CHAPTER TWO

FORMATION AND INCORPORATION OF A

COMPANY
Learning Objectives
Procedure for Formation of a company
Documents Required for Formation of a company
• Memorandum of Association
• Articles of Association
Doctrine of Ultra-vires
Doctrine of Constructive Public Notice
Doctrine of Indoor Management
Binding Force of Memorandum and Articles

INTRODUCTION
Company being an artificial person, a procedure is required to be followed to bring it into
existence. This procedure is called formation of company. Promoters, who may be a group of
persons or body corporate initiate the process of formation.
2.1 PROCEDURE FOR FORMATION OF COMPANY
There are four stages of formation:
Promotion
Incorporation
Capital subscription
Certificate of commencement of business
2.2 PROMOTION OF A COMPANY
a. Discovery of idea: Deciding the nature of business
b. Feasibility of the idea in terms of returns, expenses, investment etc.
c. Assembling various means of business: people, capital, machinery, raw material,
management.
d. Find out availability of the name and initiate the legal procedure for registration of the
company
Promoter
Lord Justice Bowen has defined promoter as “the term promoter is a term not of law but, of
business, usefully summing up in a single word a number of business operations familiar to
commercial word by which a company is brought into existence”.

Legal Definition of promoter

“promoter” means a person—
(a) who has been named as such in a prospectus or is identified by the company in the annual
return referred to in section 92; or
(b) who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act
Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a
professional capacity

Who can be a promoter?

i. A promoter may be an individual, firm, an association of people or even a company.
ii. The promoter is a person who has a desire that the company be formed and is
prepared to take necessary steps to implement it.
Who is not a promoter?
A person who renders professional services for remuneration connected with formation of a
company. Bankers, Solicitors etc.
Legal Position of a Promoter
A promoter is a person who is actively involved in the formation of the company till it is
formed. With the formation of the company, promotion comes to an end. Similar is the position
of promoter. A promoter acts on behalf of the company. However, in true legal sense he cannot
be called an agent of the company as it is not yet registered. Similarly, a promoter is acting as a
trustee, as he is taking care of the assets acquired for the company. However, in true legal sense
he cannot be called a trustee of the company, which has not yet come into existence. The
promoter occupies a fiduciary position. A position full of trust and confidence. This position
requires him to make full disclosures of the relevant facts including any profits made by him.
Duties of a promoter
 • Not to make any secret profit - The above provision is based on the principle that a
promoter cannot make either directly or indirectly, any profit at the expense of the
company he promotes, without the knowledge and consent of the company and that if
he does so, in disregard of this rule, the company can compel him to account for it. In
relation to disclosure it may be noted that part disclosure will also attract the same
consequences. A promoter is not forbidden to make profit but he is barred from making
any secret profit. Profits to be disclosed to initial shareholders and obtain approval by
ordinary resolution
• To disclose to the company any interest in a transaction entered into by it - In addition to
disclosing secret profits, a promoter has the duty to disclose to the company any interest
he has in a transaction entered into by him.
• Duties under Contract Act
-Misrepresentation in prospectus- Civil and criminal liability If he does make any
misrepresentation in a prospectus, he may be held guilty of fraud under Section 17 of the
Indian Contract Act, 1872 and would be held liable for damages. - (Explained in third
chapter)
• It is a general opinion that a promoter completes his duty the moment the company, that
he promotes, is incorporated or when the Board of directors is appointed. But, in reality
it continues until the company has acquired the property for which it was formed to
manage and has raised its initial share capital, and the Board takes over the management
of the affairs of the company from the promoters.
Remedies available with company if breach of duty takes place:
Where, the promoter bought the property with a view to sell it to the company he promotes, the
company may either—
(a) rescind the contract and if he has made a profit on some ancillary transaction that may also
be recovered; or
(b) retain the property, paying no more for it than what the promoter has paid, depriving him of
his profit; or
(c) where the above remedies would be inappropriate, such as when the property has been
altered so as to render recession impossible and the promoter has already received his inflated
price, the company may sue him for misfeasance (breach of duty to disclose). The measure of
damages will be the difference between the market value of the property and the contract price.
Liability of a promoter
The responsibilities of a promoter arise from the fiduciary position he occupies. Therefore,
they are moral than legal. He must be fair in his dealings and take actions in the best interest of
the company. He is liable to be sued or prosecuted for breach of trust. Where there are more
than 1 promoter, they are jointly and severally liable.
Remuneration payable to promoter
Since the promoter is remunerated for services rendered prior to incorporation, there cannot
be a contract between the promoter and the company intended to be formed. Generally, a
provision is made in the Articles of Association for payment of remuneration and reimbursement
of preliminary expenses. However, this is not binding on the company. Promoters do not h ave
any legal rights to sue the company for remuneration. A promoter may be remunerated in the
following manner:
i. He may be paid lump sum by the company in the form of cash or shares and
debentures of the company or both.
ii. He may take commission on shares sold by him.
iii. He may be given an option to buy shares of the company in future at par when the
market price is higher.
iv. He may sell his property for cash or fully paid up shares at a higher price to the
company. (Full disclosure to the Board of Directors and shareholders is necessary).
1.3 INCORPORATION
The company must complete the incorporation stage to come into existence. When all the
legal formalities are completed, the Registrar of companies issues an Incorporation Certificate
with the name, Company Identification Number (CIN) and date on which it was issued. This
certificate serves as the conclusive evidence of the existence of the company since that date.
Thus, the existence of the company cannot be questioned.
Certificate of Incorporations
The certificate of incorporation certifies that the company is incorporated and in case of a
limited company, that the company is limited. [Sec. 340]. Such certificate is called certificate of
incorporation. This certificate brings the company into legal existence. The company’s life comes
into existence from the date mentioned on the certificate of incorporation and the date
appearing on it is conclusive.

Procedure for Registration/ Incorporation of The Company: Important

Steps
SPICe
• Application for Availability / Reservation of Name
• Preparation of Memorandum and Articles of Association
• The memorandum and the articles have to be stamped as per the applicable State Stamp
Laws
 • All companies are required to follow Simplified Proforma for Incorporating Company
electronically SPICe under which they are required to file SPICe -INC-32, eMoA (INC-33),
and eAOA (INC-34)
SPICe +
With an objective to provide the ease of doing business, new form SPICe+ is introduced (w.e.f
23rd February 2020) for the incorporation of a company and incidental registrations. The form
SPICe+ replaces the existing SPICe form. All the new company incorporations have to be done
by the online filing of SPICe+ form. The other forms that need to be filed along with SPICe+ are
AGILE-PRO, SPICe+AoA and SPICe+MoA.
SPICe+ aims to offer about 10 services by three Central Government Ministries and Departments
(Ministry of Corporate Affairs, Ministry of Labour and the Department of Revenue in the Ministry
of Finance) and one State Government (Maharashtra). The form is an integrated web form with
a single-window for multiple services.
. Services Offered By SPICe+
The new integrated web form offers the following services:

– Part A –: Name Reservation (New Companies only)

– Part B:

Company Incorporation
Application for DIN
PAN Application
TAN Application
GSTIN Application
EPFO Registration
ESIC Registration
Opening of Bank Account for the Company
Profession Tax Registration (only for Maharashtra)
The SPICe+ application form can be applied in two ways:

Part A (Name Reservation) and Part B (All Other Services) can be applied for
on a simultaneous basis.
Part A can be applied for initially, and upon reservation of the name, Part B can be applied for.
3. What is AGILE-PRO?
AGILE stands for Application for Goods and services identification number, employees’ state
Insurance corporation registration plus Employees’ provident fund organisation registration. The
old AGILE form (INC – 35) is now replaced with the AGILE – PRO web form.
4. RUN Web Service
RUN stands for Reserve Unique Name. This web service is used to reserve the name of a new
company or for the change in the name of an existing company. The type of entity and the
proposed names for the company are to be entered in case of reserving the name for a new
company. For an existing company, the CIN/LLPIN is the additional information to be entered in
for the change of name.
Now, since the introduction of the SPICE+ and AGILE – PRO forms, the RUN web service will
henceforth be available only for the change of name of existing companies.
Services Offered By SPICe+
The new integrated web form offers the following services:

– Part A –: Name Reservation (New Companies only)

– Part B:

Company Incorporation
Application for DIN
PAN Application
TAN Application
GSTIN Application
EPFO Registration
ESIC Registration
Opening of Bank Account for the Company
Profession Tax Registration (only for Maharashtra)
The SPICe+ application form can be applied in two ways:

Part A (Name Reservation) and Part B (All Other Services) can be applied for
on a simultaneous basis.
Part A can be applied for initially, and upon reservation of the name, Part B can be applied for.
What is AGILE-PRO?
AGILE stands for Application for Goods and services identification number, employees’ state
Insurance corporation registration plus Employees’ provident fund organisation registration. The
old AGILE form (INC – 35) is now replaced with the AGILE – PRO web form.
Bank Account
All new companies incorporated through SPICe+ would also be mandatorily required to apply for
opening the company’s Bank account through the AGILE-PRO linked web form.
Presently Punjab National Bank, SBI, ICICI Bank, Kotak Mahindra Bank, Bank of Baroda and HDFC
Bank has been integrated with SPICe+ for opening a Bank account. Gradually many Public and
Private Sectors Banks would also be integrated with SPICe+.
RUN Web Service
RUN stands for Reserve Unique Name. This web service is used to reserve the name of a new
company or for the change in the name of an existing company. The type of entity and the
proposed names for the company are to be entered in case of reserving the name for a new
company. For an existing company, the CIN/LLPIN is the additional information to be entered in
for the change of name.
Now, since the introduction of the SPICE+ and AGILE – PRO forms, the RUN web service will
henceforth be available only for the change of name of existing companies.
Attachments Required for SPICe+

• Memorandum of Association
• Articles of Association
• Declaration by the first director(s) and subscriber(s) (Affidavit not required)
• Proof of office address
• Copy of utility bills
• Copy of certificate of incorporation of foreign body corporate (if any)
• A resolution passed by promoter company
• The interest of first director(s) in other entities
• Consent of Nominee (INC–3)
• Proof of identity as well as the residential address of subscribers
• Proof of identity as well as residential address of the nominee
• Proof of identity and address of Applicant I, II, III
• Resolution of unregistered companies in case of Chapter XXI (Part 1) Companies
• Declaration in Form No. INC – 14
• Declaration in Form No. INC – 15
• Optional attachments (if any)
Attachments for AGILE-PRO:
• Proof of principal place of business
• Proof of appointment of Authorised Signatory for GSTIN
• (Either of the documents– Letter of Authorisation/Copy of Resolution passed by BOD/
• Managing Committee and Acceptance Letter)
• Proof of identity of Authorised Signatory for the opening of a bank account
• Proof of address of Authorised Signatory for the opening of a bank account
 • Specimen Signature of Authorised Signatory for EPFO
Ease of Doing Business EODB initiative of the government has significantly enhanced the
procedure of formation of company. The earlier turmoil of lengthy procedure for months is now
a matter of few days.

CERTIFICATE OF INCORPORATION
Certificate of incorporation issued by registrar is the conclusive evidence that all the
requirements of the Companies Act (In respect of registration) have been duly compiled with).
That means no one can question the existence of the company. Following court cases will make
this clearer.
Moosa Goolam Arif vs. Ebrahim Goolam Arif (1913),
After the company was issued a certificate of incorporation it was found that out of the seven
persons who signed the memorandum only two were adults, one of them signing as a guardian
of the other five members who were all minors at that time. It was held that the question whether
the formation of the company is null and void will not arise, in view of the conclusiveness of the
certificate of incorporation once it is issued. The certificate is evidence of compliance of all the
requirements as required by the Companies Act. Therefore, the position is firmly established that
if a company is born, the only method to get it extinguished is not by assailing its incorporation,
but by resorting to the provisions of enactments, which provide for the winding up of companies.
Jubilee Cotton Mills Ltd. Vs. Lewis
The memorandum and articles of the company were delivered to the Registrar for registration
on the 6th January. On the 8th January the Registrar issued the certificate of incorporation, and
dated it 6th January. On the 6th January and before the certificate was issued, the company
allotted shares to L. Held, the certificate of incorporation was conclusive as to the date on which
the company was incorporated and consequently the allotment of shares to L. was not void.
The Company Identification Number (CIN)
CIN is a 21-digit alphanumeric code. The code/number is given as follows:
1. The first character will be either U or L. U will be in case of unlisted companies and L will
be used in case of listed companies.
2. Next 5 digits will indicate the activity of the company.
3. PN stands for Registrar of Companies, Pune. In case of the certificate issued by Registrar
of Companies, Mumbai, these alphabets will be MH.
4. Next four digits indicate the year of incorporation.
5. Next three alphabets will indicate type of company. PTC will be used if the company is a
private limited company, PLC for public limited company, NPL for section 25 companies
etc.
6. Last six digits will be the serial number of the company.
2.4 CAPITAL SUBSCRIBTION STAGE
A public company must follow this stage. It can raise capital by:
1. Issue of shares to the public
2. Offer for sale through agency
3. Pt placement privately (shares are bought privately by select people contacted by the
company)

1. public issue of Shares: In this method of raising capital, the prospectus must be prepared
and issued by the company. It must file prospectus with registrar of companies (ROC) and
issue it to the public within ninety days. After issue of prospectus the company must
collect minimum subscription within 120 days. If it is not collected, the capital must be
returned.
2. Offer for sale: In this case all the shares of the company are allotted to an agency called
issuing house. This issuing house then sells the shares to public. This method was adopted
by companies to avoid responsibilities associated with prospectus and public issue.
However, the advertisement or any other offer made by issuing house is now treated as
deemed prospectus.
3. Private Placement: Shares are allotted to private firms, institutions etc. In this case,
statement in Lieu of prospectus must be filed with Registrar of Companies three days
before the allotment.
The detailed procedure of issuing shares is discussed in the chapter 3
2.5 COMMENCEMENT OF BUSINESS
After obtain certificate of incorporation a company not having share capital may commence its
business but company having share capital weather public or private has to obtain another
certificate before it can commence its business. This certificate is called certificate to commence
business.
Procedure for obtaining the certificate of commencement of business
As per the Companies (Amendment) Ordinance 2018, there is a requirement for all the
companies registered on or after 2 November 2018 to file a certificate of commencement of
business.
• Form 20A is a declaration filed by the directors within 180 days of the date of
incorporation of the company. This is one of the most important compliances to follow as
the penalties for non-filing is extremely high.
• A declaration under section 10A from the directors has to be provided in the form of a
Board Resolution in the eForm itself.
 • In addition to this, a proof of deposit of the paid-up share capital by the subscribers also
needs to be attached in the eForm.
• If a company pursues objects requiring registration or approval from any sectoral
regulators such as The Reserve Bank of India and Securities and Exchange Board of India
etc, then it shall obtain such registration or approval along with the attached declaration.
• The eForm has to be verified and certified by a practising professional before filing with
the ROC
Penalties for non-compliance
• Penalty to be levied on the company: A penalty of Rs 50,000 will be levied on the company
if it fails to comply with the mentioned requirement.
• Penalty to be levied on the officers: Every such officer in default shall be liable to a penalty
of Rs 1,000 per day for each day during which the default continues subject to a maximum
of Rs 1,00,000.
• Company strike-off: If the Registrar has reasonable grounds to believe that the company
is not carrying on any business or operations even after 180 days of incorporation, the
registrar may remove the name of the company from the Register of companies
Distinction between Certificate of Incorporation and Certificate of
Commencement
Certificate of Incorporation Certificate of Commencement
1 Need For all companies. For companies with share
capital
2 Applied by An association of people A registered company applies
applies for the certificate. for the certificate.
3 Evidence Evidence of birth. Evidence of completion of legal
requirements.
4 Documents Memorandum of Association, Declaration under sec.10A
Articles of Association Board Resolution
Form under SPICe + Proof of deposit of share capital
in bank
Any other sectoral approval
Form 20A

2.6 PRELIMINARY CONTRACTS AND PROVISIONAL CONTRACTS

The procedure of formation of a company is very lengthy. However, promoters cannot wait
till the compliance of legal formalities. Dynamic nature of business does not allow them to
postpone the business transaction. During the process of formation also they hav e to enter into
various contracts. On the basis of time these contracts can be divided into two categories:
 i. Preliminary Contracts: They are also known as pre-incorporation contracts. The
parties involved are promoters and third parties. These contracts are not binding on
the company. In case of a private company, there are post-incorporation contracts.
Provisional contracts do not exist for private companies.
Contracts become binding if:
a. After incorporation, company accepts contracts.
b. The acceptance of the contract is communicated to third parties.
For example: Printing of Memorandum and Articles of Association.
ii. Provisional Contracts: These contracts are made by companies after incorporation
stage. If the trading certificate is not obtained, these contracts are not binding upon
the company. Once the trading certificate is obtained, these contracts become
binding and valid for the company.
Provisions of provisional contracts:
They are not binding upon the company till it is entitled to commence the business.
On the date the company becomes entitled to commence the business, these contracts
become binding without any ratification.
If the company is unable to get the certificate to commence the business provisional
contracts never become binding upon the company.

Distinction between Preliminary Contracts and Provisional Contracts

Preliminary Contracts Provisional Contracts
i Time frame They take place before the They take place after the company
company is incorporated gets certificate of incorporation but
before the company gets certificate to
commence the business.
ii Parties to the Promoter and the third parties Company and the third party. All
contract dealing with promoter these contracts are in the name of the
company is not a party as it company and directors are official
does not yet exist signatories.
iii Legal status of the This contract is valid till These contracts are not binding on
contract incorporation. After the company till the company gets the
incorporation the contract is certificate of commencement of
legally enforceable only if: business. If the company does not get
Company accepts the the certificate the contract become
contracts with or void and cannot be legally enforce on
without modification any of the parties.
 If communicates the
acceptance to the other
party of the contract.
Contract is within the
scope of Memorandum
of association of the
company.
iv liability Promoter is personally liable Company is liable only if the
for the pre-incorporation certificate of commencement of
contract. business is received by the company.

DOCUMENTS RELATING TO FORMATION OF A COMPANY

Following documents are necessary for the formation of the company
a. Memorandum of Association
b. Articles of Association

2.7 MEMORANDUM OF ASSOCIATION

Companies Act has defined Memorandum as “Memorandum means the memorandum of
association of a company as originally framed or as altered from time to time in pursuance of any
previous company law or of this Act”.
Lord Cairns has described Memorandum as “The memorandum of association of a
company is its charter and defines the limitations of the powers of the company”.
Lord Macmillan has explained the very purpose of this document as “The purpose of the
memorandum is to enable the shareholders, creditors and those who deal with the company to
know that what is permitted range of enterprise is. Every concerned person can know from a
study of the memorandum the extent of risk which he is subject to when he deals with the
company”.
Features of Memorandum of Association
1. It is the fundamental, life giving document of the company. It is needed at the time of
registration.
2. It states the powers and privileges conferred upon the company. It defines the
boundaries of the company.
3. It has six clauses. Object clause is the most important clause.
4. It is a public document. All people dealing with the company must go through the
Memorandum of Association before entering into contracts.
5. It defines the extent of risk taken by the entrepreneurs and investors.
6. It is the constitution of the company.
Objectives (Need of Memorandum)
Following are the objectives of Memorandum:
i. To enable all the parties who deal with the company to know the powers of the
company. Thus, an intending buyer of shares will know the purpose for which the
money is utilized by the company. He can ascertain the risk element involved in his
investment.
ii. To enable the parties dealing with the company to know whether their dealings are
permitted or not.
iii. To prevent diversification of company’s activities not closely connected with the
business for which the company is formed
2.8 CLAUSES OF MEMORANDUM OF ASSOCIATION
I. Name Clause
i. The name should not be similar to or same as any existing company.
ii. If liability is limited, the word “Limited” must be used for public and
“Private Limited” for private companies
iii. It must not be an undesirable name
iv. It should not use prohibited words
II. Registered Office Clause/Domicile Clause: This clause contains the name of the state
in which the registered office of the company is situated.
III. Object clause:
Old Act
• A- Main Objects
• B - Objects incidental to main object
• C - Other Objects
New Act
• A - The objects to be pursued by the company on its incorporation
• B - Matters which are necessary for furtherance of the objects specified in
clause iii. (A)
Legal Provisions
i. The clause should not be against the law of the land. If the object is illegal, the
incorporation certificate may be cancelled.
ii. The objectives must not be immoral or against public opinion.
Shareholders, creditors and third parties must know about the business for which
their money is being invested. They come to know if the business is ultra-virus the
company. Ultra-virus means outside the bounds of the company. Intra-virus means
within legal bounds.
iv. Capital Clause: This clause mentions the authorized capital, types of shares
 being issued, voting power enjoyed by the shareholders.
v. Liability Clause: It describes the nature of the liability of the company. If there is no
liability clause, then the company has unlimited liability. A company cannot convert
liability from limited to unlimited. Only the directors’ liability can be changed only if
the articles of Association provide for the same and the directors give written consent.
The liability can be converted from unlimited liability to limited liability. Consent of
members of the company is needed. However, the members are still liable for all debts
accrued before conversion of the company as per the provisions of the creditors of the
company. They are not personally liable for contracts entered into after conversion of
the company.
vi. Association Clause: The Memorandum of Association concludes with this clause. The
subscribers to the Memorandum of Association declare- “we the several persons
whose names and address and occupations are subscribed here to, are desirous of
being formed into a company in pursuance of this Memorandum of Association and
we respectively agree to take the number of shares in the capital of the company set
opposite our respective names”. This clause is the life-giving clause and therefore, this
clause cannot be altered. It is unalterable clause.
2.9 THE DOCTRINE (PRINCIPLE) OF ULTRA-VIRES
Ultra means beyond and vires means powers. Powers of company are mentioned in object clause.
Ultra-vires means beyond the powers of the company. Ultra virus activities are illegal. This
doctrine was introduced after a Railway case in Belgium. Lord Cairns passed judgment against
the Railway Company.
This doctrine was established in India in the case of Lakshmanaswamy Mudliar vs. L.I.C. The
directors of the company were allowed to make payment for any charitable objective useful for
society. However, the company made payment for promoting business and technical knowledge.
The Supreme Court held that the payment was ultra-vires the company.
Any transaction made by company must:
1. Be consistent with Companies Act.
2. Be in the boundaries of the Object Clause.
3. Follow the laws of the land.
Anything beyond the object clause is ultra vires the company. Anything beyond Companies
Act is ultra –vires the Companies Act. Example, payment of dividend from capital of the
company. Anything beyond the laws of the land is ultra-vires the company. Example, against
acts and legislations of the Government.
Objective of the Doctrine
i. To prohibit illegal use of capital.
ii. To protect the company, shareholders and all the third parties
 A company cannot act beyond the powers conferred upon it by its Memorandum either
implied of expressly.
Implied powers of the company: [Not required to be included in
Memorandum of Association]
1. Power to borrow
2. Power to purchase assets
3. Power to hire labor, etc.
However, as a matter of abundant care, companies do expressly mention such implied
powers in the memorandum.

Express powers of the company: [Mentioned in the Memorandum of

Association of the company]
It is prudent to include them expressly in the object clause.
1. To acquire any business similar to that of the company’s own business.
2. Entering into an agreement with other person or company for carrying on business in
partnership or for sharing profits, joint ventures or other arrangements.
3. Buying shares in other companies having similar objects.
4. Promoting other companies or providing finance for that.
5. A power to use funds for political purposes.
6. A power to give gift and make donation for charities not relating to the objects stated in
the Memorandum.
7. A power to sell and dispose of entire business of the company.
8. Entering into guarantee contracts.
9. Making loans by accompany not engaged in banking or financing business.
If any company acts beyond these powers, it becomes an ultra-vires Act.

• Any Act ultra-vires the Articles of Association but intra-vires the Memorandum of
Association can be ratified by passing the special resolution.
• Any Act ultra-vires the Memorandum is void-ab-initio and cannot be ratified even if
all the members agree unanimously.
• Any Act ultra-vires the Companies Act or constitution is illegal and hence null and void

Effects of Ultra-Vires Acts

i. Void-ab-initio: Ultra-vires acts are null and void-ab-initio. Company is not bound by
these Acts. Neither can the company sue or be sued.
 ii. Injunction: All the members unanimously or even a single member can get an
injunction order from the court restraining the company from going ahead with ultra-
vires acts
iii. Personal liability: A shareholder can maintain an action against the directors to
compel them to restore the funds of the company that they have employed in ultra-
vires activities. In case of deliberate actions, criminal procedure can also be initiated
against the directors.
iv. Ultra –vires acquired property: If the company has acquired any property under an
ultra-vires transaction and third party causes damage to that property then the
company has a right to recover these damages from the third party.
v. Restitution: If property handed over to the company under an ultra-virus transaction
is with the company in form and shape, it must be restored to the third party.
vi. Ultra-vires lending and borrowing: There is no debtor, creditor relationship. Claims
can be made only for damages.
The Articles of Association specify the limit within which money can be borrowed by the
directors. Violation of this limit is “ultra-vires the directors” and can be rectified by passing a
special resolution at a general meeting and increasing the limit that can be borrowed.
2.10 ARTICLES OF ASSOCIATION
Memorandum defined boundaries and relationship of the company with outsiders, whereas
Articles of Association provide internal rules for management and administration of companies.
As per Companies Act,2013 “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.
Thus Articles of the company can be easily altered within the scope of the Companies Act 2013
or any previous Companies Act. The legal definition is not sufficient to explain the features of the
Articles of Association; therefore, it becomes necessary to study the explanation given by Lord
Cairns.
Lord Cairns: General functions of Articles have been extracted from the verdict given by Lord
Cairns in the case tried before him “Ashbury Railway Carriage Company Ltd. Vs. Riche”. “The
articles play a part, subsidiary to, the Memorandum of Association. They accept the
Memorandum of Association as the charter of incorporation of the company, and so accepting
it, the articles proceed to define duties, rights and powers of the governing body as between
themselves and the company at large, and the mode and form in which changes in the internal
regulations of the company may from time to time be made. The Memorandum is the area
beyond which the action of the company cannot go, inside that area, shareholders may make
such regulation for their own governance as they link it”.
Features of Articles of Association
 1.It is necessary for registration of the company.
2.It is subsidiary to the Memorandum of Association.
3.It defines rules and regulations of internal management of the company.
4.It forms relationship between
a. Directors and directors
b. Company and directors
c. Shareholders and the company
d. Shareholders and the directors
Thus, Articles of Association can be easily altered to provide flexibility in the management.

Therefore, Articles can be amended with a single procedure subject to the following:
1. The alteration must be within the scope of Memorandum of Association.
2. The alteration must be consistent with the provisions of Companies Act.
3. The alteration should not sanction anything against the public policy or anything illegal.
Alteration must be genuinely in good faith of the company.
4. The alteration must not aim at exploitation of minority by giving majority shareholders
any undue advantage.
5. The alteration should not be made to justify any breach of contract with third parties.
6. Articles cannot be altered so as to compel an existing member to take or subscribe for
more shares or in any way increase his liability to contribute to the share capital, unless
he gives his consent in writing
7. The Articles of Association cannot be altered so as to have retrospective effects. The
articles only operate from the date of the amendment

Distinguish between
Memorandum of Articles of Association
Association
i Status Memorandum of Association is Articles of Association are
the top most document of the subsidiary to the Memorandum.
company, upon which its
registration depends.
ii Purpose It makes clear fundamental Articles of Association contain rules
conditions of incorporation like relating to internal management of
name, domicile, objects, capital the company.
and liability
 iii Legality The scope of activities or powers The Articles establish clear
of the company is determined by regulations by which the company
the Memorandum of must operate.
Association.
iv Ultra-vires Any activity ultra-virus the Any activity which is ultra-vires
Memorandum of Association is Articles of Association; but intra-
void-ab-initio. vires Memorandum of Association
can be ratified by passing a special
resolution.
v Relations The Memorandum defines The Articles of Association defines
(scope) relationship with the public, company’s relationships with the
government and any one shareholders and directors only.
interacting with the company.
vi Contents The Memorandum of Association The Articles contains many
contains six very important provisions, some of which may
clauses. never be used by the company.
vii Alteration The alteration procedure is long, A special resolution at a general
difficult and varies for each meeting is only needed for
clause. alteration.

2.11 BINDING FORCE OF MEMORANDUM AND ARTICLES OF

ASSOCIATION
The memorandum and articles when registered with the registrar bind the company and
the members as if they respectively are signed by the company and each member as if they
respectively are signed by the company and each member. Following are the legal implications
of the binding force of Memorandum and Articles of Association (sec.36)
1. Members are bound to the company: Memorandum and Articles constitute a contract
between company and each member and therefore members are bound to the company
as far as liabilities of members are concerned.
2. Company is bound to the members: The company is bound to the members as far as
rights of the members are concerned e.g. payment of dividend or voting rights can be
exercised by the members only as per the provisions of the Articles.
3. Members are bound to members: Memorandum and Articles constitute contract among
the members as their collective righted are concerned e.g. voting rights.
4. Company or members are not bound to outsiders: This is based on the famous principle
that a stranger to a contract cannot get any right on the basis of contract. Memorandum
or Articles do not constitute a contract between the company and outsider or member
 and outsider. Therefore, company or members are not bound to outsider even if
outsiders’ names are mentioned in the Articles.
5. The directors bound by the Articles: The directors derive their powers from the Articles of
the company. They are bound to the company and members of the company. If they act ultra-
vires the Articles their act can be ratified by the members by passing a special resolution.
However, if the company incurs any loss due to such action the directors become liable to the
company. If any outsider suffers any loss due to an act of the directors’ ultra-vires the articles he
can sue the company for such act. This concept can become clearer with the discussion of the
doctrine of Indoor Management.

2.12 DOCTRINE OF CONSTRUCTIVE NOTICE

Memorandum and Articles of association once registered with the registrar, become
public documents accessible to anybody who wishes to read them. In other words, these
documents serve as a constructive notice to the public. Therefore, it is assumed that any outsider
has read and studied these documents before entering into any contract with the company.
Ignorance of law is never justified by the court. Similarly, ignorance about these documents is
never acceptable to the law. This doctrine serves as the basis for the doctrine of ultra-vires and
protects the company against the outsiders trying to do any ultra-vires act detrimental to the
company.
Thus outsiders cannot sue the company for any contract or act which is ultra-vires the
company, on the pretext that they never knew about the object of the company. However, they
can sue the directors of the company.
2.13 DOCTRINE OF INDOOR OF MANAGEMENT
Thus this rule works as an exception to the doctrine of constructive notice. It seeks to
protect the outsiders in respect of any irregularities in the managements of the company. An
outsider is presumed to know constitution of the company, but not what may or may not have
taken place within the doors which are closed to him.
Exceptions to the Doctrine of Indoor of Management
In the following situations, outsiders cannot seek relief on the grounds of rule of Indoor
Management:
i. If the outsider had the knowledge of irregularity: This rule has no implication if the
outsider had the opportunity to know about the irregularity. The knowledge may be
actual or implied.
ii. Ignorance about the Articles: This rule cannot be involved against the person who did
not consult the Memorandum and Articles of association and did not rely on them.
iii. Void or illegal transactions: The rule cannot be made applicable in respect of the illegal
transaction such as forgery of signatures of the directors.
iv. Negligence: This rule will not provide any protection to those who are not diligent
about their own rights or interest.
v. Acts ultra-vires the company: The doctrine will not give any protection in respect of
act which is ultra-vires the company.