The Memorandum of Association

(c) The objects clause

The objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof.

This is the clause that generates the doctrine of ultra vires, which has its own chapter. Note the second half: matters necessary in furtherance of the objects are covered without being spelled out.

(d) The liability clause

The liability of members of the company, whether limited or unlimited, and also:

• (i) in a company limited by shares, that the liability of its members is limited to the amount unpaid, if any, on the shares held by them;
• (ii) in a company limited by guarantee, the amount up to which each member undertakes to contribute:
• (A) 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; and
• (B) to the costs, charges and expenses of winding up and for adjustment of the rights of the contributories among themselves.

The one year tail in (A) is the detail students miss. A member of a guarantee company who resigns is still on the hook for a year, and only for debts contracted before he ceased to be a member.

(e) The capital clause

In the case of a company having a share capital:

• (i) the amount of share capital with which the company is to be registered, its division into shares of a fixed amount, and the number of shares the subscribers agree to subscribe, which shall not be less than one share; and
• (ii) the number of shares each subscriber intends to take, indicated opposite his name.

So every subscriber must take at least one share, and must write against his own name how many.

(f) The nominee clause, for a One Person Company

In the case of a One Person Company, the name of the person who, in the event of death of the subscriber, shall become the member of the company.

The machinery around this, consent and change of nominee, is in the four provisos to section 3(1), set out in [What a Company Is].

The name: section 4(2) to 4(5)

This is where marks are quietly available, because most answers stop at clause (a).

Section 4(2): two prohibitions. The name shall not:

• (a) be identical with or resemble too nearly the name of an existing company registered under this Act or any previous company law; or
• (b) be such that its use by the company (i) will constitute an offence under any law for the time being in force, or (ii) is undesirable in the opinion of the Central Government.

Section 4(3): names needing approval. Without prejudice to sub-section (2), a company shall not be registered with a name containing:

• (a) any word or expression likely to give the impression that the company is in any way connected with, or has the patronage of, the Central Government, any State Government, or any local authority, corporation or body constituted by either under any law; or
• (b) such word or expression as may be prescribed,

unless the previous approval of the Central Government has been obtained.

Section 4(4): reservation. A person may apply to the Registrar, in the prescribed form and with the prescribed fee, to reserve a name either (a) as the name of a proposed company, or (b) as the name to which an existing company proposes to change its name.

Section 4(5)(i): how long. On receipt of the application the Registrar may, on the basis of the information and documents furnished, reserve the name for twenty days from the date of approval, or such other period as may be prescribed. Proviso: where the application is by an existing company, for reservation or for a change of name, the Registrar may reserve it for sixty days from the date of approval.

Section 4(5)(ii): reservation obtained by wrong information. Where it is found that the name was applied for by furnishing wrong or incorrect information, then:

• (a) if the company has not been incorporated, the reserved name shall be cancelled and the applicant 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:
• (i) direct it to change its name within three months, after passing an ordinary resolution; or
• (ii) take action for striking off the name of the company from the register; or
• (iii) make a petition for winding up of the company.

Note the resolution in (b)(i): an ordinary resolution. A change of name normally requires a special resolution under section 13(1) and Central Government approval under section 13(2). Here, because the Registrar is directing it, an ordinary resolution suffices. That contrast is worth a line in an answer.

Form and one prohibition: section 4(6) and 4(7)

Section 4(6). The memorandum shall be in the respective forms specified in Tables A, B, C, D and E in Schedule I, as applicable. Table A is for a company limited by shares, and so on down the list.

Section 4(7). In a company limited by guarantee and not having a share capital, any provision in the memorandum or articles purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member shall be void.

Section 10: what the memorandum does once registered

Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles.

So the memorandum and articles operate as a statutory contract. Two consequences follow, and they are examined as a pair:

It binds the company to the members and the members to the company. A member can enforce the memorandum and articles against the company, and the company against him, in respect of their rights as members.

Section 10(2) adds that all monies payable by any member to the company under the memorandum or articles shall be a debt due from him to the company, which is how unpaid calls are recovered.

What it does not do is make the memorandum a contract between the company and an outsider, or between one member and another in their personal capacities. A person who is a member but is suing in some other character, say as the company's solicitor under an article appointing him, is an outsider for this purpose.

Section 6: the Act beats the memorandum

Whatever the memorandum says, section 6 provides that, save as otherwise expressly provided in the Act:

• (a) the provisions of this Act shall have effect notwithstanding anything to the contrary in the memorandum or articles, in any agreement executed by the company, or in any resolution of the company in general meeting or of its Board, whether before or after the commencement of this Act; and
• (b) any such provision shall, to the extent to which it is repugnant to the Act, become or be void.

A worked example

Seven people wish to incorporate a public company to make ceramic tiles in Morbi and register it in Gujarat.

Their memorandum states: (a) the name Morbi Ceramics Limited; (b) the State of Gujarat, not the street address; (c) objects of manufacturing and dealing in ceramic tiles and matters necessary in furtherance; (d) that liability is limited and, being limited by shares, limited to the amount unpaid on shares held; (e) a share capital of fifty lakh rupees divided into five lakh shares of ten rupees each, with each of the seven writing against his name the number of shares taken, none taking fewer than one; and (f) nothing, because it is not a One Person Company.

The name. They first apply under section 4(4) and the Registrar reserves Morbi Ceramics Limited for twenty days. Had an existing company applied to change its name to that, the reservation would have been for sixty days.

Suppose they had chosen "National Ceramics Limited". The word "National" is likely to give the impression of a connection with the Central Government, so section 4(3)(a) requires previous Central Government approval, and without it the company cannot be registered with that name.

Suppose the reservation was obtained by giving wrong information and this comes out after incorporation. Under section 4(5)(ii)(b) the Registrar, after hearing the company, may direct it to change its name within three months by an ordinary resolution, or move to strike it off, or petition for winding up.

Two years later a member sues the company for refusing to register a transfer his articles entitle him to. He can, because by section 10 the memorandum and articles bind the company to him as a member. The same man, as the company's landlord, cannot sue on an article about rent, because there he is an outsider.

Distinctions that carry marks

What this does NOT mean

It does not mean the memorandum states the company's address. It states the State: section 4(1)(b).

It does not mean every company has a capital clause. Clause (e) applies only to a company having a share capital, so a guarantee company without capital has no capital clause.

It does not mean the memorandum is a contract with the world. Section 10 binds the company and the members, in their capacity as members, and nobody else.

It does not mean a reserved name is yours forever. Twenty days, or sixty for an existing company, and it can be cancelled with a penalty of up to one lakh rupees if it was obtained by wrong information.

Quick revision

• Six clauses, section 4(1): (a) name with Limited or Private Limited, not for a section 8 company; (b) the State of the registered office; (c) objects and matters in furtherance; (d) liability, with the guarantee company's one year tail; (e) capital, division into shares, at least one share each, number opposite each name; (f) the OPC nominee.
• Section 4(2): not identical with or too nearly resembling an existing name; not an offence; not undesirable in the Central Government's opinion.
• Section 4(3): words suggesting Government connection or patronage, or as prescribed, need previous Central Government approval.
• Section 4(4) and (5): reservation, twenty days, or sixty days for an existing company. Wrong information: cancellation and up to one lakh rupees before incorporation; after incorporation, change of name in three months by ordinary resolution, striking off, or winding up petition, after a hearing.
• Section 4(6): Tables A to E of Schedule I. Section 4(7): no participation in divisible profits otherwise than as a member, in a guarantee company without share capital.
• Section 10: memorandum and articles bind company and members as a statutory contract; monies payable by a member are a debt.
• Section 6: the Act overrides both, and repugnant provisions are void.

Test yourself

1. State the six clauses of the memorandum. Name, registered office (the State), objects, liability, capital, and, for a One Person Company, the nominee: section 4(1)(a) to (f).

2. Does the memorandum give the company's address? No. Section 4(1)(b) requires only the State in which the registered office is to be situated. The address is governed by section 12.

3. For how long is a name reserved? Twenty days from the date of approval, or such other period as may be prescribed; sixty days where the application is by an existing company for reservation or change of name: section 4(5)(i) and its proviso.

4. A company obtained its reserved name by giving incorrect information, and has been incorporated. What can the Registrar do? After giving the company an opportunity of being heard, the Registrar may direct it to change its name within three months after passing an ordinary resolution, take action to strike its name off the register, or petition for its winding up: section 4(5)(ii)(b).

5. In a company limited by guarantee, for how long after resignation can a member be called on? The memorandum must state the amount he undertakes to contribute if the company is wound up while he is a member or within one year after he ceases to be a member, and then only for debts and liabilities contracted before he ceased to be a member: section 4(1)(d)(ii)(A).

6. Can a member sue the company on the articles in a capacity other than as a member? No. Section 10 binds the company and the members as members. A person suing in another character, such as a solicitor or a landlord, is an outsider and cannot rely on the statutory contract.