UNIT-I

TOPIC I

Meaning and Nature Of Company

INTRODUCTION

The word ‘company’ is derived from the Latin word Com Panis (Com means
‘With or together’ and Panis means ‘Bread’), and it originally referred to an
association of persons who took their meals together. In the leisurely past,
merchants took advantage of festive gatherings, to discuss business matters.

In popular parlance, a company denotes an association of like minded persons

formed for the purpose of carrying on some business or undertaking In the legal
sense, a company is an association of both natural and artificial persons and is
incorporated under the existing law of a country.

In terms of the Companies Act, 2013 a “company” means a company incorporated

under this Act or under any previous company law [Section 2 (68)] In common
law, a company is a “legal person” or “legal entity” separate from, and capable of
surviving beyond the lives of its members.

NATURE AND CHARACTERISTICS OF COMPANY

1. CORPORATE PERSONALITY:

A company incorporated under the Act is vested with a corporate personality

so it bears its own name, acts under name, has a seal of its own and its assets
are separate and distinct from those of its members. It is a different ‘person’
from the members who compose it. Therefore it is capable of: owning property,
incurring debts, borrowing money, having a bank account, employing people,
entering into contracts and suing or being sued in the same manner as an
individual.

2. COMPANY AS AN ARTIFICIAL PERSON:

A Company is an artificial person created by law. It is not a human being but
it acts through human beings. It is considered as a legal person which can
 enter into contracts, possess properties in its own name, sue and can be sued
by others.
3. COMPANY IS NOT A CITIZEN:
The company, though a legal person, is not a citizen under the Citizenship
Act, 1955 or the Constitution of India.
4. COMPANY HAS NATIONALITY AND RESIDENCE:
Though it is established through judicial decisions that a company cannot be
a citizen, yet it has nationality, domicile and residence.
5. Limited Liablity
“The privilege of limited liability for business debts is one of the principal
advantages of doing business under the corporate form of organisation.” The
company, being a separate person, is the owner of its assets and bound by its
liabilities. The liability of a member as shareholder, extends to the
contribution to the capital of the company up to the nominal value of the
shares held and not paid by him.

6. PERPETUAL SUCCESSION:

An incorporated company never dies, except when it is wound up as per law.

A company, being a separate legal person is unaffected by death or departure of
any member and it remains the same entity, despite total change in the
membership. Perpetual succession, means that the membership of a company may
keep changing from time to time, but that shall not affect its continuity.

7. SEPARATE PROPERTY:

A company being a legal person and entirely distinct from its members, is capable
of owning, enjoying and disposing of property in its own name. The company is
the real person in which all its property is vested, and by which it is controlled,
managed and disposed off.

8. TRANSFERABILITY OF SHARES:

The capital of a company is divided into parts, called shares. The shares are said to
be movable property and, subject to certain conditions, freely transferable, so that
no shareholder is permanently or necessarily wedded to a company. Section 44 of
the Companies Act, 2013 enunciates the principle by providing that the shares held
by the members are movable property and can be transferred from one person to
another in the manner provided by the articles.

9. CAPACITY TO SUE AND BE SUED:

A company being a body corporate, can sue and be sued in its own name.

10. CONTRACTUAL RIGHTS:

A company, being a legal entity different from its members, can enter into
contracts for the conduct of the business in its own name.

11. LIMITATION OF ACTION:

A company cannot go beyond the power stated in its Memorandum of Association.

The Memorandum of Association of the company regulates the powers and fixes
the objects of the company and provides the edifice upon which the entire structure
of the company rests.

12. SEPARATE MANAGEMENT:

The members may derive profits without being burdened with the management of
the company. They do not have effective and intimate control over its working and
they elect their representatives as Directors on the Board of Directors of the
company to conduct corporate functions through managerial personnel employed
by them. In other words, the company is administered and managed by its
managerial personnel.

13. VOLUNTARY ASSOCIATION FOR PROFIT:

A company is a voluntary association for profit. It is formed for the

accomplishment of some stated goals and whatsoever profit is gained is divided
among its shareholders or saved for the future expansion of the company.

14. TERMINATION OF EXISTENCE:

A company, being an artificial juridical person, does not die a natural death. It is
created by law, carries on its affairs according to law throughout its life and
ultimately is effaced by law. Generally, the existence of a company is terminated
by means of winding up.
TOPIC II

KINDS OF COMPANY

INTRODUCTION

Before going to the types of companies, it is very important to understand the

meaning of company, defined under Section 2(20) of the Companies Act 2013,
according to the section, a company is an association of persons that has a separate
legal entity and has perpetual succession. The company’s capital is divided into
small denominations known as “shares”.
The term “separate legal entity” means that the company has a separate existence
from its shareholders. A company can hold assets in its name and can sue or be
sued. Similarly, “perpetual succession” means that members may come or go, but
the company remains forever.
List of varieties of Company
Here is a list of all the different types of companies under the Companies Act
2013:
 Statutory Company
 Registered Company
 Company limited by shares
 Company limited by guarantee
 Company with unlimited liability
 Public Company
 Private Company
 One Person Company (OPC)
 Foreign Company
 Indian Company
 Section 8 Company
 Government Company
 Small Company
 Subsidiaries
 Holding Company
 Associated Company
  Production Company
 Dormant Company
Types of companies based on liability
Based on liability companies can be divided into 3 parts-
 Companies limited by shares: It refers to a company in which the liability
of its partners is limited to the amount specified in the partnership
agreement. However, any unpaid amount on the share may be called upon to
settle the liability. Liability against partners can be enforced during the
existence of the company even during liquidation. It is important to note that
no amount can be claimed from the members after the shares have been fully
repaid.
For example- X is a shareholder who has paid 75 for a share with a face
value of 100. The company can call upon X to pay only the remaining 25
rupees and not exceed that amount. By far the most important are limited
liability companies.
 Companies limited by guarantee: In this type of company, the liability of
the partners is limited to the amount they undertake to contribute to the
assets of the company in the event of its dissolution. Simply put, the liability
of the shareholders is limited by the amount of the guarantee they give in the
partnership agreement.
During the liquidation of the company, the members are placed in the
position of guarantors for the fulfillment of the company’s debt. Examples
of such societies are clubs, trade associations, research associations, etc.
 Companies with unlimited liability: It applies to those companies that do
not determine the liability of their members. Members’ liability is unlimited
and their assets can be used to satisfy the company’s debt. They may or may
not have share capital.
Types of companies based on company incorporation
Based on the establishment, companies can be divided into 2 categories.
 Statutory Companies: It applies to those companies which are incorporated
by a special Act of Parliament or State Legislature. The main objective of
this type of company is to provide a public service. Since they are
established under a separate law, the Companies Act, 2013 has limited scope
for them. If there is any conflict, the Special Act for the circumstance will
prevail over the Companies Act, 2013.
 Registered Companies: Companies that are registered under the provisions
of the Companies Act, 2013 or any previous Companies Act are called
 registered companies. This type of company is formed when they have
received a certificate of incorporation (ROC).
Types of companies based on the number of members
In this category, companies can be divided into 3 parts –
 Public Companies: A public company is defined in Section 2 (71) of the
Companies Act of 2013. To establish a public company, it is necessary to
have at least 7 partners. One of the special features of a public company is
that there are no restrictions on the buying and selling of shares. Section 58
stipulates that the shares of a public company are freely transferable. If the
company does not comply with the above provisions, it will renounce the
status of “private company”. To transform a public company into a private
company, it is necessary to adopt a special resolution at the general meeting
(3/4 majority).
 Private companies: A private company [Section 2(68)] refers to an
association of persons whose maximum number of members is limited to
200. A private company cannot invite the general public to subscribe to its
shares or debentures. Shares in a private company are not freely transferable
and cannot be transferred. All such restrictions must be expressly stated in
the Articles of Association (AOA). As with a public company, a private
company can change its status by passing a special resolution (3/4 majority)
at the general meeting.
 One-Person Company (OPC): According to Section 2(62) of the
Companies Act 2012, a sole proprietorship is a company that has only one
person as a partner or shareholder. The board of directors must have 1
director and its only member can also hold the role of director. In this type
of company, the term “nominee” assumes the highest importance because,
after the death of the original member, the business of the company would
cease. It is therefore necessary to mention the name of the candidate when
registering such a company. It is not followed in other types of companies
because they have perpetual succession.
Types of Companies in India Based on Residence
 Foreign companies: According to Section 2(42) of the Companies Act,
2013, “foreign company” means any company or body corporate having its
place of business or carrying on business in India (through itself or its
agent). The provisions listed in Section 379 -393 apply to this type of
company.
 Indian companies: It applies to those companies where incorporation and
registration are done in India. It is an umbrella term and almost all other
types of companies fall under it.
Other types of companies in India
 Section 8 Company: A company registered under Section 8 of the
Companies Act 2013 is a Section 8 Company. It is also known as a non-
profit company. The features of this company are:
The object of the company is the promotion of commerce, art, science, sport,
education, research, welfare, religion, charity, environmental protection, or
any other object;
o Any profit achieved will be used to achieve the company’s goals.
o It prohibits the payment of dividends to its members.
o A Section 8 company is exempt from using “Ltd” or “private Ltd” as
a suffix to its name.
o Government companies
o A government company is a company in which the Central
Government, State Government, or a combination holds at least 51%
of the paid-up share capital.
 Small companies: According to Section 2(85) of the Companies Act 2013,
“small company” means a company other than a public company in which
the following conditions are met—
o
 share capital paid up not exceeding 50 lakh rupees.
 Turnover for the previous year does not exceed 2 crore rupees
in the previous year.
 Subsidiary Company: According to Section 2 sub-section 87 Companies
Act of 2013, a subsidiary company is a company in which the holding
company-
o
 Manage and control the composition of the board of directors.
Control can be determined if the holding company has the right
to appoint or remove a majority of the board members.
 Exercise control over more than half of the subsidiary’s voting
rights.
 Holding companies: The definition of a holding company is given in
Section 2 (46) of the Companies Act of 2013. It is a company of which these
companies are subsidiaries.
 Associated companies: According to Section 2(6) of the Companies Act
2013, an associated company means a company in which another company
has substantial influence but is not a subsidiary of the company exercising
influence. The term “significant decision” means the power to control at
 least 20% of the total voting rights or participation in the management
affairs of an affiliate.
 Producer Companies: It refers to a legally recognized association of
farmers/farmers to improve their standard of living and ensure stable income
and profitability. Some conditions for Producer Company-
o
 Only a person working in the primary sector can be a member
of such a company.
 The company name ends with the words “Producer Company
Limited”.
 The minimum and maximum number of directors in a
production company are 5 and 15 respectively.
 Sleeping or Dormant Companies: It refers to a company that has not
carried out its business or carried out significant accounting transactions in
the last 2 financial years.

TOPIC III

PUBLIC AND PRIVATE COMPANY

INTRODUCTION

The distinctions between private and public companies can affect their operations,
culture, workplace relationships and reputation. Understanding the key similarities
and differences between public and private companies may help you to understand
the nuances of these categories.
In this article, we define the terms public company and private company, explore
what key differences exist between the two and explain how a private company
becomes public.
Key takeaways
 A public company offers its shares on the stock market so that the public can
invest in the company.
 A private company is only owned by the people who create the company and
a select group of investors.
  The key differences between a public and a private company rest in who
owns company shares and how quickly a company can liquidate its assets.
What is a private company?
A private company, also commonly called a privately held company, is typically a
corporation solely owned by its founders or a group of other investors. A private
company
is also unique in that it hasn't sold any of its shares to the public through the stock
exchange.
What is a public company?
A public company sells all or a portion of its shares on the open market through the
stock exchange. A private company is subject to SEC regulations and is more
exposed to public scrutiny. As a result, the public shareholders have some stake in
the profits of the company. This allows anyone to buy a stake in a public company
and potentially influence decisions or earn money on stock.
Public Company Private Company
Shares are offered to the public for
Shares are solely owned by the company.
purchase.
Is not subject to SEC regulation if it has less
Is subject to SEC regulation. than $10 million in assets and meets certain
other criteria.
Has less creative and business
May have more creative freedom in business
freedom as it answers to
decisions.
shareholders.
Can raise money very quickly by Cannot raise money as quickly as a public
offering shares to the public. company.
Public company vs. private company
While there are some similarities between a public and private company, including
they both host annual meetings and have a board of directors, there are also some
key differences between the two. Here are some of the main differences between a
public company and a private company:
Capital and liquidity
The key difference between public and private companies is that public companies
can generate funds by issuing shares to the public. Private companies can only
issue stock to existing shareholders or current employers. Sometimes, they can
raise money from the public under certain requirements. Even when they meet
these requirements, they can only raise a maximum of $2 million in a 12-month
period.
Public companies have greater access to public markets and can raise capital more
readily. Raising money is perhaps one of the primary motivations for a company
going public. Companies can use these funds for a variety of purposes.
Ownership of shares
Public companies offer shares of their stocks to the public. Private companies may
sometimes offer shares to their employees or existing investors. An advantage of
being a public company is that many shareholders collectively hold investment
equity. The public also has some stake in the company's overall success and can
benefit from the successes of the company through dividends or profit sharing.
Size
Typically, public companies are larger. Large corporations
usually go public after they have reached a private valuation of at least $1 billion.
For a company to become public, it must generate revenue and show a clear
capability to grow in the future. In almost all cases, a public company is a
corporation, whereas private companies can be corporations, partnerships or
limited liability companies (LLCs).
Private companies may also be large and may choose to not go public because of
the advantages of remaining private, such as less regulation and more creative or
business freedom.

Regulations and reporting

After a company decides to become public, it follows many additional rules and
regulations to maintain compliance with the United States Securities and Exchange
Commission (SEC). Every fiscal year, public companies must develop a financial
report and a director's report, while an independent party audits these reports. This
can cost the company money and time.
Private companies are only required to develop reports every financial year if
they're a large proprietary company.
By definition, a large proprietary company is any private company that has any
two of the following characteristics:
 50 or more employees
 $5 million or greater in assets
 $10 million or more in revenue
In general, private companies have the advantage of having fewer reporting
requirements. This is a common reason why many companies choose to remain
private, as further documentation and regulation can cost money, time and
resources that might otherwise help the company grow.
Public involvement
In public companies, investors, the public and the SEC constantly analyze the price
of the company's stocks, with a higher likelihood of investment experts analyzing
the activities of the executives and board members. Also, the press may attend
annual meetings, and anyone with any amount of stock can attend these meetings
as well. Private companies can have a greater sense of anonymity. Typically, the
board members are a small group of people who know one another. Sometimes, all
the shareholders are members of the board. This greater sense of privacy can allow
decisions to be made more quickly.

How does a company go public?

Private companies become public companies after a process known as an initial
public offering
(IPO). An IPO is an event where a corporation offers shares on the public market.
Before becoming public, a company registers with the SEC and works to pass
certain requirements necessary to sell shares.
During this time, the company also works with investment banks to form an
underwriting agreement, which is a contract between a group of investment banks
and the company. The corporation issues securities to the syndicate and they agree
to resell them for a set amount on the public market through a stock exchange.
Collectively, the syndicate takes on the potential risks of selling stocks on the
public market.
An underwriting agreement between the syndicate and the company includes the
following:
 A commitment by the underwriter to purchase a securities issue
 The agreed-upon price of the purchase
 The agreed-upon opening resale price
 A settlement date
Once this process is complete, a corporation can hold an IPO, and the public is
now able to purchase shares of the company. A private company has become a
publc.
Examples of public and private companies
The following are a few examples of public and private companies:
 Public companies: This would include large companies sold on the stock
exchange, such as Coca-Cola Co, Target Corporation and Ford Motor
Company.
 Private companies: This would include small or mid-size companies that are
not sold on the stock exchange and may not be widely known, such as a
 local clothing store that has a sole owner or a used book store that is owned
by one or two owners.
Please note that none of the companies mentioned in this article are affiliated with
Indeed.

TOPIC IV
LIFTING OF CORPORATE VEIL

INTRODUCTION

The company, once incorporated, holds a separate legal entity in the eyes of law.
The company can act under its own name, have a seal of its own, can enter into
contracts, purchase or sell property, have a bank account and sue or get sued in the
same manner as an individual. Thus, a company is a juristic person different from
the persons who constitute it. The Corporate Veil is a shield that protects the
members from the action of the company. In simple terms, if a company violates
any law or incurs any liability, then the members cannot be held liable. Thus,
shareholders enjoy protection from the acts of the company.

Case Law: Salomon vs. Salomon and Co Ltd.

Fact of the case: In this case, Salomon incorporated a company named “Salomon
& Co. Ltd.”, with seven subscribers consisting of himself, his wife, four sons and
one daughter. Salomon was a shareholder as well as a secured creditor. There were
other unsecured creditors as well. Later on, the company incurred losses and
decides to wind up. At the time of winding up, the unsecured creditors claimed that
they should be paid before Salomon (as a secured creditor) as it was his company.
Held: This case clearly established that company has its own existence and as a
result, a shareholder cannot be held liable for the acts of the company even though
he holds virtually the entire share capital. The whole law of a corporation is in fact
based on the principle of the separate legal entity. The separate legal entity of a
company is a statutory privilege that must be used for legitimate purposes only but
with advantages comes the disadvantages as well. Thus, the Doctrine of lifting up
of or piercing of Corporate Veil was introduced to hold the members liable in case
of fraudulent or dishonest use of the separate legal entity.

The Doctrine of lifting up of or piercing of Corporate Veil: If it is found that the

members are misusing the statutory privilege then the individuals concerned will
not be allowed to take shelter behind the corporate personality. The Court will
break through the corporate shell and apply the principle/doctrine of what is called
as “lifting of or piercing the corporate veil”.

Cases where the court has ordered lifting up of veil-

In case the Company commits a Fraud.

Where the company do not have a physical presence, it is just on instruments.
If the company has an enemy character because of its association with the enemy
country.

If the criminal activities are being hidden behind the company’s name. Further, the
lifting of the corporate veil can be Statutory Lifting or Judicial Lifting. Statutory
Lifting: If the company violates the Companies Act, 2013 and the act provides for
the lifting of the veil for the same, then it is termed to be Statutory Lifting.
Judicial Lifting: If the company violates the Companies Act, 2013 and the act does
not provide for the lifting of the veil then the judges can order the lifting of the veil
which is known as Judicial Lifting.

Case Law: Re Sir Dinshaw Maneckji Petit Bari, AIR 1927 Bom.371 The fact of
the case: The assessee, Sir Dinshaw Manckjee Petit, was a wealthy man enjoying
huge income from dividends and interests. He formed four private companies and
agreed with each to hold a block of the investment as an agent for it. He credited
the income received by him in the accounts of the companies and took it back in
the form of a pretended loan. The whole idea was to split his income into four parts
with a view to reduce the tax liability.

Held: The company was formed by the assessee with an intention to evade tax and
the company was nothing more than the assessee himself. It did undertake any
business but was created simply as a legal entity to ostensibly receive the dividends
and interests and to hand them over to the assessee as pretended loans.
Misstatement in Prospectus
In a case where the company’s prospectus is misrepresented, the company and
every director, promoter, and every other individual, who authorized such issue of
prospectus shall be liable to compensate the loss to every person who subscribed
for shares on the faith of misstatement.
Also, these individuals may be punished with a jail term for a duration of not less
than six months. This duration may be extended to ten years. The concerned
company and person shall also be liable to a fine that shall not be less than the sum
involved in the fraud but may extend to three times the amount involved in the
fraud.
Misdescription of Name
As per the Companies Rule,2014, a company shall have its name printed on every
official document, including (hundis, promissory notes, BOE, and such other
documents) as may be mentioned.
Thus, where a company’s officer signs on behalf of the company any contract,
BOE, Hundi, promissory note or cheque or order for money, that individual shall
be liable to the holder if the name of the company is not properly mentioned.
Fraudulent Conduct
In case of winding up of a company, it comes out that any business has been
carried on with intent to cheat the creditors or any other individual, or for any illicit
purpose, if the Tribunal thinks it proper so to do, be directed in person liable
without limitation to obligation for all or any debts or other obligations of the
company.
Liability under the fraudulent conduct may be imposed if it is proved that the
company’s business has been carried on misguiding the creditors.
Ultra-Vires Acts
Directors and other officers of a company will be held liable for all those acts they
have performed on the company’s behalf if the same is ultra vires the company.
Failure to Return the Application Money
In case of Public Issue, if minimum subscription, as per the prospectus, has not
been received within thirty days of the issue of prospectus or such other period as
may be mentioned, the application money shall be returned within fifteen days
from the closure of the issue.
However, suppose any the application money is not so repaid within such specified
time. In that case, the directors/officers of the company shall jointly and severally
be liable to pay that money with 15% per annum.
Additionally, the defaulter company and its officer shall be liable for a penalty of
1000rs/day during which such default continues or Rs 100000, whichever is less.
Under other Statues-
Apart from the Companies Act,2013, the directors & other officers of the company
may be held personally accountable under the provisions of other statutes. For
Instance, under the Income-tax Act, 1962, where any private company is wound-up
and if tax arrears in respect of any income of any previous year cannot be
recovered, every individual who was director of that company during the relevant
preceding year shall be jointly and severally accountable for payment of tax.
Under Judicial Interpretation
While initially the court, based on the principle of the separate entity as well as a
district corporate persona, refused to lift the veil of corporate governance,
However, due to the rise of corporations and the ever-growing conflict between
corporations and their different stakeholders, courts have taken a more pragmatic
strategy and have lifted the veil of corporate governance.
It isn’t easy to record every court decision in which the veil was lifted. However,
there are various circumstances where the veil of corporate character can be taken
off, and the people who are behind the corporate entities could be found out and
punished.
1. Improper conduct and Prevention of Fraud.
2. Formation of the Subsidiary company to act as Agent.
3. Economic offence
4. Revenue Protection
 5. The company used it for illegal purposes.
6. Company ignoring welfare legislations.
7. Company acting a mere fraud.

TOPIC V

MEMORANDUM OF ASSOCIATION

A group of people comes together to form a company to achieve a specific

purpose. A company is usually established to earn profits and is commercial in
nature. An application must be filed with the Registrar of Companies (ROC) along
with certain documents to register a company. One crucial document required to be
submitted to the ROC while applying for registration is the company’s
Memorandum of Association (MoA)
What is MoA?
A Memorandum of Association (MoA) represents the charter of the company. It is
a legal document prepared during a company's formation and registration process.
It defines the company's relationship with shareholders and specifies the objectives
for which the company has been formed. The company can undertake only those
activities mentioned in the Memorandum of Association.
As such, the MoA lays down the boundary beyond which the company’s actions
cannot go. When the company's actions are beyond the boundary of the MoA, such
actions will be considered ultra vires and thus void. The MoA is a foundation upon
which the company is established. The company's entire structure is written down
in a detailed manner in the MoA.
The Memorandum of Association is a public document. Any person can get the
MoA of the company by paying the prescribed fees to the ROC. Thus, it helps the
shareholders, creditors and any other person dealing with the company to know the
basic rights and powers of the company before entering into a contract with it.
Also, the contents of the MoA help prospective shareholders make the right
decision while considering investing in the company. MoA must be signed by at
least 2 subscribers in the case of a private limited company and 7 members in the
case of a public limited company.
Format of Memorandum of Association
Section 4(6) of the Companies Act, 2013 (‘Act’) states that the format of an MoA
will be as specified in Table A to Table E of Schedule 1 of the Act. Every
company needs to select the appropriate format provided in Table A to E
depending on its business type. The different formats provided in Act are as
follows:
Table A – It is applicable to companies with a share capital.
Table B – It is applicable to a company limited by guarantee but does not have a
share capital.
Table C – It is applicable to a company limited by guarantee having a share
capital.
Table D – It is applicable to an unlimited company but does not have a share
capital.
Table E – It is applicable to an unlimited company with a share capital.
The MoA should be numbered, printed and divided into paragraphs. The
subscribers of the company must sign the MoA.
Objectives in Registering MoA
The Memorandum of Association is a necessary document that includes the
company’s crucial information. Section 3 of the Act states that the company can be
formed when the following members subscribe to the memorandum:
 Seven or more members in the case of a public company.
 Two or more members in the case of a private company.
 Only one member in the case of a One Person Company (OPC).
A company can be registered only when the MoA is drafted and it is
signed/subscribed by the minimum numbers as provided above. Thus, the MoA of
all companies is required for company registration.
Section 7(1)(a) of the Act further provides that a company’s Memorandum of
Association and Articles of Association (AoA) must be duly signed by the
subscribers for the company to be registered with the ROC. The MoA copy should
be given to the ROC while applying for company registration. The ROC can
provide the certified copy of the MoA to the public upon payment of the prescribed
fees. It helps shareholders in the following ways:
  Allowing shareholders to know about the company before buying its shares
and determine the capital they can invest in the company.
 Provide all company information to stakeholders willing to associate with it.
What are Main Clauses of the Memorandum of Association?

The following are the clauses in Memorandum of Association:

 Name Clause
 Registered Office Clause
 Object Clause
 Liability Clause
 Capital Clause
Contents of Memorandum of Association
The memorandum of association clauses/contents are as follows:
1. Name Clause: This clause specifies the name of the company. The name of
the company should not be identical to any existing company. Also, if it is a
private company, then it should have the word ‘Private Limited’ at the end.
In the case of a public company, then it should add the word “Limited” at
the end of its name. For example, ABC Private Limited in the case of the
private, and ABC Ltd for a public
company.
2. Registered Office Clause: This clause specifies the name of the State in
which the registered office of the company is situated. It helps to determine
the jurisdiction of the Registrar of Companies. The company must inform
the registered office location to the Registrar of Companies within 30 days
from the date of incorporation or commencement of the company.
3. Object Clause: This clause states the objective with which the company is
formed. The objectives can be further divided into the following 3
subcategories:
o Main Objective: It states the main business of the company
o Incidental Objective: These are the objects ancillary to the attainment
of main objects of the company
o Other objectives: Any other objects which the company may pursue
and are not covered in above (a) and (b)
4. Liability Clause: It states the liability of the members of the company. In
the case of an unlimited company, the liability of the members is unlimited.
Whereas, in the case of a company limited by shares, the liability of the
members is restricted by the amount unpaid on their share. For a company
limited by guarantee, the liability of the members is restricted by the amount
each member has agreed to contribute.
 5. Capital Clause: This clause details the maximum capital a company can
raise, also called the authorized/nominal capital of the company. It also
explains the division of such capital amount into the number of shares of a
fixed amount.

When is alteration of a Memorandum of Association allowed

Generally, the alteration of a company’s Memorandum of Association is allowed
under the following circumstances:
 When such an alteration is needed to let the company venture into new
businesses related to the one in which it is already involved;
 When such an alteration is pertinent to enable the company to upgrade its
existing means to carry out its objects, or
 When altering the Memorandum of Association will help the company carry
on its business more economically.

Alteration of a Memorandum of Association and the doctrine of ultra vires

As discussed above, a Memorandum of Association defines the relationship
between the company and its members. The Memorandum of Association states
the object of incorporating the company. It provides an overview of the company’s
operations. As per the doctrine of ultra vires, the company is not supposed to
bypass the boundary set by the Memorandum of Association on the company’s
activities. If the company does any act outside its operational scope specified under
the Memorandum of Association, such an act will be held ultra vires.
The term ‘ultra vires’ is Latin, and it means ‘beyond the powers.’ Such an ultra
vires act shall be null and void. It cannot be ratified by the company’s Board of
Directors (BoD). Similarly, any contract entered into by the company against the
provisions of its Memorandum of Association shall be ultra vires and have no
binding effect on the company. Nevertheless, the doctrine of ultra vires allows the
company to do any act that may be incidental to its main object specified in its
Memorandum of Association.
The doctrine of ultra vires was essentially brought forth to safeguard the interests
of the members—that is, the shareholders and creditors of any company. The
shareholders or creditors of the company invest in it by essentially considering its
main objectives. They invest in a particular company, considering various factors
like the market trends, the reputation of the company, etc., and expect to get a good
profit out of it. They invest, thinking that their investment will be used only for the
purposes about which they were already informed. They expect the company to be
consistent with its objectives. So, the doctrine of ultra vires prevents the company
from going beyond its permitted limits of operation. That is why altering the
Memorandum of Association of any company follows a lengthy and complex
process to ensure the company expands its scope of operation without being
affected by the doctrine of ultra vires.
Basic principles of the doctrine of ultra vires
The following are the basic principles of the doctrine of ultra vires as as derived
through the course of various case laws.
 The defence of ultra vires is available to all parties.
 No member of the company can ratify an ultra vires act.
 A party that has fully performed its part in an ultra vires transaction cannot
later avail itself of the defence of ultra vires; it is prohibited under the
doctrine of estoppel.
 Any act committed or omitted by any agent or representative of any
company within the extent of his employment cannot be repudiated availing
the defence of the doctrine of ultra vires.
Case laws relating to the doctrine of ultra vires
Let’s know more about the connection between the doctrine of ultra vires and the
alteration of a Memorandum of Association through a few landmark case laws.
Ashbury Railway Carriage and Iron Company Ltd. v. Riche (1875)
One of the landmark cases on the doctrine of ultra vires in company law is
Ashbury Railway Carriage and Iron Company Ltd. v. Riche (1875). In this case,
the object clause of the Ashbury Co. provided the following as its objects:
 To make, sell, lend, or hire railway carriages and wagons, and all kinds of
railway plants, fittings, machinery and rolling stock;
 To carry on the business of mechanical engineers and general contractors;
 To purchase, lease, work, and sell mines, minerals, land and buildings;
 To purchase and sell as merchants timber, coal, metals, or other materials,
and
 To buy any such materials on commission or as agents.
Ashbury Co. entered into a contract with the defendant company, Riche, to
construct a railway line in Belgium. Though the contract was initially ratified by
the members of Ashbury Co., it was later repudiated by it. The defendant sued
Ashbury Co. for breach of contract. In the end, the Court held that the contract was
beyond the objects specified in the Ashbury Co.’s Memorandum of Association,
and so it was held void. The Court held that the phrase “to make, sell, lend, or hire
railway carriages and wagons, and all kinds of railway plant” did not mean the
company could build an actual railway line. Ultimately, the contract was held to be
ultra vires.
Evans v. Brunner and Mond Co. (1921)
In this landmark case, a company that carried out the business of manufacturing
chemicals. The object clause in the company’s Memorandum of Association
permitted it to do anything that may be incidental to accomplishing its business.
Further, the Memorandum of Association allowed the company to provide funds to
any English university for the advancement of science and research. Such an
allowance was challenged in court. The challenge was based on the contention that
it was not a part of the main object stated in the Memorandum of Association.
Nevertheless, the Court acknowledged that funding for such activities was
connected to carrying out the company’s future operations. The fund was needed to
train the prospective students who may be easily recruited into the company. Such
an act was held to be incidental to the main object and hence valid.

Process of alteration of Memorandum of Association

Below are the steps required to be followed to bring forth any alteration in a
Memorandum of Association.
Step 1- Notice of meeting of the Board of Directors
The first step to altering any clause of a Memorandum of Association is to convey
to the Board of Directors (BoD) the proposal to make such an alteration. As
mandated by Section 173 of the Act, the BoD must be intimated through a notice at
least seven days prior to the actual board meeting.
The notice must be accompanied by the details of the proposed alteration and a
draft of the resolution.
Step 2- Meeting with the Board of Directors
The second step in altering the Memorandum of Association involves the holding
of the board meeting. The meeting witnesses the discussion of the need, pros and
cons of the proposed alteration. Finally, if the BoD agrees to carry out such an
alteration, the date, venue, and time for holding the general meeting are decided.
Further, a director or someone else is authorized to furnish a notice to all the
members of the company to participate in the general meeting.
Step 3- Notice of Extra-ordinary General Meeting
Next, the notice of the general meeting is sent to all the directors, members, and
auditors of the company. As per Section 101 of the Act, the notice should be sent
at least twenty-one days before the date of the actual general meeting. The notice
may be sent either via electronic or physical means. The notice should specify the
exact date, time, and place of the proposed meeting. Furthermore, it should contain
a brief note of the business that is proposed to take place at the meeting.
Step 4- General Meeting

Firstly, on the day of the general meeting, the quorum for the meeting is checked.
The quorum for a private company is a minimum of two (personally present.) In
the case of a public company, the quorum is a minimum of five; however, it
changes according to the number of members present in the meeting under Section
103 of the Act.
Secondly, the presence of the auditor of the company is checked. In case he/ she is
absent, a leave of absence may be granted.
Finally, the proposed special resolution for altering the Memorandum of
Association has been passed. A special resolution is said to be passed when it is
favourably voted by at least three times the number of votes cast against it. The
votes can be cast either in person, through a postal ballot, or by proxy.
Step 5- Filing application with the registrar of the company
After passing the required resolution, various applications have to be filed with the
RoC within 30 days from the date of passing the resolution. The applications vary
from one clause to another, as discussed below.

Alteration of various clauses in a Memorandum of Association

Section 13 of the Act deals with the alteration of the Memorandum of Association.
The said Section states provisions for altering every type of clause of the
Memorandum of Association, as discussed below. Please note that the steps
discussed in the above-mentioned subheading are mandatory for making any
change in the Memorandum of Association of a company; such a procedure has to
be fulfilled no matter which clause’s alteration is proposed. Nevertheless, the
following provisions need to be followed with regard to the respective clauses of a
Memorandum of Association.
All the forms mentioned below are available on the MCA portal.
Altering the Name Clause
Sections 4, 13(2), 13(3), and 16 of the Act provide for the alteration in the Name
Clause of a Memorandum of Association. A company that has passed a special
resolution for the purpose can change its name by filing an application (Form INC
24) in the Reserve Unique Name (RUN) web portal service approved by the
Ministry of Corporate Affairs (MCA). The RUN service can be availed only after
log-in into the MCA portal.
The MCA takes 2-3 days to approve the newly proposed name. It will send the
name approval letter if the name is in accordance with Sections 4(2) to 4(5) of the
Act. Under Section 13(2) of the Act, any change in a company’s name shall take
effect only after it is expressly approved by the Central Government. Nevertheless,
such approval is unnecessary in case the change is simply the addition or deletion
of the word ‘Private’ when the company gets converted from one class of company
to another.
Once the name of the company is altered, the RoC will replace the old name with
the newly altered name in the register of companies. After registering it, the RoC
will issue a new certificate of incorporation with the altered name printed on it.
The issue of the fresh certificate of incorporation marks the end of the company’s
name change.
Altering the Registered Office clause
Sections 12(4), 12(5), 13(4), 13(5), and 13(7) of the Act give the provisions as to
the change in the registered office clause of a Memorandum of Association. For
altering the registered office clause in case the registered office is to be shifted
within the local limits of the same city, after passing a special resolution for the
purpose, the company can file an application (Form INC 22) with the RoC.
In case the company wishes to shift the registered office from one city to another
within the jurisdiction of the same RoC, it should file e-Form MGT-14 and INC-22
within 30 days of passing a special resolution.
To shift its registered office from the jurisdiction of one RoC to another within the
same state, the company can file e-Form MGT-14 within 30 days of passing a
special resolution. Furthermore, it should file INC- 23 with the Regional Director,
who may issue an order approving the change in registered office. Then, INC-28
should be filed by the company within 60 days of the RD’s order. Lastly, within 30
days of getting the approval under INC-28, the company should file INC 22.
In the event a company wishes to shift its registered office from one state to
another, it should file an application (Form MGT 14) within 30 days of passing a
special resolution in this regard. Then, the company must file Form GNL 2,
followed by INC 26 for advertising the proposed change in newspapers in
vernacular language and English. Then, INC 23 is to be filed to get the approval of
the RD; the RD’s approval order should then be filed with the RoCs of the
respective states from and to where the change in the registered office is proposed.
Finally, the approval of both the RoCs must be filed as INC 22 within 30 days.
Altering the Object Clause
Under Section 13(9) of the Act, the Object Clause in the Memorandum of
Association of any company can be altered by passing a special resolution in this
regard. The said Section provides that any company that wishes to alter its Object
Clause must pass a special resolution and get it approved by the RoC within 30
days of passing the resolution. For that, the company should file Form MGT 14,
following which the RoC shall register such a proposed change and issue a
certificate thereof.
Altering Share Capital Clause
Sections 13 and 61 deal with the alteration of the share capital clause in a
Memorandum of Association, provided the company’s Article of Association
(AOA) permits it. Such an alteration may include the following;
 Increase the authorized share capital of the company;
 Increase or decrease the amount of each share;
 Convert its fully paid-up shares into stock or vice versa, and
 Cancellation of shares.
The alteration of the Share Capital Clause of a company requires the passing of an
ordinary resolution at a general meeting in that regard. Within 30 days from
passing the resolution, Form MGT 14 must be filed with the RoC, who shall then
register the change in the Register of Companies.
Altering Liability Clause
The Liability Clause in a Memorandum of Association can be altered by passing a
special resolution in this regard. Within 30 days of passing the resolution, the
company must file an application (Form MGT 14) with the RoC.
Altering Subscription Clause
The Subscription Clause in the Memorandum of Association cannot be altered
throughout the life of the company.

Documents required for alteration of Memorandum of Association

Generally, to alter any clause in a Memorandum of Association, the following
documents are required to be sent along with the application filed under Section 13
of the Act;
 Copy of the Memorandum of Association along with the proposed changes;
 A detailed report of the details of the board and general meetings in which
the resolution allowing such an alteration was passed;
 A certified copy of the resolution passed by the Board, and
 The list of creditors and debenture holders, along with their names,
addresses, debts, claims, or other liabilities due to them.
Conclusion
As discussed in this article, the alteration of a Memorandum of Association
involves a complex process. The process witnesses lengthy discussions and
brainstorming to ensure that the company’s growth is ensured without hurting the
interests of the members. Section 13 of the Act provides flexibility to alter the
contents of a Memorandum of Association; at the same time, restricts the company
from doing major changes in the business without the members’ express consent.
The doctrine of ultra vires plays an intrinsic role in balancing the interests of both
the company and the investors.
A Memorandum of Association is one of the most important documents that every
member of the company must go through before investing in it. It decides the
prospective relationship between them and the company. Hence, it is always
advised to thoroughly read it before investing in any company.

TOPIC V

Article Of Association

Introduction
The Companies Act, 2013 defines ‘articles’ as the “articles of association of a
company originally framed, or as altered from time to time in pursuance of any
previous company laws or of the present.” The Articles of Association of a
company are that which prescribe the rules, regulations and the bye-laws for the
internal management of the company, the conduct of its business, and is a
document of paramount significance in the life of a company. The Articles of a
company have often been compared to a rule book of the company’s working, that
regulates the management and powers of the company and its officers. It prescribes
several details of the company’s inner workings such as the manner of making
calls, director’s/employees qualifications, powers and duties of auditors, forfeiture
of shares etc.
In fact, the articles of association also establish a contract between the members
and between the members and the company. This contract is established, governs
the ordinary rights and obligations that are incidental to having membership in the
company.
It must be noted, however, that the articles of association, are subordinate to the
memorandum of association of a company, which is the dominant, fundamental
constitutional document of the company. Further, as laid down in Shyam Chand
v. Calcutta Stock Exchange, any and all articles that go beyond the memorandum
of association will be deemed ultra vires. Therefore, there should not be any
provisions in the articles that go beyond the memorandum. In the event of a
conflict between the memorandum and the articles, the provisions in the
memorandum will prevail. In case of any ambiguity or uncertainty regarding
details in the memorandum, it should be read along with the articles.

Distinction Between Memorandum and Articles of Association

The pivotal differences between memorandum and articles of association are as
follows:
S.No. Memorandum of Association Articles of Association

Contains fundamental conditions upon Contain the provisions for internal

1
which the company is incorporated. regulations of the company.

Regulate the relationship between

Meant for the benefit and clarity of the
the company and its members, as
2 public and the creditors, and the
well amongst the members
shareholders.
themselves.

Lays down the area beyond which the Articles establish the regulations
3
company’s conduct cannot go. for working within that area.

4 Memorandum lays down the parameters Articles prescribe details within

 for the articles to function. those parameters.

Can only be altered under specific

circumstances and only as per the Articles can be altered a lot more
5 provisions of the Companies Act, 2013. easily, by passing a special
Permission of the Central Government is resolution.
also required in certain cases.

Articles cannot include provisions

Memorandum cannot include provisions
contrary to the memorandum.
contrary to the Companies Act.
6 Articles are subsidiary to both the
Memorandum is only subsidiary to the
Companies Act and the
Companies Act.
Memorandum.

Acts done beyond the Articles can

Acts done beyond the memorandum are
be ratified by the shareholders as
7 ultra vires and cannot be ratified even by
long as the act is not beyond the
the shareholders.
memorandum.

Nature and Content of Articles of Association

As per the Companies Act, 2013, the articles of association of different companies
are supposed to be framed in the prescribed form, since the model form of articles
is different for companies limited by shares, companies limited by guarantee
having share capital, companies limited by guarantee not having share capital, an
unlimited company having share capital and an unlimited company not having
share capital.

The signing of the Articles of Association

The Companies (Incorporation) Rules, 2014 prescribes that both the Memorandum
and the Articles of a company are to be signed in a specific manner.
 Memorandum and Articles of a company, are both required to be signed by
all subscribers, who are further required to add their names, addresses and
occupation, in the presence of at least one witness, who must attest the
signatures with his own signature and details.
 Where a subscriber is illiterate, he must affix a thumb impression in place of
his signature, and appoint a person to authenticate the impression with his
 signature and details. This appointed person should also read out the content
of the documents to the illiterate subscriber for his understanding.
 Where a subscriber is a body corporate, the memorandum and articles must
be signed by any director of the body corporate who is duly authorised to
sign on behalf of the body corporate, by a passing a resolution of the board
of directors of the body corporate.
 Where the subscriber is a Limited Liability Partnership, the partner of the
LLP who is duly authorised to sign on the behalf of the LLP by a resolution
of all the partners shall sign.

Provisions for Entrenchment

The concept of Entrenchment was introduced in the Companies Act, 2013 in
Section 5(3) which implies that certain provisions within the Articles of
Association will not be alterable by merely passing a special resolution, and will
require a much more lengthy and elaborate process. The literal definition of the
word “entrench” means to establish an attitude, habit, or belief so firmly that
bringing about a change is unlikely. Thus, an entrenchment clause included in the
Articles is one which makes certain changes or amendments either impossible or
difficult.
Provisions for entrenchment can only be introduced in the articles of a company
during its incorporation, or an amendment to the articles brought about by a special
resolution in case of a public company, and an agreement between all the members
in case of a private company.

Alteration of Articles of Association

Section 14 of the Companies Act, 2013, permits a company to alter its articles,
subject to the conditions contained in the memorandum of association, by passing a
special resolution. This power is extremely important for the functioning of the
company. The company may alter its articles to the effect that would turn:

A public company into a private company

For a company wanting to convert itself from public to a private company simply
passing a special resolution is not enough. The company will have to acquire the
consent and approval of the Tribunal. Further, a copy of the special resolution must
be filed with the Registrar of Companies within 30 days of passing it. Further, a
company must then file a copy of the altered, new articles of association, as well as
the approval order of the Tribunal with the Registrar of Companies within 15 days
of the order being received.

A private company into a public company

For a company wanting to convert from its private status to public, it may do so by
removing/omitting the three clauses as per section 2(68) which defines the
requisites of a private company. Similar to the conversion of the public to a private
company, a copy of the resolution and the altered articles are to be filed with the
Registrar within the stipulated period of time.

Limitations on power to alter articles

 The alteration must not contravene provisions of the memorandum, since the
memorandum supersedes the articles, and the memorandum will prevail in
the event of a conflict.
 The alteration cannot contravene the provisions of the Companies Act, or
any other company law since it supersedes both the memorandum and the
articles of the company.
 Cannot contravene the rules, alterations or suggestions of the Tribunal.
 The alteration cannot be illegal or in contravention with public policy.
Further, it must be for the bona fide benefit and interest of the company. The
alterations cannot be an effort to constitute a fraud on the minority and must
be for the benefit of the company as a whole.
 Any alteration made to convert a public company into a private company,
cannot be made until the requisite approval is obtained from the Tribunal.
 A company may not use the alteration to cover up or rectify a breach of
contract with third parties or use it to escape contractual liability.
 A company cannot alter its articles for the purpose of expelling a member of
the board of directors is against company jurisprudence and hence cannot
occur.

Binding effect of Memorandum and Articles of Association

After the Articles and the Memorandum of a company are registered, they bind the
company and its members to the same extent as if they had been signed by each of
the members of the company. However, while the company’s articles have a
binding effect, it does not have as much force as a statute does. The effect of
binding may work as follows:
Binding the company to its members
The company is naturally completely bound to its members to adhere to the
articles. Where the company commits or is in a place to commit a breach of the
articles, such as making ultra vires or otherwise illegal transaction, members can
restrain the company from doing so, by way of an injunction. Members are also
empowered to sue the company for the purpose of enforcement of their own
personal rights provided under the Articles, for instance, the right to receive their
share of declared divided.
It should be noted, however, that only a shareholder/member, and only in his
capacity as a member, can enforce the provisions contained in the Articles. For
instance, in the case of Wood v. Odessa Waterworks Co., the articles of
Waterworks Co. provided that the directors can declare a dividend to be paid to the
members, with the sanction of the company at a general meeting. However, instead
of paying the dividend to the shareholders in cash a resolution was passed to give
them debenture bonds. It was finally held by the court, that the word “payment”
referred to payment in cash, and the directors were thus restrained from acting on
the resolution so passed.

Members bound to the company

Each member of the company is bound to the company and must observe and
adhere to the provisions of the memorandum and the articles. All the money that
may be payable by any member to the company shall be considered as a debt due.
Members are bound by the articles just as though each and every one of them has
signed and contracted to conform to their provisions. In Borland’s Trustees v.
Steel Bros. & Co. Ltd., the articles the company provided that in the event of
bankruptcy of any member, his shares would be sold at a price affixed by the
directors. Thus, when Borland went bankrupt, his trustee expressed his wish to sell
these shares at their original value and contended that he could do so since he was
not bound by the articles. It was held, however, that he was bound to abide by the
company’s articles since the shares were bought as per the provisions of the
articles.

Binding between members

The articles create a contract between and amongst each member of the company.
However, such rights can only be enforced by or even against a member of the
company. Courts have been known to make exceptions, and extend the articles to
constitute a contract even between individual members. In the case of Rayfield v
Hands Rayfield was a shareholder in a particular company., who was required to
inform directors if he intended to transfer his shares, and subsequently, the
directors were required to buy those shares at a fair value. Thus, Rayfield remained
in adherence to the articles and informed the directors. The directors, however,
contended that they were not bound to pay for his shares and the articles could not
impose this obligation on them. The courts, however, dismissed the directors’
argument and compelled them to buy Rayfield’s shares at a fair value. The court
further held that it was not mandatory for Rayfield to join the company to be
allowed to bring a suit against the company’s directors.

No binding in relation to outsiders

Contrary to the above conditions, neither the memorandum nor the articles
constitute a contract between the company and any third party. The company and
its members are not bound to the outsiders with respect to the provisions of the
memorandum and the articles. For instance, in the case of Browne v La Trinidad,
the articles of the company included a clause that implied that Browne should be a
director that should not be removed or removable. He was, however, removed
regardless and thus brought an action to restrain the company from removing him.
Held that since there was no contract between Browne and the company, being an
outsider he cannot enforce articles against the company even if they talk about him
or give him any rights. Therefore, an outsider may not take undue advantage of the
articles to make any claims against the company.

The doctrine of Constructive Notice

When the Memorandum and Articles of Association of any company, are
registered with the Registrar of Companies they become “public documents” as per
section 399 of the Act. This implies that any member of the general public may
view and inspect these documents at a prescribed fee. A member of the public may
make a request to a specific company, and the company, in turn, must, within
seven days send that person a copy of the memorandum, the articles and all
agreements and resolutions that are mentioned in section 117(1) of the Act.
If the company or its officers or both, fail to provide the copies of the requisite
documents, every defaulting officer will be liable to a fine of Rs. 1000, for every
day, until the default continues, or Rs. 1,00,000 whichever is less.
Therefore, it is the duty of every person that deals with the company to inspect
these public documents and ensure in his own capacity that the workings of the
company are in conformity with the documents. Irrespective of whether a person
has actually read the documents or not, it is assumed that he familiar with the
contents of these documents, and that he has understood them in their proper
meaning. The memorandum and articles of association are thus deemed as notices
to the public, hence a ‘constructive notice’.
Illustration: If the articles of Company A, provided that any bill of exchange must
be signed by a minimum of two directors, and the payee receives a bill of exchange
signed only by one, he will not have the right to claim the amount.

The doctrine of Indoor Management

The concept of the Doctrine of Indoor Management can be most elaborately
explained by examining the facts of the case of Royal British Bank v. Turquand,
which in fact, first laid down the doctrine. It is due to this that the doctrine of
indoor management is also known as the “Turquand Rule”.
The directors of a particular company were authorised in its articles to engage in
the borrowing of bonds from time to time, by way of a resolution passed by the
company in a general meeting. However, the directors gave a bond to someone
without such a resolution being passed, and therefore the question that arose was
whether the company was still liable with respect to the bond. The company was
held liable, and the Chief Justice, Sir John Jervis explained that the understanding
behind this decision was that the person receiving the bond was entitled to assume
that the resolution had been passed, and had accepted the bond in good faith.
However, the judgement, in this case, was not fully accepted into in law until it
was accepted and endorsed by the House of Lords in the case of Mahony v East
Holyford Mining Co.
Therefore the primary role of the doctrine of indoor management is completely
opposed to that of constructive notice. Quite simply, while constructive notice
seeks to protect the company from an outsider, indoor management seeks to protect
outsiders from the company. The doctrine of constructive notice is restricted to the
external and outside position of the company and, hence, follows that there is no
notice regarding how the internal mechanism of the company is operated by its
officers, directors and employees. If the contract has been consistent with the
documents on public record, the person so contracting shall not be prejudiced by
any and all irregularities that may beset the inside, or “indoor” operation of the
company.
This doctrine has since then been adopted into Indian Law as well in cases such as
Official Liquidator, Manabe & Co. Pvt. Ltd. v. Commissioner of Police and
more recently, in M. Rajendra Naidu v. Sterling Holiday Resorts (India) Ltd.
wherein the judgment was that the organizations lending to the company should
acquaint themselves well with the memorandum and the articles, however, they
cannot be expected to be aware of every nook and corner of every resolution, and
to be aware of all the actions of a company’s directors. Simply put, people dealing
with the company are not bound to inquire into every single internal proceeding
that takes place within the company.

Exceptions to the Doctrine of Indoor Management

1. Where the outsider had knowledge of the irregularity— Although people are
not expected to know about internal irregularities within a company, a
person who did, in fact, have knowledge, or even implied notice of the lack
of authority, and went ahead with the transaction regardless, shall not have
the protection of this doctrine. Illustration: In Howard v. Patent Ivory Co.
(38 Ch. D 156), the articles of a company only allowed the directors to
borrow a maximum amount of one thousand pounds, however, they could
exceed this amount by obtaining the consent of the company in a general
meeting. However, in this case, without obtaining this requisite consent, the
directors borrowed a sum of 3,500 Pounds from one of the directors in
exchange for debentures. The company then refused to pay the amount. It
was eventually held that the debentures were only good to the extent of one
thousand pounds since the director had full knowledge and notice of the
irregularity since he was a director himself involved in the internal working
of the company.
2. Lack of knowledge of the articles— Naturally, this doctrine cannot and will
not protect someone who has not acquainted himself with the articles or the
memorandum of the company for example in the case of Rama
Corporation v. Proved Tin & General Investment Co. wherein the
officers of Rama Corporation had not read the articles of the investment
company that they were undertaking a transaction with.
3. Negligence— This doctrine does not offer protection to those who have
dealt with a company negligently. For example, if an officer of a company
very evidently takes an action which is not within his powers, the person
contracting should undertake due diligence to ensure that the officer is duly
authorized to take that action. If not, this doctrine cannot help the person so
contracting, such as in the case of Al Underwood v. Bank of Liverpool.
4. Forgery— Any transaction which involves forgery or is illegal or void ab
initio, implies the lack of free will while entering into the transaction, and
hence does not invoke the doctrine of indoor management. For example, in
the case of Ruben v. Great Fingal Consolidated, the secretary of a
company illegally forged the signatres of two directors on a share certificate
so as to issue shares without the appropriate authority. Since the directors
 had no knowledge of this forgery, they could not be held liable. The share
certificate was held to be in nullity and hence, the doctrine of indoor
management could not be applied. The wrongful an unauthorized use of the
company’s seal is also included within this exception.
Further, this doctrine cannot include situations where there was third agency
involved or existent. For example, in the case of Varkey Souriar v. Keraleeya
Banking Co. Ltd. this doctrine could not be applied where there was any scope of
power exercised by an agent of the company. The doctrine cannot be implied even
in cases of Oppression.

Conclusion
Therefore, it is to be understood that in the sphere of corporate governance, the
articles of a company is a crucial document which, along with the memorandum
from the company’s core constitution and rule book, and hence defines the
responsibilities of its directors, kinds of business es to be undertaken by the
company, and the various means by which the shareholders may exert their control
over the directors, and the company itself. While the memorandum lays down the
objectives of the company, the articles lay down the rules by which these
objectives are to be achieved. In cases of conflict, the Memorandum supersedes
the Articles and the Companies Act further, supersedes both Memorandum and
Articles.
These articles may be altered as per Section 14 of the Companies Act, 2013. The
entrenchment provisions in the Articles of a company protect the interests of all the
minority shareholders by ensuring that amendment in the article can only occur
after obtaining the requisite prior approval of the shareholders. The Articles of a
company bind the company to its members and bind the members to the company
and further also bind the members to each other, they constitute a contract amongst
themselves and therefore, its members with respect to their rights and liabilities as
members of the company.