BBA II

Semester III
Subject : Secretarial Practice and Company Management
Unit-II Fundamental documents related to company
2.1Memorandum of Association Definition clauses & Doctrine of ultra
vires, alternation of memorandum
2.2 Articles of Association - Definition I contents & alteration of articles of
association
2.3 Prospectus - Definition Contents & statement in lies of prospectus.

Notes Compiled By : Raghunandan Shrivas ( MBA Finance )

Takshashila Mahavidhyalaya Amravati
Secretarial Practice and Company Management

2.1. Memorandum of Association Definition clauses & Doctrine of

ultra vires, alternation of memorandum
Introduction
As per section 2 of the Companies Act, 2013 memorandum means the memorandum of
association of a company as originally framed or as altered from time to time in pursuance of any
previous company law or of this Act.
2. What are different parts of Memorandum of Association (MOA)?
As Memorandum of Association (MOA) is an important documents which outlines the company
laws under which a company will work and function. It has several clauses which defines some
pertinent aspects under provision of The Companies Act, 2013 which are as follows:-
1. Name Clause
2. Situation/ Registered State Clause
3. Object clause
4. Liability clause
5. Capital Clause
6. Subscriber Clause

i. Name Clause of Memorandum of Association

The name of the company should be stated in this clause. A company name should be
which is not identical in any manner to any existing company also, there are some words which
are strictly prohibited to be used in names of company in any manner. The Word “Private/PVT
Limited” should be in end of any private company. And the word “Limited” should be in the end
of every public limited Company.
An section 8 or not for profit company are not required to use the word “Private Limited/
pvt. Limited or Limited” at the end of their company name.

ii. Situation Clause of Memorandum of Association

In this clause the state name of company’s registered office is mentioned. The Company
should intimate the location of registered office to the registrar within thirty days from the date
of incorporation in case the permanent address of company is not given.
It is one of important aspects as all the correspondence for cm=company will be sent on
this. Note that just a few months also many companies have been strike off/ name has been
removed due to non-maintenance of registered address of company able to receive and
acknowledge the letters of company.
Once a company has been registered, it should have a proper registered office until, the
company is closed.
iii. Objects Clause of Memorandum of Association
Every company have specific business which they will run after a company is
incorporated. This clause states all the business which this proposed company will commence
after incorporation that to in detail.
Now as per The Companies Act, 2013 only Main objects and other objects which are
ancillary to main objects are covered..
Any business run apart from this can lead to closure of business. Again, there are some
business which are required approval from different authorities like for loan and capital funding,
Reserve Bank of India (RBI) is required. For commencing insurance business approval from
Insurance Regulatory and development authority of India (IRDAI).
iv. Liability Clause of Memorandum of Association
This clause states the liability of the members of the company. The Liability can be
limited or unlimited which means at the time of winding up of company, a company with limited
liability, members are required to pay amount upto the value of nominal value of shares taken by
them but in case of unlimited members are required to pay without any limit for the debt or
payment which a company is required to pay.
v. Capital Clause of Memorandum of Association
This clause states the Authorised Capital of the company and total number of shares
along with value of per share. This is the limit a company can raise its capital maximum amount.
For example, if company authorised capital is 10 Lakhs and paid up at the time of incorporation
is 1 Lakh, company can raise its capital upto 9 lakhs. But nothing more than 9 lakhs.
There is no limit for amount of authorised capital a company can have in India as per The
Companies Act, 2013.
vi. Subscription Clause of Memorandum of Association
It contains the names and addresses of the first subscribers. The subscribers to the
Memorandum must take at least one share. The minimum number of members is two (2) in case
of a private company, seven (7) in case of a public company and one (1) in case of One Person
Company as per The Companies Act, 2013.
The above clause are required to be inserted omission of any of above clause will lead to
refusal of company incorporation by Registrar of Companies.
Provisions relating to alteration of Memorandum of Association
Alteration in the Memorandum of Association can be carried out only by a special resolution at
the Shareholders meeting. This is a complicated and lengthy procedure. So Memorandum must
be very carefully prepared at the beginning itself.
Provisions relating to alteration of Memorandum
The following are the provisions related to alteration in Name Clause, Objects Clause, Liability
Clause, Capital Clause and Subscription Clause.
1. Alteration of Name Clause in Memorandum of Association
A company may by passing a special resolution alter is name with the approval of the Central
Government. If the alteration involves change of the name to private limited or public limited,
permission of Central Government is not required. In case a company has been registered with a
name which resembles a name of an existing company, the Central Government may ask it to
change its name. In such case ordinary resolution is sufficient. The intimation of name change
should be given to the Registrar who will issue a fresh certificate of incorporation.
2. Alteration of Situation clause
1. In case registered office has to be shifted within the same city, town or village, a notice has to
given to the Registrar within thirty day of the change.
2. In case registered office has to be shifted from one town to another town or one village to
another village, a special resolution has to be passed.
3. A company can change its registered office from one State to another State for the following
reasons:
to carry on business more efficiently and economically;
to achieve the important purpose of the company by sophisticated means;
to expand its operations in the current location;
to control any of the existing objects;
to sell whole or part of the business undertaking;
to amalgamate with other business or person.
In case, registered office has to be shifted from one State to another State, a special resolution
has to be passed and approval from the Company Law Board has to be obtained by the company.
The altered memorandum should be filed with the Registrar of the State from which the
company is shifting and also to the Registrar of the State to which the company is shifted.
3. Alteration of Objects Clause in Memorandum of Association
A company can alter is objects clause by passing a special resolution. Alteration of objects clause
can be done for the following reasons:
1. For the purpose of carrying on its business more economically and efficiently.
2. For the purpose of obtaining the main business of the company by new and improved means
3. For the purpose of enlarging or changing the local area of its operations.
4. For the purpose of carrying on some business, which may be conveniently or advantageously
combined with the existing business.
5. For the purpose of abandoning any of the objects specified in the memorandum.
6. For the purpose of selling the whole or any part of the undertaking.
7. For the purpose of amalgamating with any other company.
4.. Alteration of Liability Clause in Memorandum of Association
The liability clause can be altered only when a public company is converted to a private
company.

5. Alteration of Capital Clause in Memorandum of Association

A company can alter its capital clause by passing an ordinary resolution in a general
meeting. Alteration of capital may relate to:
Sub division of shares
consolidation of shares
conversion of shares into stock and cancellation of unsubscribed capital.
Within thirty days of passing a resolution, the altered Articles and Memorandum have to be
submitted to the Registrar.
5. Alteration of subscription clause in Memorandum of Association
The company can alter is subscription clause to make the liability of the directors
appointed subsequent to the alteration as unlimited.

The doctrine of Ultra Vires:

Each and every company has Memorandum of Association which contains the object
clause. The members and directors are bound to follow the object clause and they cannot act
beyond the object clause which is specified in the Memorandum of Association. If the company
acts or works beyond the object clause then it is termed as Ultra Vires. The doctrine of Ultra
Vires literally means that acts done beyond power. An Ultra Vires act is considered as void and it
cannot be ratified by the directors also.

Need for Doctrine of Ultra Vires:

This doctrine was introduced to safeguard or protect the interest of the creditors and
shareholders. The object clause which is the main content of the Memorandum of Association is
the preamble of the company. It also tells or we can say helps the creditors to check that their
money is invested in an inappropriate way and place. It helps the company to avoid the situation
of insolvency. This doctrine is also needed to curb the unlimited powers of the directors of the
company.

Exceptions to the Doctrine of Ultra Vires:

The Doctrine of Ultra Vires has certain exceptions:
Such as –
“An act which is within the powers of the company but is beyond the authority of the directors
specifically may be ratified by its shareholders in an appropriate format.”
“An act which is within the powers of the company but is committed irregularly can be validated
by the consent of its shareholders.”
“If the company through an ultra vires act, acquires any property in the form of investment, will
continue to possess such right over that property.”
“While applying the said doctrine, the consequences which are incidental to the concerned act
will not be invalid unless the same is expressly prohibited by the Companies Act.”
“There are some acts under the Company law, which are not explicitly mentioned in the
memorandum of Association, but are impliedly within the power of the company and
subsequently cannot be said to be ultra vires.”
“An act of the company which is ultra vires of its Articles of Association can be validated by
altering the Articles of Association.”
2.2 Articles of Association - Definition I contents & alteration of
articles of association
Meaning And Definitions of Articles of Association
The Article of Association is the second most important document of the company. It
lays down the rules and regulations for the internal management of the company as well as for
the attainment of the objectives set by the Memorandum of Association.
Articles are subordinate to the Memorandum and help in achieving the objects given in
the Memorandum. It defines the duties, rights and the powers of the Board of Directors and also
the manner in which the business of the company is to be carried on. However, being subordinate
to the Memorandum, they cannot extend the objects as defined in the Memorandum. The Articles
define the area within which the shareholders may make such rules and regulations for their own
management as they think fit but not beyond the area defined by the Memorandum. Moreover,
these rules should not go beyond the provisions of the Companies Act.
According to Section 2 (5) of the Companies Act, 2013 “Articles mean the Articles of
Association of a company as originally framed, or as altered from time to time in pursuance of
the previous companies law or of this Act.

Need or Importance of Articles of Association

Importance of Articles of Association can be clarified on the basis of the following points :
(1) Essential for Registration : It is essential for a private company, a company limited by
guarantee and an unlimited company to register their articles along with the Memorandum.
However, it is not obliggtory to register Articles in case of a public company limited by shares.
In such a case model articles contained in ‘Table F’ of Schedule I will apply.
(2) Helpful in attaining objects : Articles of Association helps in the attainment of objectives set
by the Memorandum of Association. It defines the rules and
(3) Helpful in Internal Management : regulations for the internal management of a company.- It
also defines duties, rights and powers of the Board of Directors and thus prove helpful in the
administration of the company.
(4) Mutual Relationship : The Articles regulate the relationship between the company and its
members and employees.
(5) Public Document : Articles is a public document as it can be seen by anybody. It is therefore
assumed that any person who deals with the company is familiar with the contents of the
document.
Contents or Subject Matter of Articles of Association :
The Articles of Association of a company should usually contain the following matters :
(i) The extent to which “Table F” is applicable.
(ii) Definition of important terms and phrases used in the articles.
(iii) Share capital and rights attached to different classes of shares.
(iv) Procedure as to making of calls and forfeiture of share.
(v) Appointment of managerial personnel, e.g. directors, managing directors etc., their rotation,
powers and duties.
(vi) Rules as to—
(a) transfer and transmission of shares
(b) issue of share certificate
(c) general meetings
(d) common seal of the company
(e) dividends, reserves and capitalisation of profits
(f) accounts and audit
(g) lien on shares
(h) remuneration of managerial personnel
(i) issue of redeemable preference shares
(j) paying commissions and fixing rate thereof
(k) paying interest out of capital
(l) winding up of the company Regulations contained in the Articles of Association must„ not/
go beyond the powers of the company as laid down by the Memorandum of Association nor
violate any of the requirements of the Companies Act. All clauses in the Articles which are ultra-
vires the Memorandum or the Act shall be null and void.
Alteration of Articles of Association
A company has a statutory right to alter its articles of association’, A company can do it
at any time by passing a special resolution. But the basic ‘requirement is that the power of
alteration must be exercised in good faith andiin athe4interest of the company. The, company can
‘use its power of alteration subject to the following limitations :
(l) Articles can be altered by passing special resolution only.
(2) Alteration must not be inconsistent with the provisions of the Companies Act or any other
law.
(3) Alteration must not be inconsistent with the Memorandum of Association. (4) Alteration
must not be illegal or opposed to public policy or in lawful.
(5) No alteration can be made without approval of Central unlawful. Government or the Tribunal
if so required. For example, for conversion of public company into private company approval of
the central Government
(6) Alteration seeking to impose an additional liability on a member is must. of the company
after the date on which he became a member shall not be binding upon him unless he agrees in
writing to such an alteration. However, it is valid where the company is a club or any other
association and the alteration of Articles provides for increase in the rate of subscription by the
members.
(7) The alteration must be made bonafide for the benefit of the company as a whole and not for
the benefit of a. particular class of shareholders.
(8) The alteration must not constitute a fraud on the minority, otherwise it will be void being
oppressive to them.
(9) The alteration must not result in a breach of contract with outsiders. Such an alteration shall
be void and the company shall be liable.
(10) The amended regulation in the articles cannot operate retrospectively, but only from the date
of amendment.
(l l) Once the alteration is made, it shall have effect as if originally contained in the Articles.
2.3 Prospectus - Definition Contents & statement in lies of
prospectus.
What is a Prospectus?
Prospectus is an invitation issued to the public to offer for purchase/subscribe shares or
debentures of the company. In other words, any advertisement offering shares or debentures of
the company for sale to the public is a prospectus. A company secures capital by the issue of
prospectus inviting deposits or offers for shares and debentures from the public.
Meaning of Prospectus
It is a document containing detailed information about the company. It is an invitation to
the public for subscribing to the shares or debentures of the company.
Private limited companies are strictly prohibited from issuing prospectus and they cannot
invite public to subscribe to their shares. Only public limited companies can issue prospectus.
Thus, it is an open invitation extended to the public at large.
Objectives of Issuing Prospectus
1. To bring to the notice of the public that a new company has been formed.
2. To preserve authentic record of the terms and allotment on which the public have been invited
to buy its shares or debentures.
3. To secure that the directors of the company accept responsibility for the statements in the
prospectus.

Requirements of a Correct Prospectus:

The correct prospectus must have the following.
1. It must not be exaggerated
2. It must contain full and honest disclosures
3. Material facts must be disclosed and should not to be concealed.
4. There must not be false details and untrue statements.
Contents of Prospectus
The contents of the prospectus have been specified in Schedule II of the Companies Act.
The important contents in the prospectus include the following.
1. Name and address of the company
2. Objects of the company
3. Full particulars of the signatories to the Memorandum and number of shares taken by them.
4. The names, addresses and occupations of the directors, managing directors or managers etc.
5. The number and classes of shares.
6. The minimum subscription.
7. The qualification shares of a director and the remuneration of the directors.
8. The amount payable on application, on allotment and on calls.
9. The names of the underwriters.
10. The estimated amount of preliminary expenses.
11. The names and addresses of the auditors of the company.
12. Particulars about reserves and surpluses.
13. Voting rights of the different classes of shares.
14. Reports of the auditors regarding profits and losses of the company.
15. A similar report by the Chartered Accountant regarding the Profits and Losses and Assets
and Liabilities of the Company.
Consequences of misstatements in Prospectus
The persons, responsible for preparing false and misleading prospectus will face civil and
criminal liabilities.
1. Civil liability
In case, misleading prospectus amounts to misrepresentation, the aggrieved persons can
repudiate the contract. They can claim refund of their money. Damages can also be claimed from
the persons found guilty.
2. Criminal liability
In case any deliberate concealment is made, directors will be punished with a fine of Rs. 5,000
or imprisonment up to two years or both. If it is fraud the fine will extend to Rs. 10,000 or 5
years imprisonment or both.
Types of prospectus
According to Companies Act 2013, there are four types of prospectus.
Deemed Prospectus – Deemed prospectus has mentioned under Companies Act, 2013 Section 25
(1). When a company allows or agrees to allot any securities of the company, the document is
considered as a deemed prospectus via which the offer is made to investors. Any document
which offers the sale of securities to the public is deemed to be a prospectus by implication of
law.
Red Herring Prospectus – Red herring prospectus does not contain all information about the
prices of securities offered and the number of securities to be issued. According to the act, the
firm should issue this prospectus to the registrar at least three before the opening of the offer and
subscription list.
Shelf prospectus – Shelf prospectus is stated under section 31 of the Companies Act, 2013.
Shelf prospectus is issued when a company or any public financial institution offers one or more
securities to the public. A company shall provide a validity period of the prospectus, which
should not be more than one year. The validity period starts with the commencement of the first
offer. There is no need for a prospectus on further offers. The organization must provide an
information memorandum when filing the shelf prospectus.
Abridged Prospectus – Abridged prospectus is a memorandum, containing all salient features
of the prospectus as specified by SEBI. This type of prospectus includes all the information in
brief, which gives a summary to the investor to make further decisions. A company cannot issue
an application form for the purchase of securities unless an abridged prospectus accompanies
such a form.
Statement in Lieu of Prospectus
When the prospectus is not issued by the company a statement in lieu of prospectus, must be
filed with the Registrar at least three days before the allotment of shares. The contents of the
statement in lieu of prospectus are very much similar to the prospectus. The statement must be
signed by all the directors or their agents authorized in writing. These provisions do not apply to
a private company.