MEMORANDUM

OF
ASSOCIATION
MEMORANDUM

A document in relation to the proposed

company.
It contains the fundamental conditions
upon which alone the company is allowed
to be incorporated.
It is the charter of the company and defines
its raison d’etre.
It also regulates the external affairs of the
company in relation to outsiders.
Its purpose is to enable shareholders and
those who deal with the company to know
what its permitted range of enterprise is.
PURPOSE OF MEMORANDUM

The prospective share holders shall know

the field in, of the purpose for, which their
money is going to be used by the
company and what risk they are
undertaking in making investment.

The outsiders dealing with the company

shall know with certainty as to what objects
of the company are and as to whether the
contractual relation into which they
contemplate to enter with the company is
within the objects of the company.
PRINTING & SIGNING OF MEMORANDUM

Printed

Divided into paragraphs numbered

consecutively

Signed by seven subscribers

CONTENTS OF MEMORANDUM

Name of the company

State
Objects of the company
Main objects
Other objects
Limited liability
Share capital
THE NAME CLAUSE

Undesirable name to be avoided.

Too similar to the name of another
company
Misleading
Injunction if identical name adopted.
Limited or Private Limited
Prohibition of use of certain names
Use of key words according to authorised
capital
THE REGISTERED OFFICE CLAUSE

Registered office is compulsory

from the day of it carries on
business
THE OBJECTS CLAUSE

To enable subscribers to the memorandum

to know the uses to which their money may
be put

To enable the creditors and persons dealing

with the company to know what its
permitted range of enterprise or activities is.

Main objects and other objects

OTHER CLAUSES OF MEMORANDUM

• The capital clause

• The liability clause

• The association clause

ALTERATION OF MEMORANDUM

PROVISIONS OF THE MEMORANUM

Conditions

Other provisions
ALTERATION OF CONDITIONS Contd..

Change of name
By special resolution
By ordinary resolution

• Change of registered office

From one place to another place
From one town to another town
From one state to another state
PROCEDURE OF ALTERATION

Special resolution
Confirmation by the company law board
Notice to affected parties
Notice to registrar
Power of the company law board to
confirm change discretionary
Rights and interests of members and
creditors to be taken care of
Copy of special resolution and the order
of the company law board to be filed
with the registrar
ALTERATION OF OBJECTS

Substantive limit

Procedural limit
 ALTERATION OF OBJECTS
Substantive limit
– To carry on its business more economically or more
efficiently
– to attain its main purpose by new or improved means
– To enlarge or change the local area of its operations
– To carry on some business which may conveniently or
advantageously be combined with the objects
specified in the memorandum
– To restrict or abandon any of the objects specified in
the memorandum
– To sell of dispose of the whole, or part, of the
undertaking, or of any of the undertakings of the
company or
– To amalgamate with any other company of body of
persons
PROCEDURE OF ALTERATION

Special resolution
Copy of special resolution to be filed
Certification of registration.
Change in liability clause
Change in capital clause
DOCTRINE OF ULTRA VIRES

A company has the power to do all such

things as :
Authorized to be done by the companies
Essential to the attainment of its objects
specified in the memorandum
Reasonably and fairly incidental to its
objects
Everything else is ultra vires
PURPOSE OF ULTRA VIRES

Investors in the company so that they may

know the objects in which their money is to
be employed

Creditors by ensuring that the company’s

funds are not wasted in unauthorized
activities

Ultra vires act is void

Ultra vires the directors
Ultra vires the articles
Effects of the ultra vires transactions

Injunction
Personal liability of directors
Breach of warranty of authority
Ultra vires contracts
Ultra vires acquired property
Ultra vires torts
EXCEPTIONS OF ULTRA VIRES

If an act is ultra vires the directors of a company

but is intra vires the company, the company
may ratify it
If an act is ultra vires the articles of company,
the articles may be altered to include the act
within the powers of the company
If an act is intra vires a company, but is
irregularly done, the shareholders may ratify it
It is important to protect the company’s
creditors and shareholders against ultra vires
transactions
The rights over the property acquired by ultra
vires expenditures are protected
EXCEPTIONS OF ULTRA VIRES Contd..

If a company has purchased some property

from a third party……..
Ultra vires loan
Ultra vires loan through some
misrepresentation
If a director makes payment ultra vires the
company….
 ARTICLES
OF
ASSOCIATION
ARTICLES OF ASSOCIATION

The articles of association are the rules,

regulations and bye-laws for he
internal management of the affairs of
a company.

They are framed with the object of

carrying out the aims and objects as
set out in the Memorandum of
Association.
CONTENTS OF ARTICLES

Share capital, rights of shareholders,

variation of these rights, payment of
commissions, share certificates
Lien on shares
Calls on shares
Transfer of shares
Transmission of shares
Forfeiture of shares
Conversion of shares into stock
Share warrants
Alteration of capital
CONTENTS OF ARTICLES Contd..

General meetings and proceedings thereat

Voting rights of members, voting and poll,
proxies
Directors, their appointment, remuneration,
qualifications, powers and proceedings of
board of directors
Manager
Secretary
Dividends and reserves
Accounts, audit and borrowing powers
Capitalization of profits
Winding up.
Companies which must have their own Articles

Unlimited companies

Companies limited by guarantee

Private companies limited by shares

 REGULATIONS REQUIRED
Unlimited company
The number of members with which the
company is to be registered and
If it has a share capital, the amount of share
capital with which the company is to be
registered
Company limited by guarantee
The number of members with which the
company is to be registered
Private company
Restrict the right to transfer shares
Limit the number of its members to 50
Prohibit any invitation to the public to
subscribe for any shares in, or debentures of,
the company
STATUTORY REQUIREMENT

Printed

Divided into paragraphs

Signed by each subscriber of the

memorandum
ALTERATION OF ARTICLES

Wide powers of alteration

Any clause in the articles that restricts or
prohibits alteration of Articles is invalid
Procedure of alteration
• Special resolution
• Lawfully included originally
• A copy of every special resolution
altering the Articles shall be filed with
the Registrar
LIMITATIONS TO ALTERATION

Must not be inconsistent with the act

Must not conflict with the Memorandum
Must not sanction anything illegal
Must be for the benefit of the company
Must not increase liability of members
Alteration by special resolution only
Approval of Central Government when a
public company is converted into a private
company
Breach of contract
ARTICLES & MEMORANDUM –Relations

The articles are subordinate to Memorandum

The Memorandum must be read in conjunction

with Articles
To explain any ambiguity in the terms of
the Memorandum, or

The terms of the Memorandum cannot be

modified or controlled by the Articles
Articles & Memorandum - Distinction

Memorandum of Association Articles of Association

Charter of the company
Defines the scope
Supreme Document
Must own Memorandum
Strict regulation in alteration
Regulations
They are the rules
Subordinate
Need not have Articles of its own
Altered by a special resolution
Legal effect of Memorandum and Articles

The Memorandum and Articles, when

registered, bind a company and the
members thereof to the same extent as it
they
Had been signed by the company and
each member and
Contained covenants by the company
and each member to observe all the
provisions of the Memorandum and of
the Articles
Legal effect of Memorandum and Articles

The legal implications of these documents

bind

Members to the company

Company to the members
Members inter se
Company to the outsiders.
Constructive notice of Memorandum and Articles

Every outsider dealing with a company is

deemed to have notice of the contents of
the Memorandum and the Articles of
Association.

These documents, on registration with the

registrar, assume the character of public
documents. This is known as constructive
notice of Memorandum and Articles.
Constructive notice of Memorandum and Articles

Office of Registrar is a public office

Presumption that outsider has read

Memorandum and Articles
 Constructive notice of Memorandum and Articles
Contd...

Limitation
The outsiders 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
Memorandum and the Articles. They can
presume that all is being done regularly. This
limitation of the doctrine of constructive notice is
known as ………
Doctrine of Indoor Management

Doctrine of Indoor Management or the rule

in Royal British Bank or just Turquand Rule,
seeks to protect outsiders against the
company.
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.
Exceptions to the doctrine of Indoor Management

Knowledge to irregularity
Negligence
Forgery
Acts outside the scope of apparent
authority
PROSPECTUS
PROSPECTUS

Prospectus is any document described

or issued as a prospectus and includes any
notice, circular, advertisement or other
document inviting deposits from the public
or inviting offers from the public for the
subscription or purchase of any shares in, or
inviting offers from the public for the
subscription or purchase of any shares in, or
debentures of, a body corporate.
PROSPECTUS

Prospectus to be in writing
Subscription
Invitation to public
Offer to the public
PROSPECTUS

Dating of prospectus
Signing of prospectus

Registration of prospectus
PROSPECTUS Contd…

Copy of registration must be accompanied

with the following document
Consent of the expert of the issue
A copy of every contract, appointing or
fixing remuneration of a managing
director or manager
A copy of every material contract, not
being a contract entered into in
The written statement
The consent in writing of the person
PROSPECTUS Contd…

Objects of registration of prospectus

To keep an authenticated record of

the terms and conditions of issue of
shares or debentures and
To pinpoint the responsibility of the
persons issuing the prospectus for
statements made by them in the
prospectus
PROSPECTUS Contd…
When prospectus is not required to be issued
Where an offer is made in connection with a
bona fide invitation to a person to enter into
an underwriting agreement with respect to
the shares or debentures
Where the shares or debentures are not
offered to the public.
Where the shares or debentures are offered to
the existing members or debenture holders of
the company.
Where the shares or debentures offered are
uniform in all respects with shares or
debentures previously issued and quoted on a
recognized stock exchange.
CONTENTS OF PROSPECTUS

Matters to be stated and reports to be set out

in prospectus

State the matters specified in part I of

Schedule II and

Set out the reports specified in part II of

schedule II
PART I OF SCHEDULE II

General information
Capital structure of the company
Terms of the present issue
Particulars of the issue
Company, management and project
Particulars in regard to the company
and other listed companies under the
same management
Outstanding litigation
Management perception of risk factors
PART II OF SCHEDULE II

General information
Consent of directors, Auditors,
Solicitors…
Expert’s opinion
Change
Authority for the issue
Procedure and time schedule for
allotment and issue of certificates
Names and addresses
Part II of Schedule II

Financial information

Report by the auditors

Report by the accountants
PART II OF SCHEDULE II

Statutory and other information

Minimum subscription
Previous issue for cash
Date of allotment
Commission or brokerage on previous
issue
Issue of shares otherwise
Option to subscribe
Restrictions
Revaluation of assets
Offer for sale Deemed Prospectus

Prospectus by implication

Intention to offer shares or debentures

to the public

Additional information
Misstatements in prospectus and their
consequences

Those who issue prospectus holding out to

the public the great advantages which will
accrue to persons who will take shares in a
proposed undertaking, and inviting the to take
shares on the faith of the representations
therein contained, are bound to state
everything with strict and scrupulous accuracy
and not only to abstain from stating as fact that
which is not so, but to omit no one fact within
their knowledge, the existence of which might
in any degree affect the nature or extent and
quality of the privileges and advantages which
the prospectus holds as inducement to take
shares.
 Differences between the position of underwriters
and brokers
Underwriters Brokers
They give an undertaking to take up shares or They give no such undertaking to take up shares
debentures if the issue is under-subscribed or debentures if the issue is under-subscribed
They get underwriting commission on the entire They get brokerage only on those shares or
issue which is underwritten by them. debentures for which they procure subscription.
They are entitled to underwriting commission at a They are entitled to get such brokerage as has
rate not exceeding 5% of the issue price of shares been recognized or usual for the companies to
and 2.5% percent of the issue price of debentures. pay such brokerage/
Underwriting commission is payable only on Brokerage is payable on the shares or debentures
those shares or debentures which are offered to for which subscription is procured even where the
public. shares or debentures are not offered to the public.
Underwriters are entitled to get underwriting The brokers are entitled to brokerage even if the
commission only if the Articles authorize its Articles are silent regarding its payment.
payment.
The name, address, and occupation of each There is no such requirement in case of brokers.
underwriter has to be disclosed in the prospectus.