1

ICFAI LAW SCHOOL

ICFAI UNIVERSITY, DEHRADUN

2018-2019

SUBJECT :- COMPANY LAW

ASSIGNMENT TOPIC :- FORMATION OF COMPANY

SUBMITED TO :- SUBMITED BY :-
MS. DIVYA MORANDANI SOURABH KUMAR
16FLICDDN02061
B.A.LL.B (Hons.)
4TH YEAR
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ACKNOWLEDGEMENT

The success and final outcome of this project required a lot of guidance and assistance from many
people and I am extremely fortunate to have got this all along the completion of my project report.
Whatever I have done is only due to such guidance and I would never forget to thank them. I am thankful
to and fortunate enough to get constant encouragement, support and guidance throughout the
completion.
I am very much thankful to Ms. DIVYA MORANDANI mam for her support and guidance, without
which I would not have been able to accomplish this project work.
I am thankful to my department, ICFAI LAW SCHOOL, DEHRADUN for providing such an
expansive library which provided me all the relevant material required for this project.
I also express my gratitude to the library staff for their help in the searching of the books and whatever
other help I needed.
I am also thankful to my friends who helped me in collection of material.
Lastly and most importantly, I would like to thank my parents and the almighty for moral support and
constant supervision.

SOURABH KUMAR
16FLICDDN02061
B.A.LL.B (Hons.)
4TH YEAR
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TABLE OF CONTENTS

ACKNOWLEDGEMENT……………………………………………………………………….….02

INTRODUCTION………………………………………………………………………………......04

PROMOTION……………………………………………………………………………………….04

SUBJECT MATTER OF MEMORANDUM……………………………………………………….05

ALTERATION OF MEMORANDUM…………………………………………………………….07

ARTICLE OF ASSOCIATION …………………………………………………………………….10

ALTERATION OF AOA……………..……………………………………………………………11

DOCTRINE OF ULTRA VIRUS…………………………………………………………………..12

CERTIFICATE OF INCORPORATION…………………………………………………………..13

COMMENCEMENT OF BUSINESS……………………………………………………………...14

CONCLUSION……………………………………………………………………………………..15

BIBLIOGRAPHY…………………………………………………………………………………..16
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INTRODUCTION

One of the first steps in the formation of a company is to prepare a document called the
memorandum of association (hereinafter referred to as MoA). The MoA of the company
contains the fundamental conditions upon which alone the company has been
incorporated.1Every registered company should have a MoA which is the company’s charter.
In general the MoA regulates the company’s external affairs while the articles of association
regulate its internal structure.2

The precondition for the registration of the company involves one or more person signing and
delivering to the Companies House or the Registrar of Companies (RoC) a memorandum of
association stating the intention of the subscriber or subscribers to form a company with a
particular name stating where its registered office is located and stating the objects the company
is formed to pursue. The memorandum must state that the company is to be a limited company
if that is so and must state that it is to be a public company if that is so.

The memorandum of association is also called the charter of the company as it is the company’s
principle document. Like explained before, no company can register without a memorandum
of association as it defines the right and objects of the company.

According to section 2(28) of the Companies Act, “Memorandum means Memorandum of

Association as originally framed or as altered from time to time in pursuance of any companies
law or of this Act.” Evidently the definition is not comprehensive and does not convey the full
importance of the document. However it is notable that the act provides for the admission of
an altered version of the original memorandum the Memorandum of Association of the
company.

In this project the researcher will explicate the importance of Memorandum of Association and
elucidate the process and procedure involved in the alteration of Memorandum of Association
of a company.

Promotion:

Refers to the entire process by which a company is brought into existence. It starts with the
conceptualisation of the birth a a company and determination of the purpose for which it is to
be formed. The persons who conceive the company and invest the initial funds are known as
the promoters of the company. The promoters enter into preliminary contracts with vendors
and make arrangements for the preparation, advertisement and the circulation of prospectus
and placement of capital. However, a person who merely acts in his professional capacity on
behalf of the promoter (eg lawyer, CA, etc) for drawing up the agreement or other documents
or prepares the figures on behalf of the promoter and who is paid by the promoter is not a
promoter.

1
Kapoor G.K, Majumdar A.K, Taxmann’s Company Law and Practice,Taxmann, 2000, (pg. 94)

2
Geoffrey Morse, ‘Charlesworth &Morse Company Law, 15th Ed., Sweet and Maxwell,1996 (pg.51)
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The promoters have certain basic duties towards the company formed :-
1) He must not make any secret profit out of the promotion of the company. Secret profit is
made by entering into a transaction on his own behalf and then sell to concerned property to
the company at a profit without making disclosure of the profit to the company or its members.
The promoter can make profits in his dealings with the company provided he discloses these
profits to the company and its members. What is not permitted is making secret profits i.e.
making profits without disclosing them to the company and its members.

2) He must make full disclosure to the company of all relevant facts including to any profit
made by him in transaction with the company.

SUBJECT MATTER OF MEMORANDUM

According to Palmer, the Memorandum of Association is a document of great importance in

relation to the proposed company. It contains the objects for which the company is formed and
therefore identifies the possible scope of its operations beyond which its actions cannot go. It
defines as well as confines the powers of the company. If anything is done beyond these powers
that will be ultra vires the company and be void3

In the celebrated case of Ashbury Railway Carriage and Iron Co. Ltd. v. Richie. Lord Carins
Observed that the Memorandum of Association of a company defines the limitation on the
powers of the company… it contains in it both that which is affirmative and that which
negative. It states affirmatively the ambit and extent of vitality and power which by law are
given to the corporation and it states, if it is necessary to state, negatively that nothing shall be
done beyond that ambit.

Constituents of Memorandum of Association

Name Clause:

Since a company is an artificial person it can be identified only by its name, which is thus of
considerable importance. The promoters are free to choose any name for the company but the
same is subject to certain limitations.

If a company is limited by shares is to be a private company, the last word of its name must
be “limited” or “private limited”

3
Section 13 states the requirements with respect to memorandum. Section 14 provides that the form of
memorandum should be in such one of the forms in Tables B, C, D and E in sch.1, as may be applicable to the
company. Section 15 requires hat the document should be printed and divided into paragraphs numbered
consecutively.
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II. If the name chosen according to the opinion of the Central Government is undesirable or it
is identical or resembles too nearly, to the name by which a company in existence has been
previously registered, it may deem to be undesirable4

Registered Office Clause:

The Memorandum of Association registered with the RoC must state the geographical location
of the company. Every registered company must have a registered office which establishes its
domicile and is also the address at which the company’s statutory books must normally be kept
and to which notices and other communications can be sent. The notice of the exact situation
of the company has to be submitted to the RoC within 30 days of incorporation.5

Objects Clause:

The Memorandum of Association of a company should state the objects of the company. The
RoC can deny registration to a company which whose objects are unlawful. It is the intention
of the legislature that the Memorandum of Association of a company must state the objects for
which it is incorporated, and the company is accordingly incorporated only for the purpose of
pursuing those objects. Pursuing any other object is said to be ultra vires the company.

Accordingly there can be two objects as far as a company is concerned namely:-

(a) Main objects of the company which is to be pursued by the company on its incorporation
and objects incidental or ancillary to the attainment of the main objects

(b) Other objects

Capital Clause:
A company can be limited by shares only if it has a share capital and a company limited by
shares must state in its memorandum the total amount of share capital it is to have and the way
it is divided into shares.

The clause lays down the limit beyond which the company cannot issue shares without altering

The association or subscription Clause: At the end of ever Memorandum of Association there
is an association clause or subscription clause.

4
Supra 1

5
Kapoor G.K, Majumdar A.K, Taxmann’s Company Law and Practice,Taxmann, 2000, (pg. 95)
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ALTERATION OF MEMORANDUM
As a matter of course Memorandum of Association is not alterable. In fact the words of the
Memorandum cannot be changed that easily. It is said that “Memorandum of Association is an
unalterable document alterable only in accordance with the provisions of the law”

Alteration of Memorandum of Association under the Common Law

Under the Common Law the Joint Stock Companies Act 1856, which introduced the
Memorandum of Association into company law, made no provisions for the alteration of a
memorandum. Companies Act 1862 permitted a company to change its name and its authorized
share capital, but forbade any other alteration. Subsequent acts have extended the range of
alteration that may be made. The CA Act 1985 S.2 (7) provides: A company may not alter
conditions contained in the memorandum except in the case in the mode and to that extend, for
which express provision is made by this Act.6

The court has in Scott v. Scott Ltd. held that even if inadvertently the memorandum of a
company does not correctly express the wishes of its subscribers, the court doesn’t to have
power to rectify the mistake after the company has been registered.

Alteration of Memorandum of Association under Indian Law

Several restrictions have been imposed as far as the alteration of Memorandum of Association
is concerned. The quantum of such restrictions can be seen under S.16 of the Companies Act.

Alteration of Name Clause

Alteration of the name of a company can be effected by two methods.

(a) By special Resolutions and Permission of the government:

The Law regarding the change of name of a company is laid down under section 21 of CA. The
section provides that the name of a company may be changed at any time by passing a special
resolution at a general meeting of the company and with the written approval of the central
government. However no such approval is required if the change of name involves addition or
deletion of the word “private”

(b) By rectification of omission in name:

If by oversight or mistake a company is registered with a name which is the same or similar to
the name of an existing company, the company may change its name by passing an ordinary
resolution and getting a written permission from the Central government. In such a case the
central government within a period of one year of the first registration or registration under a

6
Mayson Stephen, Derek French et.al, ‘Company Law’, OUP, 22nd Ed., 2006 (pg.88)
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changed name can direct the company to change its name. In such a situation, the company
must alter its name by passing an ordinary resolution within three months from the date of such
direction. 7

After the alteration of name of the company, the registrar should write the new name in the
place of old name. Accordingly the certificate of newly incorporated company should be
issued. If and when the certificate of newly incorporated company is received, then only the
company’s name is recognized.8

With the change of the name of the company the power and responsibilities are not changed.
Because of this change of the name legal affairs of the company are not affected. Besides it
does not affect the company’s existence. But after the new name is registered the legal affairs
cannot be continued with the old name.

The legal effect of change in name clause can be illustrated by the decision of the Calcutta
High Court in the case of Malhati Tea Syndicate v. Revenue Officer[12] wherein a company
changed its name from Malhati Tea Syndicate Ltd. to Malhati Tea and Industries Ltd. It filed
a writ petition in its former name. Declaring the petition to be invalid the court said that nothing
in the Act authorized the company to commence legal proceedings in its former name at a time
when it had acquired its new name which has been put on the register of joint stock companies.

Alteration of Registered Office Clause

A company may change the situation of its registered office for the smooth running of its
business and the realization of its objects. Such change in the situation can be: (a) from one
place to another in the same city or town (b) from one town to another in the same state and (c)
from one state to another.

(a) Shifting from one place to another in the same city or town:

If the registered office of the company is to be shifted from one place to another in the same
city or town, the board of directors must pass a resolution to that effect and give the name
address of its registered office to the RoC within 30 days after the date of the change of
address.9

(b) Shifting from one town to another in the same state:

IF the company wants to shift its registered office from one town to another in the state, it shall
pass a special resolution to that effect at its general meeting and send the notification to the
registrar within 30 days. It shall give the new address of its registered office to the registrar.10

(c) Shifting from one state to another:

7
Section 22 of CA
8
(1973) 43 Comp Cases 337
9
Vide Section 146 (1)
10
Vide Section 146 (2) Regional Director’s approval is required for shifting the Registered office within the
state in certain cases. The same has been inserted into the C(amendment)A, 2000 to provide that shifting of the
registered office by a company from the jurisdiction of one RoC within the same state shall in addition to
passing a resolution under s. 146 also require confirmation of the Regional Director
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This kind of shifting is a much more complicated affair, as it involves alteration of the
memorandum itself. The alteration of the memorandum for this purpose is subject to the
provisions of Section 17 which requires, in the first place, a special resolution of the company
and in the second, confirmation by the Company Law Board can confirm the alteration only if
the shifting of the registered office from one state to another is necessary for any of the purpose
detailed in section 17. When this condition is fulfilled, the second stage is reached namely to
consider the objections of a person or class of person whose interest will in the opinion of CLB
be affected the alteration.11

The Supreme Court in Mackinnon v. Mackenzie & Co. 12refused to sustain the contention of
the state and allowed the transfer of the company to another state. The court said there is no
statutory right of the state as a state to intervene in an application made under section 17 for
alteration of the place of the registered office of a company. To hold that the possibility of the
loss of revenue is not only relevant but of persuasive force in regard to change is to rob the
company of the statutory power conferred on it by section 17. The question of loss of revenue
to one state would have to be considered in the total conspectus of revenue for the Republic Of
India and no parochial considerations should be allowed to turn the scale in regard to change
of registered office.

Alteration of Object Clause

Plainly speaking, it is very difficult to alter the objects clause because the law has laid down
strict limitations on such alteration. Section 17 of the CA defines the limitations and any
alteration must necessarily be within these limitations.

The limits imposed upon the power of alteration are of two kinds, namely substantive and
procedural. The former defines the physical limits of alteration and the latter the procedure by
which it can be effected.13

11
Singh A, ‘Company Law’, Eastern Book Company, 15th Ed., 2007 (pp 55-56)

12
1967 1 Comp LJ 200

13
Id. (pg.74) Section 17 of CA provides that a company may change its objects only in so far as the alteration is
necessary for any of the following purposes:

(i) To enable the company to carry on its business more economically or more efficiently

(ii) To enable the company to attain its main purpose by new or improved means.

(iii) To enlarge or change the local area of the company’s operation

(iv) To carry on some business which under existing circumstances may conveniently or advantageously be
combined with the business of the company

(v) To restrict or abandon any of the object specified in the memorandum

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The alteration of object clause involves:

(a) Special Resolution:

In the first place , the company has to call a general meeting of its members and pass a special
resolution and file a certified copy of the resolution with the central government.

(b) Ratification by the central government:

After this, the application for proposed alteration is filed with the central government. The
application shall be scrutinized by the government before confirming the alteration.

(c) Registration of alteration:

A certified copy of the order of the central government shall be filed by the company with the
RoC along with the printed copy of the altered memorandum within three months from the
date of the order. The registrar shall register the same and certify the registration under his
hand within one month of the date of filing such documents.

Articles of Association
Definition: The Articles of Association or AOA are the legal document that along with the
memorandum of association serves as the constitution of the company. It is comprised of rules
and regulations that govern the company’s internal affairs.

The articles of association are concerned with the internal management of the company and
aims at carrying out the objectives as mentioned in the memorandum. These define the
company’s purpose and lay out the guidelines of how the task is to be carried out within the
organization. The articles of association cover the information related to the board of directors,
general meetings, voting rights, board proceedings, etc.

The articles of association are the contracts between the shareholders and the organization and
among the shareholder themselves. This document often defines the manner in which the shares
are to be issued, dividend to be paid, the financial records to be audited and the power to be
given to the shareholders with the voting rights.

The articles of association can be considered as the user manual for the organization that
comprises of the methodology that can be used to accomplish the company’s day to day
operations. This document is a binding on the shareholders and the organization and has
nothing to do with the outsiders. Thus, the company is not accountable for any claims made by
any external party.

(vi) To sell or dispose of the whole or any part of the undertaking of the company

(vii) To amalgamate with any other company or body of persons.

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The articles of association is comprised of following provisions:

 Share capital, call of share, forfeiture of share, conversion of share into stock, transfer of
shares, share warrant, surrender of shares, etc.
 Directors, their qualifications, appointment, remuneration, powers, and proceedings of the
board of directors meetings.
 Voting rights of shareholders, by poll or proxies and proceeding of shareholders general
meetings.
 Dividends and reserves, accounts and audits, borrowing powers and winding up.
It is mandatory for the following types of companies to have their own articles:

1. Unlimited Companies: The article must state the number of members with which the company
is to be registered along with the amount of share capital, if any.
2. Companies Limited by Guarantee: The article must define the number of members with
which the company is to be registered.
3. Private Companies Limited by Shares: The private company having the share capital, then
the article must contain the provision that, restricts the right to transfer shares, limit the number
of members to 50, prohibits the invitation to the public for the further subscription of shares in
the form of shares or debentures.

Note: In the case of a public company limited by shares, the articles may be framed by
the company itself or in case company does not register articles then it might adopt all of
any of the regulations as contained in Table A in the Companies Act.

Alteration of articles of Association

Section 31 empowers every company to alter its articles at any time with the authority of a
special resolution of the company and filing copy with the Registrar. Since it is a statutory
power a company will not be deprived of the power of alteration by a contract wit anyone.

The power of alteration of articles conferred by sec 31 is almost absolute. It is subject

only to two restrictions-

It must not be in contravention with the provisions of the Act.

It is subject to the conditions contained in the memorandum of association.

The proviso to sub-section (1) says that an alteration which has the effect of converting a public
company into a private company would not have any effect unless it is approved by the Central
Government.

1) Alteration against memorandum- in Hutton v. Scarborough Cliff Hotel Co, a resolution was
passed in a general meeting of a company altered the articles by inserting the power to issue
preference shares which did not exist in the memorandum. It was held inoperative. However,
after Andrews v. Gas Meter Co Ltd this view has been changed where a company was allowed
by changing articles to issue preference shares when its memorandum was silent on the point.
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The power of alteration of art is subject only to what is clearly prohibited by the memorandum,
expressly or impliedly.

2) Alteration in breach of contract- a company may change its articles even if the alteration
would operate as a breach of contract. If the contract is wholly dependant on the articles, the
company would not be liable in damages if it commits breach by changing articles. But if the
contract is independent of the articles, the co will be liable in damages if it commits breach by
changing articles. Thus in Southern Foundries Ltd v. Shirlaw, where a Managing Director was
appointed for a term of ten years, but was removed earlier under the new articles on
amalgamation with another company, the company was held liable for breach of contract.

3) Alteration as fraud on minority shareholders- an alteration must not constitute a fraud on the
minority. It should not be an attempt to deprive the company or its minority shareholders of
something that in equity belongs to them.

4) Alteration increasing liability of members- no alteration can require a person to purchase

more shares in the company or to increase his liability in any manner except with his consent
in writing.

Thus, the power of alteration should be exercised in absolute good faith in the interest of the
company.

Doctrine of Ultra Vires

It is the function of the Memorandum of Association to delimit and identify the objects in such
plain and unambiguous manner as that the reader can identify the field of industry within which
the corporate activities are to be confined. And it is the function of the courts to see that the
company does not movie in a director away from the field. That is where the doctrine of ultra
vires comes into play in relation to joint stock companies.14

The doctrine has been affirmed by the Supreme Court in India in the case of Lakshmana swami
Mudaliar v. Life Insurance Corporation of India 15wherein the court held that the directors of a
company were authorized to make payment towards any charitable or any benevolent object or
for any general public, general useful object. The payment made towards the same was held by
the court as ultra vires. The court said that the directors could not spend the company’s money
on any charitable institutions or any general object they choose. They could spend for the
promotion of only such charitable objects as would be useful for the attainment of the
company’s own objects.

However, the doctrine of ultra-vires does not apply in the following cases :-
1. If an act is ultra-vires of powers the directors but intra-vires of company, the company is
liable.

14
Singh A, ‘Company Law’, Eastern Book Company, 15th Ed., 2007 (p. 48)

15
AIR 1963 SC 1185
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2. If an act is ultra-vires the articles of the company but it is intra-vires of the memorandum,
the articles can be altered to rectify the error.

3. If an act is within the powers of the company but is irregualarly done, consent of the
shareholders will validate it.

4. Where there is ultra-vires borrowing by the company or it obtains deliver of the property
under an ultra-vires contract, then the third party has no claim against the company on the basis
of the loan but he has right to follow his money or property if it exist as it is and obtain an
injunction from the Court restraining the company from parting with it provided that he
intervenes before is money spent on or the identity of the property is lost.

5. The lender of the money to a company under the ultra-vires contract has a right to make
director personally liable.

Registration of the Company

Once the documents have been prepared, vetted, stamped and signed, they must be filed with
the Registrar of Companies for incorporating the Company. The following documents must
be filed in this connection :-

The MA and AA
An agreement, if any, which the company proposes to enter into with any individual for
appointment as its managing director or whole-time director or manager.

A statutory declaration in Form 1 by an advocate, attorney or pleader entitled to appear

before the High Courty or a company secretary or Chartered Accountant in whole - time
practice in India who is engaged in the formation of the company or by a person who is
named as a director or manager or secretary of the company that the requirements of the
Companies Act have been complied with in respect of the registration of the company and
matters precedent and incidental thereto.

In addition to the above, in case of a public company, the following documents must also be
filed :-

a) Written consent of directors in Form 29 to agree to act as directors

b) The complete address of the registered office of the company in Form 18

c) Details of the directors, managing director and manager of the company in Form 32.

Certificate of Incorporation
Once all the above documents have been filed and they are found to be in order, the Registrar
of Companies will issue Certificate of Incorporation of the Company. This document is the
birth certificate of the company and is proof of the existence of the company. Once, this
certificate is issued, the company cannot cease its existence unless it is dissolved by order of
the Court.
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Commencement of Business
A private company or a company having no share capital can commence its business
immediately after it has been incorporated. However, other companies can commence their
activities only after they have obtained Certificate of Commencement of Business. For this
purpose, the following additional formalities have to be complied with :-

1. If a company has share capital and has issued a prospectus, then :-

a) Shares upto the amount of minimum subscription must be allotted

b) Every director has paid to the company on each of the shares which he has taken the same
amount as the public have paid on such shares

c) No money is or may become payable to the applicants of shares or debentures for failure to
apply for or to obtain permission to deal in those shares or debentures in any recognised stock
exchange.

d) A statutory declaration in Form 19 signed by one director or the employee - company

secretary or a Company secretary in whole time practice that the above provisions have been
complied with must be filed

2. If a company has share capital but has not issued a prospectus, then :-

a) It must file a statement in lieu of prospectus with the Registrar of Companies

b) Every director has paid to the company on each of the shares which he has taken the same
amount as the other members have paid on such shares

c) A statutory declaration in Form 20 signed by one director or the employee - company

secretary or a Company secretary in whole time practice that the above provisions have been
complied with must be filed.

Once the above provisions have been complied with, the Registrar of Companies grants
"Certificate of Commencement of Business" after which the company can commence its
activities.
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CONCLUSION
Alteration of Memorandum of Association is an important exercise through which the company
brings about the required flexibility which is pertinent to its existence and survival as an entity.
It is a precondition before the company can initiate any drastic change in its ‘shape or structure’.
As what is now clear from the discussion above it is clear that any act of the company has to
be within the limits set by the Memorandum of Association.

A seemingly innocuous act like the change of situation requires the prior mandate of the Board
of directors or the permission of the government or in certain cases both along with a special
resolution. Such approval has to be accommodated within the Memorandum of Association
before the company can actually bring about the change.

It however has to be remembered that aside from the sanction of the government or the board
of directors or the appropriate authority concerned there is an array or of other statutory
limitations involved in the alteration of the memorandum. This has been particularly true in the
case of alteration of the object clause. Due to the nature of intricacies involved a host of
statutory limitations have been instituted to prevent wanton changes in the objectives of the
company. The discussion above has made it abundantly clear the intricacies, complications and
limitations in the alteration of Memorandum of Association.

The alteration of object clause is beset with even more intricate procedures. Like explained
above, the Doctrine of Ultra Vires plays an important role in the alteration of the object clause.
In the case of alteration of objects a copy of the resolution should be filed with the RoC within
one month from the date of resolution. In the case of inter state shifting of the registered office
a certificate copy of the boards’ order and a printed copy of the alternated memorandum may
be filed with the registrar within three months of the board’s order. Within one month the
registrar will certify the registration. Alteration takes place when it is so registered. If an
application for registration is not made within the above time the whole proceedings of the
alteration of the company will lapse.
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BIBLIOGRPAHY

BOOKS :-

 COMPANY LAW BY AVTAR SINGH 17TH EDITION

 A TEXTBOOK OF COMPANY LAW BY S. CHAND 11H EDITION

WEBSITES :-

 http://www.legalserviceindia.com/company%20law/com_1.htm
 https://www.lawteacher.net/free-law-essays/company-law/formation-of-a-
company.php
 https://www.businessmanagementideas.com/company-management/formation-of-
a-company-4-stages-business-management/8962