19

Companies Act, 2013: Memorandum, Articles of Association and Prospectus

19.1 DEFINE THE MEMORANDUM OF ASSOCIATION

According to Section 2 (56) of the Companies Act, 2013, “Memorandum means the Memorandum of Association of a company as originally framed or as altered from time to time”.

A Memorandum of Association is the most important document of a company. It contains the fundamental conditions upon which a company can be incorporated. It regulates the relationship of the company with the outside world.

A Memorandum of Association lays down the powers and objects of a company and the scope of operations of the company beyond which its actions cannot go. Any action, outside the scope of the Memorandum of Association, will be ultra vires the company and so void.

In Ashubury Carriage Co. vs Riche, it was observed that the Memorandum of Association of a company is its charter and define the limitation and powers of a company.

In Guinness vs Land Corporation of Ireland Bowen, it was observed that the Memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated.

It may be noted here that a Memorandum not only defines the powers of the company but also confines them. In fact, it is the foundation on which the structure of a company is based. A company cannot do anything, which is beyond the powers conferred upon the company by the Memorandum of Association.

It is a public document open for inspection to any member of the public. Every person who deals with the company is presumed to have the knowledge of its contents.

A Memorandum shall not be altered except in the manner and to the extent provided in the Act. Even if all the members of the company in the general meeting agree to change this document, they cannot do it without the sanction of the Central Government or the National Company Law Tribunal (NCLT).

19.2 PURPOSE OF MEMORANDUM OF ASSOCIATION

The purpose of a Memorandum is to enable the shareholders, creditors and those who deal with the company to know its permitted range of enterprise. Thus, it enables the shareholders to know for what purpose their money is going to be utilized and the risk involved.

19.3 PROVISIONS RELATING TO PRINTING AND SIGNATURE OF MEMORANDUM

The Memorandum of Association must be printed, divided into paragraphs, numbered consecutively, and signed by each subscriber in the presence of at least one witness who shall attest the signature (Sec. 7). Any natural person, competent to enter into a contract or any artificial person having separate legal entity can be a subscriber to the Memorandum and sign it. One company or body corporate can become a subscriber to the memorandum of another company. A foreigner can be a subscriber to the Memorandum. A minor cannot become a subscriber to the Memorandum.

19.4 FORM OF MEMORANDUM OF ASSOCIATION—SECTION 4

The Memorandum of a company shall be in such one of the Forms in Table A, B, C, D, and E in Schedule I as may be applicable to the case of the company. The prescribed Forms are as follows:

Table A	relates to companies limited by shares
Table B	relates to companies limited by guarantee and not having a share capital.
Table C	relates to companies limited by guarantee and having a share capital.
Table D	relates to unlimited companies not having share capital.
Table E	Relates to unlimited company having share capital

19.5 CONTENTS OF THE MEMORANDUM OF ASSOCIATION—SECTION 4

Memorandum of Association of every company shall contain the following clauses:

1. The Name Clause
2. The Registered Office Clause
3. The Objects Clause
4. The Liability Clause
5. The Capital Clause
6. The Association Clause

19.6 LEGAL REQUIREMENTS AS TO THE NAME CLAUSE

The Memorandum must state the name of the company with ‘Limited’ as the last word in case of a public limited company and with ‘Private Limited’ in the case of a private limited company. A company is free to choose any name, but it must not be undesirable or must not resemble the name of any other registered company.

19.7 LEGAL REQUIREMENTS AS TO THE REGISTERED OFFICE CLAUSE

The Memorandum of Association must mention the name of the State in which the registered office of the company is to be situated. All communication and notices to be sent to its registered office.

The situation of company’s registered office determines the domicile of the company and it is important to determine the jurisdiction of the courts in which the legal action can be taken by or against the company.

All the important documents and books of the company such as Register of Members, Minutes Book, etc., are kept at the registered office.

19.8 DISPLAY OF REGISTERED OFFICE ADDRESS

A company’s name and address of its registered office must appear prominently outside of all offices or place of business of the company.

Name and address of registered office of the company must be painted or affixed on the outside of every office or place of business in a conspicuous position, in easily legible letters and in the language in general use in the locality. Name of the company must be engraved in legible characters on its seal.

The name and address of registered office must also be mentioned in legible characters in all business letters, bill heads, negotiable instruments, invoices, receipts, etc. of the company.

19.9 LEGAL REQUIREMENTS AS TO THE OBJECTS CLAUSE

This is the most important clause in the memorandum. It defines the sphere of the company’s activities, the specific objectives for the formation of the company. The company cannot do anything, which is not mentioned in the objects clause.

All companies registered under the Companies Act, 2013 must divide the Objects Clause into two parts: (i) Main Objects, and (ii) Objects incidental to achieve the Main Objects.

Main Objects	This sub-clause contains the main objects of the company to be pursued on its incorporation.
Objects incidental or ancillary to main objects	It covers the objects which are incidental or ancillary to the attainment of the main object.

Objects must not be unlawful or against the provisions of Companies Act, 2013, or against the public policy.

19.10 LEGAL REQUIREMENTS AS TO THE LIABILITY CLAUSE

This clause states the nature of liability of the members of the company. In the case of a company limited by shares or by guarantee, the fact that the liability of its members is limited must be made absolutely clear. In case of a company limited by shares, the liability of a member is limited to the nominal value of shares held by him. If the shares are fully paid up his liability is nil. But, in case of partly paid-up shares, the liability is limited to the amount which is unpaid.

In case of a company limited by guarantee, the liability clause must state the amount which every member undertakes to contribute to the assets of the company in the event of its winding-up.

19.11 CAPITAL CLAUSE

This clause states that amount of the share capital with which the company is to be registered. This clause should also state the number and face value of shares into which the capital of the company is divided.

The capital with which the company is registered is variously described as ‘registered’ or ‘nominal’ or ‘authorized’.

19.12 ASSOCIATION OR SUBSCRIPTION CLAUSE

In this clause, the subscribers declare that they desire to be formed into a company and agree to take shares stated against their names. The names, address, occupation of the subscribers must be given. Each subscriber must sign in the presence of at least one witness who shall attest his signature.

It should be noted that every subscriber must take at least one share. In case of a public company, the Memorandum must be signed by at least seven subscribers, while in case of a private company, two subscribers must sign.

After the registration, no subscriber to the Memorandum can withdraw his subscription on any ground whatsoever.

19.13 PROVISIONS FOR CHANGE IN NAME CLAUSE OF MEMORANDUM OF COMPANY OR ALTERATION OF NAME CLAUSE

Company can change its name by own or on the order of central government. Central government will issue order to change name of company when the name of company if found to similar to that of other company’s name or registered trade name.

19.13.1 Change of Name on Own—Section 13

A company may, by passing a special resolution and with the approval of the Central Government signified in writing, change its name.

But no such approval is required in cases of addition or deletion of the word ‘Private’ consequent on the conversion of a public company into a private company and vice versa.

19.13.2 Rectification of Name on Own or on C.G’s Order—Section 16

If, for any reason a company has been registered with a name which is identical with or too closely resembles with the name of an existing company. Company shall change its name within three months from receipt of direction from the Central Government by passing an ordinary resolution. However, a proprietor of a registered trade mark can apply to the central government when name of the company is identical with or too nearly resembles to a registered trade mark within period of three years from the incorporation of the company.

Change of name shall not affect any rights or obligations of the company or render defective any legal proceedings by or against it.

19.14 PROCEDURE TO CHANGE REGISTERED OFFICE FROM ONE PLACE TO ANOTHER WITHIN THE SAME CITY

A company can change its registered office from one place to another within the local limits of the same town, village or city, without many difficulties. The Board of Directors is simply required to pass a resolution to that effect. Further, a notice of the change in Form INC 22 should be given to the Registrar of Companies within 15 days.

Necessary changes must also be made in all the records, letterheads, sign boards, etc., and all concerned persons should be informed.

19.15 PROCEDURE TO CHANGE REGISTERED OFFICE FROM ONE CITY TO ANOTHER WITHIN JURISDICTION OF THE SAME ROC WITHIN THE SAME STATE

A meeting of the Board of Directors is to be called where in the draft special resolution is to be passed and general meeting of the company should be called for this purpose and special resolution to this effect must be passed in general meeting. If the shares of the company are listed on the stock exchange(s) a copy of the resolution certifying the change must be sent to the concerned stock exchange(s).

A notice of the change in Form INC 22 should be filled to the Registrar of Companies within 15 days.

The company is also required to file a certified true copy of the resolution along with Form MGT 14 to the Registrar within 15 days of passing of resolution.

19.16 PROCEDURE TO CHANGE THE REGISTERED OFFICE FROM THE JURISDICTION OF ONE ROC TO THE JURISDICTION OF ANOTHER ROC WITHIN THE SAME STATE—SECTION 12

No company shall change the place of its registered office from one place to another within a State unless such change is confirmed by the Regional Director.

The company shall make an application in Form INC 23 form to the Regional Director to shift its registered office from one ROC to another ROC within same state.

On application, Regional Director (RD) after hearing party approve or reject application within 30 days from the date of receipt of application for such change. Before making an application to RD, company shall publish a notice in a English newspaper and another notice in a regional language daily newspaper where registered office of company is situated and sent notice to debenture holders, depositors and creditors at least 21 days before making an application to RD.

The company shall file, with the Registrar a certified copy of the confirmation by the RD, for change of its registered office under this section, within 60 days from the date of confirmation, together with a printed copy of the memorandum as altered and the Registrar shall register the same.

19.17 PROCEDURE TO CHANGE THE REGISTERED OFFICE FROM ONE STATE TO ANOTHER

If the registered office is to be shifted from one state to another, it can be done by exercising the following the procedures:

1. A special resolution should be passed and a copy thereof filed with the Registrar within 15 days in Form MGT 14.
2. Application is made to the Central Government with a copy of the resolution and other documents after passing a resolution. The list of creditors is also attached to the application.
3. After making an application to central government, advertise the application in Form INC 26 in a English newspaper and another advertisement in a regional daily newspaper should be published. The said advertisement shall be published at least 14 days prior to the hearing.
4. Send notice to creditors and deposit holders who have the right to raise objection. If no objection is raised by any person, the Central Government may order confirming change in the registered office without a hearing.
5. Confirmation order of the Central Government shall be filed with the Registrar of Companies within 30 days in Form INC 28.

19.18 PROCEDURE FOR CHANGING THE OBJECTS CLAUSE OF THE MEMORANDUM—SECTION 13

The objects clause of Memorandum is the most important clause. It can be altered by passing a special resolution.

Section 13 lays down that a company, which has raised money from public through prospectus and has any unutilized amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company, and:

1. The details, as may be prescribed, in respect of such resolution shall be published in the newspapers (one in English and one in a vernacular language) which is in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, if any, indicating therein, the justification for such change.
2. The dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control in accordance with the regulations to be specified by the Securities and Exchange Board.

After passing resolution, Form MGT 14 should be filled with Registrar of Companies. The Registrar shall certify the same within period of 30 days.

For deleting any provision of the object clause, the procedure laid down in Section 13 has to be followed.

19.19 ALTERATION OF LIABILITY CLAUSE

A company may increase liability of its member by passing resolution.

A company may, if authorized by its articles, alter its Memorandum to make the liability of its directors, managing director or manager unlimited, by passing a special resolution. This rule applies to future appointees only. This alteration shall be valid only if the officer concerned has given his consent in writing.

19.20 DOCTRINE OF ULTRA VIRES

The word ‘ultra’ means ‘beyond’ and the word ‘vires’ means ‘powers’. Thus, Ultra Vires means doing an act beyond the powers. Any activity done contrary to or in excess of the scope of activity of directors, Articles, Memorandum of Companies will be Ultra Vires.

The Ultra Vires acts can be divided into following categories:

1. An act Ultra Vires the directors.
2. An act Ultra Vires the Articles of Association.
3. An act Ultra Vires the Memorandum of Association.
4. An act Ultra Vires the Companies Act.

19.20.1 Ultra Vires to the Directors

Act Ultra Vires to directors means any act beyond the power or authorities granted to the directors by the shareholders of the company. If the act is Ultra Vires the directors, it is not altogether void, because this act can be ratified by the general body of shareholders and on such ratification the act becomes binding on the company. But if any unltravires to director act is not ratified, it is not binding to company.

19.20.2 Ultra Vires to the Article of Association

It means, any act performed or done by the directors beyond the power granted or procedure prescribed under the articles of a company. Acts which are Ultra Vires the Articles of Association, but intra vires to the memorandum are not altogether void. An act Ultra Vires to the articles of the association of a company can be ratified by altering the articles of association of the company.

Example

Payment of interest on ‘advance calls’ at a rate higher than allowed by the article is an Ultra Vires act. Such acts can be ratified by the company by altering the articles by passing a special resolution in the general meeting of the company.

19.20.3 Ultra Vires the Memorandum of Association

The company is formed to carry out or achieve the objects as laid down in the Memorandum. A company cannot do anything which is beyond the purview of the objects clause. If the company does anything which is contrary to the objects clause of Memorandum, it shall be termed as Ultra Vires the Memorandum and it shall be wholly void or inoperative. Such an act cannot be subsequently ratified or validated even by a unanimous resolution of all the shareholders.

The purpose of the objects clause of the Memorandum is to see that the company carries on business for objects set out in the Memorandum. The purpose of this doctrine is to protect the interest of shareholders and creditors. The shareholders know the objects for which their money is likely to be used and creditors are protected by ensuring that the funds of the company, which they must look for payment, are not used for unauthorized activities.

The doctrine of Ultra Vires was first applied in case of Ashbury Railway carriage Co. vs Riche. In this case, the company was formed “to make and sell, or lend or hire, railways carriages and wagons and to carry on the business of the mechanical engineers and general contractors.” The company enters into a contract with Riche to finance the construction of railway line in Belgium. Later, the company repudiated the contract on the ground that it was Ultra Vires. Riche filed a suit against the company for breach of contract and claimed damages. His plea was that the contract was within the powers of the company as it was covered under the general contractor’s business.

The House of Lords held that the contract was Ultra Vires the company and, therefore, void ab initio. It was, further, held that the contract cannot be made valid by ratification on the part of the shareholders, and so the company was not liable for breach of contract.

In J. R. Mody vs Shamji Lodha, the directors of a company, on its behalf, purchased shares of another company. But, this right was not described in the Memorandum of the company. Therefore, the Court held the act as Ultra Vires.

Since then, this doctrine has been applied in a number of cases.

The doctrine has been affirmed by the Supreme Court in Lakshmanaswami Mudaliar vs the LIC of India. In this case, the directors of a company were authorized to make payments towards any charitable or any general public or useful objects. As per shareholders’ resolution, the directors paid ₹ 2 lakhs to a trust formed for the purpose of promoting technical and business knowledge. The court held that the directors could not spend company’s money on any such charitable objectives which they might choose. They could spend only for such charitable objects as would be useful for the attainment of company’s own objects. The payment was, therefore, Ultra Vires.

19.20.4 Ultra Vires the Companies Act

Any act, which is contrary to or in excess of the scope of activity of the Companies Act, shall be Ultra Vires the company. Such an act is void and cannot be ratified by a unanimous resolution of the all the shareholders.

Example

Payment of dividend out of capital.

19.21 EFFECTS OF ULTRA VIRES TRANSACTION

19.21.1 Act Null and Void

A contract which is Ultra Vires the company is wholly void ab initio and of no legal effect. It cannot even be ratified by the whole body of shareholders.

19.21.2 Company Cannot Sue or Be Sued

Not only that outsider cannot enforce Ultra Vires transactions against the company, but being void, the company can also not enforce such transactions against outsiders. The Memorandum being a public document, it is deemed that persons dealing with the company have the knowledge of the same and if he enters into transactions Ultra Vires the company, he cannot enforce it.

19.21.3 Injunction

The members of a company are entitled to hold a company to its registered objects. Hence, whenever an Ultra Vires act has been committed or is likely to be committed, any member of the company can restrain it by getting an injunction against it.

19.21.4 Personal Liability of Directors

It is the duty of directors to see that the funds of the company are used only for legitimate business of the company. If directors make an Ultra Vires payment, then he can be compelled to make good the funds used.

19.21.5 Personal Liability of Directors to Third Parties

The directors are the agents of the company and should act within its powers. If the directors have induced the third party to make a new contract for which the company has no power, the directors shall be liable to third parties provided the third party was not aware of the lack of authority.

19.21.6 Ultra Vires Acquired Property

If company’s funds were used in acquiring some Ultra Vires property, the company has the right to hold the property and protect it against damage by other persons (National Telephone Co vs St. Peter Constables).

19.21.7 Ultra Vires Torts

A company shall not be liable for torts committed outside its objects. The company can be made liable for torts or crimes of its employees, if (a) the tort was committed in the course of an activity which is in the purview of company’s Memorandum, and (b) it was committed by the employee within the course of his employment.

19.22 ARTICLES OF ASSOCIATION

Section 2(6) of the Companies Act, 2013, defines the ‘Articles’ which means the Articles of Association of a company as originally framed or as altered from time to time in accordance with the Act. The Articles of Association are the rules and regulations or the bye-laws which governs the internal management of the company.

It is the second-most important document to be filed with the Registrar at the time of registration of a company. The various rules and regulations are framed for the purpose of carrying out the objects of the company as stated in the Memorandum of Association. It states the powers of directors, officers and of the shareholders as to voting, etc., the mode and the form in which the business of the company is to be carried out and the mode, and the form in which the changes in the internal regulations can be made.

Thus, Articles of Association are subordinate to the Memorandum of Association of the company. Articles cannot supersede the objects as set out in the Memorandum of Association. The Memorandum lays down what is to be done and the Articles lay down how it is to be done. The Articles must not contain anything which is contrary to Memorandum or Companies Act.

The Articles of Association of a company is contractual force between company and its members as also between the members inter se in relation to their rights as such members.

It is not obligatory for public companies limited by shares to have their own Articles [Section 5]. A public company limited by shares, may either frame its ‘Articles’ or adopt the rules and regulations contained in Table F of Schedule I of the Companies Act, 2013 [Section 5].

An unlimited company must have its Articles of Association which must be registered along with the Memorandum.

19.23 DISTINGUISH BETWEEN MEMORANDUM AND ARTICLES OF ASSOCIATION

The Memorandum is the charter of the company which defines its objects and powers. The Articles are the bye-laws of the company, for the internal management of the affairs, for achieving the objects set out in the Memorandum.

The Memorandum is the supreme document of the company, while the Articles are subordinate to the Memorandum. If there is any conflict between the Memorandum and Articles, the Memorandum shall prevail.

Memorandum of Association should not contain any provisions contrary to the Companies Act. Articles must not include any provisions contrary to the Companies Act as well as Memorandum of Association.

Every company must have its own Memorandum. But, a company limited by shares, may or may not have its own Articles. It may adopt Table F of Schedule I of the Act.

The Memorandum defines the relationship between the company and the outsiders, while the Articles define the relationship between the company and its members and among the members themselves.

A new company must prepare its Memorandum and file it with the Registrar before the registration of the company becomes effective. But Articles are not required to be filed for the purpose of registration. A company can adopt Table ‘F’ if it does not prepare its own Articles.

Any act of the company which is Ultra Vires the Memorandum is wholly void and cannot be ratified even by the whole body of shareholders. But, any act which is Ultra Vires the Article, but intra vires the Memorandum, can be ratified by the shareholders by passing a special resolution.

The Memorandum cannot be altered easily. The procedure laid down in the Act must be followed for altering the various clauses of the Memorandum. In some cases, the approval of the Central Government is required. But, alteration of Articles is not difficult. Articles can be altered by passing a special resolution and the approval from the Central Government is not necessary.

19.24 PROVISION RELATED TO PRINTING AND SIGNATURE OF ARTICLES

Articles shall be printed, divided into paragraphs, numbered consecutively and signed by each subscriber of the Memorandum of Association in the presence of at least one witness who shall attest the signatures and shall, likewise, add his address and occupation.

19.25 CONTENTS OF THE ARTICLES OF ASSOCIATION

It contains the following matter:

1. The exclusion, whole or in part, of Table F.
2. Share capital.
3. Rights of different classes of shareholders.
4. Allotment of shares.
5. Calls on shares.
6. Lien on shares.
7. Forfeiture of shares.
8. Transfer of shares.
9. Surrender of shares.
10. Share certificate.
11. Issue of share warrants.
12. Increase or decrease of share capital.
13. Conversion of shares into stock.
14. Consolidation and sub-division of shares.
15. Borrowing powers.
16. General meetings, proceedings, thereof, and votes, proxies and polls.
17. Appointment of managerial personnel, e.g., directors, their remuneration, qualifications, powers and proceedings of the Board meetings.
18. Appointment and remuneration of auditors.
19. Dividends and reserves.
20. Accounts and audit.
21. Adoption or execution of preliminary contracts, if any.
22. Capitalization of profits.
23. Notices.
24. Common seal.
25. Winging up.

It should be noted that any provisions of the articles, which is contrary to the provisions of the Companies Act or memorandum, shall be Ultra Vires and void.

19.26 PROCEDURE FOR THE ALTERATION OF ARTICLES OF ASSOCIATION—SECTION 14

A company has wide powers to alter its Articles to meet the requirements from time to time. Section 8 of the Companies Act, 2013 states that a company cannot alter the Articles of Association without obtaining a prior permission from the Central Government.

A declaration in the meeting of the Board must be taken to change all or any of the regulations of the existing articles, and they shall fix up the day, time, place, and agenda for the general meeting. It should be noted that a company can never replace the existing Articles. It can only change the regulations contained in the Articles.

A proposed alteration conforms to the provisions of the Act and the Memorandum. The change(s) must not increase the liability of any member and must not provide for the expulsion of a member by the company.

A notice calling the general meeting should be sent to every member at least 21 days prior to the meeting wherein the proposed special resolution and the explanation relating to the implications of the proposed change be given.

In case of a listed company, notice shall be send to the respective stock exchange.

A special resolution should be passed by shareholders in the general meeting.

After the Articles have been altered, copy of amended article should be filed with the stock exchange.

A copy of the special resolution along with explanatory statement in Form MGT 14 must be filed with the Registrar.

Necessary changes must be made in all the copies of the Articles.

If the effect of alteration is to convert a public company into a private company, the approval of the tribunal is necessary. Also, a copy of the altered Articles should be filed with the Registrar within 15 days from the date of the receipt of the consent of the tribunal to the alteration.

Once an alteration is made in accordance with provisions, then altered Articles shall be binding on the members in the same way as original Articles.

19.27 LIMITATIONS ON ALTERATION OF ARTICLES

A company can alter or add to the Articles of association at any time by passing a special resolution. However, the right to alter the Articles is subject to the following limitations or restrictions:

19.27.1 Not Inconsistent with Provisions of Any Act

The alteration must not be inconsistent with any provisions of the Companies Act or any other statute. For example, where a resolution was passed expelling a member and authorizing the directors to register the transfer of his shares without an instrument of transfer, the resolution was held to be invalid as being against the provision of the Act (Madhav Ram Chandra Kamath vs Canara Banking Corporation).

However, Articles may impose on the company conditions stricter than those provided under the law, for example, they may provide that a resolution should be passed by a special majority when the Act requires it to be passed by an ordinary majority.

If the alteration in article will be Ultra Vires the memorandum, then it would be void and inoperative. Allen vs Gold Reefs of West Africa Ltd.

19.27.2 Not Illegal or Against Public Policy

The alteration must not contain anything illegal or against public policy.

19.27.3 Not inconsistent with the order of a Government or a court

The alteration must not be inconsistent with an order of the Central Government or a Tribunal as the case may be.

19.27.4 Must be Bonafide

The alteration must be bonafide for the benefit of the company as a whole. The alteration made shall be valid even if it is likely to affect adversely the interest of some of the members.

19.27.5 Must Not Be Fraudulent

If the alteration is for the benefit of majority and it constitutes a fraud on the minority or inflicts hardship on the minority without any corresponding benefit to the company as a whole, it shall be invalid (Brown vs British Abrasive Wheels Co.).

19.27.6 Must Not Result in Breach of Contract

The alteration must not cause a breach of contract with an outsider. Such an alteration shall be void and the company shall be liable to pay damages to the other party.

19.27.7 Must not Increase Liability of the Members

An alteration in the Articles, which has the effect of increasing the liability of the members to contribute to share capital, is not binding on the present members, unless he has given his consent in writing.

An alteration in the Articles which has the effect of converting a public company into a private company shall not be effective unless such an alteration has been approved by the tribunal.

The amended regulation in the Articles of Association cannot operate retrospectively, but only from the date of amendment.

Any alteration made, must be duly incorporated in every copy of the same and every copy of the Articles issued after the date of such alteration must be in accordance with such alteration.

19.28 BINDING EFFECTS OF MEMORANDUM AND ARTICLES OF ASSOCIATION

According to Section 10 of the Companies Act, 2013, the Memorandum and Articles of a company, when registered, bind the company and its members as if they, respectively, had been signed by the company and each member. The Memorandum and Articles of Association constitute a binding contract between the company and its each member.

This means that the Articles bind the company to its members and members to the company, members to each other, but do not bind the company or its members to outsiders.

19.28.1 Members to the Company

Every member of the company is bound to observe the provisions of the Memorandum and the Articles, as if; each member had signed the same (Hanuman Prasad Gupta vs Hiralal). A company can sue its members for the enforcement of these provisions and the members may also be restrained by court from committing the breach of provisions of these documents.

In Boreland Trustees vs Steel Brothers & Co. Ltd., the Articles of the company provided that the shares of any members who became bankrupt should be sold to some other persons at a price to be fixed by the directors. B became bankrupt and his trustee in bankrupt claimed that he was not bound by the Articles of Association and could, therefore, sell the shares as he liked. It was held that the trustee in bankruptcy was bound by the Articles of Association and could not claim the shares against the company.

Each member is not only bound by the covenants of Memorandum and Articles as originally framed but as altered from time to time in accordance with the provisions of the Companies Act.

Shareholders cannot among themselves enter into an agreement which is contrary to or inconsistent with the Articles of Association of the company [V.B. Rangaraj vs V.b. Gopalakrishana].

19.28.2 Company to the Members

The company is also bound to its members by the provisions of the Articles of Association. Any member is entitled to issue the company or obtain an injunction restraining the company from committing any breach of the Articles or from doing an illegal act. The company is bound to each member in respect of their rights as members. Where a right is conferred by the Articles on a shareholder to record his vote at a company meeting, the chairman of the meeting cannot deprive him of this right.

In Wood vs Odessa Water Works Co., the Articles of Association empowered the company to declare a dividend to be paid to the shareholders with the sanction of the company at general meeting. Instead of paying the dividend in cash, a resolution was passed whereby the dividend was to be paid by issue of debenture bonds. A member filed a suit restraining the company from acting on the resolution. The court granted an injunction restraining the company from acting on the resolution.

These documents bind the company to members in respect of their membership rights and not contractual rights of other kinds.

19.28.3 The Members Inter Se

As between the members themselves, they are bound by the provisions of the Articles. The Memorandum and Articles of Association do not constitute express agreement among the members of the company, but each member is bound by these documents on the basis of the implied contract. The Articles regulate their right inter se. But such rights can be enforced only through the company.

A shareholder may, however, sue in his own name to restrain another, or others from doing fraudulent or Ultra Vires acts. [Rayfiled vs Hands and Others]. In the Articles provided that every member who intends to transfer shares shall inform the directors who will take the said shares equally between them at a fair value. On their refusal to take the shares, it was held that the directors as members were bound to take shares.

19.28.4 Company to Outsiders

Outsider means a person who is not a member of the company. But even a member may be an outsider. Section 10 creates an obligation binding on the company in its dealings with members in their capacity as members.

The Articles of Association create no contract between the company and outsiders, even though outsiders are named in the Articles in some capacity other than of a member. An outsider is not entitled to enforce the Articles against the company for any breach of right that is conferred on him by the Articles.

In Browne vs La Trinidad, the Articles provided that B was to be appointed as director till 1888. But he was removed earlier. The court held that Articles do not constitute a contract between the company and outsider and, therefore, B was not entitled to bring any action against the company.

Even a member cannot enforce provisions of Articles in some capacity other than a member. In Eley vs the Positive Government Life Assurance Company Ltd., the Articles provided that Eley should be the solicitor for life of the company and that he would not be removed from office except for misconduct. He was also a member of the company. Eley acted as solicitor to the company for some years, but he was removed from service without any charge of misconduct. He sued the company for damages for breach of contract. It was held that he had no cause of action, because the Articles did not constitute any contract between the company and himself. Thus, to succeed, the party suing must prove a contract outside and independent of the Articles.

Thus, it can be stated that a company is not bound to outsiders on the basis of Articles. He must prove a contract independent of the Articles of association if he wants to hold the company liable.

19.29 DOCTRINE OF CONSTRUCTIVE NOTICE

The Memorandum and Articles of Association of every company are required to be registered with the Registrar of Companies. And, on registration, documents become public documents. These documents are available for public inspection either in the office of the company or in the office of the Registrar of Companies on payment of fee.

Every person, who deals with the company, is presumed to have read these documents and understood them in their true perspective.

Every person dealing with the company must inspect these documents and make sure that his contract is in conformity with their provisions. Whether he actually reads them or not, he is presumed to have read and understood them.

In Kotla Venkatswamy v. Ram Murthi, the Articles provided that all deeds, etc., were to be signed by the managing director, secretary and a working director. A deed signed by the working director and secretary was held to be inoperative and the party was not allowed to seek exemption on the plea that he had not read the Articles.

Accordingly, if a person deals with a company and the transaction turns out to the beyond the powers of the company or its officers as contained in these documents, he cannot enforce it against the company and he shall be personally liable to bear the consequences of such dealings.

Example

If the articles provide that a bill of exchange to be effective must be signed by two directors, a person dealing with the company must see that it is so signed; otherwise, he cannot claim under it.

However, the doctrine of constructive notice, discussed here, is subject to one exception, that is, so far as the internal proceedings of the company are concerned, outsiders dealing with the company can assume that everything has been regularly done. This rule is known as the ’doctrine of indoor management’.

19.30 DOCTRINE OF INDOOR MANAGEMENT

This rule is based on business convenience and justice. The doctrine of indoor management is an exception to the rule of constructive notice. The doctrine of indoor management imposes an important limitation on the doctrine of constructive notice.

Persons dealing with the company should read these documents and satisfy themselves that the company has the power to enter into the contract, and they are required to do no more. He is not required to examine whether the internal proceedings have been complied with or not. The details of internal procedure are not open for public inspection as the Memorandum and Articles are. Thus, every person dealing with the company is entitled to assume that everything has been done regularly so far as the internal proceedings of the company are concerned. In other words, outsiders can safely assume that provisions of the Articles have been complied with by the company in its internal working. This doctrine seeks to protect the outsiders against the company.

If the Articles of the company give powers to borrow with the sanction of an ordinary resolution in a general meeting, a lender need not enquire whether the general meeting was convened on proper notice, or whether a proper quorum was present at the meeting, or whether the necessary resolution was properly passed. He was entitled to assume that what has been done has been done regularly and can hold the company liable even if internal formalities are found not to have been completed. In other words, if the internal formalities have not been complied with, the contract shall be binding on the company and it shall be liable to outsiders. This rule is known as the doctrine of indoor management.

This rule was first laid down in The Royal British Bank vs Turquand. In this case, the directors of a company issued a bond to T. They had the power to issue such bonds, but only subject to the resolution passed at a general meeting of the company. In this case, no such resolution had been passed. It was held that T could recover the amount of the bond from the company on the ground that he was entitled to assume that the resolution had been passed. It was observed that Outsiders are bound to know the external position of the company, but are not bound to know its indoor management.

In the case of Mahony Vs East Holyford Mining Co., article of company suggesting that cheques were to be signed by two named directors and countersigned by the name of a secretary. The secretary of company sent to their banker what purported to be copy of the board resolution naming the directors and secretary. The banker accordingly honoured the cheques accordingly. Subsequently it was found that the directors and the secretary were never appointed. No board meeting was ever held. It was held that bankers were bound to inspect the articles which they did. Beyond that they were neither bound nor entitled to look into the regularity of appointment of the directors and the secretary.

19.31 EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT

The doctrine of indoor management is subject to the following limitations:

19.31.1 Knowledge of Irregularity

The protection under the rule of indoor management cannot be claimed by a person who has the knowledge of the irregularity or constructive notice of irregularity.

In Howard vs Patent Ivory Manufacturing Co., the directors had the power under the Articles to borrow on behalf of the company up to £ 1,000. And for any amount exceeding this sum, the sanction of the shareholders in the general meeting was required. The directors themselves lent £3,500 to the company without the sanction from the shareholders in the general meeting. It was held that the company was liable for £1,000 only.

19.31.2 Negligence on the Part of the Outsider

Where the circumstances are of a suspicious nature as to invite further inquiry and the person has failed to enquire into it, he shall not be entitled to protection under this rule.

Similarly, where the transaction is of an unusual nature, the outsider must make detailed inquires.

Underwood vs Bank of Liverpool: certain cheques drawn in favour of company were deposited by a director in his personal account. The bank credited the cheques in the account of the directors instead of company’s account. The bank argued that they acted on direction of the director of company. The court held that cheque of company could not be given credit to personal account of that director. It is a case of gross negligence on the part of the banker.

19.31.3 Forgery

The protection under this doctrine shall not be available where the outsiders have relied upon a forged document, because nothing can validate. A company is not liable for forgeries committed by its officer.

But a company may be held liable for fraudulent acts of its officers acting under their ostensible authority on its behalf.

Share certificate was issued under a common seal of the company. However, signatures of two directors thereon were forged. Shareholders argued that how he can determine forgery, but on the ground of forgery is nullity, certificate was held to be invalid. (Ruben vs Great Fingall Consolidated Co)

19.31.4 No Knowledge of the Articles

The doctrine of indoor management cannot be invoked in favour of a person who had no knowledge of the Articles of Association of the company.

However, if the contract is within the ostensible authority to bind the company, a company shall be liable for contracts made by him even if he had no knowledge of the articles of company.

19.31.5 Acts Outside Apparent Authority

An outsider will not be protected if the act of an officer of a company is one which would not ordinarily be within his powers simply, because under the Articles, power to do the act could have been delegated to him.

In Anand Bihari Lal vs Dinshaw & Co., the plaintiff accepted a transfer of the company’s property from its accountant, the transfer was held void. The plaintiff should have seen the power of attorney executed in favour of the accountant by the company.

19.31.6 Void or Illegal Transactions

The doctrine of indoor management shall not apply to those transactions, which are void or illegal ab initio.

19.32 PROSPECTUS

A prospectus, as per Section 2 (70), means any documents described or issued as prospectus and includes a red herring prospectus or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.

A document shall be called a prospectus if it satisfies two conditions:

1. It invites subscriptions to securities; and
2. The aforesaid invitation is made to the public.

As per the Companies Act, 2013, prospectus is required to be issued by a public company when it makes an offer to public to subscribe for securities while public company do not make public offer (i.e., privately placed shares to relatives and friends of the directors), it is not required to prepare prospectus. Therefore, it is necessary to understand what amount as offer to public.

19.32.1 What Constitutes an Offer to Public?

Real test: It is not who receives offer or the invitation, but who can accept it. If invitation can be accepted by any one whether the prospectus was address to him or not.

An invitation to the public shall include an invitation to any section of the public, whether as members of the company or any other person who is not member as clients of the person.

An invitation shall not be an invitation to the public if it cannot be calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the invitation.

19.33 CIRCUMSTANCES WHEN THE PROSPECTUS IS NOT REQUIRED TO BE ISSUED

Prospectus is required to be issued only when the public company makes an offer to public to subscribe its shares or debenture. Issue of prospectus by a company is not compulsory in the following cases:

1. It is private company.
2. Public company need not issue a prospectus, if the promoters or directors feel that they can mobilize resources through personal relationship and contracts. Raising capital without issue of prospectus is known as private placement.
3. Where the application form is issued to person to enter into an underwriting agreement with respect to the shares or debentures.
4. Where the application form is issued in relation to shares or debentures not offered to the public.
5. Where the shares or debentures are offered to the existing holders of shares or debentures by way of rights (i.e., rights issue) with or without the right of renunciation in favour of other persons.
6. Where the issue relates to shares or debentures, which are, or to be, uniform in all respects with shares or debentures previously issued and dealt in or quoted on a recognized stock exchange.

19.34 ABRIDGED PROSPECTUS—SECTION 33

A prospectus is a very bulky document and, therefore, retail or small investors, generally, do not refer it. Government realized this loophole and, therefore, made provision for abridged prospectus. Section 33 of the Companies Act, 2013, requires that no one shall issue any form of application of shares or debentures of a company unless the same is accompanied by a memorandum containing salient features of prospectus (more commonly known as ‘abridged form of prospectus’), as may be prescribed.

It is further required that the abridged prospectus and the share application form should bear the same printed number and the two should be separated by a perforated line. Accordingly, the investor may detach the application form before submitting the same to the company or the designated bankers.

When company has issued abridged prospectus, it is duly bound to furnish prospectus on demand.

19.35 STATUTORY REQUIREMENTS IN RELATION TO A PROSPECTUS

A prospectus is, generally, issued after incorporation of the company, and it must contain the matter as specified under the Companies Act, 2013.

A prospectus must be dated and that date, unless the contrary is proved, be taken as the date of publication of the prospectus. It must be signed by every person who is named therein as a director or proposed director of the company. Where a prospectus is issued in more than one language, a copy of it as issued in each language should be delivered to R.O.C. Emperor vs Bengal Salt Co.

Before issue of prospectus to the public, it must be delivered to the registrar for registration. The prospectus must be issued within 90 days after the date on which a copy, thereof, has been delivered for registration.

19.35.1 Statement of an Expert

A statement made by an expert shall be included only if expert is or was engaged or interested in the formation or promotion or management of the company and has given his written consent to the issue of the prospectus. Such consent of expert must not be withdrawn by his before the delivery of the prospectus to the Registrar for registration and a statement to that effect, shall be included in the prospectus.

Every prospectus issued shall state that a copy has been delivered to the Registrar and specify attached documents.

The registrar shall not register a prospectus unless all requirements have been complied with and the prospectus is accompanied by the consent in writing of the all person named in the prospectus.

Prospectus shall not be valid if it is issued more than 90 days after the date on which a copy, thereof, delivered to the Registrar.

A prospectus must not include a statement purporting to be made by an expert, unless the expert is a person who is not, and has not been, engaged or interested in the formation or promotion, or in the management, of the company.

Terms of contract mentioned in the prospectus cannot to be varied except subject to the approval in general meeting.

19.36 RED HERRING PROSPECTUS—SECTION 32

Provision of ‘red herring prospectus’ has been made vide Section 32 of Companies Act 2013. Red herring prospectus is used in the book building method of public offer. It is like any other simple prospectus or offer document, but it does not contain information on price of shares and number of securities.

The ‘red herring prospectus’ means a prospectus which does not have complete particulars on the price of securities offered and the quantum of securities offered. It may give a band or minimum figure of issue size and issue price. Prospective investors bid at different prices at which they would like to subscribe shares. An issue is closed and, then cut-off price is determined. Now, price is fixed. The company is require to file again a prospectus, but with all details of price and number of securities.

19.37 THE CONTENTS OF A PROSPECTUS. SECTION 26 AND RULE 3, 5 OF COMPANIES (PROSPECTUS AND ALLOTMENT OF SECURITIES) RULES, 2014

For obtaining a prospectus, a company has to comply with Section 26(1) read with Rule 3 of Companies (Prospectus and Allotment of Securities) Rules, 2014. The following information must be included in a prospectus.

1. Names and addresses of the registered office of the company, company secretary, chief financial officer, auditors, legal advisers, bankers, trustees, if any, underwriters and such other persons as may be prescribed.
2. Dates of the opening and closing of the issue, and declaration about the issue of allotment letters and refunds within the prescribed time.
3. A statement by the Board of Directors about the separate bank account where all mony received out of the issue are to be transferred and disclosure of details of all mony including utilized and unutilized mony out of the previous issue in the prescribed manner.
4. Details about underwriting of the issue.
5. Consent of the directors, auditors, bankers to the issue, expert’s opinion, if any, and of such other persons, as may be prescribed.
6. The authority for the issue and the details of the resolution passed therefore.
7. Procedure and time schedule for allotment and issue of securities.
8. Capital structure of the company in the prescribed manner.
9. Main objects of the public offer, terms of the present issue and such other particulars as may be prescribed.
10. Main objects and present business of the company and its location, schedule of implementation of the project;
11. Particulars relating to:
    • management perception of risk factors specific to the project.
    • gestation period of the project.
    • extent of progress made in the project.
    • deadlines for completion of the project.
    • any litigation or legal action pending or taken by a government department or a statutory body during the last five years immediately preceding the year of the issue of prospectus against the promoter of the company.
12. Minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash.
13. Details of the directors including their appointments and remuneration, and such particulars of the nature and extent of their interests in the company as may be prescribed.
14. Disclosures in such a manner as may be prescribed about sources of promoter’s contribution.

19.37.1 Reports with Prospectus

Every prospectus shall set out the following reports for the purpose of financial information:

1. Reports by the auditors of the company with respect to its profits and losses, and assets and liabilities, and such other matters as may be prescribed.
2. Reports relating to profits and losses for each of the five financial years immediately preceding the financial year of the issue of prospectus including such reports of its subsidiaries and in such manner as may be prescribed. Where company has not completed five financial years than such report for all financial years is required.
3. Reports made in the prescribed manner by the auditors upon the profits and losses of the business of the company, for each of the five financial years immediately preceding the issue and assets and liabilities of its business on the last date to which the accounts of the business were made up, being a date not more than one hundred and eighty days before the issue of the prospectus. Where the company has not completed five financial years than such reports for all financial years is required.
4. Reports about the business or transaction to which the proceeds of the securities are to be applied directly or indirectly.

19.37.2 Declaration of Compliance

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

19.38 REFUSAL TO REGISTRAR PROSPECTUS BY THE REGISTRAR OF COMPANIES

Section 26 provides that the Registrar shall not register a prospectus, if:

1. It is not dated.
2. It does not comply with the requirements of Section 26 as to the matters and reports to be set out in it.
3. It contains statements or reports of experts engaged or interested in the formation or promotion or management of the company.
4. It includes a statement purported to be made by an expert without a statement that he has given and has not withdrawn his consent to the manner of its inclusion therein.
5. It is not signed by every person who is named therein as a director or proposed director of the company or by his agent authorized in writing.
6. It is not accompanied by the consent in writing of the auditor, legal advisor, attorney, solicitor, banker, or broker of the company or intended company, to act in that capacity.

19.39 SHELF PROSPECTUS AND INFORMATION MEMORANDUM—SECTION 31

’Shelf prospectus’ is a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without issue of further prospectus.

A company filing a shelf prospectus with the registrar shall not be required to file prospectus afresh at every stage of offer of securities by it within a period of validity of such a shelf prospectus.

A company filing a shelf prospectus shall be required to file an information memorandum on all material facts relating to new charges created, changes in the financial position as have occurred between the first offer of securities, previous offer of securities and the succeeding offer of securities within such time as may be prescribed by the Central Government, prior to making of a second or subsequent offer of securities under the shelf prospectus.

An information memorandum shall be issued to the public along with shelf prospectus filed at the stage of the first offer of securities and such prospectus shall be valid for a period of one year from the date of opening of the first issue of securities under that prospectus:

Provided that where an update of information memorandum is filed every time an offer of securities is made, such memorandum together with the shelf prospectus shall constitute the prospectus.

The information memorandum and shelf prospectus carry the same obligations as are applicable in the case of a prospectus.

Any variation or changes between the dates of two public issues is highlighted by issing an information memorandum.

19.40 MISSTATEMENT IN PROSPECTUS

Misstatement in prospectus means a statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context in which it is included.

Where the omission from a prospectus of any matter is calculated to mislead, the prospectus shall be deemed, in respect of such omission, to be a prospectus in which an untrue statement is included.

Misleading statement means a statement made by a person who does not care whether the statement is true or false. Fraud means any act committed with the intent to deceive somebody. It includes the deliberate suggestion of an untrue fact by someone, the active concealment of a fact by one having knowledge of the fact, a promise made without any intention of performing it, or any other act intent to deceive.

Example

A statement in prospectus says that the share capital has been subscribed when it has only been allotted in fullypaid shares to company’s contractor. It was held that it is misstatement in prospectus.

Example

A statement says that two leading businessmen of repute have agreed to become directors of a company when they had only expressed their willingness to help the company. It was held that it is misstatement in prospectus.

19.41 LIABILITY FOR MISSTATEMENT IN PROSPECTUS—SECTION 34–35

It may be grouped under the following two heads:

1. Civil liability
2. Criminal liability

19.41.1 Civil liability—Section 35

Where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequences thereof, the company and every person who:

1. Is a director of the company at the time of the issue of the prospectus;
2. Has authorized himself to be named and is named in the prospectus as a director of the company, or has agreed to become such director, either immediately or after an interval of time;
3. Is a promoter of the company;
4. Has authorized issue of prospectus, and
5. Is an expert,

shall, be liable to pay compensation to every person who has sustained such loss or damage.

19.41.2 Criminal Liability—Section 34

Where any prospectus is issued or circulated or distributed, which includes any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, then every person who authorizes the issue of such prospectus shall be liable under Section 447 for fraud.

19.41.3 Class Action—Section 37

Complain may be filed under Sections 34 or 35 by group of persons or association of persons who are affected by misleading statement in public issue. When a group of affected parties jointly file a complaint, it is known as class action.

19.41.3.1 Remedies Available Against the Company to a Person Who Subscribe for securities on faith of misleading prospectus The injured party may refuse to take securities and get repayment of the amount paid on the securities. But, for this right, he must prove that:

1. The prospectus was issued by or on behalf of the company.
2. There was a material misrepresentation on fact.

However, the right to rescind the contract is lost in the following circumstances:

1. If the allottee does not take steps to set aside the contract within a reasonable time after he comes to know of the misrepresentation.
2. By affirmation of the contract by the allottee after he discovers the misrepresentation.

   Example

   Execution of a transfer for selling shares, voting at a general meeting, accepting dividends, etc.

3.  

   If the company goes into liquidation.

The allottee is also entitled to sue the company for damages. But, in order to succeed, fraudulent misrepresentation must be proved. If the allottee wishes to claim damages, he must surrender the shares to the company. He cannot do the both to retain the securities and claim damages.

19.41.3.2 Remedies Available Against the Promoters and Directors The following are some of the remedial measures available to the subscribers who were deceived because of any misleading statements in the prospectus:

1. As per Section 37, a suit may be filed or any other action may be taken under Section 34 or Section 35 or Section 36 by any person, or group of persons, or any association of persons, affected by any misleading statement, or the inclusion, or omission of any matter in the prospectus.
2. He may take proceedings to repudiate the contract and require repayment of his money with interest.
3. He may, in respect of any misleading statement or the inclusion or omission of any matter in the prospectus, bring an action against the directors and promoters, for the recovery of compensation.
4. He may, bring an action for damages against the directors and other persons responsible for failure to disclose matters in a prospectus.
5. He may, in respect of any misleading statement or the inclusion or omission of any matter in the prospectus, bring an action against directors or those who are responsible for the prospectus.

In addition to directors and promoters the liability under the section also attaches to a person who has authorized the issue of the prospectus. However, the words cannot reasonably be held to apply to such persons as bankers, brokers, accountants, solicitors and engineers who merely consent to their names appearing as such in the prospectus.

19.42 DEFENSES AVAILABLE TO DIRECTORS IN CASE OF MISLEADING PROSPECTUS

However, the person other than an expert sought to be made liable may escape his liability, if he proves:

19.42.1 Withdrawal of Consent

That he withdraws his consent to become a director before the issue of the prospectus, and that it was issued without his authority or consent.

19.42.2 Issue Without Knowledge

That the prospectus was issued without his knowledge or consent and that on becoming aware of its issue, he forthwith gave public notice that it was issued without his knowledge or consent.

19.42.3 Ignorance of Untrue Nature of the Statement

That he believed, on reasonable grounds, that the statement was true.

19.42.4 Official Documents

That the statement was a correct and fair representation of a public official document.

19.42.5 Statement of Expert

A director or promoter may escape from his liabilities where he proves that the statement was made on the authority of an expert who was competent to make it and that person had given the consent and had not withdrawn it.

19.43 DEFENSES AVAILABLE TO EXPERTS IN CASE OF MISLEADING PROSPECTUS

An expert can escape liability if he proves that:

1. He withdrew his consent in writing before delivering a copy of the prospectus for registration.
2. After the delivery of the copy of the prospectus for registration, but before allotment thereunder, he, on becoming aware of the untrue statement, withdrew his consent in writing and gave reasonable public notice of the withdrawal and of the reasons therefore.
3. He was competent to make the statement and that he had reasonable ground to believe and did up to the time of the allotment of the shares or debentures, believe that the statement was true.

LIST OF LANDMARK JUDGEMENTS

1. Malahati Tea Syndicate Ltd vs Revenue officer (1973)

   After change of name has been registered by the Registrar of Companies, a company should commence legal proceeding in its new name.

2. Weeek vs Properts (1873)

   If director of a company act beyond his authority, he is personally liable.

3. Brown vs British Abrasive Wheel Co. Ltd (1919)

   Alteration to article of association must not constitute a fraud on the minority shareholders.

4. Sidebottom vs Kershaw Lesse Co. Ltd (1920)

   Alteration to the article of association must be in good faith and for the benefit of the company as a whole.

5. Boreland’s Trustee vs Steel Brothers & Co. Ltd (1901)

   Members of a company are bound to company by provisions of memorandum and articles.

6. Wood vs Odessa Water Works Co. (1889)

   The company is also bound to the members by the provisions of the memorandum and the articles of association.

7. Eley vs Positive Govt. Security Life Assn. Co. (1876)

   Article of association create no contract between a company and outsiders.

8. Kotla VenkatSwamy vs Ramamurthi (1934)

   Every person who is dealing with a company must have knowledge of the memorandum and the articles of association.

9. Howard vs Patent Ivory Mfg. Co. (1888)

   Person cannot take benefit of doctrine of indoor management when he has knowledge of irregularities on the part of a company.

10. Ruben vs Great Fingall Ltd (1906)

    For application of the doctrine of indoor management, transaction should be genuine (i.e., without forgery).

11. Forest vs Manchester Etc. Railway Company (1861)

    Any activity which is incidental for the purpose of achieving the main object of a company is intra-vires.

12. Rama Corporation vs Proved Tin and General Investment Co. (1952)

    Doctrine of indoor management is not applicable when person dealing with a company has no knowledge of the articles of association.

13. New Brnswick Co. vs Muggeridge (1860)

    Nothing should be stated in the prospectus as a fact which is not so, and no fact should be admitted, which might affect the degree of judgment of the investor.

14. Peak vs Gurnery (1873)

    A person who purchase shares in the open market has no remedy against a company or director, even if he has referred the prospectus.

15. Diwanchand vs Gujranwala Sugar Mills (1937)

    A company is liable for false statement in the prospectus when prospectus is issued by or on behalf of company.

TEST YOUR KNOWLEDGE

1. What is memorandum of association? What are its different clauses?

   (Ref. Para-19.1, 19.5)

2. The memorandum of association is unalterable in character. Explain.

   (Ref. Para-19.1)

3. What are the importance of memorandum?

   (Ref. Para-1, 19. 2)

4. Explain the purpose of memorandum.

   (Ref. Para-19.2)

5. Is the memorandum of company required to be printed? if so, explain the relevant rules.

   (Ref. Para-19.3)

6. Write a short note on the form of the memorandum of association.

   (Ref. Para-19.4)

7. What are the legal requirements of the name clause of the memorandum of association?

   (Ref. Para-19.6)

8. Discuss the significance of the registered office clause in the memorandum of association.

   (Ref. Para-19.7)

9. Where to display the address of the registered office?

   (Ref. Para-19.8)

10. The object clause is critical for the business activities of a company. Comment.

    (Ref. Para-19.9)

11. What are the legal requirements as to the liability clause? Can liability of a member be increased?

    (Ref. Para-19.10)

12. What information should be provided under the capital clause of the memorandum?

    (Ref. Para-19.11)

13. What are the requirements of the association clause? Can it be altered?

    (Ref. Para-19.12)

14. How a change can be effected in the name clause?

    (Ref. Para-19.13)

15. Write down steps to change the registered office from one place to another within the same city.

    (Ref. Para-19.14)

16. State the procedure to be followed by a company for change in registered office from one place to another within same state.

    (Ref. Para-19.16)

17. State the procedure to be followed by a company to shift its registered office from one state to another state.

    (Ref. Para-19.17)

18. What is the procedure to alter the object clause of the memorandum of association?

    (Ref. Para-19.18)

19. How the liability clause can be altered?

    (Ref. Para-19.19)

20. What do you mean by the doctrine of ultra-vires?

    (Ref. Para-19.20)

21. Any act which is ultra-vires to the directors is void—Comment.

    (Ref. Para-19.20)

22. What are the consequences of the ultra-vires act?

    (Ref. Para-19.21)

23. What is an article of association? Does every company require articles ?

    (Ref. Para-19.22)

24. Distinguish between article and memorandum.

    (Ref. Para-19.23)

25. The article of association of a company is subordinate to the company’s memorandum of association—Comment.

    (Ref. Para-19.23)

26. Explain the provisions related to printing and signature of article.

    (Ref. Para-19.24)

27. What are the content of the article of association?

    (Ref. Para-19.25)

28. Can company alter article of association? If so, then how?

    (Ref. Para-19.26)

29. The power to alter article is wide yet it is subject to large number of limitations—Comment.

    (Ref. Para-19.27)

30. Explain that article is binding contract between company and its member and member inter-se.

    (Ref. Para-19.28)

31. Is the company liable to outsiders by whatever is contained in the article ?

    (Ref. Para-19.28)

32. Write a short note on the doctrine of constructive notice.

    (Ref. Para-19.29)

33. Explain the doctrine laid down in Turquand’s case.

    (Ref. Para-19.30)

34. What are the exception to the doctrine of indoor management.

    (Ref. Para-19.31)

35. What is prospectus? Is it compulsory for every company to issue prospectus?

    (Ref. Para-19.32)

36. Explain the term ’invitation to public‘ with reference to prospectus.

    (Ref. Para-19.32)

37. When a company is not required to issue a prospectus?

    (Ref. Para-19.33)

38. Write a short note on abridged prospectus.

    (Ref. Para-19.34)

39. Steps requirement in relation to prospectus.

    (Ref. Para-19.35)

40. What is red-herring prospectus? What are its unique features?

    (Ref. Para-19.36)

41. What are the contents of a prospectus?

    (Ref. Para-19.37)

42. When registrar of company shall refuse to register the prospectus?

    (Ref. Para-19.38)

43. What is self prospectus? Which company can issue it?

    (Ref. Para-19.39)

44. Write short a note on misstatement in prospectus?

    (Ref. Para-19.40)

45. Who are liable for misstatement in prospectus?

    (Ref. Para-19.41)

46. Explain the remedial measures available to the shareholder, who had applied for shares on the faith of false prospectus.

    (Ref. Para-19.41)

47. Discuss a company’s liability for misstatement in prospectus.

    (Ref. Para-19.41)

48. What defenses are available to directors of a company for misstatement in prospectus?

    (Ref. Para-19.42)

49. What defenses are available to promoters of company for misstatement in prospectus?

    (Ref. Para-19.42)

50. What defenses are available to the experts of a company for misstatement in the prospectus?

    (Ref. Para-19.43)

MULTIPLE-CHOICE QUESTIONS

1. The doctrine of indoor management is an _______ to the doctrine of constructive notice
   1. Exception
   2. Extension
   3. Alternative
   4. None of these
2. The doctrine of _______ does not apply to acts void ab-initio.
   1. Ultra virus
   2. Intra virus
   3. Constructive notice
   4. Indoor management
3. An act ultra virus the directors can be rectified if it is not ultra-vires
   1. The articles
   2. The memorandum
   3. Company Act
   4. Both (ii) and (iii)
4. The lending of funds ultra-vires, the company has no rights
   1. Under the company’s act;
   2. contract act;
   3. under equity;
   4. none of these.
5. If a new company gets registered with a name which resembles the name of the existing company, then to whom it may apply?
   1. Central government
   2. SEBI
   3. ROC
   4. None of these
6. In case of forgeries, acts done in the name of the company are
   1. Valid
   2. Void
   3. Void ab Initio
   4. None of these
7. Signature of memorandum and articles should be done by ___________ number of persons in case of a public company
   1. 7
   2. 5
   3. 4
   4. None of these
8. Signature of memorandum and articles should be done by ___________number of persons in case of private company
   1. 3
   2. 4
   3. 2
   4. None of these
9. Can a company sign on behalf of a person in the memorandum and the articles?
   1. Yes
   2. No
10. Can a minor be a subscriber to the memorandum?
    1. Yes
    2. No
11. Can foreigners be subscriber to the memorandum?
    1. Yes
    2. No
12. In the MOA, there are six clauses. We can alter all clauses expect one clause. Which one is that clause?
    1. Objects Clause;
    2. Name clause;
    3. Association clause;
    4. None of these.
13. Address of the registered office is included in ______________
    1. MOA;
    2. AOA;
    3. Balance Sheet;
    4. None of these.
14. Which of the following need not have an MOA?
    1. Public company;
    2. Private company;
    3. Government company;
    4. Statutory Corporation
15. Ultra-vires means
    1. Beyond the power;
    2. Within the power;
    3. Both;
    4. None of these
16. Ultra-vires loans granted by the company are
    1. Void;
    2. Voidable;
    3. Valid;
    4. None of these.
17. _____ is the charter of a company.
    1. Memorandum;
    2. Articles;
    3. Both
    4. None of these.
18. A private company need not issue prospectus.
    1. Yes
    2. No
19. Prospectus is required to be issued when right issues are made
    1. Yes
    2. No
20. Prospectus is not required to be issued when sweat equity shares are issued to directors and employees
    1. Yes
    2. No
21. Prospectus is required to be issued when issue is for employees under employee stock option scheme
    1. Yes
    2. No
22. When there is an untrue statement in a prospectus, who can sue?
    1. Applicant under IPO;
    2. Purchaser from stock exchange;
    3. Purchaser from shareholder;
    4. Any person
23. Under which section, the definition of prospectus is given?
    1. 2 (30)
    2. 2 (32)
    3. 2 (34)
    4. 2 (70)
24. Which of the following are not required for issuing a prospectus?
    1. Private company;
    2. In case of right issue;
    3. Sweat equity issue;
    4. All these.
25. _______are the prospectus issued instead of full prospectus.
    1. Abridged prospectus;
    2. Statement in lieu;
    3. Shelf prospectus;
    4. Red herring prospectus.
26. _______includes an engineer, valuer, accountant
    1. Expert;
    2. Promoter;
    3. Auditor;
    4. Director
27. _________prospectus were issued in case where securities were issued in stages.
    1. Deemed;
    2. Shelf;
    3. Red herring;
    4. None of these
28. ________are required to file prior to making second and subsequent issue of securities in case shelf prospectus are filed:
    1. Information memorandum;
    2. Information articles;
    3. Form PAS 3;
    4. None of these
29. Information memorandum + shelf prospectus together constitutes________________
    1. Memorandum;
    2. Articles;
    3. Prospectus;
    4. None of these
30. Validity period of shelf prospectus is ________
    1. 1 year;
    2. 2 years;
    3. 3 years;
    4. 4 years
31. _________ prospectus were issued in order to test the market before finalizing issue size/price.
    1. Deemed;
    2. Shelf;
    3. Red herring;
    4. None of these
32. When there is an untrue statement in the prospectus. The shareholders who subscribed in the secondary market can sue the company
    1. Yes
    2. No
33. When there is any untrue statement in the prospectus. The shareholders who were a subscriber to the memorandum can sue the company
    1. Yes
    2. No
34. Because of misrepresentation in the prospectus, an expert will be criminally liable.
    1. Yes
    2. No
35. The date of opening of the subscription list means the beginning of the ________from the day of the issue of prospectus.
    1. 5th;
    2. 3rd;
    3. 10th;
    4. 20th
36. Which document is/are alterable in the case of a company?
    1. Article of Association;
    2. Memorandum of Association;
    3. Prospectus;
    4. Both (i) and (ii)

ANSWER KEYS

1. i
2. i
3. ii
4. i
5. i
6. iii
7. i
8. iii
9. i
10. ii
11. i
12. iii
13. i
14. ii
15. i
16. i
17. i
18. i
19. i
20. i
21. ii
22. i
23. iv
24. i
25. i
26. i
27. ii
28. i
29. iii
30. i
31. iii
32. ii
33. ii
34. ii
35. i
36. iv