Formation of a Company - Alteration of Memorandum of Association

INTRODUCTION

One of the first steps in the formation of a company is to prepare a document called the memorandum of association (hereinafter referred to as MoA). The MoA of the company contains the fundamental conditions upon which alone the company has been incorporated.[1]Every registered company should have a MoA which is the company’s charter. In general the MoA regulates the company’s external affairs while the articles of association regulate its internal structure. [2]

The precondition for the registration of the company involves one or more person signing and delivering to the Companies House or the Registrar of Companies (RoC) a memorandum of association stating the intention of the subscriber or subscribers to form a company with a particular name stating where its registered office is located and stating the objects the company is formed to pursue. The memorandum must state that the company is to be a limited company if that is so and must state that it is to be a public company if that is so. [3]

The memorandum of association is also called the charter of the company as it is the company’s principle document. Like explained before, no company can register without a memorandum of association as it defines the right and objects of the company.

According to section 2(28) of the Companies Act, “Memorandum means Memorandum of Association as originally framed or as altered from time to time in pursuance of any companies law or of this Act.” Evidently the definition is not comprehensive and does not convey the full importance of the document. However it is notable that the act provides for the admission of an altered version of the original memorandum the Memorandum of Association of the company.

In this project the researcher will explicate the importance of Memorandum of Association and elucidate the process and procedure involved in the alteration of Memorandum of Association of a company.

CHAPTER 1- SUBJECT MATTER OF MEMORANDUM

According to Palmer, the Memorandum of Association is a document of great importance in relation to the proposed 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. It defines as well as confines the powers of the company. If anything is done beyond these powers that will be ultra vires the company and be void[4]

In the celebrated case of Ashbury Railway Carriage and Iron Co. Ltd. v. Richie[5] Lord Carins Observed that the Memorandum of Association of a company defines the limitation on the powers of the company… it contains in it both that which is affirmative and that which negative. It states affirmatively the ambit and extent of vitality and power which by law are given to the corporation and it states, if it is necessary to state, negatively that nothing shall be done beyond that ambit.

1.1 Constituents of Memorandum of Association

1.1.1 Name Clause:

Since a company is an artificial person it can be identified only by its name, which is thus of considerable importance. The promoters are free to choose any name for the company but the same is subject to certain limitations.

I. If a company is limited by shares is to be a private company, the last word of its name must be “limited” or “private limited”

II. If the name chosen according to the opinion of the Central Government is undesirable or it is identical or resembles too nearly, to the name by which a company in existence has been previously registered, it may deem to be undesirable[6]

1.1.2 Registered Office Clause:

The Memorandum of Association registered with the RoC must state the geographical location of the company. Every registered company must have a registered office which establishes its domicile and is also the address at which the company’s statutory books must normally be kept and to which notices and other communications can be sent. The notice of the exact situation of the company has to be submitted to the RoC within 30 days of incorporation.[7]

1.1.3 Objects Clause:

The Memorandum of Association of a company should state the objects of the company. The RoC can deny registration to a company which whose objects are unlawful. It is the intention of the legislature that the Memorandum of Association of a company must state the objects for which it is incorporated, and the company is accordingly incorporated only for the purpose of pursuing those objects. Pursuing any other object is said to be ultra vires the company.

Accordingly there can be two objects as far as a company is concerned namely:-[8]

(a) Main objects of the company which is to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of the main objects

(b) Other objects

1.1.4 Capital Clause:

A company can be limited by shares only if it has a share capital and a company limited by shares must state in its memorandum the total amount of share capital it is to have and the way it is divided into shares.

The clause lays down the limit beyond which the company cannot issue shares without altering the memorandum as provided by section 94 of the Companies Act.

1.1.5 The association or subscription Clause: At the end of ever Memorandum of Association there is an association clause or subscription clause.

CHAPTER 2- ALTERATION OF MEMORANDUM

As a matter of course Memorandum of Association is not alterable. In fact the words of the Memorandum cannot be changed that easily. It is said that “Memorandum of Association is an unalterable document alterable only in accordance with the provisions of the law”

2.1 Alteration of Memorandum of Association under the Common Law

Under the Common Law the Joint Stock Companies Act 1856, which introduced the Memorandum of Association into company law, made no provisions for the alteration of a memorandum. Companies Act 1862 permitted a company to change its name and its authorized share capital, but forbade any other alteration. Subsequent acts have extended the range of alteration that may be made. The CA Act 1985 S.2 (7) provides: A company may not alter conditions contained in the memorandum except in the case in the mode and to that extend, for which express provision is made by this Act.[9]

The court has in Scott v. Scott Ltd. held that even if inadvertently the memorandum of a company does not correctly express the wishes of its subscribers, the court doesn’t to have power to rectify the mistake after the company has been registered.

2.2Alteration of Memorandum of Association under Indian Law

Several restrictions have been imposed as far as the alteration of Memorandum of Association is concerned. The quantum of such restrictions can be seen under S.16 of the Companies Act.

2.2.1 Alteration of Name Clause

Alteration of the name of a company can be effected by two methods.

(a) By special Resolutions and Permission of the government:

The Law regarding the change of name of a company is laid down under section 21 of CA. The section provides that the name of a company may be changed at any time by passing a special resolution at a general meeting of the company and with the written approval of the central government. However no such approval is required if the change of name involves addition or deletion of the word “private”

(b) By rectification of omission in name:

If by oversight or mistake a company is registered with a name which is the same or similar to the name of an existing company, the company may change its name by passing an ordinary resolution and getting a written permission from the Central government. In such a case the central government within a period of one year of the first registration or registration under a changed name can direct the company to change its name. In such a situation, the company must alter its name by passing an ordinary resolution within three months from the date of such direction. [10]

After the alteration of name of the company, the registrar should write the new name in the place of old name. Accordingly the certificate of newly incorporated company should be issued. If and when the certificate of newly incorporated company is received, then only the company’s name is recognized.[11]

With the change of the name of the company the power and responsibilities are not changed. Because of this change of the name legal affairs of the company are not affected. Besides it does not affect the company’s existence. But after the new name is registered the legal affairs cannot be continued with the old name.

The legal effect of change in name clause can be illustrated by the decision of the Calcutta High Court in the case of Malhati Tea Syndicate v. Revenue Officer[12] wherein a company changed its name from Malhati Tea Syndicate Ltd. to Malhati Tea and Industries Ltd. It filed a writ petition in its former name. Declaring the petition to be invalid the court said that nothing in the Act authorized the company to commence legal proceedings in its former name at a time when it had acquired its new name which has been put on the register of joint stock companies.

2.2.2 Alteration of Registered Office Clause

A company may change the situation of its registered office for the smooth running of its business and the realization of its objects. Such change in the situation can be: (a) from one place to another in the same city or town (b) from one town to another in the same state and (c) from one state to another.

(a) Shifting from one place to another in the same city or town:

If the registered office of the company is to be shifted from one place to another in the same city or town, the board of directors must pass a resolution to that effect and give the name address of its registered office to the RoC within 30 days after the date of the change of address.[13]

(b) Shifting from one town to another in the same state:

IF the company wants to shift its registered office from one town to another in the state, it shall pass a special resolution to that effect at its general meeting and send the notification to the registrar within 30 days. It shall give the new address of its registered office to the registrar.[14]

(c) Shifting from one state to another:

This kind of shifting is a much more complicated affair, as it involves alteration of the memorandum itself. The alteration of the memorandum for this purpose is subject to the provisions of Section 17 which requires, in the first place, a special resolution of the company and in the second, confirmation by the Company Law Board can confirm the alteration only if the shifting of the registered office from one state to another is necessary for any of the purpose detailed in section 17. When this condition is fulfilled, the second stage is reached namely to consider the objections of a person or class of person whose interest will in the opinion of CLB be affected the alteration.[15]

The Supreme Court in Mackinnon v. Mackenzie & Co[16] refused to sustain the contention of the state and allowed the transfer of the company to another state. The court said there is no statutory right of the state as a state to intervene in an application made under section 17 for alteration of the place of the registered office of a company. To hold that the possibility of the loss of revenue is not only relevant but of persuasive force in regard to change is to rob the company of the statutory power conferred on it by section 17. The question of loss of revenue to one state would have to be considered in the total conspectus of revenue for the Republic Of India and no parochial considerations should be allowed to turn the scale in regard to change of registered office.

2.2.3 Alteration of Object Clause

Plainly speaking, it is very difficult to alter the objects clause because the law has laid down strict limitations on such alteration. Section 17 of the CA defines the limitations and any alteration must necessarily be within these limitations.

The limits imposed upon the power of alteration are of two kinds, namely substantive and procedural. The former defines the physical limits of alteration and the latter the procedure by which it can be effected.[17]

The alteration of object clause involves:

(a) Special Resolution:

In the first place , the company has to call a general meeting of its members and pass a special resolution and file a certified copy of the resolution with the central government.

(b) Ratification by the central government:

After this, the application for proposed alteration is filed with the central government. The application shall be scrutinized by the government before confirming the alteration.

(c) Registration of alteration:

A certified copy of the order of the central government shall be filed by the company with the RoC along with the printed copy of the altered memorandum within three months from the date of the order. The registrar shall register the same and certify the registration under his hand within one month of the date of filing such documents.[18]

Doctrine of Ultra Vires

It is the function of the Memorandum of Association to delimit and identify the objects in such plain and unambiguous manner as that the reader can identify the field of industry within which the corporate activities are to be confined. And it is the function of the courts to see that the company does not movie in a director away from the field. That is where the doctrine of ultra vires comes into play in relation to joint stock companies.[19]

The doctrine has been affirmed by the Supreme Court in India in the case of Lakshmanaswami Mudaliar v. Life Insurance Corporation of India [20]wherein the court held that the directors of a company were authorized to make payment towards any charitable or any benevolent object or for any general public, general useful object. The payment made towards the same was held by the court as ultra vires. The court said that the directors could not spend the company’s money on any charitable institutions or any general object they choose. They could spend for the promotion of only such charitable objects as would be useful for the attainment of the company’s own objects.

CONCLUSION

Alteration of Memorandum of Association is an important exercise through which the company brings about the required flexibility which is pertinent to its existence and survival as an entity. It is a precondition before the company can initiate any drastic change in its ‘shape or structure’. As what is now clear from the discussion above it is clear that any act of the company has to be within the limits set by the Memorandum of Association.

A seemingly innocuous act like the change of situation requires the prior mandate of the Board of directors or the permission of the government or in certain cases both along with a special resolution. Such approval has to be accommodated within the Memorandum of Association before the company can actually bring about the change.

It however has to be remembered that aside from the sanction of the government or the board of directors or the appropriate authority concerned there is an array or of other statutory limitations involved in the alteration of the memorandum. This has been particularly true in the case of alteration of the object clause. Due to the nature of intricacies involved a host of statutory limitations have been instituted to prevent wanton changes in the objectives of the company. The discussion above has made it abundantly clear the intricacies, complications and limitations in the alteration of Memorandum of Association.

The alteration of object clause is beset with even more intricate procedures. Like explained above, the Doctrine of Ultra Vires plays an important role in the alteration of the object clause. In the case of alteration of objects a copy of the resolution should be filed with the RoC within one month from the date of resolution. In the case of inter state shifting of the registered office a certificate copy of the boards’ order and a printed copy of the alternated memorandum may be filed with the registrar within three months of the board’s order. Within one month the registrar will certify the registration. Alteration takes place when it is so registered. If an application for registration is not made within the above time the whole proceedings of the alteration of the company will lapse.

BIBLIOGRPAHY

Datey, V.S., 2004, ‘Taxmann Students’ Guide to Corporate Laws and Secretarial Practice’, Taxmann Allied Services Private Limited, Haryana, 7th Edition

Gullick, J.M., 1987, ‘Ranking and Spicer’s Company Law’, Butterworths, London, 13th Edition.

Pennington, Robert R., 1995, ‘Pennington’s Company Law’, Butterworths, London, 7th Edition

Singh, Avtar, 1999, ‘Company Law’, Eastern Book Company, Lucknow, 12th Edition

Geoffrey Morse, ‘Charlesworth &Morse Company Law, 15th Ed., Sweet and Maxwell, 1996

Kapoor G.K, Majumdar A.K, Taxmann’s Company Law and Practice,Taxmann, 2000

Mayson Stephen, Derek French et.al, ‘Company Law’, OUP, 22nd Ed., 2006

[1] Kapoor G.K, Majumdar A.K, Taxmann’s Company Law and Practice,Taxmann, 2000, (pg. 94)

[2] Geoffrey Morse, ‘Charlesworth &Morse Company Law, 15th Ed., Sweet and Maxwell,1996 (pg.51)

[3] Section 13 states the requirements with respect to memorandum. Section 14 provides that the form of memorandum should be in such one of the forms in Tables B, C, D and E in sch.1, as may be applicable to the company. Section 15 requires hat the document should be printed and divided into paragraphs numbered consecutively.

[4] Supra 1

[5] [1857] LR H.L 653

[6] Section 20. Trade Marks Act 1999 introduced a change into the provisions of the section. Without prejudice to the generality of the provisions in sub-s 1 and sub-s 2 provides:

1. A name is undesirable if there is a previously registered company bearing that name

2. A name is undesirable if it is identical with or too nearly resembles application for registration of another person under the Trade Marks Act 1999

The act also empowers the Central Government to consult the Registrar of Trade Marks Act before declaring a name to be undesirable.

The same section also states that abbreviated names are not allowed at the first instance. An established company may change its name into an abbreviated form by showing that it had become well known in its field under its abbreviation. Additionally the name shall not violate the provisions of the Emblems and Names Act 1950.

[7] Kapoor G.K, Majumdar A.K, Taxmann’s Company Law and Practice,Taxmann, 2000, (pg. 95)

[8] Singh A, ‘Company Law’, Eastern Book Company, 15th Ed., 2007 (pp 55-56)

[9] Mayson Stephen, Derek French et.al, ‘Company Law’, OUP, 22nd Ed., 2006 (pg.88)

[10] Section 22 of CA

[11] Section 23 of CA

[12] (1973) 43 Comp Cases 337

[13] Vide Section 146 (1)

[14] Vide Section 146 (2) Regional Director’s approval is required for shifting the Registered office within the state in certain cases. The same has been inserted into the C(amendment)A, 2000 to provide that shifting of the registered office by a company from the jurisdiction of one RoC within the same state shall in addition to passing a resolution under s. 146 also require confirmation of the Regional Director.

[15] Singh A, ‘Company Law’, Eastern Book Company, 15th Ed., 2007 (pp 55-56)

[16] 1967 1 Comp LJ 200

[17] Id. (pg.74) Section 17 of CA provides that a company may change its objects only in so far as the alteration is necessary for any of the following purposes:

(i) To enable the company to carry on its business more economically or more efficiently

(ii) To enable the company to attain its main purpose by new or improved means.

(iii) To enlarge or change the local area of the company’s operation

(iv) To carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company

(v) To restrict or abandon any of the object specified in the memorandum

(vi) To sell or dispose of the whole or any part of the undertaking of the company

(vii) To amalgamate with any other company or body of persons.

[18] Section 18 of CA

[19] Singh A, ‘Company Law’, Eastern Book Company, 15th Ed., 2007 (p. 48)

[20] AIR 1963 SC 1185