Constitutional laws in India

Constitutional Documents of a Company

Written by:  Anand Srivastava - National Law School of India University, Banaglore
Company Lawyers in India
Legal Service
  • 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.

    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.

    # 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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