74730bos60488-m1-cp2.pdf

CHAPTER 2 INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO LEARNING OUTCOMES At the end of this chapter, you will be able to: ♦ Explain the Formation & Incorporation of company (Private Limited/...

CHAPTER 2 INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO LEARNING OUTCOMES At the end of this chapter, you will be able to: ♦ Explain the Formation & Incorporation of company (Private Limited/ Public Limited), One person company (OPC) and the formation of Not for Profit Organization (Section 8 Company). ♦ Identify the need for Memorandum of Association (MOA) and Articles of Association (AOA) and changes incidental thereto. ♦ Know the effect of registration. ♦ Explain and identify the concepts related to registered office of company. ♦ Understand how documents may be served and filing thereof. ♦ Know about Authentication of documents, proceedings and contracts and Execution of bills of exchange, etc. © The Institute of Chartered Accountants of India  2.2 CORPORATE AND OTHER LAWS CHAPTER OVERVIEW This chapter will discuss in detail the provisions contained in Chapter II of the Companies Act 2013 pertaining to the incorporation of companies and matters incidental thereto. The scope of this chapter is shown in below figure; Incorporation of company and related matters Formation and Memorandum Other Documents Incorporation and Articles Provisions Minimum Memorandum Registered members & Service (Sec 20) (MOA) (Sec 4) Office (Sec 12) OPC (Sec 3 & 3A) Article (AOA) Authentication Commencement Documents of Business (Sec 5) (Sec 21) required (Sec (Sec 10A) 7) Act to override Execution Rectify Name Not for profit MOA/AOA (Sec 22) (Sec 16) company (Sec (Sec 6) 8) Changes in Convert Effect of Memorandum Company registration (Sec 13) (Sec 18) (Sec 9) Subsidiary Changes in Can't hold Article (Sec 14) shares in holding (Sec 19) Updation of changes to be noted in every copy of MOA/AOA (Sec 15) Give copy of MOA/AOA to members (Sec 17) © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.3 INCIDENTAL THERETO 1. INTRODUCTION TO INCORPORATION OF COMPANIES & PROMOTOR Chapter II Consists of sections 3 to 22 as well as the Companies (Incorporation) Rules, 2014. A company is a separate legal entity from its members. It has perpetual succession and can be incorporated only for lawful purposes. Prior to incorporation, promotion activities are essential. Promotion signifies a number of business operations familiar to the commercial world by which a company is brought into existence 1 Persons who undertake promotion activities in order to incorporate the company are generally known as promoters. The section 2(69) of Companies Act, 2013 2 (herein after referred to as ‘the Act’) defines the term “Promoter” (already mentioned in chapter 1 of module; elaborated here). Promoter means a person; a. Who has been named as promoter in a prospectus; or b. Who is identified as promoter by the company in the annual return; or c. Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or d. In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, but shall not include a person who is acting merely in a professional capacity such as attorney, technical or functional experts. Students are advised to take note that above definition serves the purpose to make a person liable ‘in capacity of promoter’ for fraud through misstatement, but not highlighting what actually promoters do. Hence, considering the judicial pronouncements improves our understanding regarding role of promoter. Promoter is one who undertakes to form a company with reference to a given project, and to set it going, and who takes the necessary steps to accomplish that 1 Whaley Bridge Printing Co. v. Green (1880) 5 B.D. 109 2 Act 18 of 2013 © The Institute of Chartered Accountants of India  2.4 CORPORATE AND OTHER LAWS purpose. 3 To be a promoter, one need not necessarily be associated with the initial formation of the company; one who subsequently helps to arrange floating of its capital will equally be regarded as a promoter. 4 Hence, “promoter” denotes any individual, association, partnership or a company that takes all the necessary steps to incorporate (create and mould) 5 a company and set it going, in a fiduciary position. 6 Illustration (True/False) Statement – To be a promoter one necessarily be associated with the initial formation of the company. Answer - False, one who subsequently helps company to keep going, raise fund & advice to board (other than in professional capacity) will equally be regarded as a promoter. 2. FORMATION OF COMPANY [SECTION 3] Earlier companies were granted rights by royal charter, but now a company may be incorporated by either a special Act of the legislature or under the Companies Act, 2013. Accordingly, an incorporated company may be either Chartered Company, Statutory Company, or Registered Company. Section 3 of the Act deals with registered companies. FORMS OF COMPANIES The Companies are broadly classified into categories shown below in figure. Definitions of many of these are already covered under chapter 1 of this module. 3 Twycross v. Grant (1877) 2 C.P.D. 469 4 Lagunas Nitrate Co. v. Lagunas Syndicate (1899) 2 Ch. 392. 5 Erlanger v New Sombrero Phosphate Co. (1878) 48 LJ Ch. 73 6 ibid © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.5 INCIDENTAL THERETO Kind of Companies Company Incorporated Companies Un-incorporated On the basis of mode of registration Registered Statutory Chartered Companies Companies Companies On the basis of liabilty Limited by Shares Limited by Guarantee Unlimited Public Private with capital without capital with capital without capital Public Private Public Private Public Private Public Private Sub-section 1 to section 3 provides that for lawful purpose, by subscribing their name to memorandum and complying with requirement of this Act; a. A public company may be formed by seven (7) or more persons b. A private company may be formed by two (2) or more persons c. A one person company (as private company) may be formed by one (1) person. Further, sub-section 2 to section 3 provides that, company formed as specified above may be incorporated either as; a. Companies limited by shares; or b. Companies limited by guarantee; or c. Unlimited liability companies. © The Institute of Chartered Accountants of India  2.6 CORPORATE AND OTHER LAWS Note: A limited liability companies may be Companies limited by guarantee as well as shares. Specified IFSC Public or Specified IFSC Private Company shall be formed only as a company limited by shares. IFSC Company means a company licensed to set up businesses in any International Financial Services Center in India, like in Gujarat International Finance Tec-City. ONE PERSON COMPANY (OPC) The Companies Act, 2013 for the first time allowed the formation of company by just one person with limited liability, called one person company; such a company is described as a private company under section 3(1)(c). Further section 3(1) along with rule 3 and 4 of the Companies (Incorporation) Rules, 2014, provides certain provisions specifically applicable in case of One Person Company listed below; Who can form one person company? Only a natural person, other than minor; who is an Indian citizen and whether resident in India or otherwise shall be eligible to incorporate a One Person Company. Resident in India means a person who has stayed in India for a period of not less than one hundred and twenty days during the immediately preceding financial year. OPC can’t be incorporated or converted into a company under section 8 of the Act. Further, OPC can’t carry out Non-Banking Financial Investment activities including investment in securities of any body-corporates. Indicate Name & Consent Nominee The memorandum of One Person Company shall also indicate the name of the natural person, other than minor; who is an Indian citizen, whether resident in India or otherwise (as nominee), along with his prior written consent in the Form No. INC-3, who shall, in the event of the subscriber’s death or his incapacity to contract become the member of the company. Note: This provision is to ensure perpetual succession of legal existence of OPC. Example – Ms. Madhu formed an OPC wherein Mr. Sudan is nominee as his name is specified in MOA along with his consent. Ms. Madhu declared insolvent, pending © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.7 INCIDENTAL THERETO to discharge insolvency, she becomes incompetent to contract, hence, Mr. Sudan becomes the member of such OPC. The name of such nominated person in Form No. INC-32 (SPICe) along with consent of such nominee obtained in Form No. INC-3 and fee as provided in the Companies (Registration offices and fees) Rules, 2014 shall be filed with the Registrar at the time of incorporation of the company along with its memorandum and articles. Note: A natural person shall not be member of more than a One Person Company at any point of time and the said person shall not be a nominee of more than a One Person Company Where a natural person, being member in One Person Company in accordance with this rule becomes a member in another such Company by virtue of his being a nominee in that One Person Company, such person shall meet the above specified criteria (can be member of only one OPC) within a period of one hundred and eighty days. Withdraw of Consent by Nominee Such other person (nominee) may withdraw his consent by giving a notice in writing to such sole member and to the One Person Company In this case, the sole member shall nominate another person as nominee within fifteen days of the receipt of the notice of withdrawal and shall send an intimation of such nomination in writing to the Company, along with the written consent of such other person so nominated in Form No. INC-3. Note: Despite name of such other (old nominee) and another person (new nominee) specified in memorandum, any such change in the name of the person shall not be deemed to be an alteration of the memorandum. Replacing Nominee with another one The member may change the name of the person nominated by him at any time for any reason including in case of death or incapacity to contract of nominee and nominate another person (new nominee) after obtaining the prior consent of such another person in Form No. INC-3. Member can do so by intimation in writing to the company. © The Institute of Chartered Accountants of India  2.8 CORPORATE AND OTHER LAWS This is not specified, either in Act or rules whether intimation shall be prior to making change or can be made afterward, but if we consider reasonable construction the intimation shall be ‘Prior Intimation’. Any such change in the name of the person shall not be deemed to be an alteration of the memorandum. Example - Rajesh has formed a ‘One Person Company (OPC), wherein his wife Roopali is named as nominee. For the last two years, his wife Roopali is suffering from terminal illness and due to this hard fact he wants to change her as nominee. He has a trusted and experienced friend Ramnivas who could be made nominee or his (Rajesh) son Rakshak who is of seventeen years of age. In the instant case, Rajesh can appoint his friend Ramnivas as nominee in his OPC and not Rakshak because Rakshak is a minor. When Nominee become Member Where the sole member ceases to be the member and nominee become new member, then such new member shall nominate within fifteen days of becoming member, a person (new nominee) who shall in the event of his death or his incapacity to contract become the member of such company. Notice of change to Registrar In all the three case of change discussed above (Withdraw of Consent by Nominee, Replacing Nominee with another one and When Nominee become Member) the company within thirty days of receipt of notice of withdrawal of consent by nominee, intimation of change of nominee from member, or cessation; shall file the notice with the Registrar of such withdrawal of consent, change or cessation respectively and intimate the name of such another person (new nominee) in Form No. INC-4 along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 along with the prior written consent of such another person so nominated in Form No. INC-3. Note: All the notices and intimations required above shall be in written only, whether specific form provided or otherwise. Illustration (True/False) Statement – Even a Non-Resident Indian can form and become member of OPC. Answer – True, Rule 3(1) of The Companies (Incorporation) Rules, 2014. © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.9 INCIDENTAL THERETO Only a natural person, other than minor; who is an Indian citizen and whether resident in India or otherwise shall be eligible to incorporate a One Person Company. Additional reading Relaxations available to an OPC include: ♦ Not required to prepare a cash-flow statement with effect of section 2(40). ♦ The annual return to furnished under section 92 can be signed by the Director and not necessarily a Company Secretary, even abridged annual return may be prescribed. ♦ Further, following the similar line, section 134 provides it would suffice if one director signs the audited financial statements and abridged form of director report may be prescribed. ♦ Holding annual general meeting as required under section 96 is not necessary in case of OPC. Moreover, certain specific provisions related to general meetings and extraordinary general meetings, specified under sections 100 to 111 not applicable to OPC. ♦ Even relaxation is also there in convening board meetings section 173 requires an OPC to hold only one meeting of the Board of Directors in each half of a calendar year. ♦ Vide section 137, the OPC are allowed to file financial statements within six months from the close of the financial year as against 30 days. 3. MEMBERS SEVERALLY LIABLE IN CERTAIN CASES i.e. REDUCTION IN MINIMUM MEMBERSHIP [SECTION 3A] Member may have limited or unlimited liability depending upon nature of company. Generally, the members are jointly liable for the debt of company, but they shall be severally liable for the payment of the debts of the company and may be severally sued therefore; if at any time: 1. The number of members of a company is reduced below seven (7) and two (2) in case of a public and private company, respectively; and © The Institute of Chartered Accountants of India  2.10 CORPORATE AND OTHER LAWS 2. Such company carries on business for more than six months with reduced number of members; and 3. Every such person who carries on business after those six months is cognizant (aware) of the fact that business is carried reduced members Such members are liable for the payment of the whole debts of the company contracted during that time (after elapse of six months) Example – Amar, Akbar, and Anthony along with five of their friends were member of Harmony Limited. Amar and Akbar died on 18th August 2022, resultantly members count reduced to 6 and every one aware about it. Harmony limited continued its operation without increasing members. In March 2023, Company took loan for business operations, and defaulted in payment thereof. The lender of such loan can sue company, or Anthony or any of rest of five friends, because members shall severally liable for said loan in given case. Illustration (True/False) Statement – Members who knowingly operating the company for more than six months with less than the minimum number of members specified in Section 3(1) are severally liable for the payment of all debts contracted by the company during the period since the number of members was first reduced. Answer – False, refer section 3A of the Act. Such members are liable severally for the payment of the whole debts of the company contracted during that time (after elapse of six months) 4. INCORPORATION OF COMPANY [SECTION 7] Section 7 of the Act provides for the procedure to be followed for incorporation of a company. The steps involved in the process of incorporation are enumerated in Figure shown below (Steps for Incorporation). Majority of steps are covered under section 7 while some other related to documents such as MOA and AOA governed by section 4 and 5 respectively. Corresponding procedural aspects are described by rule 12 to 18 of the Companies (Incorporation) Rules, 2014 and Fees are notified through rule 12 of the Companies (Registration Offices and Fees) Rules, 2014. © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.11 INCIDENTAL THERETO Steps for Incorporation 1. Determine the 2. Reservation of 3. Drafting and nature of company name by filing an signing of MOA & (private or public) apllication AOA 6. Submission of 5. Consent of 4. Submission of statutory persons nominated MOA and AOA to declaration of as directors ROC compliances 7. Pay fees & 9. File declaration 8. Obtain certificate amount of stamp about address of of incorporation duty Registered office Note: Now, it is also required to submit a declaration that all the subscribers have paid the value of shares agreed to be taken by him apart from filling of verification of registered office before the commencement of business. FILING OF THE DOCUMENTS AND INFORMATION WITH THE REGISTRAR [SUB-SECTION 1] An application for registration of a company shall be filed, with the Registrar within whose jurisdiction the registered office of the company is proposed to be situated, in SPICe+(Simplified Proforma for Incorporating company Electronically Plus: INC- 32) along with the fee as provided under the Companies (Registration offices and fees) Rules, 2014 accompanied by following documents and information; SPICe+ is an integrated Web form offering 10 services by 3 Central Govt. Ministries & Departments. (Ministry of Corporate Affairs, Ministry of Labour & Department of Revenue in the Ministry of Finance) thereby saving as many procedures, time and cost for starting a business in India. SPICe+ is initiatives towards Ease of Doing Business. Students may refer to FAQs on SPICe+ form at MCAs’ website for more details https://www.mca.gov.in/MinistryV2/spicefaq.html © The Institute of Chartered Accountants of India  2.12 CORPORATE AND OTHER LAWS The duly signed memorandum of association and articles of association The memorandum (e-MOA in Form No. INC-33) and article (e-AOA in Form No. INC-34) of company so furnished shall be duly signed by all the subscribers to the memorandum in the manner prescribed by rule 13 of the Companies (Incorporation) Rules, 2014 as stated below: a. Each subscriber shall add his name, address, description & occupation, if any, in the presence of at least one witness who shall attest the signature, shall sign and add his name, address, description and occupation, if any. b. Where a subscriber is illiterate, he shall affix his thumb impression or mark which shall be described as such by the person, writing for him, who shall place the name of the subscriber against or below the mark and authenticate it by his own signature and he shall also write against the name of the subscriber, the number of shares taken by him. Note: The type written or printed particulars of the subscribers and witnesses shall be allowed as if it is written, so long as appends signature or thumb impression. c. Where the subscriber is a body corporate, the memorandum and articles of association shall be signed by director, officer or employee of the body corporate duly authorized in this behalf by a resolution of the board of directors. d. Where the subscriber is a Limited Liability Partnership, it shall be signed by a partner of the Limited Liability Partnership, duly authorized by a resolution approved by all the partners of the Limited Liability Partnership: Note: In either case c or d stated above, the person so authorized shall not, at the same time, be a subscriber to the memorandum and articles of Association. e. Where subscriber to the memorandum is a foreign national residing outside India his signatures and address on the memorandum and articles of association and proof of identity shall be notarized by a Notary (Public) with a certificate. Further, if such person residing in a country outside the Commonwealth or which is not a party to the Hague Apostille Convention, 1961, the certificate of the Notary (Public) shall be authenticated by a Diplomatic or Consular Officer. © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.13 INCIDENTAL THERETO f. Where subscriber to the memorandum is a foreign national residing outside India and visited in India and intended to incorporate a company, in such case the incorporation shall be allowed if, he/she is having a valid Business Visa. In case of Person is of Indian Origin or Overseas Citizen of India, requirement of business Visa shall not be applicable. Practical Insight / Illustration Extracts from Memorandum of Association of Infosys Limited (Corporate Identification Number: L85110KA1981PLC013115) © The Institute of Chartered Accountants of India  2.14 CORPORATE AND OTHER LAWS Declaration of Compliance by Professional & Director, Manager or Secretary of company A declaration that all the requirements of this Act and the rules made thereunder in respect of registration and matters precedent or incidental thereto have been complied with shall be be filled in Form No. INC-8 by: a. an advocate, a chartered accountant, cost accountant or company secretary in practice who is engaged in the formation of the company and b. a person named in the articles as director, manager or secretary of the company. Declaration by subscribers to the memorandum and persons named as the first directors A declaration in Form No. INC-9 from each of the subscribers to the memorandum and from persons named as the first directors (if any) in the articles, stating that all the documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of his knowledge and belief a. He is not convicted of any offence in connection with the promotion, formation or management of any company, or b. He has not been found guilty of any fraud or misfeasance or of any breach of duty to any company under this Act or any previous company law during the last five years, Address for correspondence The address for correspondence till its registered office is established. Particulars of persons named as the first directors The particulars i.e name, including surname or family name, the Director Identification Number (DIN), residential address, nationality and such other particulars including proof of identity of each person mentioned in the articles as first director of the company and his interest in other firms or bodies corporate along with his consent (Form No. DIR-2) to act as director of the company shall be © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.15 INCIDENTAL THERETO filed in Form No. DIR-12 along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014. Particulars of subscribers to the memorandum The following particulars of every subscriber to the memorandum shall be filled; a. Name (including surname or family name) and recent Photograph affixed b. Father’s/Mother’s name c. Nationality, Proof of nationality in case the subscriber is a foreign national d. Date and Place of Birth (District and State) e. Educational qualification and Occupation f. Permanent Account Number g. Email id and Phone number of Subscriber h. Permanent residential address and also Present address i. Residential proof such as Bank Statement, Electricity Bill, Telephone / Mobile Bill, provided that Bank statement Electricity bill, Telephone or Mobile bill shall not be more than two months old j. Proof of Identity (For Indian Nationals - Voter’s identity card, Passport copy, Driving License copy, Unique Identification Number (UIN) & for Foreign nationals and Non Resident Indians – Passport) k. If the subscriber is already a director or promoter of a company(s), the particulars relating to name of the company; Corporate Identity Number; Whether interested as a director or promoter Where the subscriber to the memorandum is a body corporate, then the following particulars shall be filed with the Registrar a. The name of the body corporate and Corporate Identity Number of the Company or Registration number of the body corporate, if any b. GLN, if any © The Institute of Chartered Accountants of India  2.16 CORPORATE AND OTHER LAWS c. The registered office address or principal place of business d. E-mail Id e. If the body corporate is a company, certified true copy of the board resolution specifying inter-alia the authorization to subscribe to the MOA f. If the body corporate is a limited liability partnership or partnership firm, certified true copy of the resolution agreed to by all the partners specifying inter alia the authorization to subscribe to the MOA g. In case of foreign bodies corporate, the details relating to the copy of certificate of incorporation of the foreign body corporate; & the registered office address. As per rule 12 of the Companies (Incorporation) Rules, 2014 In case any of the objects of a company requires registration or approval from sectoral regulators such as the RBI and SEBI, then such registration or approval shall be obtained by the proposed company before pursuing such objects and a declaration in this behalf shall be submitted at the stage of incorporation. In case of a Company being incorporated as a Nidhi, the declaration by the Central Government under Section 406 of the Act shall be obtained by the Nidhi before commencing the business and a declaration in this behalf shall be submitted at the stage of incorporation by the Company. ISSUE OF CERTIFICATE OF INCORPORATION ON REGISTRATION The Registrar on the basis of documents and information filed, shall register all the documents and information in the register and issue a certificate of incorporation in the Form No. INC-11 to the effect that the proposed company is incorporated under this Act. Certificate of Incorporation shall mention permanent account number of the company where if it is issued by the Income-tax Department. © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.17 INCIDENTAL THERETO Practical Insight Certificate of Incorporation Students are advised to take note; The Certificate contains the name of the company, the date of its issue, CIN (Corporate Identity Number) and the signature of the Registrar with his seal. Certificate of incorporation is evidence of registration (existence of separate legal entity with perpetual succession). It effects are highlighted by section 9, explain later in this chapter. Earlier, the certificate of incorporation considered as conclusive proof, but as per the Companies Act, 2013, certificate of Incorporation is not conclusive proof of everything prior to incorporation being in order. Sub-section (6) and (7) of section 7 signify this understanding. © The Institute of Chartered Accountants of India  2.18 CORPORATE AND OTHER LAWS ALLOTMENT OF CORPORATE IDENTITY NUMBER (CIN) On and from the date mentioned in the certificate of incorporation, the Registrar shall allot to the company a corporate identity number, which shall be a distinct identity for the company and which shall also be included in the certificate of incorporation. CIN is a 21 alpha-numeric digit based unique identification number, comprising data sections/elements that reveals the basis aspects about company. 7 Example - Decode the CIN CIN of Infosys Limited is L85110KA1981PLC013115 The first character – L (reveals listing status, L for listed and U for unlisted, for instance Infosys is Listed one) The next five digits – 85110 The next two letters – KA (reveals the Indian state where the company is registered, for instance KA is for Karnataka) The next four digits – 1981 (reveals the year of incorporation of a company) The next three characters – PLC (reveals the company classification - PLC for public, PTC for private, FTC for foreign, and GOI for government) The last six digits – 013115 (reveals registration number with concerned ROC) MAINTENANCE OF COPIES OF ALL DOCUMENTS AND INFORMATION The company shall maintain and preserve copies of all the documents and information as originally filed at its registered office, till its dissolution under this Act. FURNISHING OF FALSE OR INCORRECT INFORMATION OR SUPPRESSION OF MATERIAL FACT AT THE TIME OF INCORPORATION (I.E. DURING INCORPORATION PROCESS) If any person furnishes any false or incorrect particulars of any information or suppresses any material information, of which he is aware in any of the documents filed with the Registrar in relation to the registration of a company, he shall be liable for action for fraud under section 447. 7 This Example is only for understanding of the students. © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.19 INCIDENTAL THERETO Note: Provisions of section 447 explained in detail in book chapter 3; Prospectus and Allotment of securities. COMPANY ALREADY INCORPORATED BY FURNISHING ANY FALSE OR INCORRECT INFORMATION OR REPRESENTATION OR BY SUPPRESSING ANY MATERIAL FACT (i.e. POST INCORPORATION) Where, at any time after the incorporation of a company, it is proved that the company has been got incorporated by a. furnishing any false or incorrect information or representation or b. by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company, or c. by any fraudulent action, Then, the promoters, the persons named as the first directors of the company and the persons making declaration under this section shall each be liable for action for fraud under section 447. ORDER OF THE TRIBUNAL Where a company has been got incorporated by a. furnishing false or incorrect information or representation, or b. by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company or c. by any fraudulent action, Then, the tribunal (NCLT) on being satisfied that the situation so warrants, in response to an application made to it, may pass order as it may deem fit including; a. regulation of the management of the company including changes, if any, in its memorandum and articles, in public interest or in the interest of the company and its members and creditors; or b. direct that liability of the members shall be unlimited; or c. direct removal of the name of the company from the register of companies; or d. winding up of the company; or © The Institute of Chartered Accountants of India  2.20 CORPORATE AND OTHER LAWS Provided that before making any such order: a. the company shall be given a reasonable opportunity of being heard in the matter; and b. the Tribunal shall take into consideration the transactions entered into by the company, including the obligations, if any, contracted or payment of any liability Tribunal means the National Company Law Tribunal (NCLT) constituted on 1st June, 2016under section 408 of the Companies Act, 2013. The NCLT is a quasi- judicial body in India that adjudicates issues relating to companies in India. Example - The Certificate of incorporation is not the conclusive proof with respect to the legality of the objects of the company mentioned in the objects clause of the memorandum of association. As such, if a company has been registered whose objects are illegal, the incorporation does not validate the illegal objects. In such a case, the only remedy available is to wind up the company. 5. FORMATION OF COMPANIES WITH CHARITABLE OBJECTS, ETC. [SECTION 8] The underlying purpose of formation of company is not always making profit through operating economic activities, it may have charitable or social objects. To illustrate, Tata Foundation (CIN U85191MH2014NPL253500) and Azim Premji Foundation (CIN U93090KA2001NPL028740). Students are advised to take note that 5th data section of both the CIN comprises of ‘NPL’, which signify Not-for-Profit License Company. Such companies are licensed by Central Government* under section 8 of the Companies Act, 2013 8, relevant provisions of section 8 and applicable rules thereto are described below. Note: The power of *Central Government under section 8 delegated to: (i) ROCs 9 to the extent and for purpose of: 8 Act 18 of 2013 9 S.O. 1353(E), dated 21st May, 2014 © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.21 INCIDENTAL THERETO sub-section (1); clause (i) to sub-section (4), except for alteration of memorandum in case of conversion into another kind of company; and sub-section (5) (ii) Regional Directors 10 to the extent and for purpose of: clause (i) to sub-section (4), for alteration of memorandum in case of conversion into another kind of company; and sub-section (6) WHO CAN ISSUE AND GET THE LICENSE UNDER SECTION 8(1)? As per section 8, the Central Government (ROC in its behalf) may grant such a licence if it is proved to the satisfaction that a person or an association of persons proposed to be registered under this Act as a limited company a. has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object; b. intends to apply its profits (if any) or other income in promoting its objects; and c. intends to prohibit payment of any dividend to its members. Note: The use of the word ‘person’ appears to allow even a single person to form a company for the objects specified. However, as discussed earlier also (under heading ‘OPC’ of this chapter) that rule 3(5) of the Companies (Incorporation) Rules, 2014 prohibit the OPC to be incorporated or converted into a company under section 8. Likewise, as per section 2(85), a small company cannot be incorporated or converted into a section 8 company. A firm may be a member of the company registered under section 8. Despite, members liability is limited, the words ‘Limited’ or ‘Private Limited’ shall not be added to its name. But on registration, the company shall enjoy same privileges and obligations as of a limited company. Licence issued may on such conditions as Central Government (ROC) deems fit. 10 S.O. 4090(E), dated 19th Dec, 2016 © The Institute of Chartered Accountants of India  2.22 CORPORATE AND OTHER LAWS REGISTRATION OF COMPANY USING LICENSE After granting licence, an application shall be made to registrar under section 8(1) itself for registration of company in the manner specified in rule 19 of the Companies (Incorporation) Rules 2014. Application for registration A person or an association of persons desirous of incorporating a company with limited liability under section 8(1), shall make an application to registrar in Form SPICe+ (Simplified Proforma for Incorporating company Electronically Plus: INC- 32) along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014. Supporting document along with Application The application furnished as specified above shall be accompanied by the following documents; a. The memorandum and articles of association of the proposed company in the Form No. INC-13 and Form No. INC-31, respectively; b. An estimate of the future annual income and expenditure of the company for next three years, specifying the sources of the income and the objects of the expenditure; c. The declaration in by an Advocate, a Chartered Accountant, cost accountant or Company Secretary in practice Form No. INC-14 and by each of the persons making the application in Form No. INC-15, that; ♦ the memorandum and articles of association have been drawn up in conformity with the provisions of section 8 and rules made thereunder and ♦ all the requirements of the Act and the rules made thereunder relating to registration of the company under section 8 and matters incidental or supplemental thereto have been complied with; ALTERATION OF MEMORANDUM AND ARTICLES REQUIRES PRIOR PERMISSION OF GOVERNMENT A company registered under this section requires prior permission from; a. Central Government (power delegated to regional directors) for alteration of its memorandum and b. Central Government (power delegated to ROCs) for alteration of its articles. © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.23 INCIDENTAL THERETO CONVERSION INTO ANY OTHER KIND OF COMPANY A company registered under this section may convert itself into company of any other kind only after complying with such conditions as may be prescribed in rule 21 and 22 of the Companies (Incorporation) Rule 2014 as described below; a. A company shall pass a special resolution at a general meeting for approving such conversion b. An explanatory statement to notice of such general meeting must set-out the details on reason of such conversion. c. The company shall file an application in Form No. INC-18 with the Regional Director with the fee along with a certified true copy of the special resolution and a copy of the Notice convening the meeting including the explanatory statement for approval for conversion. Also attach the proof of serving of the notice served by registered post or hand delivery, to: ♦ the Chief Commissioner of Income Tax having jurisdiction over the company, ♦ Income Tax Officer who has jurisdiction over the company, ♦ the Charity Commissioner, ♦ the Chief Secretary of the State in which the registered office of the company is situated, ♦ any organisation or Department of the Central Government or State Government or other authority under whose jurisdiction the company has been operating. Note: If any of these authorities wish to make any representation to Regional Director, it shall do so within sixty days of the receipt of the notice, after giving an opportunity to the Company. d. A copy of the application with annexures as filed with the Regional Director shall also be filed with the Registrar. e. The company shall, within a week from the date of submitting the application to the Regional Director, publish a notice at its own expense, and a copy of © The Institute of Chartered Accountants of India  2.24 CORPORATE AND OTHER LAWS the notice, as published, shall be sent forthwith to the Regional Director and the said notice shall be in Form No. INC-19 and shall be published; ♦ at least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated, and having a wide circulation in that district, and at least once in English language in an English newspaper having a wide circulation in that district; and ♦ on the website of the company, if any, and as may be notified or directed by the Central Government. f. The company should have filed all its financial statements and Annual Returns upto the financial year preceding the submission of the application to the Regional Director and all other returns required to be filed under the Act up to the date of submitting the application to the Regional Director Note: In the event the application is made after the expiry of three months from the date of preceding financial year to which the financial statement has been filed, a statement of the financial position duly certified by chartered accountant made up to a date not preceding thirty days of filing the application shall be attached. g. On receipt of the application, and on being satisfied , the Regional Director shall issue an order approving the conversion of the company into a company of any other kind subject to such terms and conditions as may be imposed in the facts and circumstances of each case. h. Before imposing the conditions or rejecting the application, the company shall be given a reasonable opportunity of being heard by the Regional Director i. On receipt of the approval of the Regional Director, the company shall convene a general meeting of its members to pass a special resolution for amending its memorandum of association and articles of association and the Company shall thereafter file these with the Registrar (with declaration to adhere conditions if any, imposed by Regional Director) j. On receipt of the documents referred above, the Registrar shall register the documents and issue the fresh Certificate of Incorporation. © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.25 INCIDENTAL THERETO REVOCATION OF LICENSE a. The Central Government (power delegated to regional director) may by order revoke the licence of the company where; ♦ the company contravenes any of the requirements or the conditions of this sections subject to which a licence is issued or ♦ the affairs of the company are conducted fraudulently, or in violation of the objects of the company or prejudicial to public interest, Note: On revocation, the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the register. Before such revocation a written notice must be served on such company and opportunity to be heard in the matter shall be given. b. Where a licence is revoked and the Central Government is satisfied, that it is essential in the public interest; then after giving a reasonable opportunity of being heard; by order it may direct that ♦ Company be wound up under this Act. Excess assets on the winding up or dissolution, after the satisfaction of its debts and liabilities, may be transferred to;  Another company registered under this section and having similar objects, subject to such conditions as the Tribunal may impose, or  May be sold and proceeds thereof credited to the Insolvency and Bankruptcy Fund formed under section 224 of the Insolvency and Bankruptcy Code, 2016. ♦ Company be amalgamated with another company registered under this section and having similar objects. The Central Government empowered with overriding effects to provide the said amalgamation to form single entity with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order. © The Institute of Chartered Accountants of India  2.26 CORPORATE AND OTHER LAWS PENALTY/ PUNISHMENT IN CONTRAVENTION Penalty for offences under section 8 are summarised below; Offence Penalty company makes any default company shall, be punishable with fine varying in complying with any of the from ten lakh rupees to one crore rupees requirements laid down in directors and every officer of the company who is this section in default shall be punishable with fine varying from twenty-five thousand rupees to twenty-five lakh rupees the affairs of the company every officer in default shall be liable for action were conducted fraudulently under section 447 FIGURE- SUMMARY OF SUB-SECTION 6 TO 11 OF SECTION 8 Contravention Licence revoked Punishment Expression Amalgamate with Company with 10 Ltd. or Pvt. Winding up lacs to 1 crore Section 8 company Ltd. Added to Surplus Assets with simlar name transfer to: objectives. Director or Officer with 25 thousand to 25 lacs Section 8 company (Fraud u/s 447) Insolvency & with simlar Bankruptcy Fund objectives. © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.27 INCIDENTAL THERETO Additional reading Relaxations available to a Section 8 Company include; ♦ Can call its general meeting by giving a clear 14 days’ notice instead of 21 days. ♦ Requirement of minimum number of directors, independent directors etc. does not apply. ♦ Need not constitute Nomination and Remuneration Committee and Shareholders Relationship Committee. 6. EFFECT OF REGISTRATION [SECTION 9] Section 9 of the Act provides for the effect of registration of a company, it states; From the date of incorporation specified in the certificate of incorporation, the subscribers to the memorandum and all other persons, who may become members of such company, shall be a body corporate by the name as contained in the memorandum Thereafter such body corporate, by the said name; shall be capable of; a. Exercising all the functions of an incorporated company under this Act and b. Having perpetual succession c. Power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, d. To contract and to sue and be sued. © The Institute of Chartered Accountants of India  2.28 CORPORATE AND OTHER LAWS SUMMARY OF SECTION 9 Subscribers to the memorandum and All other persons, who may from time to time, become members of the company Registration (Certificate of Incorporation Granted) From the date of incorporation specified in the certificate of incorporation, corporate by the name specified in memorandum beceome body corporate, Under said name Exercising all the Power to To contract Having functions of an acquire, hold and to sue perpetual incorporated and dispose of and be sued. succession company property movable and tangible and immovable intangible 7. MEMORANDUM OF ASSOCIATION – MOA [SECTION 4] Memorandum of association (MOA) is the fundamental document for the formation of the company, hence considered as its charter or constitution. Memorandum defines the relationship of the company with outsiders because it enables all those who deals with the company to know what its powers are and what activities it can engage in. The memorandum shall contains the following clauses: a. Name Clause b. Situation Clause (also called registered office clause) © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.29 INCIDENTAL THERETO c. Objects Clause d. Liability Clause e. Capital Clause (applicable, if company is formed with share capital) f. Association Clause or Subscription Clause (specifically drafted in case of OPC) g. Nomination Clause (applicable, in case of OPC) Section 4 of the Act along with relevant rules from the Companies (Incorporation) Rules 2014, provides for the requirements with respect to memorandum. NAME CLAUSE [SECTION 4 (1) (a) READ WITH SUB-SECTION 2 TO 5] The name of the company with the last word “Limited” in the case of a public limited company, or “Private Limited” in the case of a private limited company. The above clause is not applicable in case of section 8 companies. In case of Specified IFSC Public Company 11 & IFSC Private Company 12, name shall have the suffix, “International Financial Service Company” or “IFSC”. Application for reserving name for proposed company [sub-section 4] A person may make an application in SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus: INC-32) accompanied by fee, as provided in the Companies (Registration Offices and Fees) Rules, 2014, to the Registrar for reservation of a name set out in the application as name of the proposed company. Resubmission shall be allowed within 15 days, for rectification of defect, if any. Application for reserving the name for the changing name of existing company [sub-section 4] A person may make an application, using web service RUN (Reserve Unique Name) along with fee as provided in the Companies (Registration Offices and Fees) Rules, 2014, to the Registrar for the reservation of a name set out in the application as the name to which the company proposes to change its name. Resubmission shall be allowed within 15 days, for rectification of defect, if any. 11 GSR 08 (E) dated 04.01.2017 12 GSR 09 (E) dated 04.01.2017 © The Institute of Chartered Accountants of India  2.30 CORPORATE AND OTHER LAWS Restriction regarding names and use of words & expressions therein [sub- section 2 and 3] Sub-section 2 states that the name mentioned in the memorandum shall not be; a. Identical with or resemble too nearly to the name of an existing company registered under this Act or any previous company law; or b. Such, use of which by the company will constitute an offence under any law for the time being in force; or c. Such, use of which by the company is undesirable in the opinion of the Central Government (this power of Central Government has been delegated to ROC) 13 Further, sub-section 3 provides, unless the previous approval of the Central Government has been obtained; a company shall not be registered with that name; d. Which contains any word or expression that is likely to give the impression that the company is in any way connected with, or having the patronage of, the Central Government, any State Government, or any local authority, corporation or body constituted by the Central Government or any State Government under any law for the time being in force; or e. Which includes words or expressions namely Board; Commission; Authority; Undertaking; National; Union; Central; Federal; Republic; President; Rashtrapati; Small Scale Industries; Khadi and Village Industries Corporation; Financial Corporation and the like; Municipal;; Development Authority; Prime Minister or Chief Minister; Minister; Nation; Forest corporation; Development Scheme; Statute or Statutory; Court or Judiciary; Governor; Bureau; and the use of word Scheme with the name of Government (s), State, India, Bharat or any Government authority or in any manner resembling with the schemes launched by Central, State or local Governments and authorities. A name is said to ‘resemble’ when difference is only and only of a. Plural or singular form of words in one or both names (Green Technology Ltd. is same as Greens Technology Ltd. and Greens Technologies Ltd.) 13 S.O. 1353(E), dated 21st May, 2014. © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.31 INCIDENTAL THERETO b. Type and case of letters, spacing between letters, and punctuation marks used in one or both names (ABC Ltd. is same as A.B.C. Ltd. and A B C Ltd.) c. Use of different tenses in one or both names (Ascend Solutions Ltd. is same as Ascended Solutions Ltd. and Ascending Solutions Ltd.) d. Slight variation in the spelling of the two names including a grammatical variation thereof (Disc Solutions Ltd. is same as Disk Solutions Ltd. but it is not same as Disco Solutions Ltd) e. Use of different phonetic spellings including use of misspelled words of an expression (Bee Kay Ltd is same as BK Ltd, Be Kay Ltd., B Kay Ltd., Bee K Ltd., B.K. Ltd. and Beee Kay Ltd) f. Complete translation or transliteration, and not part thereof, of an existing name, in Hindi or in English (National Electricity Corporation Ltd. is same as Rashtriya Vidyut Nigam Ltd.) g. Use of host name such as ‘www’ or a domain extension such as.net’. org’, ‘dot’ or ‘com’ in one or both names (Ultra Solutions Ltd. is same as Ultrasolutions.com Ltd. But Supreme Ultra Solutions Ltd. is not the same as Ultrasolutions.com Ltd.) h. The order of words in the names (Ravi Builders and Contractors Ltd. is same as Ravi Contractors and Builders Ltd.) i. Use of the definite or indefinite article in one or both names (Congenial Tours Ltd. is same as A Congenial Tours Ltd. and The Congenial Tours Ltd. But Isha Industries Limited is not the same as Anisha Industries Limited.) j. Addition of the name of a place to an existing name, which does not contain the name of any place; (If Salvage Technologies Ltd. is an existing name, it is same as Salvage Technologies Delhi Ltd. But Retro Pharmaceuticals Ranchi Ltd. is not the same as Retro Pharmaceuticals Chennai Ltd.) k. addition, deletion, or modification of numerals or expressions denoting numerals in an existing name, unless the numeral represents any brand (Thunder Services Ltd is same as Thunder 11 Services Ltd and One Thunder Services Ltd.) Students may also refer to 23 instances specified in rule 8A of the Companies (Incorporation) Rules 2014 that tantamount to “undesirable names” © The Institute of Chartered Accountants of India  2.32 CORPORATE AND OTHER LAWS Reservation of name [sub-section 5] Upon receipt of an application the Registrar may, on the basis of information and documents furnished along with the application, reserve the name for a period of twenty days from the date of approval or such other period. Provided that in case of an application for reservation of name or for change of its name by an existing company, the Registrar may reserve the name for a period of sixty days from the date of approval. 1. While allotting names, the Registrar of Companies concerned should exercise due care to ensure that the names are not in contravention of the provisions of the Emblems and Names (Prevention of Improper Use) Act, 1950. It is necessary that Registrars are fully familiar with the provisions of the said Act. 14 2. An application for extension of reservation of name under rule 9A of the Companies (Incorporation) Rules 2014 can be made before expiry of 20 days; a. For another 20 days (total of 40 days) with fee of ` 1000, which may be further extend by another 20 day (total of 60 days) with fee of ` 2000. Or b. For another 40 days (total of 60 days) with fee of 3000 Cancellation of reserved name [sub-section 5] Where after reservation of name, it is found that name was applied by furnishing wrong or incorrect information, then a. if the company has not been incorporated, the reserved name shall be cancelled and the person who has made the application shall be liable to a penalty which may extend to one lakh rupees; b. if the company has been incorporated, the Registrar may, after giving the company an opportunity of being heard; ♦ Either direct the company to change its name within a period of 3 months, after passing an ordinary resolution; ♦ Take action for striking off the name of the company from the register of companies; or ♦ Make a petition for winding up of the company. 14 General Circular No. 29/2014, dated 11th July, 2014 © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.33 INCIDENTAL THERETO Example: Mr. Anil Desai, has applied for reservation of company name with a prefix “Sanwariya”. He claimed that the Prefix “Sanwariya” is registered trademark in his name. Later on, it is found that the said prefix is not registered with Mr. Anil Desai, however, he has formed company by giving incorrect documents/ information while applying the name of the company. In such case, the Registrar shall take action as per the provisions of the Act after giving opportunity of being heard. SITUATION CLAUSE - SECTION 4 (1) (b) Section 4(1)(b) requires, the memorandum of a company shall mention the name of state, where registered office is proposed to be situated. The situation (place) of registered office is important from perspective of; a. Establishing the domicile of company for the purpose of determining jurisdictions in context to compliance (ROC, RD etc.), judicial aspects (bench of NCLT, high court etc.), fiscal aspects (taxation), and for many other purposes. b. Place at which the company’s statutory books must normally be kept (in case of public company, general meeting also required to be conducted at registered office or in the city where it is situated). c. Act as the address to which notices and other communications can be sent. A company shall, within thirty days of its incorporation and at all times thereafter, have a registered office capable of receiving and acknowledging all communications and notices as may be addressed to it. OBJECT CLAUSE & DOCTRINE OF ULTRA VIRES Section 4(1)(c), requires the memorandum of a company shall state the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof. Specified IFSC Public Company & IFSC Private company shall state its objects to do financial services activities as permitted under the Special Economic Zones Act, 2005 read with SEZ Rules, 2006 and any matter considered necessary in furtherance thereof in accordance with license to operate, from International Financial Services Centre located in an approved multi services Special Economic Zone, granted by the RBI, SEBI, or IRDA. © The Institute of Chartered Accountants of India  2.34 CORPORATE AND OTHER LAWS A company can’t depart away to do anything beyond or outside its objects stated in memorandum and if any act done beyond that will be ultra vires and void, same can’t be ratified even by the assent of the whole body of shareholders. Note: Acts ultra-vires to the authority of the directors may be ratified by the company.15 Articles provide for regulations inside scope established by MOA, hence acts beyond (ultra-vires) the articles, can be ratified by the shareholders provided the relevant provisions are not beyond the memorandum. To illustrate; One of the director is authorised to issue cheque of ` 10000, but he issued for ` 12000; company can ratify so. It is worth noting here that Memorandum of company can be altered to widen the scope of objects, but such alteration shall have prospective effect only; not the retrospective, hence an act once ultra-vires remain so ever. A company may do anything which is incidental to and consequential upon the objects specified and such act will not be an ultra vires act. 16 To illustrate for trade one have rent or own a building, issue invoices, make and receive payments. Essence of the Doctrine of Ultra Vires The Doctrine of Ultra Vires is meant to protect shareholders and the creditors of the company or anyone who deals with the company. Enunciation of Doctrine of Ultra Vires The doctrine of ultra vires was first enunciated by the House of Lords in a classic case, Ashbury Railway Carriage and Iron Co. Ltd. v. Riche. 17 The memorandum of the company in the said case defined its objects thus: “The objects for which the company is established are to make and sell, or lend or hire, railway plants to carry on the business of mechanical engineers and general contractors…….” The company entered into a contract with M/s. Riche, a firm of railway contractors to finance the construction of a railway line in Belgium. On subsequent repudiation of this contract by the company on the ground of its being ultra vires, Riche brought a case for damages on the ground of breach of contract, as according to him the words 15 Rajendra Nath Dutta v. Shilendra Nath Mukherjee, (1982) 52 Com Cases 293 (Cal.) 16 Attorney-General v. Great Eastern Rly Co (1880) 5 AC 473 17 (1878) L.R. 7 H.L. 653 © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.35 INCIDENTAL THERETO “general contractors” in the objects clause gave power to the company to enter into such a contract and, therefore, it was within the powers of the company. More so because the contract was ratified by a majority of shareholders. The House of Lords held that the contract was ultra vires the company and, therefore, null and void. The term “general contractor” was interpreted to indicate as the making generally of such contracts as are connected with the business of mechanical engineers. The Court held that if every shareholder of the company had been in the room and had said, “That is a contract which we desire to make, which we authorise the directors to make”, still it would be ultra vires. The shareholders cannot ratify such a contract, as the contract was ultra vires the objects clause, which by Act of Parliament, they were prohibited from doing. Effects of Doctrine of Ultra Vires The key effect will be as under; a. Whenever an ultra vires act has been or is about to be undertaken, any member of the company can get an injunction to restrain it from proceeding with it. 18 b. Neither party (even outsider) can sue for enforcement or specific performance of such agreement. Reason explained under heading Constructive Notice LIABILITY CLAUSE Section 4(1)(d) requires, the memorandum of a company shall state; a. In the case of a company limited by shares the liability of its members is limited to the amount unpaid, if any, on the shares held by them; and b. In the case of a company limited by guarantee, the amount up to which each member undertakes to contribute: ♦ to the assets of the company in the event of its being wound-up while he is a member or within one year after he ceases to be a member, for payment of the debts and liabilities of the company or of such debts and liabilities as may have been contracted before he ceases to be a member, as the case may be; and ♦ to the costs, charges and expenses of winding-up and for adjustment of the rights of the contributories among themselves 18 Attorney-General v. Great Eastern Rly Co (1880) 5 AC 473 © The Institute of Chartered Accountants of India  2.36 CORPORATE AND OTHER LAWS Note: Those shareholders who are members of the company at the time of its winding-up are included in list 'A'. They are primarily liable for making payment to the company at the time of its winding-up. While list 'B' consists of those persons who were the members of the company during the 12 months preceding the date of winding-up. B list contributories are liable to contribute if the amount realised from the contributories of list ‘A’ is not sufficient to discharge the liabilities of the company. Example - Modern Furniture limited, a company limited by shares having share capital divided into shares with face value of ` 10 each, out of which ` 8 is called up. Mr. Singh who is having 200 share paid all ` 8 on each of share he hold, while Ms. Sarla owning 100 shares paid ` 10 (Rupee 2 in advance); whereas Mr. Sanju owning 250 shares paid ` 6 per share (` 2 in arrear per share). Liability of Mr. Singh, Ms. Sarla, and Mr. Sanju shall be maximum upto ` 400, Nil, and ` 1000 only; respectively. CAPITAL CLAUSE Section 4 (1) (e) (i) requires, in the case of a company having a share capital, the memorandum of a company shall state; a. The amount of share capital with which the company is to be registered (usually termed as authorised or nominal capital); and b. The division thereof into shares of a fixed amount (i.e. face value and number of shares); and c. The number of shares which the subscribers to the memorandum agree to subscribe which shall not be less than one share. SUBSCRIPTION CLAUSE Section 4 (1) (e) (ii) requires, the memorandum of a company shall state, the number of shares each subscriber to the memorandum intends to take, indicated opposite his name, in the case of a company having a share capital. NOMINATION CLAUSE (ONLY IN CASE OF ONE PERSON COMPANY) Section 4 (1) (f), requires, the memorandum of a company shall state the name of the person (nominee) who, in the event of death of the subscriber, shall become the member of the company, in the case of One Person Company. Note: This provision is corresponding to first proviso to section 3 (1) already discussed earlier in this chapter. © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.37 INCIDENTAL THERETO FORMS AND SCHEDULE RELATED TO MEMORANDM [SUB-SECTION 6] The memorandum of a company shall be in respective forms specified in Tables A, B, C, D and E in Schedule I to the Act, as the case shown in figure; Forms of MOA Table A Memorandum of association of a company limited by shares Table B Table E Memorandum of Memorandum of association of a association of an company limited by unlimited company guarantee and not and having share having a share capital Forms of MOA capital Table C Table D Memorandum of Memorandum of association of a association of an company limited by unlimited company guarantee and and not having having a share share capital capital 1. As per section 399 of the Act, a memorandum is a public document. Consequently, every person entering into a contract with the company is presumed to have the knowledge of the conditions contained therein. 2. As per section 4 (7), any provision in the memorandum or articles, in the case of a company limited by guarantee and not having a share capital, shall not give any person a right to participate in the divisible profits of the company otherwise than as a member. If the contrary is done, it shall be void. © The Institute of Chartered Accountants of India  2.38 CORPORATE AND OTHER LAWS 8. ARTICLES OF ASSOCIATION – AOA [SECTION 5] Actually, articles of association of a company contains internal rules and regulations of the company. It is complementary to Memorandum and together give effect as charter of the company. Article establish a contract between the company and the members and between the members inter se. This contract governs the ordinary rights and obligations incidental to membership in the company 19 Section 5 of the Companies Act, 2013 and rule 10 and 11 of the Companies (Incorporation) Rules, 2014 seeks to provide the contents and model of articles of association. The provisions are state below; CONTENTS AND MATTERS TO BE INCLUDED [SUB-SECTION 1 AND 2] The articles of a company shall contain; a. The regulations for management of the company. b. Such matters as may be prescribed (rules 11 of the Companies (Incorporation) Rules, 2014 refers to the matters specified in the model forms given under schedule I to the Act). However, a company may also include such additional matters in its articles as may be considered necessary for its management. PROVISION FOR ENTRENCHMENT [SUB-SECTION 3 TO 5] Entrenchment is the chronic or deep-rooted fact of an attitude, habit, or belief that is firmly established or accustomed, therefore it become difficult or unlikely to change. To illustrate – Men don’t cry Entrenchment may be possible for processes, as well as procedures in both way; that processes are so well established, it become difficult to change them or make process of change so rigid that process become well established. Students, here we are studying the word entrenchment with sense of making the process of alteration in articles more difficult, in order to enhance the protection. Usually an article of association may be altered by passing special resolution but entrenchment makes it more difficult to change the articles, in manner specified ahead; 19 Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. AIR 1971 SC 422 © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.39 INCIDENTAL THERETO Article may contain provisions for entrenchment [Sub-section 3] The articles may provide that specified provisions contained in it may be altered only if conditions that are more restrictive and harder than those applicable in the case of a special resolution, are met or complied with. Manner of inclusion of the entrenchment provision [Sub-section 4] The provisions for entrenchment shall only be made either: a. On formation of a company, or b. By an amendment in the articles agreed to ♦ By all the members of the company in the case of a private company and ♦ By a special resolution in the case of a public company. Summary of Section 5(4) At Formation Timing of Entrenchment Private Co. - All members After coming in existence Public Co. - Special Resolution Notice to the registrar of the entrenchment provision [Sub-section 5 read with Rule 10 of the Companies (Incorporation) Rules, 2014] The company shall give notice to the Registrar of entrenchment provisions included in article a. In the SPICe+(Simplified Proforma for Incorporating company Electronically Plus: INC-32), along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 at the time of incorporation of the company, and b. In case of existing companies, in Form No. MGT-14 within thirty days from the date of entrenchment of the articles, along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014. © The Institute of Chartered Accountants of India  2.40 CORPORATE AND OTHER LAWS Summary of Section 5(5) and Rule 10 At Formation - In the SPICe+ Notice of Entrenchment After coming in existence - Form No. MGT-14 within thirty days MODEL FORMS OF ARTICLES [SUB-SECTION 6 TO 8] Sub-section 6 provides that the articles of a company shall be in respective forms specified in Tables, F, G, H, I and J in Schedule I to the Act as specified in figure. Such forms are called model forms. Further, sub-section 7 provides leeway to company, in adopting all or any of the regulations contained in the model articles applicable to such company. Forms of AOA Table F Articles of association of a company limited by shares Table J Table G Articles of Articles of association of an association of a unlimited company limited company and not by guarantee and having share Model forms of having a share capital AOA capital Table I Table H Articles of Articles of association of an association of a unlimited company limited company and by guarantee and having share not having a capital share capital © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.41 INCIDENTAL THERETO Students are advised to take note: Sub-section 8 provides that in case of any company, which is registered after the commencement of this Act, in so far as the registered articles of such company do not exclude or modify the regulations contained in the model articles applicable to such company, those regulations shall, so far as applicable, be the regulations of that company in the same manner and to the extent as if they were contained in the duly registered articles of the company – Either exclude or modify expressly or else it applies what stated in model applicable to company. Sub-section 9 restricts the scope of section to the articles either registered or amended under this Act - Hence no provision of this section (section 5) shall be applicable to articles registered under previous company law; provided not amended under this Act. Illustration – Question & Answer Question – Highlight differences between the MOA and AOA Answer - The key differences between the MOA and AOA includes; 1. Content - The memorandum contains the fundamental conditions as basis of incorporation. It lays down the parameters that define relation of company with outsiders. The Articles contain internal regulations of the company; hence regulate the relationship between company and the members and members inter se. 2. Supremacy - Memorandum cannot include any clause that is contrary to the provisions of the law, whereas the articles shall be subordinate to both the law and memorandum. Therefore, in case on conflict among the two, the MOA shall prevail. 3. Scope -Memorandum lays down the scope beyond which the activities of the company cannot go. An act done by a company beyond the scope of the memorandum are ultra vires and void. They cannot be ratified even by all the shareholders. Articles provide for regulations inside scope established by MOA, hence acts beyond the articles can be ratified by the shareholders provided the relevant provisions are not beyond the memorandum. © The Institute of Chartered Accountants of India  2.42 CORPORATE AND OTHER LAWS 9. DOCTRINE OF CONSTRUCTIVE NOTICE AND DOCTRINE OF INDOOR MANAGEMENT Both the doctrines carries the counter effect to each other, doctrine of constructive notice put onus on outsider to be aware of what is stated in MOA and AOA; whereas doctrine of indoor management protects such outsider from internal irregularities. DOCTRINE OF CONSTRUCTIVE NOTICE Essence of Doctrine of Constructive Notice All those who are dealing with company deemed to be aware of what is stated in its MOA and AOA, in its true perspective, because both this documents are public documents. Section 399* provides that the Memorandum and Articles when registered with Registrar of Companies ‘become public documents’ and then they can be inspected by any one by electronic means on payment of the prescribed fee. Further, Section 17 provides that a company shall on payment of the prescribed fee send a copy of each of the following documents to a member within seven days of the request being made by him a. Memorandum; b. Articles; c. Every agreement and every resolution referred to in sub-section (1) of section 117, if and so far as they have not been embodied in the memorandum and articles. Any failure will make the company as well as every officer in default liable to a fine of one thousand rupee for each day during which default continues or one lac rupee whichever is less. *Section 399 is not part of syllabus, but essential to develop understanding. Enunciation of Doctrine of Constructive Notice The doctrine of constructive notice is based on the rule laid down in Ernest v Nicholls. 20 It was held for the first time that any person who is dealing with the company is deemed 20 (1857) 6 HL Cas 401 © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.43 INCIDENTAL THERETO to be familiar with the contents of all the public documents of the company. The memorandum and the articles of association of every company are registered with the Registrar of Companies. The office of the Registrar is a public office. Hence, the memorandum and the articles of association become public documents. It is therefore the duty of person dealing with a company to inspect its public documents and make sure that his contract is in conformity with their provisions. As observed by Lord Hatherley whether a person actually reads them or not, he is to be in the same position as if he had read them. Effect of Doctrine of Constructive Notice Every person (dealing with company) shall be presumed to know the contents of the documents and understood them in their true perspective. Absence of notice of MOA and AOA cannot be an excuse to claim relief for outsiders. 21 Even if the party dealing with the company does not have actual notice of the contents of these documents, it is presumed that he has an implied (constructive) notice of them. Example - One of the articles of a Modern Furniture Limited provides that a cheque below ` 1 lacs may be signed by single director but if above ` 1 lac shall be signed by at-least two directors. Similar instructions issued to bank with which MFL have account, as well. M/s Sagwan Wood Works, a vendor accepts a cheque of ` 2.20 lacs, signed only by single director. Considering Doctrine of Constructive Notice, the M/s Sagwan Wood Works (payee) has no right to claim, when cheque will be returned without payment by bank. Criticism of Doctrine of Constructive Notice The ‘Doctrine of Constructive Notice’ is an unreal doctrine. People know a company through its officers and not through its documents. Since it does not take notice of the realities of business life, hence caused inconvenient for business transaction. To illustrate, where the directors or other officers of the company were empowered under the articles to exercise certain powers subject only to certain prior approvals or sanctions of the shareholders, it is difficult for an outsider to ascertain whether necessary sanctions and approvals have been obtained before a certain officer exercises his powers or not. 21 Kotla Venkataswamy v. Chinta Ramamurthy. AIR (1934) Mad 579 © The Institute of Chartered Accountants of India  2.44 CORPORATE AND OTHER LAWS Therefore, to mitigate such a situation, those dealing with the company can assume that if the directors or other officers are entering into those transactions, they would have obtained the necessary sanctions. This is known as the ‘Doctrine of Indoor Management’ or Turquand’s Rule, and act as an exception to the constructive notice. The Europe Communities Act, 1972 has abrogated this doctrine through effect of its section 9. Even in India also the Calcutta High Court 22 enforced a security which was not signed in accordance with the company’s articles. DOCTRINE OF INDOOR MANAGEMENT Essence of Doctrine of Indoor Management The people who are dealing with company are entitled to presume that internal proceedings and requirements has been duly met. Enunciation of Doctrine of Indoor Management The Doctrine of Indoor Management was first laid down in the case of Royal British Bank v. Turquand 23 The directors of a company were authorised by the articles to borrow on bonds such sums of money as should from time to time, by a resolution of the company in general meeting, be authorised to be borrowed. The directors gave a bond to Turquand without the authority of any such resolution. The question arose whether the company was liable on the bond. Held, the company was liable on the bond, as Turquand was entitled to assume that the resolution of the company in general meeting had been passed. Rationale of Doctrine of Indoor Management What happens internally in a company is not a matter of public knowledge. An outsider can only presume the intentions of a company, but not know the information he/she is not privy to. If not for the doctrine, the company could escape creditors by denying the authority of officials to act on its behalf. 22 Charnock Collieries Co Ltd v. Bholanath Dhar. ILR (1912) 39 Cal 810. 23 (1856) 6 E & B 327 © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.45 INCIDENTAL THERETO Exceptions to Doctrine of Indoor Management Relief on the ground of ‘indoor management’ cannot be claimed by an outsider dealing with the company in the following circumstances; a. Knowledge of irregularity - In case this ‘outsider’ has actual knowledge of irregularity within the company, the benefit under the rule of indoor management would no longer be available. In fact, he/she may well be considered part of the irregularity. b. Negligence: If with a minimum of effort, the irregularities within a company could be discovered, the benefit of the rule of indoor management would not apply. The protection of the rule is also not available where the circumstances surrounding the contract are so suspicious as to invite inquiry, and the outsider dealing with the company does not make proper inquiry. c. Forgery: The rule does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery. A company can never be held bound for forgeries committed by its officers. d. Where the question is in regard to the very existence of an agency. e. Where a pre-condition is required to be fulfilled before company itself can exercise a particular power. In other words, the act done is not merely ultra vires the directors/officers but ultra vires the company itself. Illustration The doctrine of indoor management is considered to be ______ to the doctrine of constructive notice. a. Exception b. Extension c. Alternative d. Not related Answer – a. Exception © The Institute of Chartered Accountants of India  2.46 CORPORATE AND OTHER LAWS 10. ACT TO OVERRIDE MEMORANDUM, ARTICLES, ETC. [SECTION 6] The provisions of this Act shall have overriding effect to the provisions contained in; a. Memorandum of company; or b. Articles of company; or c. Any agreement executed by it; or d. Any resolution passed by the company in general meeting or by its Board of Directors Whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Act Any provision contained in the memorandum, articles, agreement or resolution, to the extent in conflict to the provisions of the Act; shall be void. Example - Section 123 declares that no dividend shall be paid by a company except out of profits. The force of this section cannot be undone by any provision in the articles of association, because the articles cannot sanction something which is forbidden by the Act. Even still it attempts then shall be void. Note: This section starts with saving clause i.e. “Save as otherwise ….”, means if any other section of the Act says that provisions contained in the memorandum, articles, agreement or resolution is superior then we will treat it accordingly. Example - Section 47 of the Act deals with voting power of members. A notification dated 5th June, 2015 says that section 47 is applicable to a private company subject to its Article of Association (AOA). Now if AOA of a private company says that section 47 is not applicable to it then, in this case AOA will become superior and section 47 of the Act will not be applicable. 11. EFFECT OF MEMORANDUM AND ARTICLES [SECTION 10] Sub-section 1 to Section 10 aims to impart contractual force to the Memorandum and Articles. It provides, when the memorandum and articles got registered; it shall bind the © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.47 INCIDENTAL THERETO a. Members to the company; b. Company to the members; c. Members to the members; To observe all the provisions of the memorandum and of the articles, as signatory thereof. Example (Member to the Company) The articles of association of the Steel Bros & Co Ltd contained clauses to the effect that on the bankruptcy of a member his shares would be sold to a person and at a price fixed by the directors. Borland, a shareholder, was adjudicated bankrupt. His trustee in bankruptcy claimed that he (Borland) was not bound by these provisions and should be at liberty to sell the shares at their true value. But it was held that contracts contained in the articles of association is one of the original incidents of the shares. Shares having been purchased on those terms and conditions, it is impossible to say that those terms and conditions are not to be observed. 24 Example (Company to the Member) The articles of the Odessa Waterworks Co provided that "the directors may, with the sanction of the company at general meeting, declare a dividend to be paid to the members". Instead of paying the dividend in cash to the shareholders a resolution was passed to give them debenture bonds. In an action by Mr. Wood, a member to restrain the directors from acting on the resolution, it was held that "The question is whether that which is proposed to be done in the present case is in accordance with the articles of association of the company. Those articles provide that the directors may, with the sanction of a general meeting, declare a dividend to be paid to shareholders. Prima facie that means to be paid in cash. The debenture bonds proposed to be issued are not a payment in cash." 25 Example (Member to the Member) Mr. Rayfield was a shareholder in a company. Clause 11 of the articles of company required him to inform the directors of his intention to transfer his shares in the company and which provided that the directors will take the said shares equally between them at a fair value. In accordance with this provision the Mr. Rayfield so 24 Borland's Trustee v Steel Bros & Co Ltd (1901) 1 Ch 279 25 Wood v Odessa Waterworks Co (1889) 42Ch D 636 © The Institute of Chartered Accountants of India  2.48 CORPORATE AND OTHER LAWS notified the directors (who are members as well), who contended that they were not bound to take and pay for the shares. They said, articles could not impose such obligation upon them in their capacity as directors. Their argument was set aside by the court by treating those directors as members. Accordingly, the directors (being members) were compelled to take the Mr. Rayfield’s shares at a fair value. 26 Students are advised to take Note; 1. Articles bind the members to the company and the company to the members. But neither of them is bound to an outsider to give effect to the articles. "No Article can constitute a contract between the company and a third person." Example - The articles of association of a company, La Trinidad contained a clause to the effect that Browne should be a director and should not be removable till after 1888. He was, however, removed earlier and had brought an action to restrain the company from excluding him. It was held that there was no contract between Browne and the company. No outsider can enforce articles against the Company even if they purport to give him certain rights. 27 2. Further sub-section 2 to section 10 provides, all monies payable by any member to the company under the memorandum or articles shall be a debt due from him to the company. Example - A company can recover calls in arrear from a member as forcefully as it is recovering loan due. 12. ALTERATION OF MEMORANDUM [SECTION 13] PROCEDURE OF ALTERATION OF MEMORANDUM Alteration includes the making of additions, omissions and substitutions. Section 13 of the Act along with Rules 29 to 32 of the Companies (Incorporation) Rules, 2014 provides the provisions that deals with the alteration of the memorandum, detailed below; 26 Rayfield v Hands (1958) 2 WLR 851 27 Browne v La Trinidad (1887)37 Ch D 1 © The Institute of Chartered Accountants of India  INCORPORATION OF COMPANY & MATTERS 2.49 INCIDENTAL THERETO Alteration by special resolution [Sub-section 1] Company may alter the provisions of its memorandum with the approval of the members by a special resolution. Further, as per section 13(6) (a) company shall file with the Registrar, such special resolution. Name change of the company [Sub-section 2 and 3] As per sub-section 1, any change in the name of a company shall be effected only with the approval of the Central Government (power delegated to ROC by Central Government) 28 in writing in Form No. INC-24 along with fee. However, no such approval shall be necessary where the change in the name of the company is only the addition/deletion of the word “Private”, on the conversion of any one class of companies to another class in accordance with the provisions of the Act. The change of name shall not be allowed to a company which has not filed annual returns or financial statements due for filing with the Registrar or which has failed to pay or repay matured deposits or debentures or interest thereon. Once the necessary documents filled or payment or repayment made then change shall be allowed. As per clause (b) to sub-section 6 to section 13, the approval from the Central Government, shall be filed with registrar by the company. Practically importance of provision is demeaned as power of central government is already delegated to ROC. Further, as per sub-section 2, on any change in the name of a company, the Registrar shall enter the new name in the register of companies in place of the old name and issue a fresh certificate of incorporation in the Form No. INC-25 with the new name and the change in the name shall be complete and effective only on the issue of such a certificate. Example – Tata Sky Limited changed its Name to Tata Play Limited (CIN U92120MH2001PLC130365). Industrial Insight On August 24, 1910, a company was registered in India under the name Imperial Tobacco Company of India Limited. As the Company's ownership progressively 28 Notification S.O. 1353(E), dated 21st May, 2014 © The Institute of Chartered Accountants of India  2.50 CORPORATE AND OTHER LAWS Indianised, the name of the Company w