Articles of association

The memorandum of association is the most important document , the articles of association comes second in terms of importance. It contains all rules regulations regarding internal control of the company. A private company that is limited by shares, a company limited by guarantee and an unlimited company have to adopt articles of association. 

Schedule 1 of the companies act sets out model forms of articles for various companies , which can be adopted by such companies. This is called as Table A. A company limited by shares has to adopt table A. It can also prepare its own articles.. But Table A would be applicable to the extent it is excluded. We can say that the Table is like a ready made articles of association which can be easily adopted. Since such Table is provided by the act, it legal beyond any doubt. 

The articles of association have to be signed by every subscriber. 

Relationship of the articles to the memorandum:

Memorandum of association is  the supreme document when compared to articles. It explains the very purpose as to why the company exists. The articles are related only to internal control of the company. An alteration of the memorandum would need the sanction of central government and the company law board, there is no such requisite for the articles. Where the memorandum and articles of association clash, it is the memorandum that prevails, except in matter relating to reduction of share capital.

Binding for of memorandum and articles of association:

1) Members bound to the company:

The members cannot contravene the provisions of the article of association or the memorandum of association. Once they have subscribed to such documents they are completely bound by it and cannot later say they were not aware of such provisions, hence their subscription is essential.

2) Company to the members:

A company has to follow all provisions of the memorandum and articles. It cannot contravene it as such provisions have been subscribed to and agreed by the share holders. The company would be answerable to the shareholders on an event of such contravention. 

3) Members inter se:

The members are bound among themselves due to the provisions of the articles of association. But they can enforce their right only in the capacity of being a member and not an individual . And such rights can only be enforced through the company. 

4) Not bound to outsiders:

Neither the company nor the members are bound to the outsiders by the provisions of the articles. In the case of Browne vs Trinidad, The plaintiff was agreed to be made director and not removable till a certain date, it was so provided by the articles. But such provision could not be enforced as the plaintiff was an outsider. Even a members becomes an outsider, when he acts outside the capacity of a member.

Alteration of the articles of association:

The articles can be ordered by passing a special resolution and filing a copy of such altered articles with the registrar of companies. 

Following points should be noted regarding alteration:

1) The alteration can be regarding the constitution of the company. Eg a company can issue a certain class of shares about which the memorandum is silent.

2) A company can cause a breach of contract by alteration of the articles. A company would not be liable for damages, if such contract is wholly dependent on the articles, but it would be liable for damages for breach of contract if such contract is wholly independent of the articles. 

3) Alteration cannot increase the liability of any members by asking him to subscribe to more shares. 

4) The alteration cannot constitute a fraud upon the minority share holders.

Memorandum of Association

The Memorandum of association is the constitution of the company. Everything that the company does must be in conformity with this document. Exceeding what this document provides for would amount to an ultra vires act. Every shareholder is advised to read this important document while investing in the company.

Let us see as to what the contents of the memorandum of association are :

1) Name clause:
Every company needs a name. Such name must not be one that is undesirable by the government or one that infringes trade mark of another company. The Trade Mark Act 1999 governs this procedure of granting a name to the company. The company can use the name permanently once it acquires central government approval. The name should be one that gives correct information about the company, incorrect usage of the world international,intercontinental etc for companies that have only a local operation are not allowed. A private company must affix the word private limited after its name and a public limited company must affix the word limited after its name. A company can alter its name if its wishes too, but it would need central government approval.

2) Registered office clause:
Every company must have a registered office in any Indian state. A company can have only one registered office. A registered office is the place where the company keeps all its books of accounts and the shareholders register along with other statutory documents. Any shareholder can access a registered office to inspect the books of accounts of the company and other documents. Failure to maintain such statutory books in the registered office would attract a fine or a penalty to the officer who's duty it was to do so. A registered office can be shifted from one state to another state only if its beneficial to the share holders and if it would improve the locale of the company. Prior permission of the company law board would be needed to this along with special resolution passed by the share holders.

3) Liability clause:

The liability clause would specify the kinds of liability the shareholders and the members would have. Liability can be limited or unlimited. Under limited liability the shareholder is expected to pay up only the amount of the share he has invested in . Under unlimited liability the share holder can be held liable much more than the value of the share he has invested in ,moreover unlimited liability can lead to personal liability too.

4) Capital clause:


This clause specifies the authorized capital of the business.  . A private company needs a minimum capital of one lac rupees and a public limited company needs a minimum capital of five lac rupees. The capital of the company cannot go below the minimum level but it can exceed it depending on whats provided in the articles of association.

The memorandum of association must be subscribed by at least 7 persons in case of public limited and 2 persons in case of private limited companies.

5) Objects clause:


 This clause contains the objects of the company. That is the purpose for which such company is formed. The object clause shows to us the kinds of business the company is entitled to carry on. The company can carry on business that are ancillary to the ones mentioned in the objects clause but it cannot carry on one which is not germane to the original objects.The objects clause helps the creditors to know as to what their money is being used for and gives a better sense of security. The objects can be altered by passing a special resolution, the conformity of the company law board is not a necessity here.

Doctrine of ultra vires:

Any business which is not mentioned in the objects clause is carried on is ultra vires. All acts of the company must be in conformity with the objects clause. It was held so in a famous case  Ashbury railway carriage case: In which the company was in the business of manufacturing railway carriages and it also undertook general contracts. The plaintiff entered into a contract with the company for laying railway lines. Later the company refused to comply. The plaintiff contended in a court of law that the term general contracts included laying railway lines. The court held that the term general contracts must be read in connection with manufacturing carriages and not otherwise. If not then any company can undertake general contracts, the term is too vague, hence it must be read in connection to its original business that is manufacturing railway carriages.The plaintiff could not avail any remedy and the defendant companies act was held correct. 

The ultra vires agreements neither make the company or the other party liable, though they might have committed to the contract to a great extent. 

However directors can be held personally liable for ultra vires agreements entered into by the company. 

It has to be noted the law sometimes gives exceptions to this doctrine in certain cases such as purchase of immovable property, that is even if the contract is ultra vires but if its relating to immovable property then it can make the company and the other party liable. In case of torts commited by the employees of the company in course of business , the company is made liable. Ultra vires loans taken to repay intra vires loans is also an exception.

You could test your understanding of the topic with the help of the following multiple choice questions:

1) The minimum capital that a private limited company needs to commence business is:
a) 5 lacs.
b) 4 lacs.
c) 1 lac.
d) 10 lacs.

2) The act of contravening the object clause is called as:
a) Intra vires act.
b) Ultra vires act.
c) void act.
d) actus reus.

3) How many registered offices can a company have ?
a) Two.
b) Three.
c) one office in each state.
d) One office totally.

4) Which act regulates the name of the company?
a) Essential commodities act.
b) Indian contract act.
c) Trade marks act.
d) Companies act.

5) What is the minimum number of persons who must subscribe to the memorandum of association?
a) 2 in case of public co and 7 in case of private.
b) 2 in case of private co and 7 in case of public ltd.
c) 1 in case of both private and public ltd.
d) 7 in case of both public ltd and in case of private.

Answer key:
1) C)
2) B)
3) D)
4) C)
5) B)

Certificate of Incorporation and Pre-Incorporation contracts

Certificate of incorporation:

A company in order to commence business must obtain a certificate of incorporation. Such certificate is issued by the registrar of companies on submission of mandatory documents such as the copy of the memorandum of association duly attested, statement of the willingness of the directors to act as directors and that they have paid up all the money on shares held by them.

A private company would need a certificate of incorporation to commence business, whereas a public limited company would need a certificate of incorporation as well as a certificate of commencement of business to start the business. It is a must to obtain such certificate. Following are the particulars needed to obtain certificate of commencement of business:

1) Shares payable in cash must have been allotted up to the amount of minimum subscription.

2) Directors must have paid in cash the application and allotment money on the shares taken by them.

3) No money should have become refundable for failure to obtain permission for shares to be dealt in a stock exchange.

A certificate of incorporation is conclusive evidence that the company is incorporated. Any mistake in the facts presented shall not make the certificate of incorporation invalid. A certificate of incorporation once issued is always issued. In this particular case the memorandum was signed by an adult and he had also forged the signatures of other members who were minors. The registrar had not noticed this and had issued the certificate of incorporation. Later such certificate cannot be revoked as it is conclusive evidence and once it’s given it’s given.

A company must obtain a fresh certificate each time it commences business that’s not mentioned in its object clause or commences a business that’s not germane to its current business. In this case it is a must that the share holders must pass a special resolution and in case only ordinary resolution has been passed the central government must approve it.

Pre incorporation contracts

Any contact which is entered into by the company before incorporation is called pre incorporation contracts. Such contracts do not bind the company or the outsiders who have entered into such contracts with the company. Only the promoters who have entered into such contracts before incorporation can be held liable for it and not the company. A company can enforce a pre incorporation contract on a later date if such contract is within its objects mentioned in the object clause in the memorandum of association.

Eg: The promoters of a hotel business purchased wine from a dealer before the company was incorporated. But such company went into liquidation before incorporation. It was held that the dealer need not suffer for the fact that the company was not incorporated as the promoters are personally liable for pre incorporation contracts.

You could test your understanding by answering the following multiple choice questions:

1) Is the company bound by contracts entered into before obtaining certificate of incorporation?
a) Yes
b) No

2) There is no requirement to submit a copy of the memorandum of association for obtaining the certificate of incorp.
a) True.
b) False.

3) Statement of directors , that they are willing to act as directors has to be submitted to the registrar of companies to obtain the certificate of incorporation.

a) True.
B) False.


4) A private company needs certificate of commencement of business.
a) True.
b) False.

5) Obtaining certificate of incorporation is optional.
a) True.
b) False.

6) A company can enforce pre incorporation contracts later.
a) True.
b) False.

7) What document has to be obtained every time a company commences a new business or a business that is not germane to its objects in the object clause.
a) Memorandum of association.
b) Articles of association.
c) Non polluting certificate.
d) Certificate of incorporation.

Answer key
1) b
2) b
3) a
4) b
5) b
6) a
7) d


Reading through the above given notes would explain as to why a particular choice is the right answer.

Probable company law topics for an examination.

Companies act 1956

A company is a company registered under the companies’ act 1956, also included is an existing company registered under any previous acts. The essential of a company is the registration under this act.

Advantages of a registered company:

Any business cannot be a company. As discussed above only a company registered under the companies act can be a company. A registration gives many advantages to a company, which it would not be available otherwise.

1)  Independent corporate existence:

 

A company enjoys an independent corporate existence. It enables a separate existence of the company from its owners. A company stands out as a separate individual and can carry out its business.

2) Limited liability:

A limited liability ensures that the liability of the members are only limited to the extent of their contribution to the share capital of the company. The company’s capital is divided into shares and each members subscribes to such shares and their liability is limited only to such amount of subscription. On winding up the subscriber shall only pay such amount as subscribed and nothing more. It is an advantage as compared to partnership where the liability can be unlimited, that is even the personal assets of the partners can be made liable to meeting liabilities on winding up.

3) Perpetual succession:

A company has no life span like a human being. It does not cease to exist. The members of the company can die but the company cannot die. Even if there is a war and an atomic bomb is dropped on a company killing all its members, the company would not cease to exist.

4) Separate property:

A company can have separate property from its members. It has a separate legal entity as a result of which it can have a separate property from its members. A company can buy, sell and insure its own separate property.

5) Access to money market:

A company has access to money market, through which it can raise capital by issuing shares to the public who would subscribe to such share by paying the application money. This is a feature which would not be available in the case of a partnership firm, where the shares are only held by individual members.

6) Transferable shares:

The shares purchased by the public from the money market can be easily transferred from person to person without any restrictions. That is a person can buy a share of the company from the money market and can subsequently re sell the share to another individual in the open market. There is no impact on the share capital of the company, it would remain the same.

7) Capacity to be sued and be sued:

 

A company can sue in its own name and be sued in its own name as well. This enables a company to seek legal remedy in case of breach of contract, breach of trust etc. At the same time it makes the company liable for its ultra vires acts and it can be sued in its own name for the same.

From the above points we can see as to how incorporation of a company is advantageous to it. At the same time there are disadvantages due to the incorporation which are as follows.

1)                 Lifting the corporate veil:

An independent corporate existence gives the company a corporate veil that is the members are different from the company and the company is liable for all its acts. But at the same time such corporate veil can be lifted under certain circumstances. After all it’s the humans that run the company and they must not be allowed to escape for illegal acts done in the name of the company.

Following are the circumstances under which corporate veil can be lifted up:

1)      Illegal objects.

2)      Objects are against public policy.

3)      Tax evasion.

4)      When the company has a enemy character.

5)      When the company is created for objects different from the ones mentioned in the memorandum of association.

6)      When the company is a sham

2)     Expenditure and formalities :

A company has to undergo various formalities with the registrar of companies and submit various documents. And it must also incur various other expenses related to such formalities.

      3)     Company is not a citizen:

A company only gets the rights of a person who is not a citizen; it is not entitled to the fundamental rights given in the constitution of India.

Constitutional Law of India

Constitutional law of India : Probable questions and answers. 

Q1) who is a citizen? How citizenship maybe acquired through domicile? 15 marks

Ans : citizenship is a process by which the state under the constitution confers certain rights , civil and political on a person. In other words a person who enjoys full civil and political rights.

There are two types of citizenship:

1)      Dual: Citizenship of the federation and another citizenship of the state. : eg America.

2)      Single citizenship : one citizenship for the whole country. Eg: India.

Articles 5 to 8 deal with citizenship at the commencement of the constitution.

Art 9 to 11 deal with modes of acquisition and loss of citizenship.

How citizenship can be acquired through domicile:

Citizenship by domicile ( art 5)

Domicile means s a permanent home or a place where a person resides with the intention of permanently remaining there.

The following conditions have to be satisfied to acquire citizenship through domicile:

1)      At the time of the commencement of the constitution he must have his domicile in the territory of India.

2)      He must fulfill any of the following conditions: a) he was born in India or b) either of his parents was born in India or c) he must have been ordinarily resident in the territory of India for not less than five years immediately before the commencement of the constitution.

Domicile in India is considered an essential requirement for acquiring the status of Indian citizenship.

Two elements are necessary for the existence of domicile

1)      domicile of a particular kind

2)      An intention of a particular kind.

The residence need not be continuous but it must be indefinite, not purely fleeing. The intention must be permanent intention to reside for ever in the country where the residence has been taken up. Domicile is not the same thing as residence. Mere residence in a place is not sufficient; it must be accompanied by the intention to make it his permanent home.

Case laws: Mohammad raza vs state of Bombay, The appellant came to India in 1938. He went on a pilgrimage to Iraq in 1945. He was registered a foreigner and several times his stay in India was extended. In 1957 his request to extend the stay period was refused. He appealed saying he must be regarded as a citizen under article 5. But it was dismissed. The court held that though he was original resident he did not acquire Indian citizenship because he did not have a domicile in India. His application for extending his stay in India made from time to time forfeited this conclusion. The domicile of choice continues until the former domicile has been resumed or another has been acquired

Q2) Define state. Explain the tests to determine which other authorities can be included in the definition.

Ans: State is defined under article 12 of the Indian constitution for the purpose of protection promotion and enforcement of fundamental rights as provided in the part III of the constitution. Under art 36 the same definition is used for DPSP unless otherwise provided under part IV. It does not apply to part XIV or other parts.

The word state includes the following:

1)      Union government and union legislature.

2)      State government and state legislature.

3)      Local authorities and other authorities within the territory of India and under the control of the government of India.

Local authority refers to local self government.

It can mean municipal committee, mining settlement boards, panchayats or other authorities legally entrusted by the government to manage or control local funds.

Other authorities: what all it includes.

1) Interpreted first time in shantha bai Vs University of madras. Here the question was whether the university comes under the definition of state. It was held that though Madras University was state aided it was a body corporate and does not come within the ambit of state. It was also held that only bodies exercising government or sovereign function are the test for state. But this was rejected in ujjambai vs state of UP and held that sales tax officer comes under the definition of state.

2) Statutory bodies: statutory bodies are those created by a statute and some of them are LIC ONGC IFC. In Rajasthan vs mohanlal it was held that all authorities created by statute on which power is conferred upon by law comes within meaning of state under art 12.

3) Agency/ instrumentality of the state:  If a body that is an agency or instrumentality of the state and it is a body corporate registered under the companies act 1956 but it is not a statutory body it still comes within meaning of state under art 12.

Case law for this is Ramanadayaram shetty vs International airport authority.

The following are the tests to determine if a body is an agency or instrumentality of the state:

1)      Financial resources of the state are the chief funding source.

2)      Deep and pervasive state control.

3)      Functional character is governmental in nature.

4)      If a department is transferred from government to corporations.

5)      Monopoly status is enjoyed and is conferred upon by the state or state protected.

Above test are only illustrative and not exhaustive.

Q3) what is double jeopardy? Explain. – 5 marks

Ans: Double jeopardy means double punishment. Here it refers to being punished twice for the same offence. No person can be punished twice for the same offence.

Case laws: maqbool hussain vs state of Mumbai. Here the accused was caught by the customs for bringing in gold without declaration from a foreign country. The authorities seized the gold under the sea customs act and he was also charged under the foreign exchange management act .Here the prosecution under FEMA did not amount to double jeopardy as the act done under sea customs act was not a judicial order of a court.

Q4) Indian constitution in neither unitary nor federal but is a mix of both, discuss. 15 marks.
 

Following are the essentials of a federal constitution:

1)      Distribution of powers.

2)      Supremacy of the constitution.

3)      A written constitution.

4)      Rigidity.

5)      Authority of courts.

Indian constitution possesses all of the above but it modifies the federal principle in the following:

1)      Appointment of governors.

2)      Parliament’s power to legislate in national interest.

3)      Parliament’s power to form new states and alter boundaries of existing states.

4)      Emergency provisions.

Thus we can say that the above modification provide for unitary state features also, we can conclude saying Indian constitution is a mix of both.

Q5) No person shall be deprived of his life or personal liberty except according to procedure established by law. Discuss with a leading case. 15 marks.
 

Ans: The right to life and liberty is a fundamental right and includes the following:

1)      Right to privacy.

2)      Right to education.

3)      Right to clean water and air.

4)      Right to livelihood.

5)      Right to die is not a fundamental right.

All of the above are rights which cannot be taken away except under a procedure established by law.

Maneka Gandhi case gives us a new dimension on this aspect.

Maneka Gandhi vs union of India.

The meaning and content of words personal liberty came up for consideration to the Supreme Court. In this case the SC gave the widest possible interpretation to personal liberty.

Facts of the case: The petitioners passport was impounded by central government the act authorized the central government to do so if it was in the general public interest.  The government of India declined to give reasons for the action in the name of public interest. The petitioner challenged this on the basis that there was no hearing given to seize the passport nor was there any reason given by the government. However the government disclosed in affidavit that the petitioner’s presence may be needed in connection with proceedings of a commission of inquiry.

The attorney general filed a statement that the petitioner could make a representation in respect of impounding the passport that the rep would be dealt with expeditiously in accordance with law. The sc also held that the govt was not justified in withholding the reasons for impounding the passport from the petitioner.

It was held that the procedure thus est. by the act for impounding a passport is in conformity with the requirement of art 21 and is not violative of that article.

Following conditions have to be fulfilled before a person is deprived of his property.

1)      There must be a valid law.

2)      There law must provide a procedure.

3)      The procedure must be just, fair and reasonable.

4)      The law must satisfy the requirement of art 14 and 17 that is it must be reasonable.

Q6) can preamble be amended under article 368? Answer with the aid of a decided case.
 

The preamble can be amended or not under article 368 can be understood with the following landmark case.

Keshavananda bharati vs state of kerala :

Facts of the case : In that case attorney general argued that by virtue of amending power in article 368 even preamble can be amended. It was said that since preamble was a part of the constitution it could be amended like any other provision of the constitution. The petitioners how ever contended that the amending power in article 368 is limited. The preamble creates implied limitation on the power of amendment. The preamble contains basic elements of our constitution. Amending power cannot be used to destroy these basic features. It was argued on the basis that preamble is not part of constitution. The Supreme Court held that preamble is a part of our constitution . On the question whether preamble can be amended or not it was held that preamble is part of our constitution it can be amended subject to this condition that basic features present in preamble cannot be changed. It was held that these basic features are our edifice of our constitution and that if these features are amended the whole system will collapse. No one can suggest these words are ambiguous in any manner. The amending power cannot result in the constitution being changed in such a way that it ceases to be a sovereign democratic republic. It would only wreck the constitution.

Q7) A magistrate issues an order authorizing investigating officer to take specimen handwriting and fingerprints of Mr. x an accused against his willingness. X challenges the order stating that it violates his Fundamental right under article 20(3) . Decide.

In state vs m Krishna Mohan the SC has held that taking of specimen handwriting and fingerprint from accused is not prohibited under article 20(3) as being witness against himself.