THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER II

Incorporation of a Company

Sections 3–22

For Judicial Service Aspirants & Law Students

RJS • DJS • PCS-J • HJS • UPJS • BJS • MPCJ

MOA • AOA • Incorporation Procedure • Doctrine of Ultra Vires

— Enriched with landmark judgments and illustrative case law —

Chapter II — Incorporation of a Company (Sections 3–22)

Chapter II traces the birth of a company — from the formation of its capital subscribers, through its constitutional documents (memorandum and articles), to its registration, commencement of business, alteration of objects and name, and conversion of one class of company into another. It is among the most frequently examined chapters in judicial services because it concerns the foundational act by which a juristic person is brought into existence.

Section 3: Formation of Company

Section 3 provides for the formation of a company by subscribing their names to a memorandum. The required minimum number of subscribers is —

seven or more, for a public company;
two or more, for a private company; and
one, for a One Person Company (a private company).

A company may be formed for any lawful purpose. It may be a company limited by shares, a company limited by guarantee, or an unlimited company [Section 3(2)].

Section 3A — Members Severally Liable in Certain Cases

If at any time the number of members of a company falls below the statutory minimum (seven for public, two for private), and the company carries on business for more than six months while so reduced, every person who is a member during the time that it so carries on business after those six months and is cognisant of the fact shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor.

This provision, inserted by the Companies (Amendment) Act, 2017, revives the analogous rule under Section 45 of the 1956 Act. It penalises contumacious continuance of business with an inadequate base of members.

Section 4: Memorandum of Association

The Memorandum of Association (MOA) is the charter of the company. It defines the scope of the company's activities and its relationship with the outside world. Section 4 prescribes its mandatory contents, commonly referred to as the six clauses:

Name Clause — The name of the company with 'Limited' as the last word in the case of a public limited company, or 'Private Limited' in the case of a private limited company.
Registered Office Clause — The State in which the registered office of the company is to be situated.
Objects Clause — The objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof.
Liability Clause — The liability of members, whether limited or unlimited, and also state — (i) in the case of a company limited by shares, that liability of its members is limited to the amount unpaid, if any, on the shares held by them; (ii) in the case of 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; and (b) to the costs, charges and expenses of winding up.
Capital Clause — In the case of a company having share capital, the amount of share capital with which the company is to be registered, and the division thereof into shares of a fixed amount; and the number of shares which the subscribers to the memorandum agree to subscribe, which shall not be less than one share.
Association/Subscription Clause — The names, addresses, descriptions and occupations of the subscribers; and each subscriber shall subscribe his name and shall, in the presence of at least one witness who shall attest the signature, sign the memorandum.

Name Clause: Rules of Availability and Reservation [Sections 4(2)–(5)]

The name stated in the memorandum shall not (a) be identical with or resemble too nearly the name of an existing company; or (b) be such that its use would constitute an offence under any law for the time being in force, or would be undesirable in the opinion of the Central Government.

A person may make an application to the Registrar for the reservation of a name under Section 4(4), which, if approved, shall be reserved for a period of twenty days from the date of approval (for a new company), or for sixty days for a change of name of an existing company.

If, after reservation, it is found that the name was applied by furnishing wrong or incorrect information, then —

if the company has not been incorporated, the reserved name shall be cancelled and a fine of up to Rs. 1 lakh shall be imposed;
if the company has been incorporated, the Registrar, after giving opportunity of being heard, may — (i) direct the company to change its name within three months by ordinary resolution; (ii) take action for striking off the company; or (iii) make petition for winding up.

⚖ Case Law — Ewing v. Buttercup Margarine Co. Ltd., [1917] 2 Ch 1

Where a company's name is so similar to that of an existing business as to lead to confusion, an injunction may be granted restraining its use. The plaintiff, who traded as 'Buttercup Dairy Company', obtained an injunction against the defendant company. An enduring authority on passing-off through corporate names, now reflected in Section 16 (rectification of name) of the 2013 Act.

⚖ Case Law — Atlas Cycle Industries Ltd. v. Atlas Products (P) Ltd., AIR 1980 Del 148

The court restrained the defendants from carrying on business under a name deceptively similar to that of a well-known established company, holding that the statutory registration of a name does not confer immunity from passing-off. The registration under the Companies Act is without prejudice to the common-law rights of other traders.

Objects Clause — Doctrine of Ultra Vires

Historically, the objects clause defined the zone of the company's lawful activity. Any act outside this zone was ultra vires — beyond the powers — and void ab initio. Under the 2013 Act, while the objects clause remains, the rigour of the ultra vires doctrine has been substantially mitigated; yet the doctrine retains its relevance.

⚖ Case Law — Ashbury Railway Carriage & Iron Co. Ltd. v. Riche, (1875) LR 7 HL 653

The foundational case on ultra vires. The company's object was to make and sell railway carriages and to carry on the business of mechanical engineers. It entered into a contract to finance the construction of a railway in Belgium. The House of Lords held the contract ultra vires and therefore void; even a unanimous ratification by the shareholders could not validate it, for the act was beyond the company's capacity altogether.

⚖ Case Law — A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India, AIR 1963 SC 1185

Directors of United India Life Assurance Co. donated Rs. 2 lakh from the company's funds to a trust for promoting technical/business education. When the life business was nationalised, the LIC sought to recover the donation. The Supreme Court held the donation ultra vires — the objects clause permitted charity only incidental to the company's business; a gratuitous donation of this character was outside the company's powers. Directors were held liable to refund the amount to the LIC.

Doctrine of Ultra Vires — Legal Consequences

An ultra vires act is void ab initio and cannot be ratified even by unanimous shareholder resolution.
The company cannot sue nor be sued on an ultra vires contract.
Directors who sanction an ultra vires act are personally liable to make good the loss.
Property acquired out of ultra vires expenditure may be recovered by the company in tracing proceedings.
An injunction may be obtained by any member to restrain the company from committing an ultra vires act.

Section 5: Articles of Association

The Articles of Association (AOA) are the internal rules of the company — the by-laws governing its management, the rights and duties of its officers and shareholders, the conduct of meetings, transfer of shares, and related matters. While the Memorandum is the charter, the Articles are the domestic regulations.

Contents of Articles [Section 5(1)–(3)]

The articles shall contain the regulations for management of the company. The articles shall also contain such matters as may be prescribed. The 2013 Act introduces the important concept of 'entrenchment' — Section 5(3) permits the articles to include provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions more restrictive than those applicable in the case of a special resolution, are met or complied with.

Model Articles — Tables F, G, H, I, J of Schedule I

Schedule I prescribes model articles for different kinds of companies:

Table F — Company limited by shares.
Table G — Company limited by guarantee and having a share capital.
Table H — Company limited by guarantee and not having a share capital.
Table I — Unlimited company and having a share capital.
Table J — Unlimited company and not having a share capital.

A company may adopt any or all of the regulations in the applicable Table; if the company does not register articles, the relevant Table applies ex proprio vigore.

Distinction: Memorandum vs. Articles

Basis	Memorandum of Association	Articles of Association
Nature	Charter / constitution of the company	Internal rules and regulations
Scope	Defines the company's relationship with outsiders	Governs internal management
Contents	Six compulsory clauses (name, office, objects, liability, capital, subscription)	Regulations for internal administration; entrenchment possible
Alteration	Rigid — strict procedure (Sections 13, 16, 18, 61)	More flexible — by special resolution (Section 14)
Ultra vires	Acts beyond MOA are void and incapable of ratification	Acts contrary to AOA but within MOA may be ratified by shareholders
Supremacy	Supreme document	Subordinate to MOA — any AOA clause inconsistent with MOA is void

Section 6: Act to Override Memorandum, Articles, etc.

Section 6 is a declaratory provision of first importance. It provides that (a) the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles, or in any agreement executed by the company, or in any resolution passed by the company in general meeting or by its Board; and (b) any provision contained in the memorandum, articles, agreement or resolution shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be.

In other words, neither the memorandum nor the articles can override the statute. A company cannot contract out of mandatory provisions of the Act.

Section 7: Incorporation of a Company

Section 7 prescribes the procedure for incorporation. The following documents are required to be filed with the Registrar of Companies (RoC) having jurisdiction over the State in which the registered office is to be situated:

The memorandum and articles of the company, duly signed by all the subscribers.
A declaration in the prescribed form by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of the company, and by a person named in the articles as a director, manager or secretary, that all the requirements of the Act and the rules have been complied with in respect of registration.
A declaration from each of the subscribers to the memorandum and from persons named as first directors, that they are not convicted of any offence in connection with promotion/formation/management of any company, or have not been found guilty of fraud or misfeasance, etc., during the preceding five years.
The address for correspondence until its registered office is established.
The particulars of every subscriber — name, surname, residential address, nationality — along with proof of identity, and particulars of first directors (along with DIN).
Particulars of interests of first directors in other entities, in such form as may be prescribed.

Upon receipt of the documents and payment of prescribed fees, the Registrar shall register all the documents and, on the basis of documents and information filed, issue a Certificate of Incorporation in the prescribed form.

Effect of Certificate of Incorporation — Conclusive Evidence Rule

The Certificate of Incorporation is conclusive evidence that all requirements of the Act in respect of registration and matters precedent and incidental thereto have been complied with, and that the company is a validly incorporated company.

⚖ Case Law — Moosa Goolam Ariff v. Ebrahim Goolam Ariff, (1912) ILR 40 Cal 1 (PC)

The subscribers to the memorandum were all minors; the signatures had been made by the agent on their behalf. It was urged that no valid incorporation had taken place. The Privy Council held that once the certificate of incorporation is issued, its validity cannot be questioned on the ground of any irregularity prior to registration. The certificate is conclusive. The company had been validly incorporated.

⚖ Case Law — Jubilee Cotton Mills Ltd. v. Lewis, [1924] AC 958

Shares were allotted to Lewis on 6th January. The certificate of incorporation was dated 6th January but actually issued on 8th January. The question was whether the allotment was valid. The House of Lords held that the certificate was conclusive evidence that the company was incorporated from the date mentioned in the certificate; the allotment was accordingly valid.

Section 7(7) — Remedial Powers of Tribunal for Fraudulent Incorporation

Where a company has been got incorporated by furnishing false or incorrect information or representation, or by suppressing any material fact in the documents filed under Section 7, the Tribunal may, on an application made by the Registrar or any other person, and after giving the company a reasonable opportunity of being heard —

pass such orders as it may think fit for regulation of the management of the company;
direct that liability of the members shall be unlimited;
direct removal of the name of the company from the register of companies; or
pass an order for winding up of the company.

This is a statutory instance of lifting the corporate veil and aligns with Section 447 (punishment for fraud). It ensures that the conclusive evidence rule is not a cloak for fraud.

Section 8: Formation of Companies with Charitable Objects

Section 8 permits the Central Government, on application, to licence the incorporation of a company with limited liability without the addition of the word 'Limited' or 'Private Limited' to its name, where the company —

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;
intends to apply its profits, if any, or other income in promoting its objects; and
intends to prohibit the payment of any dividend to its members.

Such a company enjoys all the privileges and is subject to all obligations of limited companies. It may be converted into any other kind of company subject to such conditions as may be prescribed. Contravention of Section 8 conditions may lead to revocation of the licence and even winding-up.

Section 9: Effect of Registration

From the date of incorporation mentioned in the certificate, such subscribers to the memorandum and all other persons who, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company, having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name.

The common seal, which was an indispensable feature under the 1956 Act, has been made optional by the Companies (Amendment) Act, 2015; documents may now be authenticated by two directors (or one director and the company secretary).

Section 10: Effect of Memorandum and Articles

The memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they 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.

This famous provision gives rise to the doctrine of the 'statutory contract' — the memorandum and articles operate as a contract between the company and its members inter se, but only in respect of membership rights.

⚖ Case Law — Hickman v. Kent or Romney Marsh Sheep-Breeders' Association, [1915] 1 Ch 881

The articles of a registered association contained a clause referring all disputes with a member to arbitration. Hickman, a member, sought to sue the company in court. The company pleaded the arbitration clause. It was held that the articles constituted a contract between the company and the member in his capacity as member; therefore the arbitration clause bound him. A classic illustration of the binding force of articles on members qua members.

⚖ Case Law — Eley v. Positive Government Security Life Assurance Co. Ltd., (1876) 1 Ex D 88

Eley's appointment as a solicitor for life was inserted in the articles. The company did not employ him. He sued on the articles. The court held that the articles are a contract only between the company and its members, and only in their capacity as members; since Eley was suing in his capacity as solicitor (i.e., an outsider), he could not rely on the articles. An outsider has no right under the articles even if a provision purports to confer a benefit on him.

Section 10A — Commencement of Business (Re-introduced by 2018 Ordinance, retained by 2019 Amendment)

A company incorporated on or after 2nd November 2018 and having a share capital shall not commence any business or exercise any borrowing powers unless —

a declaration is filed by a director within 180 days of incorporation in the prescribed form verified in the prescribed manner, with the Registrar, that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making such declaration; and
the company has filed with the Registrar a verification of its registered office as provided in Section 12(2).

Default attracts penalty; if no declaration is filed within 180 days, the Registrar may initiate action for removal of the company's name from the register.

Section 12: Registered Office

A company shall, on and from the fifteenth day 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. The company shall furnish to the Registrar verification of its registered office within thirty days of its incorporation in such manner as may be prescribed.

Every company shall paint or affix its name, and the address of its registered office, and keep the same painted or affixed, on the outside of every office or place in which its business is carried on. It shall also display its name on business letters, billheads, notices, and other official publications.

Change of Registered Office [Section 12(5)]

Change of registered office —

within the local limits of the same city/town/village — by Board resolution;
from one city to another within the same State but to another RoC — by special resolution with confirmation from the Regional Director;
from one State or Union territory to another — by special resolution with confirmation of the Central Government (delegated to the Regional Director);

Section 13: Alteration of Memorandum

Save as otherwise provided in Section 61 (alteration of share capital), a company may, by special resolution and after complying with the procedure specified in Section 13, alter the provisions of its memorandum.

Particular Types of Alterations

Name change — special resolution + approval of Central Government (delegated to RD/Registrar); the new certificate of incorporation shall be issued and the change shall be complete and effective on its issue.
Registered office — shift from one State to another — special resolution and approval of Central Government after hearing objections of creditors, debenture-holders, the RoC, and the State Governments concerned.
Objects clause — special resolution; if the company has raised money from the public through prospectus and still has unutilised amount, such alteration requires dissenting shareholders to be given an exit opportunity by promoters/controlling shareholders as per SEBI regulations.
Liability clause / capital clause — by special resolution.

Section 14: Alteration of Articles

Subject to the provisions of this Act and the conditions contained in its memorandum, if any, a company may, by a special resolution, alter its articles including alterations having the effect of conversion of (a) a private company into a public company; or (b) a public company into a private company.

Conversion of a public company into a private company requires the approval of the Tribunal (the Central Government, by notification dated 18th December 2018, has been delegated this power to the Regional Director).

Limits on Alteration of Articles

Must not be inconsistent with the Act or with the memorandum.
Must not be a fraud on the minority.
Must be for the benefit of the company as a whole, in good faith (bona fide test).
Cannot deprive members of rights already vested.
Cannot require a member to take or subscribe for additional shares without his written consent (Section 38 of 1956 Act now Section 14 + Sec. 62 scheme).

⚖ Case Law — Allen v. Gold Reefs of West Africa Ltd., [1900] 1 Ch 656 (CA)

A company amended its articles to take a first lien on paid-up shares of members indebted to it, with the result that the estate of a deceased shareholder lost its previous exemption. The Court of Appeal upheld the alteration, Lord Lindley MR laying down the classical test: an alteration of articles, though passed by special resolution, will not be valid unless it is 'bona fide for the benefit of the company as a whole'. This test continues to govern judicial review of alterations.

⚖ Case Law — Brown v. British Abrasive Wheel Co., [1919] 1 Ch 290

Majority shareholders amended the articles to enable them to compulsorily acquire the shares of a minority. Held, the alteration was not bona fide for the benefit of the company as a whole but was a mere device to expropriate the minority, and was struck down. A useful illustration of the bona fide test being applied to strike down an alteration.

Section 15: Alteration of Memorandum or Articles to be Noted

Every alteration made in the memorandum or articles shall be noted in every copy thereof. If a company makes default in complying, it shall be liable to a penalty.

Section 16: Rectification of Name of Company

If, through inadvertence or otherwise, a company is registered with a name which — (a) in the opinion of the Central Government, is identical with or resembles too nearly the name of an existing company; or (b) upon application by a registered proprietor of a trademark — is identical with or resembles an existing registered trademark, the Central Government may direct the company to change its name within three months, and the company shall change its name accordingly by passing an ordinary resolution.

Section 17: Copies of Memorandum and Articles, etc., to be Given to Members

A company shall, on being so requested by a member, send to him within seven days, subject to payment of such fees as may be prescribed, a copy each of (a) the memorandum; (b) the articles; and (c) every agreement and every resolution referred to in Section 117(1), if and in so far as they have not been embodied in the memorandum or articles.

Section 18: Conversion of Companies Already Registered

A company of any class registered under this Act may convert itself as a company of other class under this Act by alteration of memorandum and articles of the company in accordance with the provisions of Chapter II. Any conversion shall not affect any debts, liabilities, obligations or contracts incurred or entered into before the conversion.

Section 19: Subsidiary Company not to Hold Shares in its Holding Company

No company shall, either by itself or through its nominees, hold any shares in its holding company, and no holding company shall allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void.

Three exceptions: (a) where the subsidiary holds shares as legal representative of a deceased member; (b) where the subsidiary holds shares as a trustee; or (c) where the subsidiary was a shareholder even before it became a subsidiary of the holding company — in which case, the subsidiary has no voting rights in respect of such shares.

The rationale is to prevent cross-holdings that could facilitate manipulation of voting and reduction of independent members.

Section 20: Service of Documents

A document may be served on a company or an officer thereof by sending it to the company or officer at the registered office of the company by registered post, or by speed post, or by courier service, or by leaving it at its registered office, or by such electronic or other mode as may be prescribed.

Section 21: Authentication of Documents, Proceedings and Contracts

A document or proceeding requiring authentication by a company; or contracts made by or on behalf of a company, may be signed by any Key Managerial Personnel or an officer or employee of the company duly authorised by the Board. This provision dispenses with the earlier cumbersome insistence on the common seal.

Section 22: Execution of Bills of Exchange, etc.

A bill of exchange, hundi or promissory note shall be deemed to have been made, accepted, drawn or endorsed on behalf of a company if made, accepted, drawn, or endorsed in the name of, or on behalf of or on account of, the company by any person acting under its authority, express or implied.

A company may, by writing under its common seal (if any), authorise any person, either generally or in respect of any specified matters, as its attorney to execute other deeds on its behalf in any place either in or outside India; and where the company does not have a common seal, the authorisation may be made by two directors or by a director and the Company Secretary.

Interplay: Doctrine of Constructive Notice and Doctrine of Indoor Management

Doctrine of Constructive Notice

The memorandum and articles of a company, once registered with the Registrar, become public documents available for inspection on payment of the prescribed fee. Every person dealing with the company is deemed to have 'constructive notice' of their contents. Ignorance of their provisions is no defence; a person who contracts with the company in a manner contrary to the public documents does so at his peril.

Under the 2013 Act, the rigour of constructive notice has been significantly diluted by the abolition of the doctrine of ultra vires in relation to the capacity of the company; yet notice of matters evident from public documents continues to be imputed.

Doctrine of Indoor Management — Rule in Turquand's Case

While outsiders are fixed with notice of the public documents, they are entitled to assume that internal procedural requirements have been duly complied with. They are not bound to inquire into the regularity of internal proceedings.

⚖ Case Law — Royal British Bank v. Turquand, (1856) 6 E&B 327

The articles of a company permitted it to borrow money on bond provided that the borrowing was authorised by a resolution of the general body. The company borrowed from the Bank without any such resolution. The Bank sued on the bond. The Court of Exchequer Chamber (per Jervis CJ) held that the Bank was entitled to assume that the necessary resolution had been duly passed — the Bank was bound to know what was in the articles but was not bound to inquire whether internal procedure had been followed. 'Turquand's rule' was born, since reaffirmed innumerable times.

Exceptions to the Doctrine of Indoor Management

Knowledge of irregularity — where the outsider had actual or constructive knowledge of the irregularity.
Suspicion of irregularity — where circumstances surrounding the transaction put the outsider on enquiry.
Forgery — the rule does not protect forged transactions. See Ruben v. Great Fingall Consolidated, [1906] AC 439: a share certificate forged by the company's secretary was held a nullity.
Acts outside the ostensible authority of officers — the third party cannot rely on the rule if the act was beyond the ostensible authority of the officer with whom he dealt.
Acts which are void or illegal — the rule does not validate acts which are intrinsically void.

⚖ Case Law — Ruben v. Great Fingall Consolidated, [1906] AC 439

The company secretary forged share certificates of the company and pledged them to the plaintiff. The plaintiff sued the company on the certificates. The House of Lords held that a forgery is a nullity; the doctrine of indoor management cannot validate a forgery. An outsider cannot assume a forged document to be regular merely because it emanates from the company.

⚖ Case Law — Dewan Singh Hira Singh v. Minerva Mills Ltd., AIR 1959 Punj 448

Directors of a company allotted a block of shares to the plaintiff. Under the articles, such an allotment required a special resolution; no resolution had in fact been passed. The Punjab High Court held that the allotment was binding on the company, as the plaintiff was an outsider entitled to assume compliance with internal procedure. A useful Indian illustration of Turquand's rule.

Pre-Incorporation Contracts

A pre-incorporation contract is one purportedly entered into by promoters on behalf of a company before its incorporation. Since a non-existent person cannot contract, and ratification requires the principal to have been in existence at the date of the contract, pre-incorporation contracts posed classical difficulties at common law.

⚖ Case Law — Kelner v. Baxter, (1866) LR 2 CP 174

Promoters of a company not yet formed purchased wine on its behalf; the company was thereafter incorporated but became insolvent before paying. The question was whether the promoters could be held personally liable. The court held that since there was no principal in existence at the time of the contract, the promoters who signed the contract were personally liable; the subsequent incorporation of the company could not ratify the contract.

The Indian statutory position is salutary. Under Sections 15(h) and 19 of the Specific Relief Act, 1963, a pre-incorporation contract is enforceable by or against the company if (a) the contract is warranted by the terms of incorporation and (b) the company has accepted the contract after incorporation and communicated the acceptance to the other party. The common-law rule that promoters are personally liable survives where these conditions are not fulfilled.

📝 Exam Pointers — Chapter II

• Master the six clauses of the Memorandum — their content, their order, and the distinctive procedure for altering each.

• Salomon, Ashbury Railway Carriage, Lakshmanaswami Mudaliar, Turquand, Ruben, Allen v. Gold Reefs, and Kelner v. Baxter together cover nearly all incorporation-related case law.

• The conclusive evidence rule (Moosa Goolam Ariff, Jubilee Cotton Mills) is a favourite for MCQs — notice how Section 7(7) interacts with it.

• Distinguish clearly between (i) ultra vires the Act (void), (ii) ultra vires the memorandum (void, cannot be ratified), and (iii) ultra vires the articles (voidable, can be ratified by members).

• Section 10A and its 180-day declaration requirement for commencement of business is a contemporary favourite, introduced by the 2018 Ordinance.