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STUDY MATERIAL FOR INTERNAL CIRCULATION

COURSE & SEMESTER: 5 YEARS B.COM. LL.B. VI SEM

SUBJECT: COMPANY LAW

UNIT-II
INCORPORATION.

Procedure of incorporation – Certificate of incorporation- MOA- AOA- Doctrine of indoor

management- Prospectus.

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FORMATION OF COMPANY

(REGISTRATION AND INCORPORATION)

A company is said to be form when it is incorporated or registered under the provisions

of companies Act. Before the company is formed lot of preliminary works are to be performed
such as whether it should be a public or private company, what its capital should be concerned.
All these decisions are taken by the certain persons known as promoters. They do all the
necessary preliminary work, incidental to the formation of a company. N

Mode of forming incorporated company (section3):

Section 3 (1) of the Companies Act, 2013 provides that 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 is to be formed as a private company; or
(c) One person where the company is to be formed as One Person Company (OPC), that is to
say, a private company:
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As per Section 3 (2), A company so formed under sub-section 1 may be either:

(a) a company limited by shares, or
(b) a company limited by guarantee, or
(c) an unlimited company.

Members severally liable in certain Cases. — (A new Section 3-A inserted by the Companies
9Amendment) Act, 2017.) if at any time the number of members of a company is reduced, in
case of a public company, below seven, in the case pf a private company, below two, and the
company carries on business for more than six months while the number of members is so
reduced, every person who is a member od the company during the time that it is carrying on
business with less than Seven members or two members, as the case may be, shall be severally
liable for the payment of the whole debts of the company contracted during that time, and may
be severally sued therefor.

Incorporation of Companies:

A company gets legal recognition only after its incorporation, namely, gets certificate of
incorporation of the company from the Registrar of Companies. Incorporation is the second
important stage of the formation of a company. The company gets perpetual existence soon
after it is incorporated or registered. A company is incorporated by registering certain
documents with the Registrar of Companies, and paying certain fees and stamp duties. Unless
these formalities are complied with, a company does not have a legal existence of its own.
Therefore, 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.

➢ Documents to be filed with the Registrar (section 7):

Before a company is registered, it is essential to ascertain from the Registrar of

Companies (for the State in which the registered office of the company is to be situate)
if the proposed name of the company is approved. Then the following documents duly
stamped together with the necessary fees are to be filed with the Registrar:
i) An application in the prescribed form along with prescribed fees as required
shall be filed to Registrar of Companies of the State. The application must
specify the name of the company proposed to be incorporated as its name and
the kind of company, namely, whether it is a public or a private company.
ii) The Memorandum of Association and Articles of Association should be
prepared to and printed and a copy of each of them has got to be stamped,
according to the Stamp Act.
iii) The Memorandum and Articles are to be duly signed by at least seven
subscribers in case of a public company and two in case of a private company;
and each subscriber should give his address, description and occupation etc.
and number of shares subscribed by him. The subscribers must sign these
documents in the presence of at least one witness who shall attest the signature.
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iv) The agreement, if any, which the company proposes to enter into with any
individual for appointment as its managing or whole- time director or manager.
v) A list of the directors who have agreed to become the first directors of the
company (this applies to a public company limited by shares) and their written
consent to act as directors and take up qualification shares.
vi) A declaration stating that all the requirements of the Companies Act and other
formalities relating to registration have been complied with. Such declaration
shall be signed by any of the following persons: viz., an Advocate of the
Supreme Court or of a High Court; or an Attorney or a pleader entitled to
appear before a High Court; or a secretary or a Charted accountant in whole-
time practice in India, who is engaged in the formation of a company; a person
named in the Articles as a director, manager or secretary of the company.
vii) The address of correspondence till the registration office is established. Then
within 30 days of the date of incorporation of the company, a notice of the
situation of the registered office of the company shall be given to the Registrar
who shall records the same in the Register book of Companies.

The Registrar of Companies on being satisfied that all the requirements have been duly
complied with will enter the name of the company in the Registrar of Companies maintained
by him and issue a certificate of incorporation to the company under his signature under Section
9 of the Companies Act, 2013. The company becomes a body corporate with perpetual
succession and a common seal from the date on the certificate even if that is not in fact the date
when it was issued. It must be stated that if the documents are in order and the object of the
company is legal, the Registrar has no discretion in the matter and he must grant the certificate
of incorporation. A writ of mandamus can therefore, be issued by the High Court to any of the
subscribers ordering the Registrar to issue the certificate of incorporation to the company since
he is acting as a quasi- judicial authority in the matter. If the documents produced before the
Registrar are returned for rectification of certain defects and the applicant instead of rectifying
the defects, drops the matter, he cannot claim refund of fees paid for registration.

➢ Procedure for Incorporation of A Company Under Companies Act, 2013:

1. Select a Name of the Company
In order of preference, at least one suitable name up to a maximum of six names,
indicative of the main objects of the company. Apply to the concerned RoC to ascertain
the availability of name in eForm1 A by logging in to the portal. A fee of Rs. 500/- has
to be paid alongside and the digital signature of the applicant proposing the company
has to be attached in the form. If proposed name is not available, the user has apply for
a fresh name on the same application.
2. Obtain Digital Signatures
Nowadays various document prescribed under the Companies Act, 2013, are required
to be filed with the digital signature of the Managing Director or Director or Manager
or Secretary of the Company, therefore, it is compulsorily required to Obtain a Digital
Signature Certificate from authorized DSC issuing authority for at least one director to
sign the E-forms related to incorporate like form INC.1 and other documents.
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3. Obtain Director Identification Number [Section 153]

As per section153 of the Companies Act, 2013, every individual intending to be
appointed as director of a company shall make an application for allotment of Director
Identification Number in form DIR- 3 to the Central Government in such form and
manner and along with such fees as may be prescribed. Therefore, before submission
of e-Form INC.1 for availability of name, all the directors of the proposed company
must ensure that they are having DIN and if they are not having DIN, it should be first
obtained.

➢ Procedure for Registration Made Easy

Prior to May 1, 2015 registration of a company took around 30 days’ time, but
introduction of new registration Form INC-29 by the Government has brought down
this period of seven days and even less. As a measure to ease the process of company’s
registration and streamlining the procedure by reducing instances of manual
interventions, the Government introduced a new registration Form INC-29 which has
clubbed all the seven forms into one. Earlier, the procedure of registration started from
getting a digital signature and ending up with getting a certificate for commencement
of business. In between the entrepreneur had to fill the different forms, each serving a
specific purpose.
With the introduction of single Form-29, it should not take more than a week to
get the company registered. In fact, after submitting the INC-29 form, entrepreneurs
should get Director Identification Number (DIN), Permanent Account Number (PAN)
and Tax Deduction Account Number (TAN) at their door steps. The main object of
introducing single Form for registration of company to eliminate manual interventions
so as to ensure speedy registration of companies and make starting of business easy by
reducing instances of manual interventions.

➢ CERTIFICATE OF INCORPORATION:

When the requisite documents are filed with the Registrar, the Registrar shall satisfy
himself that the statutory requirements regarding registration have been duly complied with, in
exercising this duty, the Registrar is not required to carry out any investigation. If the Registrar
is satisfied as to the compliance of statutory requirements, he retains and registers the
Memorandum, the Articles and other documents filed with him and issues a ‘certificate of
incorporation, i.e., of the formation of the company. (Sections 3, 7, 9) By issuing certificate of
incorporation, the Registrar certifies under his hand that the company is incorporated and in
the case of a limited company, that the company is limited.

Conclusiveness of certificate of incorporation:

A certificate of incorporation given by the Registrar in respect of a company is conclusive

evidence that all the requirements of the Companies Act have been complied with in respect of
registration. The certificate of incorporation has been held to be conclusive on the following
points:
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1. That requirement of the Act in respect of registration of matters precedent and incidental
thereto has been complied with.
2. That the association is a company authorised to be registered under the Act, and has been
duly registered.
3. That the date borne by the certificate of incorporation is the date of birth of the company,
i.e., the date on which the company comes into existence.

Effects of registration (sec-9)

Certificate of Incorporation brings the company into existence as a legal person. Upon its issue
the company is said to be born. The companies’ life commences from the date mentioned in
the certificate of incorporation. A private company can commence its business immediately as
soon as which is registered, but in case of public company it has to obtained further certificate
for commencement of business. Unless and until it obtains such certificate fit cannot commence
its business.

When a company is registered and a certificate of incorporation is issued by the Registrar, three
important consequences follow:

1. The company becomes a distinct legal entity, its life commences from the date mentioned
in the certificate of incorporation.
2. The company acquires a perpetual succession.
3. The company’s property is not the property of the shareholders
4. The liability of the company is not the liability of the shareholders.

➢ Commencement of Business [Section 11]

A private company or a public company not having share capital, may commence its
business and exercise borrowings powers immediately after it has received the certificate
of incorporation. But a public company having share capital cannot commence business or
exercise borrowings powers even after its incorporation unless it obtains a certificate to
commence business. The is to protect persons against non-fulfilment of obligation by the
company which has reached a stage of formation. A public company which has share
capital must comply with the requirements of Section 11 in order to get the certificate of
commencement of business.

MEMORANDUM OF ASSOCIATION
An important step in the formation of a company is to prepare a document called the
‘Memorandum of Association’. MOA is a primary document of a company it directs all the
matters relating to the company. It regulates the external affairs of the company and it gives a
name of the company, it is the foundation on which the structure of the company is built, it is
the charter of the company. Its purpose is to enable the shareholders, creditors and outsiders to
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know what their permitted range of activities is. In other words, it defines the relationship of
the company with the outside world. It shows the aims and objects of the formation of the
company. MOA is a very important document. It is compulsory for every company and
therefore it is called as the life-giving document to the company.

Definitions of MOA:

According to section 2(56) of the companies Act of 2013, Memorandum means “the
Memorandum of Association of a company as originally framed or as altered from time to time
in pursuance of any provisions of this Act or previous Act.

According to Palmer, “It is a document of great importance in relation to the proposed

company”

Nature of MOA:

The company cannot deviate from the provisions contained in the memorandum. If the
company does in any activities not authorised in the memorandum, they would be ultra-virus
and therefore null-void. After the incorporation the company is confined to conduct its business
within the territory of its MOA. It should not exceed its boundary line. If it exceeds it is treated
as ultra-virus, i.e., beyond the power. Once the MOA is registered, it becomes the public
document any person can inspect this document and can have certified copy of it. The object
of this is to protect its shareholders, creditors and outsiders who came forward to have contract
with the companies.

Importance of MOA:

1. It is the life giving document of a company because it is necessary for the registration of
a company. No one can register without this document.
2. It is the foundation on which the structure of the company is built.
3. It is the charter containing fundamental conditions upon which the company is registered.
4. It is the constitution of a company in relation to the outside world.
5. It shows the name of the company.
6. It shows the place of a company.
7. By stating the objects and powers it fixes the area of operations of a company.
8. It gives the information about the capital of a company.
9. It shows the liabilities of a member of a company.
10. It is a public document open for public inspection.
11. It controls the Articles of Association of a company.

Form and Procedure for filing MOA [section 4]:

Form of MOA: The MOA of a company shall be in such one of the Forms in Tables A,B, C,
D, and E in Schedule- I to the Companies Act, 2013, as may be applicable to the case of the
company or in a Form as near thereto as circumstances admit.

Procedure for filing MOA: The following are the procedures for filing MOA:
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a) That the MOA should be in printed or type written format.

b) It must be divided into paragraphs, numbered consecutively.
c) The appropriate stamp should be attached on the MOA.
d) Registration fee must be paid.
e) MOA should be registered only with the Registrar of the company.

On the registration of MOA of the company Registrar will be certified under his hand and
issues certificate of incorporation.

CONTENTS/ CLAUSES OF MOA [sec-4]:

Section 4 of the Companies Act deals with important contents or clauses of MOA.
There are 6 clauses in the MOA.
(a) Name Clause
(b) Registered Office Clause
(c) Objects Clause
(d) Limited Liability Clause
(e) Capital Clause
(f) Association Clause/ Declaration Clause.

1. NAME CLAUSE [Section 4 (a)]

This is the first clause in the MOA. It describes the name of a company. A company being
a legal person, must have a name on its own. As pointed by Johnson J. in Osborn Vs. Bank of
U.S., “the name of an incorporation is the symbol of its personal existence”. The company can
adopt any name it likes, any suitable name can be selected for the companies.

At the time of selecting the names to the company, the company has to follow certain legal
rules such as:

➢ Undesirable names to be avoided:

A company cannot be registered by a name in the opinion of the Central Government,
is undesirable. Although a company is free to adopt a name of its choice but it cannot
be registered with a name which, in the opinion of the Central Government is
undesirable. It should not contravene the provisions of the Emblems and Names
(Prevention of Improper Use) Act, 1950 nor it should it be suggestive of any
Government’s patronage or protection to the Company. It should not include the word
‘Co-operative’ in it. More recently, the non- Government Companies or enterprises are
prohibited to include the word ‘national’ within its name.
Broadly speaking, a name is undesirable and therefore rejected if it is either-
(a) Too similar to the name of another company; or
(b) Misleading, i.e., suggesting that the company is connected with a particular
business or that it is an association of a particular type.

➢ Injunction if identical name adopted:

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A company may not adopt a name which is identical, with or too nearly resembles
the name by which a company in existence has been previously registered. If a company
adopts such a name, it may be declared undesirable by the Central Government, and
may be restrained from, adopting such an identical name may be misleading and
injurious to an already existing company.
If a company gets registered with a name which resembles the name of an existing
company, the other company with whom the name resembles can apply to the court for
an injunction to restrain the new company from adopting the identical name. An
injunction will not be granted to prevent the use of a purely descriptive word with a
definite meaning and in common use, where the name of the two companies contains a
word which is in common use, its use cannot be restrained and even a very trifling
distinction between their names will suffice to make them acceptable.
In order to avoid the possibility of an identical name being adopted by a new-comer
company, the promoters have to seek advance approval of the name through an
application made to the Registrar of Companies. The Registrar shall inform the
company about the approval of the name of a company or otherwise, within fourteen
days of the receipt of the application.

A newly formed company cannot be registered by a name which is similar to or

resembles the name of an already incorporated company as the same may be
misleading to the public. Explaining the reasons for not allowing an identical name to
a new-comer company Lord Lawrence J. in Asiatic Govt. Security Life Insurance CO.
Ltd. v/s New Asiatic Insurance CO. Ltd. Observed that “no other company can be
registered under 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 Co,Ltd. V. New Asiatic Life

Insurance Co. Ltd., 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.
In this case, although the name of the two companies, Asiatic Govt. Security
Life Insurance CO. Ltd. and New Asiatic Insurance CO. Ltd resembled to a large extent,
it was held by the Court that the names were not identical and therefore the defendants
were not restrained from using their name.
In Ewing v/s Butter Cup Margarine Co. ltd (1917), the plaintiff was an
unincorporated firm carrying on substantial business under the trade name of Buttercup
Dairy Company. The defendant company was registered to trade name in similar
commodities and selected the name bona fide believing that there was no other
company is in existence with a similar name. the plaintiff alleged that the name of the
new company would lead to confusion and was detrimental to the plaintiff’s business.
The Court granted injunction in favour of plaintiff, which was carrying an business
under the trade name ‘Butter Cup Diary Co. Ltd. the new company was intending to
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register was Butter Cup Margarine Co. ltd. On the ground that the public might think
that the two business were inter-connected.
➢ ‘Limited’ or ‘Private Limited’ as the last words of the name: The Memorandum
shall state the name of the company with ‘Limited’ as the last word of the name in case
of a public limited company. In case the company has been formed for the promotion
of art, science, religion etc., the Central Government may permit, by a licence, the
omission of the word ‘Limited’ or the words ‘Private Limited’ from accidental.
➢ Publication of name: Every company shall-
(a) Paint or affix its name and the address of its registered office, on the outside of
every office or place in which its business is carried on,
(b) Have it engraved in legible characters on its seal, and
(c) Have its name and the address of its registered office mentioned in legible
characters in all business letters, bill-heads, negotiable instruments, invoices,
receipts, etc., of the company.

2. THE REGISTERED OFFICE CLAUSE [Sec-12]:

This is the second important clause in the MOA. Registered office clause must specify the
State in which the registered office of the company is to be situate. The company must have a
registered office where all the communications and notices shall be address to it. Registered
office of a company is the most important organ of the company. The company may have
several branches all over the country even in foreign but it must have one registered office. The
promoter takes into several consideration such as availability of electricity, water, labour, raw
materials, transportation, communication etc.
Within 30 days of incorporation or commencement of business whichever is earlier the
exact place where the registered office is to be located must be given to the registrar who will
record the same in the register of companies. If default is made in complying with these
requirements, the company and every officer of the company who is in default shall be
punishable with fine which may extend to Rs.50 for every day during which the default
continues.

3. THE OBJECT CLAUSE:

The object clause is the third clause of MOA. The object clause is the most
important clause among all the clauses of MOA. The object clause is very significant one.
The function of company is depended on this object clause for which purpose the company
is to be established. The object clause reveals the nature, purpose, motto, aim, intention and
object of the company. The companies object must be lawful object therefore the object
clause prohibits illegal objects or business such as gambling, lotteries, wagering etc.
The object of a company is very essential for the publics to purchase shares in a
company. The object of company should be very clear and exact. The object clause
functions in three folds:
a) It protects the shareholders by assuring that their invested amount shall be safeguarded
and shall be used in proper manner.
b) It protects the creditors who lend money to the company in good faith and trust.
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c) It also protects the outsiders who came to have contract with the company.

4. THE CAPITAL CLAUSE:

This is the fourth clause of MOA. It states the total amount of capital with which the
company is to be registered. It states the amount of nominal capital of a company, the number
and the value of the shares in which it is divided. The capital of a company is the principal
amount with which the company is formed to carry on business. When the subscribers fix
certain amount as the capital of a company and incorporated in MOA it should not be
decreased later.

5. THE LIABILITY CLAUSE:

It is the fifth clause of MOA. This clause has to state the nature of liability that the
members incur. If the company is to be incorporated with limited liability the clause must
state that the members shall be limited by shares. This means that no member can be called
upon to pay anything more than the nominal value of the shares held by him. The liability
clause is not applicable to unlimited liability companies. The liability clause is of both
practical and legal significant by this clause a member knows the extent of his financial
liability to the company as long as he remains as a member in a company.

6. ASSOCIATION CLAUSE/ DECLARATION CLAUSE:

This clause contains a declaration by the subscribers to the memorandum that they are
desirous of forming themselves into a company of shares in the capital of the company noted
against their names.

➢ ALTERATION OF MOA:

The companies Act provides that company shall not alter the conditions contained in
its MOA except in the rarest case provided in the Companies Act of 2013, it can alter.
According to section 13 a company may, by a special resolution and after complying with the
procedure specified in this section, alter the provisions of its memorandum.

1. Alteration of Name Clause: Company can change or alter its name clause for any
purpose at anytime by following certain procedures like;
a) By passing Special Resolution,
b) It must take the approval of the Central Government in writing,
c) when a company changes its name it become s the duty of the Registrar to delete
the old name and enter the new name in the register book of company, and
d) Issues the new Certificate of Incorporation.
2. Alteration of Registered Office Clause: company can shift its registered office from
one place to another , the change of registered office may involve, change its office
from one place to another place within the same city, change of office from one town
to another town, change of office from one state to another state. For affecting this
change, the company has to fulfil following procedures like;
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a) The special resolution must be passed by the company,

b) Make an application for the purpose of taking the approval of Central
Government,
c) Copy of its must be filed before the Registrar within 30 days,
d) The Registrar will consider primarily the intention of the company, its
shareholders and also whether the changes is in good faith or not against to the
public interest and
e) Issues the new Certificate of Incorporation.
3. Alteration of Object Clause: The object clause is the most important clause in the
MOA. The legal personality of a company exists only for the particular purpose of
incorporation. The object of a company can be altered to carry on the business more
economically and efficiently, to attain the main purpose by new or improved means,
to enlarge the local area of its operations and to carry on its business conveniently. For
affecting this alteration, the company has to fulfil following procedures like;
a. Pass a special resolution in a company meeting,
b. Copy of the special resolution must be filed with the Registrar within 1 month
c. The Registrar shall register the special resolution and certify the registration under
his hand within 1 month from the date of filing the special resolution.
4. Alteration of Capital Clause: The procedures for altering the capital clause are
provided in the AOA. If the procedures are not given in the AOA, the company can
change its capital clause by passing special resolution.
5. Alteration of Liability Clause: It generally cannot be altered so as to make the
liabilities of the members unlimited. The liability of the members once it is fixed it
cannot be alter without their consent. The company if authorised by its articles may
alter that before the Registrar of companies.
6. Alteration of Association Clause: The association clause of MOA of a company
cannot be altered.

➢ DOCTRINEOF ULTRA VIRUS:

A company has the power to do all such things as are permitted by the Companies
Act of 2013, essential attainment of its object mentioned in the MOA and reasonable
and fair play which are incidental to its objects. Company’s activities are regulated or
controlled by the MOA, the company has to work within the framework given in the
MOA, but under certain circumstances the company may exceeds its limit then the act
of the company will be treated as ultra virus.

The word ‘Ultra’ means ‘Beyond’ and the word ‘virus’ means ‘powers’. The term
Ultra Virus for a company means that the doing of the act is beyond the legal power
and authority of the company. The main purpose of these restriction is to protect the
investors in the company so that they may know the objects in which their money is to
be employed and creditors by ensuring that the company’s funds are not wasted in
unauthorised activities.

Ultra-Virus act is void:

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An ultra-virus act in a company is void and cannot be ratified even if all the
members or shareholders wish to ratify it. It is not necessary that an act to be
considered ultra-virus must be illegal; it may or may not be illegal. The Doctrine of
Ultra Virus has been well established in the leading case:

Ashbury Railway Carriage and Iron Ore Co. Ltd. v/s. Riche [1875] LR 7
HR 653.

Brief Facts of the Case: A company was incorporated with the following objects:
a) To make, sell, or lend on hire, railway carriages and wagons
b) To carry on the business of mechanical engineers and general contractors
c) To purchase, lease, work, and sell mines, minerals, land and buildings.

The company entered into a contract with Riche for the financing of the
construction of a railway line in Belgium. The question raised was whether that contract
was covered within the meaning of ‘general contractors. The word ‘general contractors’
was not covered under the Act, because these words to be read with the word
‘mechanical engineer’ for the purpose of companies business. The House of Lords held
that the contract was ultra-virus the company and void so that not even the subsequent
assent of the whole body of shareholders could ratify it.

The main feature and facet of the doctrine of ultra-virus is that a company being
a corporate person should not be punished for its own acts or acts of its agents, if they
are beyond its powers and privileges. Where the company exceeds its authority, the act
is good to the extent of the authority and bad as to the excess. But if the excess cannot
be separated from the authority conferred on the company by the Memorandum, the
whole transaction would be affected by the doctrine of ultra-virus and would be void.

Ultra-Virus of the Directors:

If the Directors use the funds of the Company for the purpose outside the object
clause of the MOA, they will be personally liable to restore such funds to the company.
When the Directors contract with the third party (on behalf of the company) within the
powers of the company and such powers are not contained in the MOA are personally
liable. If an act or transaction is ultra-virus the directors (i.e., beyond their powers, but
within the powers of the company), the shareholders can ratify it by a resolution in a
general meeting or even by acquiescence provided they have knowledge of the facts
relating to the transaction to be ratified. If an act is within the powers of the company,
any irregularities may be cured by the consent of the shareholders.

Ultra-Virus the Articles:

If an act or transaction is ultra-virus the Articles, the company can ratify it by

altering the Articles by a special resolution. Again, if the act is done irregularly, it can
be validated by the consent of the shareholders provided it is within the powers of the
company.
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ARTICLES OF ASSOCIATION
The AOA is the second important document required to be filed with the Registrar for
Registration of the company. The AOA of a company are the rules, regulations, principles,
procedures which governed the internal management of the company. The AOA deals with the
powers of directors, officers and shareholders of the company. The articles will also contain
the mode and the form in which the business of the company is to be carried out and also the
procedures in which the changes in internal regulation can be made. Articles are the binding
on the company and its members thus the AOA controls the relationship between the company
and its members. They have nothing to do with the outsiders. AOA stands next to the MOA.
The MOA lays down what is to be done whereas the AOA lays down how it is to be done.

Definition of AOA:

According to section 2(5) “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.
According to J. Charlesworth “the AOA is a document regulating the rights of
members of a company and a manner in which the business of the company is to be
carried out”.

Forms of AOA:

That every company AOA must be;

a) printed or type written,

b) divided into paragraphs,
c) numbered consecutively.
d) It must be dated,
e) It must be stamped,
f) Signed by each member to the MOA. Who shall add his address, description, occupation
in the presence of at least 2 witnesses.

Contents of AOA [section 5]:

The AOA regulates internal arrangement or internal management of the company. According
to section 5, the following mentioned matters are deals with internal affairs of the company.

1. It defines important definitions of terms,

2. Nature of business of the company,
3. It states the objects of the company,
4. It states the share capital, payment of commissions and issue of shares,
5. Provisions related to transfer of shares,
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6. Procedures for the allotment of shares,

7. Increase and decrease of capital,
8. Voting methods of its members,
9. Maintenance of accounts,
10. General meetings, special meetings of the company,
11. Powers delegated to BOD, Managers etc,
12. Appointment of BOD’s their qualifications, remunerations, removal, liabilities,
13. Borrowing powers of a company,
14. Management of a company,
15. Rules for adopting preliminary contracts,
16. Rules regarding creation of reserves,
17. Rules regarding declaration of dividends,
18. Rules relating to keeping of register of members,
19. Appointments of Auditors, qualifications, remunerations, removal, rights and duties
20. Maintenance of audit report
21. Company’s common seal,
22. Notices and circulars and
23. Matters relating to winding up of a company.

Alteration of AOA [section 14]:

The alteration of AOA is very much easier than the alteration of MOA. The alteration of AOA
are made subject to the provisions of Company’s Act 2013 or to the provisions contained in
the MOA of a company. According to section 14, a company can alter its articles at any time
and any number of times, but there are some restrictions to alter the companies AOA:

1. Articles can be altered only by-passing special resolution,

2. Articles can be altered only after the approval of the Tribunal, [NCLT]
3. A copy of the approval order of the Tribunal shall be filed with the Registrar, together
with a printed copy of the altered articles, within a period of 15 days in such manner as
may be prescribed, who shall register the same.

Limitation to alteration of AOA:

1. The alteration of the AOA must not be inconsistent with or go beyond the provisions of
Companies Act of 2013.
2. The alteration of the AOA must not exceed the power given by the MOA.
3. The alteration must not purport to sanction anything which is illegal.
4. The alteration must be made for the benefit of the company with the bona-fide intention.
5. The alteration must not in any way increase the liability of its members.

DOCTRINE OF CONSTRUCTIVE NOTICE:

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Every outsider dealing with a company is deemed to have notice of the contents of the MOA
and AOA. These documents, on registration with the Registrar, assume the character of public
documents. This is known as constructive notice of MOA and AOA. In other words, any person
has the knowledge as to the contents of these documents. Such knowledge or notice is called
‘Constructive Notice’.

• Office of Registrar is a public office: The MOA and AOA are open and accessible to all.
It is the duty of every person dealing with a company to inspect these documents and see
that it is within the powers of the company to enter into the proposed contract.
• Applicability of constructive notice: The doctrine of constructive notice applies not only
to MOA and AOA, but also other documents, which have to be filed with the Registrar,
such as special resolutions, and particulars of changes.

DOCTRINE OF INDOOR MANAGEMENT:

The doctrine of indoor management constitutes as exception to the principle of constructive

notice. The doctrine of constructive notice is based on the fact that the MOA and AOA, being
public documents, their contents are supposed to be known to everyone dealing with the
company. The doctrine of indoor management relates to the internal matters, and an outsider
can presume that the internal working of the company is in consonance with the provisions of
public documents. He need not enquire into the regularity of the internal proceedings.

The outsider dealing with the company are entitled to assume that as far as the internal
proceedings of the company are concerned, everything has been regularly done. They are
presumed to have read these documents and to see that the proposed dealing is not inconsistent
therewith, but they are not bound to do more; they need not inquire into the regularity of the
internal proceedings as required by the MOA and AOA. They can presume that all is being
done regularly. This limitation of doctrine of constructive notice is called as the “doctrine of
indoor management”. or the rule in Royal British Bank v/s Turquand.

Thus, whereas the doctrine of constructive notice protects the company against outsider,
the doctrine of indoor management seeks to protect outsiders against the company.

In Royal British Bank v/s Turquand, (1856). The directors of the defendant company
borrowed money from the plaintiff (Turquand). According to AOA, the Directors have
borrowing power subject to authorisation but shareholders resolution. The Plaintiffs claim was
denied on the ground that there was no resolution by shareholders to that effect. However, the
court denied the contents of the shareholders and held that the company liable and the Plaintiff
could recover the amount from the company on the ground that he was entitled to assume that
the resolution had been passed.

The gist of the rule is that persons dealing with limited liability companies are not bound
to inquire into the regularity of the internal proceedings and will not be affected by irregularities
of which they had no notice.

This rule is based on public convenience and justice:

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Firstly, the MOA and AOA are public documents. They are open to inspection by everybody.
But the details of internal proceedings are not open to public inspection. An outsider is
presumed to know the constitution of a company, but not what may or may not have been taken
place within the doors that are closed to him.

Secondly, the lot of creditors of a limited liability company is not a particularly happy one: it
would be unhappier still if the company could escape liability but denying the authority of the
officers to act on its behalf.

Exceptions to the Doctrine of Indoor Management:

1. Knowledge of irregularity: Where a person dealing with a company has actual or

constructive notice of the irregularity as regards internal management, he cannot claim
the benefit under the rule of indoor management.
2. Negligence: Where a person dealing with a company could discover the irregularity if he
had made proper inquiries, he cannot claim the benefit of the rule of indoor management.
The protection of the rule is also not available where the circumstances surrounding the
contract are so suspicious as to invite inquiry, and the outsider dealing with the company
does not make proper inquiry.
3. Forgery: The rule in Turquand case does not apply where a person relies upon a
document that turns out to be forged since nothing can validate forgery. A company can
never be held bound for forgeries committed by its officers.
4. Acts outside the scope of apparent authority: If an officer of a company enters into a
contract with a third party and if the act of the officer is beyond the scope of his authority,
the company is not bound.

PROSPECTUS
➢ INTRODUCTION:

One of the main advantages of incorporation of company is it invites the public to invest
their money in it by way of shares and debentures or deposits. For this purpose, the company
has to be informed about the various details of the company such as its object and its nature of
business to enable the public to decide whether to contribute or not to contribute. For the
assurance of the public the company will issue a document called Prospectus by which a
company exhibits its repaying capacity, its resources, reasons for the development, profits etc.
Further it is to be noted that every company need not go for borrowing if its promoters are
stronger enough and successful with their own financial arrangements. The prospectus is
needed only when the company wants to procure money from the public in return of shares and
debentures.
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➢ OBJECTS OF PROSPECTUS:

People want to invest their money in sound and profitable company. Prospectus gives
the information about the profitability, soundness and prosperity of the company. The basic
object and fundamental function of the prospectus is to attract the public. Prospectus is an
invitation to offer it is not a direct offer.

➢ MEANING AND DEFINITION OF PROSPECTUS:

In order to finance its activities, a company needs capital which is raised by a company
by the issue of a prospectus inviting deposits or offers for shares and debentures from the
public. The central theme of a prospectus, from the money point of view, is that it sets out the
prospectus of the company and the purpose for which the capital is required. The prospectus is
the basis on which the prospective investors from their opinion and take decisions as to the
worth and prospects of the company.

According to section 2 (70) “prospectus means any document described or issued as a

prospectus and includes any notice, circular, advertisement or other document inviting offers
from the public for the subscription or purchase of any securities of a body corporate”.

In other words, any document inviting deposits from the public or inviting offers from
the public for the subscription of shares or debentures of a company is a prospectus.

The Essential Ingredients of a Prospectus

1. There must be an invitation to offer to the public;

2. The invitation must be made by or on behalf of the company or in relation to an intended
company;
3. The invitation must be “to subscribe or purchase”; and
4. The invitation may relate to shares or debentures.

➢ CONTENTS / SUBJECT MATTER TO BE SPECIFIED IN PROSPECTUS –

(SECTION 26):
Prospectus is the most important document of a company, since the intending investors
take their decisions on anyone of the facts and figures furnished in the prospectus. In order to
protect the interest of investors against the frauds of the promoters the Companies Act requires
every company to issuing a prospectus has to observe large number of regulations failure to
observe them will made to punishable with fine or imprisonment or both and hence at most
care should be taken in drafting prospectus. Section 26 of the Act deals with the contents to be
specified in prospectus.

(i) Names and addresses of the registered office of the company, company secretary,
Chief Financial Officer, auditors, legal advisers, bankers, trustees, if any,
underwriters and such other persons as may be prescribed;
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(ii) Dates of the opening and closing of the issue, and declaration about the issue of
allotment letters and refunds within the prescribed time;

(iii) A statement by the Board of Directors about the separate bank account all monies
received out of the issue are to be transferred and disclosure of details of all monies
including utilised and unutilised monies out of the previous issue in the prescribed manner;

(iv) Details about underwriting of the issue;

(v) Consent of the directors, auditors, bankers to the issue, expert’s opinion, if any, and of
such other persons, as may be prescribed;

(vi) The authority for the issue and the details of the resolution passed there for;

(vii) Procedure and time schedule for allotment and issue of securities;

(viii) Capital structure of the company in the prescribed manner;

(ix) Main objects of public offer, terms of the present issue and such other particulars as
may be prescribed;

(x) Main objects and present business of the company and its location, schedule of
implementation of the project;

(xi) Particulars relating to—

(A) Management perception of risk factors specific to the project;
(B) Gestation period of the project;
(C) Extent of progress made in the project;
(D) Deadlines for completion of the project; and
(E) any litigation or legal action pending or taken by a Government Department or a
statutory body during the last five years immediately preceding the year of the issue of
prospectus against the promoter of the company;

(xii) Minimum subscription, amount payable by way of premium, issue of shares otherwise
than on cash;

(xiii) Details of directors including their appointments and remuneration, and such
particulars of the nature and extent of their interests in the company as may be prescribed;
and

(xiv) Disclosures in such manner as may be prescribed about sources of promoter’s

contribution;

(xv)Reports by the auditors of the company with respect to its profits and losses and assets
and liabilities and such other matters as may be prescribed;

(xvi) Reports relating to profits and losses for each of the five financial years immediately
preceding the financial year of the issue of prospectus including such reports of its
subsidiaries and in such manner as may be prescribed: Provided that in case of a company
with respect to which a period of five years has not elapsed from the date of incorporation,
 P a g e | 19

the prospectus shall set out in such manner as may be prescribed, the reports relating to
profits and losses for each of the financial years immediately preceding the financial year
of the issue of prospectus including such reports of its subsidiaries;

(xvii) Reports made in the prescribed manner by the auditors upon the profits and losses
of the business of the company for each of the five financial years immediately preceding
issue and assets and liabilities of its business on the last date to which the accounts of the
business were made up, being a date not more than one hundred and eighty days before the
issue of the prospectus: Provided that in case of a company with respect to which a period
of five years has not elapsed from the date of incorporation, the prospectus shall set out in
the prescribed manner, the reports made by the auditors upon the profits and losses of the
business of the company for all financial years from the date of its incorporation, and assets
and liabilities of its business on the last date before the issue of prospectus; and

(xvii) Reports about the business or transaction to which the proceeds of the securities are
to be applied directly or indirectly;

(xviii) Make a declaration about the compliance of the provisions of this Act and a statement
to the effect that nothing in the prospectus is contrary to the provisions of this Act, the
Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India
Act, 1992 and the rules and regulations made there under.

➢ RULES AND REGULATIONS RELATING TO PROSPECTUS:

1. Prospectus must be Issued to the Public:

A document to be a prospectus, must be “issued to the public” and the provisions of the
Act are not attracted unless the prospectus is issued to the public.
In Nash v. Lynde, several copies of a document marked “strictly confidential” and
containing particulars of a proposed issue of shares, were sent accompanied by
application form by the managing directors of a company to a co-director; who sent a
copy to a solicitor who, in turn, gave it to a client who passed it on to a relation. Thus,
the document was passed privately through a small group of friends of the directors.
The House of Lords ruled that there had been no issue to the public and therefore, no
action for compensation of loss caused to the allottees would sustain.
Re South of England Natural Gas & Petroleum Co. Ltd, three thousand copies of a
document in the form of a prospectus were sent out and distributed among the members
of certain gas companies only. It was held that it was a prospectus issued to the public.

2. Every prospectus must be dated:

Every prospectus must be dated. If it is not dated then the Registrar will refuse to
register the prospectus of a company.

3. No prospectus must be issued without its publication:

No prospectus shall be issued by a company in relation to an intended company unless
on or before the date of its publication, there has been delivered to the Registrar for
registration, a copy thereof signed by every person who is named therein as a director
or proposed director of the company or by his duly authorised attorney
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4. Every prospectus must be Registered:

The National Company Law Tribunal (NCLT), SEBI and RBI are the competent
authorities to give permission for the registration of prospectus. According to section
26 of the Act, a prospectus must not be issued unless it is registered. Registration must
be made before the publication of prospectus. The copy of the prospectus must be sent
for the registration should be signed by every Directors. It must be stated on the face of
the prospectus that it is registered.
In order to register the prospectus of a company certain documents should be filed with
the Registrar.
a) Copy of reports of expert opinion
b) A copy of every contract relating to appointment and remuneration of Managers
and BOD’s
c) A copy of every contract
d) A written statement relating to adjustments made by the auditors or accountant
relating to profits and losses, assets and liabilities
e) The consent in writing of the persons named in the prospectus as a auditor, legal
advisor, bankers and brokers of the company.

Prospectus must be issued within 90 days of its registration. If a prospectus is issued in

contravention of the provisions, the company shall be punishable with fine which shall
not be less than fifty thousand rupees but which may extend to three lakh rupees and
every person who is knowingly a party to the issue of such prospectus shall be
punishable with imprisonment for a term which may extend to three years or with fine
which shall not be less than fifty thousand rupees but which may extend to three lakh
rupees, or with both.

5. Consent of expert must be obtained:

At the time of making prospectus, it is necessary to for the companies to obtain experts
opinion and such experts must be independent person competent to give such opinion.

6. Every application must be accompanied with prospectus:

Every form of application for subscribing the shares or debentures shall not be issued
unless it is accompanied by the copy of prospectus. In case any person goes against to
this provision shall be punishable with fine of Rs 50,000 or above. Registrar of
companies may also refuse to register the prospectus in case all the conditions and
formalities are not complied with.

➢ NEWS PARER ADVERTISEMENT OF PROSPECTUS- SECTION-30:

Where any prospectus is published as a newspaper advertisement it is not necessary to
specify the entire contents of the prospectus this is with a view to facilitate wider publicity with
reasonable cost. It is not necessary to publish complete details of the company in the
newspaper. The newspaper advertisement about the company is just an advertisement or an
announcement and not prospectus. The newspaper announcement regarding the companies
must mention the following:
a) Name of the company
b) Address of the company
c) Activities of the company
d) Location of the industry
e) Name of Board of Directors
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f) Opening and closing dates of the subscription list.

This form of newspaper advertisement is not compulsory but most of the companies
follow it.

➢ MISSTATEMENT IN PROSPECTUS AND THEIR COSEQUENCES:

Prospectus constitutes the contract between the company and the person who purchases the
shares or debentures. The persons who are behind the company have all the knowledge as to
the present and future of the company but, the investing public do not know anything about the
company. Therefore the prospectus must describe all the matters very clearly it must not
misrepresent or conceal any facts of the company. The prospectus containing false, misleading,
ambiguous, fraudulent statements of the facts of the company are called as misleading or
misstatement of prospectus. The people who want to purchase shares in a company are entitled
to true and correct facts of the company. The prospectus must therefore tell the truth and
nothing but the truth this is known as ‘golden rule as to the framing of prospectus’.

Liabilities for Mis statement of Prospectus:

If the investor is cheated by the company or by directors, promoters and all experts of the
company, they have both criminal and civil remedies by imposing civil and criminal remedies.

1. Civil Liability [section- 35]:

A company or any officer of the company induces the investors the civil liabilities will be
imposed on such wrong doers. A person who has subscribed for shares on the faith of
misleading prospectus he has certain remedies.
• Remedies against the company: The person who has been induced to subscribe for
shares may
a) Rescind the Contract:
Where the prospectus contains misstatement the contract to purchase
shares is voidable at the option of the aggrieved party. The shareholders
is entitled to rescind the contract to take shares and he will have to return
the shares allotted and his name will be removed from the register of
members and money paid by him to the company shall also be returned
to that person.
b) To Claim Damages:
In case where prospectus contains wrong statements, the injured person
is entitled to claim for damages. This remedy is available even after the
company goes into liquidation and the sufferer in order to claim
damages, he has to prove 3 things:
i) That the person who had issued the prospectus was not
authorised to issue
ii) That the person who had issued the prospectus were known that
the statement was wrong and
iii) That the subscriber had suffered loss on account of fraudulent
mis representation in the prospectus.
• Remedies against the Promoters, BOD and Experts:
Any person who has purchase shares and debentures on the
faith of the prospectus containing wrong statement may sue every directors,
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promoters and experts of the company for claiming any of the following
remedies.
a) Claim Damages:
Directors. Promoters and Experts who is authorised to issue
prospectus are liable to compensate the sufferer. However, it is
immaterial whether this is the prospectus or not it is the director who
supposed to know what is true and what is untrue.
b) Damages for noncompliance of section-26:
If any directors, promoters or experts fail to follow the
provisions of section 26 then the aggrieved person can ask for the
remedy before the court by filing the suit against the wrong doers.
c) Damages under Indian Contract Act 1872:
The aggrieved person can bring an action among directors,
promoters and experts can claim remedies under Indian Contract Act
1872, i.e., the right to rescind the contract for their negligence and the
company may goes into liquidation.

Defences to Civil Liability- Section-35 (2)

1. Withdrawal of Consent
2. Without Knowledge.
3. Ignorance of untrue statement
4. Has reasonable ground for belief
5. Reliance on expert’s opinion
6. Statement based on public official document

2. Criminal Liability[section-34]:
A public company generally does the business throughout the country and also beyond
the boundaries of country. All the investors may not have the unity, legal awareness and
time to invest money in legal expenses, therefore the law itself imposes severe criminal
liability upon the directors, promoters and every experts.
Section 34 says that where prospectus includes any untrue statement, every person who
has authorised the issue of the prospectus includes any untrue statement, every person
who has authorised the issue of the prospectus shall be punishable under Section 447 of
the Act, which provides punishment for fraud. Any person found guilty of fraud may be
punished with:
(a) Imprisonment for a term which may not be less than six months but which may extend
to ten years, and
(b) Fine which shall not be less than the amount involved in the fraud, but which may
extend to three times the amount involved in the fraud, or
(c) Both imprisonment and fine.

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