Lecture Notes on Corporate Laws

Corporate
Constitution

Balkrishna Parab
balkrishnaparab@jbims.edu

Introduction
The constitution is a set of formal documents, drawn up by those applying to
register the company, which sets out the rules for running the company. The
constitution of a company comprises of two documents: memorandum of
association and articles of association. A company's memorandum of
association defines what its purpose and line of business is, whilst the articles
of association contain regulations regarding the way in which the company
conducts its internal affairs.

Memorandum of Association
The memorandum of association of a company contains the fundamental
conditions upon which alone the company has been incorporated. The
memorandum, along with the articles of association, is the constitution or
charter of the company and contains the powers of the company.
The memorandum of association of a company is of great importance. It
defines as well as confines the powers of the company. It contains the objects
for which the company is formed and therefore identifies the possible scope of
its operations beyond which its actions cannot go. The memorandum of
association defines and formulates the principal conditions of the companys
incorporation.
Lecture Notes on Corporate Laws
Corporate Constitution
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The memorandum enables the shareholders, creditors and all those who deal
with the company to know what its powers are and what is the range of its
activities. An intending shareholder can find out the purpose for which his
money is going to be used and what risk he is taking in making the investment.
A company has wide discretion about what to include in the memorandum of
association. However, the memorandum of association of every company must
contain the following clauses:

Name Clause
A company being a distinct legal entity must have a name of its own to
establish its separate identity. The name of a public limited company must
end with the word 'Limited' and that of a private limited company must end
with the words 'Private Limited'1. The company cannot have a name, which in
the opinion of the Central Government is undesirable. A name that is identical
to or closely resembles the name of another existing company is not allowed.
A company cannot use a name that is prohibited under the Names and
Emblems (Prevention of Misuse Act), 1950, or use a name suggesting a
connection to the Government.

Situation Clause
The state in which the registered office of company is to be situated is
mentioned in this clause2. Every company must have a registered office that
establishes its domicile.
The registered office of the company is the official address of the company
where the statutory books and records must be normally be kept. Every
company must affix or paint its name and address of its registered office
outside every office or place at which its activities are carried on in. The name
must be written in one of the local languages and in English.

Objects Clause
This clause is the most important clause of the company. It specifies the
activities which a company can carry on and which activities it cannot carry
on3. The company cannot carry on any activity, which is not authorized by its
memorandum. This clause must specify: (i) main objects of the company and

1
Section 4 (1) (a) of the Companies Act, 2013.
2
Section 4 (1) (b) of the Companies Act, 2013.
3
Section 4 (1) (c) of the Companies Act, 2013.
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Corporate Constitution
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objects incidental or ancillary to the attainment of the main objects; and (ii)
other objects of the company not included in (i) above.
In case of the companies other than trading corporations whose objects are not
confined to one state, the states to whose territories the objects of the company
extend must be specified.

Liability Clause
This clause contains a declaration that the liability of the members is limited in
case of the company limited by the shares or a company limited by guarantee4.
The memorandum of a company limited by guarantee must also state that each
member undertakes to contribute to the assets of the company such amount
(not exceeding specified amounts) as may be required in the event of the
liquidation of the company.
A declaration that the liability of the members is unlimited in case of the
unlimited companies must be given. The effect of this clause is that in a
company limited by shares, no member can be called upon to pay more than
the uncalled amount on her shares. If her shares are already fully paid up, she
has no further liability towards the company.

Capital Clause
The amount of share capital with which the company is to be registered must
be specified giving details of the number of shares and types of shares5. A
company cannot issue share capital greater than the maximum amount of share
capital mentioned in this clause. This is known as the authorized capital of the
company.

Association Clause
This is a declaration given by the persons subscribing to the memorandum of
association that they desire to form into a company and agree to take the
shares. It states the names, addresses, identification and occupations of the
subscribers and the number of shares each subscriber has agreed to take. The
law requires that:
the memorandum must be signed be each subscriber6;
each subscriber must take at least one share;

4
Section 4 (1) (d) of the Companies Act, 2013.
5
Section 4 (1) (e) of the Companies Act, 2013.
6
Section 3 (1) of the Companies Act, 2013.
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Corporate Constitution
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each subscriber must write opposite his name the number of shares she
has agreed to subscribe.

Alteration of Memorandum
A company cannot change its memorandum except in the circumstances and
manner expressly provided for in the Companies Act, 2013. The provisions in
the Act regarding amendment of various clauses of the memorandum are
discussed below:
ALTERATION OF NAME CLAUSE
The name of a company can be changed anytime by passing a special
resolution7 at a general meeting of the company and with the written approval
of the Central Government8. The changed name should be intimated to the
Registrar and the company should obtain a new certificate of incorporation
signifying a change in name. When a company has been inadvertently
registered with a name that is identical to an existing company, the company
can change its name by passing an ordinary resolution9 and obtaining the
approval of the Central Government.
The change of name of the company does not affect any rights and obligations
of the company or render the same defective in legal proceedings by or against
it.
If the Registrar has registered the change of name, the commencement of the
legal proceeding in the former name is not valid. However, legal proceedings
that might have been continued or commenced by or against the company by
its former name may be continued. By the change of name of the company the
constitution of the company does not change. All the rights and obligations
under the law of the company remain same.
ALTERATION OF SITUATION CLAUSE
A change in the registered office of the company can take three forms:
Change of registered office from one premise to another in the same
city, town or village. This change does not amount to alteration of the
memorandum of association and as such can be brought about by
passing a resolution of the Board of Directors.

7
Section 13 (1) of the Companies Act, 2013. A special resolution is one that is passed by
three-fourths majority in a general meeting of the members or shareholders.
8
Section 13 (2) of the Companies Act, 2013.
9
An ordinary resolution is one that is passed by a simple majority in a general meeting of the
members.
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Lecture Notes on Corporate Laws
Corporate Constitution
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Change of registered office from one premise to another in another

city, town or village, in the same State. This change can be brought
about by passing a special resolution in the general meeting and
obtaining confirmation of the Regional Director.
Change of registered office from one state to another state may be done
by passing a special resolution in the general meeting and obtaining
confirmation from the Central Government.
The first two of the above instances does not require amendment of the
memorandum; the third instance does. The situation clause can be amended by
passing a special resolution10. After effecting the change the ROC must be
intimated about the same within 30 days of the change.
ALTERATION OF OBJECT CLAUSE
The objects clause may be amended by passing a special resolution at a
general meeting of members of the company.
ALTERATION OF LIABILITY CLAUSE
The liability of a member cannot be increased unless the member agrees in
writing. The consent of the member may, however, be given either before or
after the alteration
However, in case of a company that is a club or any other similar association
and the alteration in the memorandum requires the member to pay recurring or
periodical subscription or charges at a higher rate, although he does not agree
in writing to be bound by the alteration, it shall be binding on him.
In case of an unlimited company, the liability may be made limited or reduced
by re-registration of the company. The alteration will, however, not affect any
debts, liabilities, obligations or contracts entered into by or with the company
before the registration of the unlimited company as a limited company.
ALTERATION OF CAPITAL CLAUSE
A company limited by share capital may alter the capital clause of its
memorandum of association by passing an ordinary resolution in general
meeting. This may be done to:
Increase its share capital by such amount as it thinks expedient by
issuing new shares;
Consolidate and divide all or any of its share capital into shares of
larger amount than its existing shares;

10
Sections 13 (1) and 13 (4) of the Companies Act, 2013.
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Lecture Notes on Corporate Laws
Corporate Constitution
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Convert all or any of its fully paid up shares into stock, and reconvert
that stock into fully paid-up shares of any denomination;
Sub-divide its shares, or any of them, into shares of smaller amount
than is fixed by the memorandum, so, however, that in the sub-division
the proportion between the amount paid and the amount, if any, unpaid
on each reduced share shall be the same as it was in the case of the
share from which the reduced share is derived;
Cancel shares which, at the date of the passing of the resolution in that
behalf have not been taken or agreed to be taken by any person, and
diminish the amount of its share capital by the amount of the shares so
cancelled.

Articles of Association
Articles of association contain the rules or byelaws and regulations relating to
the internal management and administration of the company. The relationship
between the company and its members and the relationship between one
member and the other is based on the provisions made in the articles of
association of the company. It is an important document of the company and
along with the memorandum of association constitutes the constitution of the
company.
The articles of association are subordinate to the memorandum of association.
The memorandum of association states the objects of the company, defines
and formulates the principal conditions of the companys incorporation, the
articles merely set out the composition and mode by which the company
desires to attain those objects. The articles are secondary to the memorandum.
The provisions of the articles must not be in conflict with the provisions of the
memorandum of association. In case such a conflict arises, the memorandum
will prevail.
The articles of association constitute a contract between the company and its
members. They are binding on the company as well as on its members. The
outsiders are not concerned or connected with the articles of the company.

Form of Articles of Association

The Act provides that a company limited by shares may register the articles of
association along with its memorandum. A public company limited by shares

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Lecture Notes on Corporate Laws
Corporate Constitution
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is given an option. It can prepare and file its own articles of association or may
adopt Table F as its articles11.
The law provides that the articles of association of every company must be: (i)
printed; (ii) divided into paragraphs, numbered consequently; (iii) signed by
each subscriber to the memorandum who shall add her address, description
and occupation, if any, in the presence of at least one witness who will attest
the signature and shall likewise add her address, description and occupation, if
any; (iv) must be properly stamped as required under the Indian Stamp Act;
and (v) should be registered with the ROC along with the memorandum of
association and other necessary documents.

Contents of Articles of Association

The Articles of Association contain regulations for the internal management of
the company. The articles set out the rights and duties of the members of the
company and constitute a contract between them. The third parties or
outsiders are in no way concerned with the articles. The articles usually
contain regulations on the following matters:
Powers, duties, rights and liabilities of Directors
Powers, duties, rights and liabilities of members
Rules for Meetings of the Company
Dividends
Borrowing powers of the company
Calls on shares
Transfer & transmission of shares
Forfeiture of shares
Voting powers of members

Entrenched Provisions
The articles may contain such provisions which may be altered only if certain
conditions or procedures which are more restrictive than those applicable in
the case of a special resolution, are met or complied with. The provisions for
entrenchment shall only be made by a private company on formation, or by an
amendment in the articles agreed to by all the members of the company. A
public company may be made by passing a special resolution.

11
Table F of Schedule I of the Companies Act, 2013 contains the model articles of association
for a public company limited by shares.
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Lecture Notes on Corporate Laws
Corporate Constitution
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Where the articles contain provisions for entrenchment, the company is

required to give notice to the Registrar12 of such provisions in along with the
prescribed fee13 at the time of incorporation of the company or in case of
existing companies, the same shall be filed within thirty days from the date of
entrenchment of the articles14.

Alteration of Articles
A company can alter any of the provisions of its articles of association, subject
to provisions of the Act and subject to the conditions contained in the
memorandum of association of the company. The articles of association can be
amended by passing a special resolution in the general meeting. Thus, the
company can alter or add to its articles and such alteration or addition shall be
valid as is originally contained in the articles. The procedure for any alteration
or addition is not lengthy and time consuming as in case of memorandum of
association. The procedure is as follows:
SPECIAL RESOLUTION. The alteration in the articles can be made by
passing a special resolution in the general meeting;
FILING OF RESOLUTION. A copy of the special resolution authorizing
the alteration must be filed with the ROC within 30 days of passing the
said resolution.
FILING OF ALTERED ARTICLES. A copy of the new (altered) articles of
association needs to be filed with the registrar within three months of
passing the special resolution. The alteration will be effective from the
date of registration with the ROC. Every copy of the articles issued
after the date of alteration must be per the alteration made.
SANCTION OF GOVERNMENT. A company must obtain a sanction from
the Central Government for certain alterations in the articles. For
example, alteration for conversion of a public limited company into a
private limited company, or alteration, which results in the increase in
the remuneration to a director, managing director, or whole time
director.

12
Form INC.2 or Form INC.7.
13
Companies (Registration Offices and Fees) Rules, 2014.
14
Form MGT.14.
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Lecture Notes on Corporate Laws
Corporate Constitution
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Limitations on the Power to Alter Articles

The power to alter articles is a statutory power and cannot be curtailed in any
way. However, this freedom of the company to alter its articles is subject to
certain limitations.
GENERAL RESTRICTIONS
The following are the general restrictions on a companys power to alter its
articles of association:
A company cannot alter its articles to increase a members liability
without her consent;
A provision in the articles that is contrary to public policy is void;
A provision in the articles which is inconsistent with the Act is void;
and
An alteration to the articles that conflicts with the memorandum would
be effectively void.
SPECIFIC RESTRICTIONS
The specific restrictions on a companys power to alter its articles of
association are as follows:
The proposed alteration must not be inconsistent with the provisions of
the Act or any other law, memorandum of association, and with the
alteration ordered by the Company Law Board or the Central
Government.
The alteration must be bona fide. This means that the proposed
alteration should be just, fair and equitable. It should be in the best
interest of the company.
The alteration must not constitute a fraud on the minority members.
The alteration must not increase the liability of a member without her
consent to take more shares than she had before the alteration.
The alteration must not be made for the conduct of illegal business.
The alteration must not lead to breach of contract with the outsiders.
The alteration must not make the articles unalterable as it is regarded
bad in law.

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Corporate Constitution
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Memorandum Vs Articles
Memorandum of association is a fundamental document that states about the
objects and powers of the company. The articles of association are a
subordinate document that contains regulations regarding the internal
management and administration of the company.
Memorandum of association is the primary, basic and principal document of a
company. It is subordinate to the Act only.
The articles of association are secondary, subsidiary and subordinate
document of the company. It is subordinate to the memorandum.
Memorandum of association governs external relations of the organization and
indicates the permitted range of its activities. The articles of association
govern relations between company and its members and between the members
inter se.
It is compulsory for every company to prepare and file their memorandum of
association at the time of incorporation. The preparation of articles of
association is optional for public company limited by shares, as it can adopt
the model articles of association contained in Schedule I Table A of the Act.
The memorandum of association is practically unalterable charter of the
company except to the extent Act provides. Such alterations also need sanction
of the Central Government. On the other hand, articles can be altered merely
by passing a special resolution.
Any transaction that is outside the limits prescribed by the memorandum of
association is void and even if all the members desire, it cannot be ratified. On
the other hand, any transaction that is outside the limits of the articles can be
ratified by the company passing a special resolution.

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Lecture Notes on Corporate Laws
Corporate Constitution
balkrishnaparab@jbims.edu

Legal Effect of Memorandum and Articles

The law states:
Subject to the provisions of this Act, memorandum and articles
shall, when registered, bind the company and the members
thereof to the same extent as if they respectively had been
signed by the company and by each member, and contained
covenants on its and his part to observe all the provisions of the
memorandum and of the articles15.
All money payable by any member to the company under the memorandum or
articles shall be a debt due from her to the company.
It is clear from the above section that when the memorandum and the articles
are registered, they bind the company and the members to observe all the
provisions of the memorandum and the articles of association. The effect of
the registration of these documents is such that they bind the company and the
members as if they have been separately signed by the company and each
member. It will be easy to understand the implications of this section, by
considering the contractual relations between the parties:
MEMBERS AND THE COMPANY. As between the members and the
company, each member is bound to the company by a statutory
contract to observe the provisions of the memorandum and the articles
of association. For example, if the articles provide that the company
shall have paramount lien on its shares, then the members are bound by
it and the company can exercise its rights as against its members in
pursuance of and in accordance with its articles.
COMPANY AND THE MEMBERS. The company is also bound to its
members to observe the provisions of the memorandum and the
articles. It has a statutory obligation to observe the provisions of these
documents. However, it is held that it is not true to say that the
company is wholly bound to its members, but it is bound to such an
extent that a member can sue the company to prevent any breach of
articles by it which would affect his right as a member of the company.
For example, a member can insist on observation of articles regarding
his right to vote.
MEMBERS INTER SE. As between the members inter se, the articles of
the company bind each member to the other member. However, if

15
36.
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Lecture Notes on Corporate Laws
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there is a breach of an article by a member, another member cannot sue

him. In such a case, the company should take the action. Exception is
made to this principle only when the members against whom the
complaint is lodged control the majority of the shares and will not
allow a suit to be brought against them in the name of the company. In
that event the complaining shareholders can sue in their own names if
they can show that the actions complained of are fraudulent.

Legal Effect of Constitution on Company and Outsiders

As between the company and the outsiders, the memorandum and the articles
do not constitute a statutory contract between them and as such they do not
give any right to the outsiders against the company even though their names
may be mentioned in these documents, For example, if the articles contain a
clause that Ms. Asha will be appointed as the secretary of the company and
later on if she is not appointed as a secretary then Ms. Asha cannot claim the
right of appointment as secretary against the company.
The memorandum and articles do not constitute a contract binding the
company or any member to an outsider or to a shareholder in any other
capacity than as a member.
Provisions of the memorandum or articles can sometimes form part of an
extrinsic contract between the company and an outsider. This can happen in
one of three ways:
Where provisions of the memorandum or articles are expressly
incorporated into an express contract between the company and the
outsider;
Where there is no express contract but a provision in the
memorandum/articles is incorporated by implication from the conduct
of the parties; and
Where there is an express contract which is silent on a matter, and
relevant provisions in the articles or memorandum are used to fill in
any gaps. The company is not actually liable to the outsider based on
the articles, but under the extrinsic contract.

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Lecture Notes on Corporate Laws
Corporate Constitution
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Doctrine of Ultra Vires

Any transaction that is outside the scope of the powers specified in the objects
clause of the memorandum of association is ultra vires the company and
therefore void. No rights and liabilities on the part of the company arise out of
such transactions and it is a nullity even if every member agrees to it.
The consequences of an ultra-vires transaction are that:
The company cannot sue any person for enforcement of any of its
rights;
No person can sue the company for enforcement of its rights; and
The directors of the company may be held personally liable to
outsiders for an ultra vires act.
However, the doctrine of ultra vires does not apply in the following cases:
If an act is ultra vires of powers the directors but intra vires that of the
company, the company is liable;
If an act is ultra vires the articles of the company but it is intra vires of
the memorandum, the articles can be altered to rectify the error;
If an act is within the powers of the company but is irregularly done,
consent of the shareholders will validate it;
Where there is ultra vires borrowing by the company or it obtains
delivery of the property under an ultra vires contract, then the third
party has no claim against the company on the basis of the loan but he
has right to follow his money or property if it exist as it is and obtain
an injunction from the Court restraining the company from parting
with it provided that he intervenes before is money spent on or the
identity of the property is lost; and
The lender of the money to a company under the ultra vires contract
has a right to make director personally liable.
A company, generally, does not have the power to borrow money, unless such
powers are stated in the object clause. However, trading companies have
implied power of borrowing. Where there is ultra vires borrowing by the
company or it obtains delivery of the property under an ultra vires contract,
then the third party has no claim against the company on the basis of the loan
but he has right to follow his money or property if it exists as it is and obtains
an injunction from the Court restraining the company from parting with it
provided that he intervenes before the is money spent on or the identity of the
property is lost. The lender of the money to a company under the ultra vires
contract has a right to make the directors personally liable.
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Lecture Notes on Corporate Laws
Corporate Constitution
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Doctrine of Constructive Notice

The law provides that the memorandum and articles when registered with
ROC become public documents and can be inspected by anyone on payment
of a nominal fee16. Therefore, any person who contemplates entering into a
contract with the company has the means of ascertaining and is presumed to
know the powers of the company and the extent of which they have been
delegated to the directors. In other words, every person dealing with the
company is presumed to have read these documents and understood them in
their true perspective. This is known as doctrine of constructive notice.

Doctrine of Indoor Management

The doctrine of constructive notice presumes that the outsider who deals with
the company is aware of the objects, powers and provisions of the
memorandum and articles of association of the company. At times, this rule
proves inconvenient for business transactions, particularly where the directors
or the other officers of the company are empowered under the articles to
exercise certain powers subject only to prior approval or sanction of the
members. Whether those sanctions and approvals had been obtained or not
could not be ascertained because the investors, vendors, creditors and other
outsiders could not dare to ask the directors about those sanctions having been
obtained or to produce the relevant resolutions.
Since there are no means to ascertain whether necessary sanctions and
approvals have been obtained before a certain officer exercises his powers
which as per the articles, can only be exercised subject to certain approvals,
those dealing with the company should be allowed to assume that if the
directors or other officials are entering into such transactions, they would have
obtained the necessary sanctions. This is known as the doctrine of indoor
management and was first laid down in the case of Royal British Bank v.
Turquand, 1856.
It should be noted that while the doctrine of constructive notice throws a
burden on people entering into contracts with the company by making a
presumption that they have read the memorandum and articles of association
of the company even though they might not have actually read them. The
doctrine of Indoor management, on the other hand, allows all those who deal
with the company to assume that the provisions of the articles have been

16
610.
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observed by the officers of the company. In other words, the persons dealing
with the company are not bound to inquire into the regularity of internal
proceedings.
However, there are some exceptions to this doctrine. An outsider dealing with
the company in the following circumstances cannot claim relief under the
indoor management rule.
KNOWLEDGE OF IRREGULARITY. Where the outsider had the knowledge
of the irregularity. The rule does not protect any person who has actual
or even an implied notice of lack of authority of the person acting on
behalf of the company.
IGNORANCE OF ARTICLES. Relief under the doctrine of indoor
management is not available to the outsider if she had no knowledge of
articles.
FORGERY. The doctrine of indoor management does not extend to
transactions involving forgery or otherwise void or illegal. Forgery
includes forgery of signatures, unauthorized use of company seal,
execution of a document towards personal discharge of a company
officers liability instead of the liability of the company.
NEGLIGENCE. In cases where an officer of a company does something
that is not ordinarily within his powers, the person dealing with him
must make proper enquiries. For example, in a transaction involving
sale of land, the Accountant of the company signed the papers on
behalf of the company. The Court observed that the buyer cannot get
relief under this doctrine as any reasonable person could have realized
with the most basic inquiries that an accountant does not have
authority to sell land belonging to the company

BALKRISHNA PARAB
Jamnalal Bajaj Institute of Management Studies,
University of Mumbai. Contact: E-Mail:
balkrishnaparab@jbims.edu; Cell: 9833528351;
Address: JBIMS, 164, DN House, HT Parekh
Marg, Backbay Reclamation, Mumbai 400 020.

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