertake.
Section 2 (56) of the businesses Act, 2013 defines Memorandum as “Memorandum of Association of an organization as originally framed or as altered from time to time in pursuance of any provision of any previous company law or this Act.”
The above definition refers to the Memorandum of Association as a legal instrument that has got to be prepared by every company as per the provisions of the businesses Act, 2013.
Features of Memorandum of Association
1. it’s a primary document of a corporation that states its aims and objectives.
2. It describes and regulates the relationship between the company and outsiders viz. the shareholders, creditors, suppliers, investors etc. who can make out from the Memorandum, whether a corporation is permitted to undertake a particular activity (or transaction) or not.
3. Every company must prepare its Memorandum of Association at the time of its Incorporation and submit it along with the application for Incorporation to the ROC.
4. It is prepared by the promoters and needs to be signed by a minimum of 7 persons – in case of a public company, 2 persons – just in case of a personal company and 1 person – in case of One Person Company. Each subscriber must write against his name the number of shares he has agreed to subscribe to. As per the Companies Act 2013, each subscriber must take at least one share. This will not be required for a corporation with a guarantee without share capital.
5. It contains the following clauses :
a) The Name Clause
b) The Address Clause (Registered Office Clause)
c) The Objects clause
d) The Liability Clause
e) The Capital clause
f) The Association or Subscription Clause.
6. because it defines the character and character of the corporate, it’s not very easy to change the clauses. The Act has laid down specific rules and provisions to be followed to alter each clause.
7. It cannot contain anything contrary to the provisions of the Companies Act, 2013.
8. Any act done by the company which goes beyond the powers of the Memorandum will be ‘Ultra-Vires’ i.e. it will be invalid.
9. it’s a public document and anybody who wants to enter into a contract with the corporate is supposed to possess knowledge about the contents of a company’s Memorandum of Association.
10. Companies Act, 2013 has prescribed the format in the form of Table A, B, C, D and E for preparing the Memorandum for different types of companies.
Clauses of Memorandum of Association and Provisions
1) The Name Clause
This clause mentions the name of the company. As a Company is a legal entity distinct from its members, it’s to possess its name to determine its separate identity. The promoters choose a name for the Company.
The following points should be kept in mind while choosing the name of the corporate
i) The name shouldn’t be identical or resemble the name of an already existing company registered under this Act or any previous Company Law.
ii) The name should not contain any words which will constitute an offence under any Law.
iii) The name or words in the name shall not offend any section of people.
iv) The name shall not violate the provisions of Emblems and Names (Prevention of Improper Use Act, 1950)
v) The name shall not resemble any registered Trade Mark.
vi) The name shouldn’t have any word that provides an impact that the corporate is connected with or has the support of Central or government or any agency.
vii) just in case of a Public Company Limited by shares or Guarantee, the last word of the name should be ‘Limited’. e.g. ‘Tata Steel Ltd’
Similarly, for a Private Company Limited by Shares or Guarantee, the last word of the name should be ‘Private Limited’ e.g. ‘Posco India Pvt. Ltd’
And in the case of One Person Company, the words ‘One Person Company’ must be mentioned in the name of the Company in the bracket. e.g. ‘Smart services Pvt. Ltd’ (OPC)
The Companies Act states that every company shall paint or affix its name and the address of its registered office outside its place of business.
Alteration of Name Clause
A company may change its Name anytime –
a) On its own
b) On its conversion from Public company to non-public or vice-versa.
c) On the direction of the Central Government if it thinks that the name is similar to the name of an already existing company or almost like a registered Trade Mark.
The name clause can be altered by passing a special resolution in the General Meeting of a Company.
2. The Address Clause (Registered office Clause)
The clause states the name of the State during which the Registered Office of the corporate is going to be
located. Every company must have its Registered office within 30 days of its Incorporation.
A Registered office is a must as
i) It establishes the domicile (location) of a corporation.
ii) it’s the address to which all communications, notices, etc. will be sent.
iii) It is also the place where all statutory books, records and documents of the company will be kept.
iv) The address clause also indicates the jurisdiction of the court where cases are often filed by the company against others.
Alteration of Address Clause
A company may change its Registered office from-
a) One place to another place within the same city or town. In this case, no alternation is made in the Memorandum.
b) One Town or city to another town or city within the same state.
c) One state to another state.
In both these cases (b) and (c), a special resolution is to be passed in the General Meeting to alter the Address clause. In the case of (c) above, approval of the Regional Director is required.
3. The Object Clause
This clause defines the objects that a corporation is made. It indicates the range of activities a company can undertake. This clause states in detail the Main Objects for which the company is to be incorporated and also describes any other activities it may undertake if necessary, in achieving its main objects.
The Objects of the corporate must not be illegal, immoral, against the general public policy or in contravention of the businesses Act or the other Laws.
A company cannot do anything beyond or outside the scope of its objects. It can do anything incidental to and consequential upon the objects specified in this clause.
Any act done by a corporation beyond the scope of its objects, is going to be ‘Ultra-Vires’ and can be void and have no legal validity.
The doctrine of Ultra Vires
The word ‘Ultra’ means beyond and the word ‘Vires’ means the powers. Thus ‘Ultra Vires’ means beyond the powers of the Memorandum. The Doctrine of ultra vires states that any activity done by a corporation that is beyond the powers of the corporate is going to be null and void or legally ineffective even if all the members have agreed to such an act.
Thus a corporation cannot undertake any object or activity not stated within the object clause.
Effect of Ultra Vires Transaction
1) The acts which are Ultra-vires are considered null and void. The company cannot sue anybody nor can any third party file a case against the company for such acts.
2) Members of a corporation can get an injunction from the court to prevent the corporate from doing any act which is Ultra Vires.
3) The Directors of the company are personally liable for Ultra Vires acts of the company.
Purpose of the Doctrine of Ultra Vires
The purpose of the Doctrine of Ultra Vires is to protect the interest of all the stakeholders like the shareholders, creditors, investors, Banks etc.
The stakeholders have a right to ensure that the company uses their money for the objects mentioned in the Memorandum.
Alteration of Object Clause
A Company may change its object clause as and when it feels it is necessary to do so for its survival or growth.
A special resolution must be passed within the General Meeting for altering the thing clause.
4. The Liability Clause
This clause states the extent of liability of the members of the corporate.
In the case of a company limited by shares, this clause states that the liability of the member is limited to the extent of the amount unpaid on the Face Value of Shares held by the member.
Similarly, in the case of a company limited by Guarantee, this clause states the amount which every member guarantees to pay towards the assets of the company at the time of winding up or towards the value or expenses at the time of completing.
In the case of an Unlimited liability company with or without share capital, this clause states that the liability of its members is unlimited.
Alternation of Liability Clause
The Companies Act, 2013 or any Rules made thereunder, does not contain any provision regarding alteration of liability clause. Legally speaking, the relationship between a member and the company is a contractual relationship. Hence, if any changes are to be made in the liability of a member, it has to be with the consent of the member and that too in writing.
5. The Capital Clause
This clause states the quantity of capital with which the corporate is registered. This capital is hence called Registered Capital. This is the utmost capital that the corporate is permitted to raise, hence it’s also called Authorized Capital.
In the case of a corporation with share capital, this clause states the entire amount of share capital in terms of the total number of shares and the fixed value per share called as Face Value of the share.
If a corporation wants to issue more shares to boost more funds than the quantity of Authorized Capital, then the corporate has got to alter the capital clause.
Alteration of Capital Clause
The Articles of Association of an organization authorizes the alteration within the capital clause. A capital clause is altered for reasons like increasing the Authorized capital by issuing new shares, convert
fully paid-up shares into stock etc.
A capital clause is altered by passing a standard Resolution within the General Meeting of the Company.
6. The Association or Subscription clause
This is the last clause of the Memorandum of Association and it is placed at the end. In this clause, the subscribers to the Memorandum make a declaration stating that they’re desirous of forming a company as per the Memorandum and agree to take a certain number of shares in the capital of the company.
In the case of a public company, the Memorandum must be signed by at least seven subscribers whereas for a personal Company – by a minimum of two subscribers and one subscriber just in case of 1 Person Company.
Each subscriber has to put his name, address and occupation in the presence of at least one witness who shall also put in his details.
II) Articles of Association
Articles of Association is that the second most vital document which must be filed with the ROC alongside the Memorandum at the time of incorporation of a corporation. This document is subordinate (secondary) to the Memorandum. It is just like the Bye-Laws of the corporate because it contains rules and regulations that govern the interior management of the corporate. It defines the powers, rights and duties of the Board of Directors and officers and also the way during which the business of the company will be carried on. It establishes a relationship between the corporate and its members and also between the members.
As per Section 2(5) of the businesses Act, 2013, ‘Articles’ means the “Articles of Association of a corporation as originally framed or as altered from time to time in pursuance of any previous company law or this Act.”
Thus, the article is a legal document in writing which contains rules and regulations which helps in the internal management of a company. As every company may be managed differently, the Companies Act, 2013 does not specify the exact contents of the Articles. However, the regulations given in the Articles should not exceed the power of the Company as laid down by its Memorandum or contradict the Companies Act, 2013 or any other Laws.
Articles of Association usually includes rules and regulations regarding powers, rights and duties of administration, issue of shares, calls on shares, forfeiture of shares, the procedure for transfer and transmission of shares and debentures, etc.
Companies Act has given the format within the sort of Model Articles i.e. Table F, G, H, I and J for preparing the Articles of Association for various sorts of Companies.
A Company is liberal to include all or any of the regulations contained within the Model Articles as applicable to such company. As per the Act, Articles must be signed by all the subscribers who have signed the Memorandum and give all their details like name, address and occupation in the presence of a minimum of one witness who shall sign and attest the signatures and also give his details.
Contents of Articles of Association
A Company may adopt the Model Articles as given by the Companies Act, 2013 or add additional matters as per its requirements.
The Articles of Association usually contain rules and regulations related to the following matters –
i) Share Capital – Shares and their value and their division into different types of shares.
ii) Rights of each class of shareholders and procedure for variation of their rights.
iii) Procedure concerning the allotment of shares, making of calls and forfeiture of shares.
iv) Rules concerning transfer and transmission of shares and therefore the procedure to be followed.
v) Lien of the company on shares allotted to the members for the amount unpaid by them.
vi) Increase, alteration or reduction of Share Capital.
vii) Appointment, remuneration, power, duties, etc. of the Directors and officers of the Company.
viii) Procedure for conversion of shares into stock and the other way around.
ix) Provisions related to Board, Committee and General Meetings, Voting rights of members, proxy, quorum, poll, adjournment of meeting etc.
x) Audit of accounts, transfer of cash to Reserves, declaration of Dividend, etc.
xi) Borrowing powers of the corporate and therefore the mode of borrowings.
xii) Issue of Share Certificates including the procedure for issue of duplicate share certificate.
xiii) Constitution and composition of the Audit Committee, Remuneration Committee, Corporate Social Responsibility Committee.
xiv) Provision for winding up of Company.
Articles of Association of a Private Company must contain 3 restrictions
i) Limit the number of members to 200
ii) Restrict the right to transfer shares
iii) Prohibits inviting the public to buy its shares, debentures or any securities of the company.
The entrenchment of Articles / Entrenched Articles
Entrenched Articles are those Articles (Provisions) that cannot be altered by passing only a special resolution but a more elaborate procedure as prescribed by the Act must be followed. e. g. To alter the name of the Company 9/10 the majority should agree.
Entrenchment Articles can be done at the time of formation of a company or even later on.
Alteration of Articles of Association
The Companies Act states that subject to the provisions of the Act and the conditions contained in the Memorandum of Association, a company can alter its Articles of Association by passing a special resolution in the General Meeting of the Company. Alterations in the Articles, bind the members in the same way as the original Articles did.
A Company can alter its Articles of Association in the following ways –
i) by the adoption of a new set of an Articles
ii) by deletion of an article
iii) by addition or insertion of a new article
iv) by substitution of an article
v) by amendment of an article
The doctrine of indoor management
It is an accepted fact that certain information which is internal to a company cannot be known by outsiders. Hence they act following the information they get from the Memorandum of Association and Articles of Association.
The doctrine of Indoor Management states that persons entering into a contract with the company need not inquire whether the company or its officers have properly followed the internal proceedings as stated in the Articles. It is assumed that the company acts as per its Memorandum and Articles of Association.
The doctrine of Indoor Management protects the interest of the outsiders when they act based on the Memorandum and Articles of Association of a Company as outsiders are not bound to inquire into the regularity of internal proceedings.
When a Public company, is collecting capital by issuing shares to the public has to issue a document called ‘Prospectus.’ Prospectus is a document that contains information about various aspects of the company and invites the investors to buy the securities offered by the company.
Section 2 (70) of Companies Act, 2013 defines prospectus as “any document described or issued as a prospectus and includes a Red Herring Prospectus or shelf prospectus or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.”
The prospectus must contain factual disclosures as investors decide to invest based on the information given in the prospectus.
- Abridged Prospectus
It contains the main contents of a prospectus but in brief. It is attached with the application form issued by the corporate while offering its securities. The abridged prospectus is issued only in case of a Public offer made by a company.
- Shelf Prospectus
A public company may raise funds from the general public by issuing securities as and when it needs more funds. For every such issue, a fresh prospectus is to be issued. The process of preparing and registering a prospectus is very time-consuming. Thus, instead of preparing a fresh prospectus for every issue, a company can prepare a ‘Shelf Prospectus’. Shelf prospectus can be used for all issues made by the company up to one year from the date of the first offering of securities under that prospectus.
However, an ‘Information Memorandum’ is to be filed with the ROC whenever a subsequent offer of securities is made during the validity period of one year of the shelf prospectus. The Information Memorandum contains the latest material facts such as any new charges created on assets of the company, changes in the financial position from that of the succeeding offers, etc.
- Red Herring Prospectus
A Red herring prospectus is a kind of incomplete prospectus as it does not include complete particulars of the number of securities offered or the issue price of the securities being offered. It is usually issued at the time of IPO or for any issue done under the Book Building process.
A Red Herring prospectus shall have the same obligations that apply to the prospectus. A Company must file a Red Herring Prospectus with ROC at least 3 days before the opening of the subscription list and the offer.
- Letter of offer
When a company undertakes further issue of shares by making a Rights Issue i.e. offering shares on to its existing shareholders in proportion to the shares held by them, the corporate issues a document called as ‘Letter of offer”. It contains the details of the offer.
- Offer Letter
An offer letter is issued to a select group of investors by a company when it makes a private placement offer of securities. Private placement means when a company is offering its shares to any select group of investors.
Contents of Prospectus
A prospectus must contain the following –
- Information and Reports
As per the Companies Act, the prospectus must contain information such as the name of the issuing company, its full Registered office address with phone numbers, email address, nature, number and price of securities being offered, details of Lead Merchant Banker, Registrar to the difficulty, names of the stock market where the shares are to be listed, a clause on general risk, date of opening and closing of issue etc. It must also have reported on financial information. SEBI specifies the contents to be included in the prospectus.
There should be a declaration by the corporate saying that each one of the provisions of the businesses Act have complied with which the prospectus doesn’t contain anything contrary to the provisions of Companies Act, Securities Contracts (Regulation) Act, 1956 and SEBI Act, 1992 and the rules and regulations made thereunder.
- Statement of an Expert
A prospectus may contain a press release made by an expert sort of a Company Secretary, Chartered Accountant, Cost Accountant, Valuer, Engineer, etc. relating to matters that they have looked into. The Expert has to give written consent to issue the prospectus.
Statutory Requirements about Prospectus
1. Draft Prospectus to be made Public
A draft prospectus filed with SEBI by the company should be made available to the public and to the Stock Exchanges where the company wants to list its shares.
2. Signed by Directors
The prospectus must be signed by all Directors or by the duly authorized attorney.
3. Registration of Prospectus
A copy of the prospectus must be registered (filed) with the ROC before issuing it to the public.
4. Dating of prospectus
A prospectus has to be dated. The date on the prospectus is considered the date of publication of the prospectus.
5. Issuing prospectus to the Public
The prospectus must be issued to the public within 90 days from the date of registering a copy with the ROC.
Penalty for non-compliance
If a Prospectus is issued in contravention of the above-mentioned provisions, the penalty is as follows –
1) The company shall be liable to pay a fine between ` Fifty Thousand and Three Lacs, and
2) Every person who has knowingly been involved in issuing such a prospectus, will be punishable with imprisonment for up to 3 years or with a fine between ` Fifty Thousand and ` Three Lacs or with both.
- Mis- Statement in a Prospectus
As the investors make their decision to invest based on the information given in the prospectus, care should be taken to ensure all information is accurate and no material fact is omitted. An untrue statement or misstatement means –
i) The statement is misleading in form or content, or
ii) Where any inclusion of a press release or its omission is probably going to mislead the reader.
If an investor has bought shares of a corporation that supported a prospectus that had misleading information or suppressed material information, then he can take action against the corporate.
If there are any untrue or misstatements within the prospectus, the corporate and persons responsible for issuing such prospectus will need to face the following liability.
a) Civil Liability: Pay compensation for loss suffered by the investor.
b) Criminal Liability: The company or its officers will be fined or imprisoned or both.
IV) Distinction between Memorandum of Association and Articles of Association
|Sr. No.||Points||Memorandum of Association||Articles of Association|
|1.||Meaning||It is the document that defines the aims and objectives of the company.||It is the document that contains the rules and regulations for the internal management of the company|
|2.||Status||It is the primary document without which no company can be formed.||It is the second most important document prepared at the time of incorporation of the company. It is subordinate to Memorandum.|
|3.||Scope||It lays down the area beyond which the activities of the company cannot go. It lays down the boundaries within which the Articles will be framed.||It provides the regulations within the
boundaries laid down by the Memorandum. It thus lays down the scope within which a company can function.
|4.||Contents in which||It lays down the range of activities a company can do and cannot do. It contains the Name of the company, state in which the registered office is located, capital structure, details of objects of the company, the liability of members, etc.||It lays down rules and regulations for
the internal management of the company. It contains details of allotment of securities, appointment, duties and powers of directors, auditors, officers, winding up procedure etc.
|5.||Relation||It defines the relationship between the company and outsiders.||It defines the relationship between Company and its members and between the members.|
|6.||Contradict||It cannot contain anything which contradicts the Companies Act or any other statute.||It cannot contain any provisions which contradict the Companies Act as well as the Memorandum.|
|7.||Alterations||The process of the Alteration of the Memorandum is a little complicated as approval from Central Government may be needed at times.||Altering the Articles is a simple process as often only a special resolution is needed to alter it.|