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Reclassification Of Authorized Share Capital Under Companies Act 2013

Understanding The Memorandum Of Association

The company while coming into existence has to prepare and file various documents with its Registrar of Companies and out of such documents there are a few documents which the company needs to abide throughout its existence. One of such documents is Memorandum of Association ("MOA") of a company.

The Companies Act, 2013 (CA 2013 or the Act) has defined the word "memorandum" under clause 56 of section 2:
"means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act".

The above definition doesn't provide what actually constitutes or what is actually a MOA. However, in common parlance, MOA is basically considered as the charter of a company, which defines the ambit of the operations and the business to be carried on by the company. It is the basic document in the constitution of a company. The main purpose of the Memorandum is to lay down the objects for which a company is formed.

Content Of Moa And Its Capital Cause

When we delve into the contents of MOA, we find various other provisions in MOA of a company besides its objects.

The Table A to E of schedule I of CA 2013 provides for the standard MOA for different kinds of companies which they need to adopt according to their member's liabilities and capital at the time of formation or changing from time to time. However, a company may adopt its own MOA.

The above tables under schedule I of the Act categorized MOA into six clauses, namely name clause, situation clause, object clause, liability clause, capital clause and association clause.

Under capital clause of MOA, the authorized capital of the company and its division in kind of share capital (equity or preference) is specified in the manner below:

"The share capital of the company is.....................rupees, divided into.............................equity shares and/or preference shares of.......................rupees each."

Significance Of MOA

In Pacific Coast Coal Mines Ltd. v. Arbuthnot (1917) AC 607 (PC), the court has made it clear that the company has no power to do any act not authorized expressly or impliedly by its memorandum and any act so done is ultra vires and incapable of ratification, even if every member of the company assents to it.

Therefore, company is allowed to pursue its business activities only within the ambit of its MOA, otherwise activities of the company will be considered as void.

Provisions Relating To Alteration Of MOA

The CA 2013 allows a company to alter its MOA from time to time with respect to its six clauses and the provisions relating to its alteration have been enshrined in section 13 of CA 2013 read with the Companies (Incorporation) Rules, 2014. It specifies the resolution to be passed by the company as well as approval required to be sought from regulatory authorities for alteration and once such alteration is made by the company then it is required to file such altered MOA with the ROC for their record purposes.

Apart from aforesaid section 13, the CA 2013 allows a company to make certain other changes in its share capital by alteration of its MOA by complying with the provisions of section 61 read with Section 64 of the CA 2013.

Section 13 Vs Section 61 Of CA 2013

The sub section (1) of section 13 of the CA 2013 provides that "save as provided in section 61, a company may, by a special resolution and after complying with the procedure specified in this section, alter the provisions of its memorandum".

The initial words of the above sub section have explicitly provided that the alteration of MOA by a company other than alteration specified in section 61 will be made by complying with the conditions laid down in section 13 of CA 2013.

Considering section 61 of CA 2013 which talks about the power of limited company to alter its share capital, it has specified the following five cases which require authorization in Articles for such change and approval of shareholders by way of ordinary resolution:
  • Increase its authorised share capital by such amount as it thinks expedient
  • Consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares;
  • Convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination;
  • Sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived;
  • Cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.
     
The cancellation of shares under sub-section (1) of Section 61 shall not be deemed to be a reduction of share capital.

Analysis: it is abundantly clear from the plain reading of the title and provisions of section 61 that this section is specific in nature as it is only talking about alteration in MOA by a company through change in its share capital whereas section 13 deals with the change in MOA of the company other than section 61. Thus, section 13 is broad in nature as it deals with change in all the clauses of MOA except to the extent changes are not covered under section 61 of the Act. Also, special resolution is required for alteration of MOA under section 13 whereas ordinary resolution is required in case of section 61.

Is Reclassification Of Asc Covered Under Section 13 Or 61?

Under CA 2013, there are basically two kinds of share capital i.e., equity share capital or preference share capital and the company raising funds through the issue of shares may prefer either of its share capital depending upon its desire to dilute voting rights of the company. Also, the company is allowed to issue shares only within the limit permitted by its ASC.

As we discussed, in the beginning the capital clause of MOA provides for ASC of the Company and its division into the share capital.

The word reclassification has not been defined in CA 2013. However, it implies that the company is changing the existing structure and division of ASC as mentioned in its MOA. Further, there are no direct provisions in CA 2013 prescribing the reclassification of ASC and its detailed procedure.

Analysis: Since there are no direct provisions prescribed, the reclassification would be covered under ambit of section 13 of the Act which is the general section for alteration of MOA of a company, and additionally, section 61 and 64 of the Act should also be complied for updating its ROC records for change in structure of ASC and file e-form SH-7 therewith as no other relevant e-form has been prescribed under the Act for reclassification.

  • Send notice of board meeting to all the directors as per under section 173 of the CA 2013 and SS-1
  • Convene board meeting and pass following resolutions:
  • Approval of alteration of the MOA as per the CA 2013 subject to members approval.
  • Fixing of day, date, time and venue for calling general meeting and approval of notice calling general meeting.
  • Approving of notice for calling of general meeting to pass special resolution for alteration of MOA of the company under section 13 read with section 61 and 64 of CA 2013.
  • Complete formalities regarding minutes of the board meeting as per Section 118 of the CA 2013 read with SS-1.
  • Send notice of general meeting to all directors, shareholders, auditors, secretarial auditors and Debenture Trustee, if any, of the company at least 21 clear days before the date of general meeting as per section 101 of CA 2013 read with of SS-2.
  • Convene general meeting and get approval of members in general meeting for alteration of the MOA as per the CA 2013 by way of special resolution under section 13 read with section 61 and 64 of CA 2013.
  • Complete formalities regarding minutes of the general meeting as per Section 118 of the CA 2013 read with SS-2.
  • File e-Form MGT-14 for special resolution of alteration of MOA and e-form SH-7 for updating share capital records of the Company with the Registrar of Companies within 30 days of passing such resolution and pay fee as per the Companies (Registration Offices and Fees) Rules, 2014.
  • Get printing of new MOA with new provisions and add a footnote for alteration of the MOA stating date and manner of passing of resolution (Section 15 of the CA 2013).

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