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Introduction
From the Deed of Settlement present in the 1844 Joint Stock
Companies Act, the constitutional document of the company splits
into Memorandum of Association and the Article of Association
which was first adopted by the Joint Stock Companies Act, 1856. It
was split into two depending on the importance of the entries; as
it was believed that the basic characteristics of a company had to
be distinguished from the operations of the company. The
personality of the company is however limited to the purpose for
which it has been envisaged which has to be stated in the Objects
clause. Memorandum of Association should contain the fundamental
document of the company and should be unalterable in the interest
of the shareholders, public and especially the creditors of the
company while the Articles of Association should be freely
alterable by the shareholders in the general meeting.
This paper will go through the constitutional documents of the companies limited by shares, guarantee and unlimited companies and will analyze them through their comparative study. Following are the main issues which will be dealt in this paper:
1. What is the importance of
keeping the capital clause in the Memorandum of Association for
the companies limited by shares and guarantee when it is in the
Articles of Association for an unlimited company?
2. Tables given in the First
Schedule of the Companies Act provide a format for the Memorandum
of Association and the Articles of Association of the different
types of companies; is it necessary to adhere to it? How much
leeway is possible?
3. Why the same principle of
transfer for shares and membership cannot be applied for companies
limited by shares and guarantee?
4. Why there is change in the
wordings of sections 28 and 29?
Nature of the liability of the members is one of the vital aspects
apart from the sphere of operations of the company. Companies can
be classified into limited liability companies and unlimited
companies. Limited liability can be further classified into
company limited by shares and company limited by guarantee (with
share capital or without share capital). Companies having limited
liability are also classified into public companies and private
companies. Unlimited companies are also with share capital or
without share capital. But this classification of companies on the
basis of their liabilities is an erroneous conception as the
liability of the company is always unlimited; it is the liability
of the members that is limited or unlimited.
In a company limited by shares, the liability of the members will
be judged according to the yardstick of his shareholding together
with the premium paid for those shares. This liability may arise
when the company is a going concern or when the company has to pay
off its creditors. There is no link between members of a company
and its creditors between whom there is no vinculum juris (an
obligation of law). The memorandum of the company limited by share
must state that the liability of the members is limited and should
also state the number of shares and the nominal value of each
share.
In a guarantee company which is usually resorted to by charity
institutions, a member undertakes that in certain eventualities
when the company is wound up and its assets are not sufficient
enough to pay off the creditors, then the guarantee amount will be
paid and this is in the guarantee clause in the Memorandum of
Association. As regards the nature of liability, there is no
distinction between a guarantee company or unlimited company
because the liability only arises on winding up and when the
assets are not enough to meet the creditor’s needs. But the extent
of liability of a guarantee company is limited unlike an unlimited
company.
A guarantee company having a
share capital and an unlimited company with a share capital are
hybrid companies, though the capital clause appears in the
Memorandum of Association for the former but in the Article of
Association for the latter (Table D). The members have a two fold
liability: liability on the guarantee clause and the liability on
the shares. For unlimited companies there is a liability on
undertaking in the Article of Association and on the shares. The
qualitative difference between the two liabilities is that the
share liability is applicable to a going concern but the guarantee
liability is only on winding up. The voting power in a guarantee
company having a share capital is determined by the share holding,
not by the guarantee.
If the company is issuing a
share capital, then the nominal value must be stated in the
Memorandum of Association except in the case of an unlimited
company, wherein it is stated in the Article of Association as per
section 27 of the Companies Act, 1956 . This is because the
capital clause is not significant for the third parties because
members are any way liable to an unlimited company. Further under
section 16, the Memorandum of Association cannot be altered and
the procedures for the name change are stringent. However for the
limited companies since the third parties rely on the share
capital it should not be conducive to easy change and hence it is
in the Memorandum of Association. According to section 31,
principle lying under Article of Association is freely alterable.
Putting the statement of share capital in articles instead of the
memorandum makes it easier for an unlimited company to alter its
authorized capital.
Section 13 provides obligatory provisions in the Memorandum of
Association. This includes name, office, objects, capital clause
and the association clause besides the nature of the liability of
the members. If there is limited liability, then the name of the
company must have ‘Limited’ and for private companies, it should
have ‘Private Limited’ except for Section 25 companies. The format
of the Memorandum of Association must be strictly in accordance
with the procedure laid down. The form of the Memorandum of
Association must be following the models in Tables B, C, D or E as
per section 14 of the Companies Act, 1956 . But the provisions of
Tables B, C, D and E were intended only to provide models and not
strait-jackets. They indicate form or arrangement, not substance .
The legislative direction that a company should have a memorandum
in the form of one of the model memoranda provided by statutory
instrument or as near to that form as circumstances permit means
only that companies should follow the formal layout and does not
extend to prescription of the contents of the document.
Table A, C, D and E in the Schedule 1 prescribes a format to
govern different kinds of companies differently . But it is not
necessary to adhere to this format only; there is scope for them
to take a sideway from this track. They can modify, add or delete
some of the provisions from this guideline but they should not
come in conflict with the provisions given in their respective
Table otherwise they will be declared illegal . In case, no such
alterations are expressly mentioned, then it will give rise to
presumption that they will adhere to their prescribed Table given
in Schedule 1. This leeway from the general format is good for the
development of the companies as it is not possible for every
company to adhere to the same set of rules and regulations.
Circumstances of the particular company have to be taken into
consideration while drafting guidelines of any particular company.
Contents of Article of Association and form are prescribed in
sections 26, 27, 28 and 29 but it not mandatory for public
companies limited by shares. But it is better to take care of
peculiarities of the Article of Association and not take resort to
Table A which is a general provision. Anything in the Article of
Association overrides a conflicting provision in Table A and if it
is on a different point, not inconsistent with the Article of
Association then Table A will be considered as part of Article of
Association (only those parts). Table A can be excluded by an
explicit provision. Further Table A applies only to companies
limited by shares alone.
Any provisions of Table A can
be adopted by reference but the model articles in Tables C, D and
E are merely models which cannot be adopted by reference and will
not apply to fill lacunae in the registered articles . The
contents of the memorandum and articles, as distinct from their
arrangement, must correspond to the models in the regulations but
their contents will be held to be valid even though they differ
radically from those of the models.
The Memorandum of Association and Article of Association must be
printed and signed . If the company has a share capital then the
Memorandum of Association has to be signed by subscribers, who
should write opposite to their names, the shares agreed to be
taken by them.
Articles of Association deals with the matter of internal
regulation. It is optional in the case of public companies limited
by shares but is obligatory in all other cases . For all these
cases except public companies limited by shares, there is a
necessity under section 3(1)(iii) to file Article of Association
and for guarantee company and unlimited company, the number of
members must be stated in the Articles pursuant to section 27(1)
and 27(2). Hence it is only non-obligatory for public companies
limited by shares and Table A can be adopted. When a company has a
share capital, then one share must be held at least for
membership.
The applicability of Table A is automatic only in case of
companies limited by shares only when they are not in consistent
with the Articles itself; though it can be expressly overridden.
This automatic application is only for companies limited by shares
registered under Companies Act, 1956.
In the case of an unlimited company the clause in the Memorandum
that the liability of the members is limited is omitted, and the
name of the company need not incorporate Limited
or Public
Limited Company at the end. The Memorandum and Articles of
Association of an unlimited company have to be in the form of
Table E or as near thereto as circumstances admit according to
section 14.
Object clause is the
fundamental provision of the Memorandum of Association. It gives
the contractual capacity of the company. Statutory corporations,
by virtue of the enactment of the statute are limited in their
powers as it has been reasonably restricted. If the powers
exercised are not in reasonable relation with the specified
activities, then the act is ultra vires.
Liability clause is applicable only in respect of companies
limited by shares and by guarantee (with or without share
capital).
For the alteration of the Object clause, there is no scrutiny of
courts but a special resolution needs to be passed only on seven
specific grounds.
Memorandum and Articles of the
company can be altered subject to the Companies Act. Section 31
provides that Article of Association can be altered by Special
Resolution and any agreement to make an item in the Article of
Association unalterable is void under section 9 . Section 16 on
the other hand clearly says that the company shall not alter the
Memorandum of Association clearly evincing legislative policy. The
change in the Article of Association is permitted in order to
allow the company to change with the times. However, section 17
says that under circumstances the objects clause can be amended by
a special procedure which involves a special resolution and filing
of the same in the Registrar. Items in the Memorandum of
Association are only those which are required to be there under
section 13 or any other express provisions. Section 16(3) also
says that non-obligatory clauses in the Memorandum of Association
are treated as clauses in the Article of Association and can be
altered. If there is a conflict, then the Memorandum of
Association and the Article of Association must be harmoniously
construed failing which the Memorandum of Association will
prevail.
For Article of Association,
the change must be consistent with the obligatory provisions of
the Memorandum of Association. Section 38 which gives the effect
of an alteration fixes the maximum and minimum liability of
members. The liability of a member cannot be increased by an
alteration of the Memorandum of Association or Article of
Association unless the member himself agrees to the alteration or
in case of a non-profit making association where a periodic
subscription is to be paid up. The alteration also cannot require
him to take more shares. Again class rights cannot be varied
without the consent of the class as in section 106 . However a
Memorandum of Association from the very outset can provide for
such a clause increasing liability but cannot provide that an
alteration to that effect is valid.
In case of guarantee
companies, where specific provisions in the Articles of
Association providing for transfer of member’s interest,
provisions of section 108(1) would not be applicable as such
provisions relates to shares only . The Supreme Court in
Narendra
Kumar Agarwal v. Saroj Maloo held that there is material
difference between the set of Articles in Table A and C of
Schedule 1 relating to companies limited by shares and limited by
guarantee and as such same principles of transfer for shares and
membership cannot apply. The right of a guarantee company to
refuse to accept the transfer by a member of his interest in the
company is on a different footing than that of a company limited
by shares.
The Legislature did not in
section 29 provide for voting rights of members of the company
limited by guarantee as was done in the case of companies limited
by shares but wanted to achieve the same purpose by prescribing
the forms in the Tables in Schedule 1. A change in the wording of
section 28 and 29 implies a change in the contents of the two
provisions. While in section 28 the Articles may adopt all or any
of the regulations contained in Table A in Schedule1, but in
section 29 the Articles of any company shall be in such form or in
a form as near thereto as circumstances admit. The alteration in
the languages has been deliberately made for a stricter
conformation to the prescribed form. The statutory provision has
not been worded in such a way that an undeviated Form is required.
There could be variations in the Article consistent with the model
form. The aim and object of the Act and form in Table C giving
every member a right of one vote would be defeated, if the
direction of the legislature is not strictly observed. It is thus
imperative to adopt the form. The provision of Section 29 was
inserted with an object of participation in the management of the
companies. That would be nullified and hence the provision would
be mandatory.
Conclusion
Constitutional documents should be crystal clear and no scope
should be left for its ambiguity. Tables given in the First
Schedule should be their role model; though before preparing the
memorandum and articles, following matters should be obtained by
the draftsmen:
1. The nature of the business
should be known in connection with the objects clause of the
memorandum. The courts will not look outside the memorandum to
discover what the objects are, though it may look at the
surrounding circumstances to determine the stated objects.
2. The amount of nominal
capital and the denomination of the shares into which it is to be
divided (for company having share capital) should be known prior
to the preparation of the memorandum and articles of association.
3. If there are any special
requirements which deviate from the normal as exemplified by the
appropriate Table, like matters dealing with quorums and the
maximum and minimum number of directors should be known to the
draftsmen in advance only .
Apart from these three information, it should also be kept in
mind that the other requirements of the Act as to the contents of
the memorandum and articles are complied with and they are in the
statutory form. With the aid of these information, it will be
very conducive enough for the draftsmen to come up with a detail
and clear constitutional documents for different types of company;
thus restricting the scope of multiple interpretations.
This paper has gone through
two different constitutional documents. The separation into two
documents emphasized that the matters in the memorandum were
fundamental and unalterable whereas the articles could be altered
by the company. But now it is possible to alter almost all the
provisions of a company’s memorandum, though specific procedures
are prescribed for each type of alteration. Separate documents
are, therefore, no longer necessary and the memorandum and
articles of association can be replaced by a single document.
Endnotes
# C.M. Schmitthoff and J.H. Thompson, Palmer’s Company Law (21st
ed.,London: Stevens & Sons Limited, 1968) at 50-51.
# Supra note 1 at 25.
# Section 27(1): "In the case of an unlimited company, the
articles shall state....the amount of share capital with which the
company is to be registered.
# S.W. Mayson et al., Mayson, French & Ryan on Company Law (21st
edn., New York: Oxford University Press, 2004) at 56.
Section 14 says that, The memorandum of association of a company
shall be in such one of the Forms Tables B,C,D and E in Schedule 1
as may be applicable to the case of the company, or in a Form as
near thereto as circumstances admit.
# Gaimon v. National Association for Mental Health, [1970]3 WLR
42.
# Eilis Ferran, Company Law and Corporate Finance (New Delhi:
Oxford University Press, 2003) at 6.
# Table A prescribes articles of company limited by shares; Table
C provides articles for companies limited by guarantee and not
having a share capital; Table D deals with the company limited by
guarantee and having a share capital and Table E is the guideline
for an unlimited company.
# Sections 28(2) and 29 of the Companies Act, 1956.
# P.L. Davies, Gower’s Principles of Modern Company Law (6th ed.,
London: Sweet & Maxwell Ltd., 2000) at 107.
# Robert R Pennnington, Company Law (7th edn., London:
Butterworths, 1995) at 4.
# Sections 15 and 30. Section 15 talks about the printing and
signature of the memorandum while section 30 describes the form
and signature of articles.
# Section 26 of the Companies Act, 1956 which deals with the
articles prescribing regulations.
# Supra note 3.
# Section 17(1) of the Companies Act, 1956 says that a special
resolution and confirmation by Central Government is required for
the alteration of the memorandum.
Section 9(b): any provision contained in the memorandum, articles,
agreement or resolution aforesaid shall, to the extent to which it
is repugnant to the provisions of this Act, become or be void, as
the case may be.
# Section 106 deals with the alteration of rights of holders of
special classes of shares.
# Section 108(1) says that transfer of shares cannot be registered
except on production of instrument of transfer.
# Saroj Maloo v. Magadh Stock Exchange Association, (1995)4 Comp
LJ 135 (Cal.).
# (1995)6 SCC 114.
# J.M.J. Sethna, Sethna’s Indian Company Law Vol. 1 (11th ed., New
Delhi: Modern Law Publications, 2005) at 784.
# Pramod Chopra v. Apparels Export Promotion Council, ILR 1984
Delhi 717.
# Supra note 7.
# Supra note 7.
# Supra note 7.
# Supra note 4 at 66.
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Constitutional
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author can be reached at: AnandSrivastava@legalserviceindia.com /
