Doctrine of Ultra Vires | Company Law - CLAT PG PDF Download

Ultra Vires and Its Consequences

Ultra Vires refers to actions taken by a company that are beyond the powers specified in its object clause.

Consequences of Ultra Vires

• Liability of Directors: Directors are responsible for ensuring that the company’s capital is used only for the purposes outlined in the memorandum. If capital is diverted for unauthorized purposes, directors may be held personally liable.
• Ultra Vires Borrowing by the Company: If a bank lends money to the company for purposes not specified in the object clause, the borrowing is considered ultra vires, and the bank may not be able to recover the amount.
• Ultra Vires Lending by the Company: If the company lends money for an ultra vires purpose, the lending is deemed ultra vires.
• Void ab initio: Ultra vires acts of the company are considered void from the beginning.
• Injunction: Any member of the company can seek an injunction to prevent the company from engaging in ultra vires acts.

Liability Clause

The Liability Clause in a company’s memorandum provides legal protection to shareholders by limiting their personal liability for the company’s debts.

There are two types of limited liabilities:

Limited by Shares

• Defined in Section 2(22) of the Companies Act, 2013.
• Shareholders are only liable to pay the price of the shares they have subscribed to.
• If the company winds up and shareholders have not paid the full amount for their shares, their liability is limited to the unpaid amount.

Limited by Guarantee

• Defined in Section 2(21) of the Companies Act, 2013.
• Members, instead of shareholders, undertake to contribute a fixed amount to the company’s assets upon winding up.
• Members guarantee a specific amount they will be liable for.

Companies limited by guarantee are often used by non-profit organizations and charities.

Capital Clause

The Capital Clause in a company’s memorandum specifies the total amount of share capital and how it is divided into shares.

It details the types of shares, such as equity shares or preference shares.

Illustration: If a company has a share capital of 80,00,000 rupees, it might be divided into 3000 shares of 4000 rupees each.

Subscription Clause

The Subscription Clause in a company’s memorandum identifies the individuals signing the memorandum and the number of shares each is subscribing to.

Key points about the Subscription Clause include:

• Each subscriber must state the number of shares they are subscribing to.
• Subscribers need to sign the memorandum in the presence of two witnesses.
• Each subscriber must subscribe to at least one share.

Association Clause

The Association Clause in the memorandum of association is a declaration by the subscribers expressing their intention to associate and form a company.

By signing this clause, the subscribers formally indicate their desire to come together and establish the company as outlined in the memorandum.

Memorandum of Association for One-Person Company

A one-person company(OPC) is a unique business structure in India, allowing a single individual to establish a company with limited liability. Here are the key points regarding the memorandum of association for an OPC:

Definition and Legal Framework

• According to Section 2(62) of the Companies Act, 2013, a one-person company is defined as a company with only one person as its member.
• OPCs are subject to the same laws and regulations as private companies in India.

Formation and Requirements

• The minimum capital requirement to form a one-person company is 1,00,000 Rupees.
• OPCs were introduced to promote entrepreneurship and provide a formal structure for small businesses.

Separate Legal Entity

• A one-person company is considered a separate legal entity distinct from its owner.
• This means the company can own assets, enter into contracts, and be liable for its debts independently of the owner.

Conversion Requirement

• If an OPC’s annual turnover exceeds 2 Crore Rupees, it is mandatory for the company to convert into a private limited company.
• This requirement ensures that larger companies operate under a more robust legal framework.

Nomination Clause

• In addition to the standard clauses, the memorandum of association for a one-person company includes a Nomination Clause.
• This clause designates an individual who will become the member of the company in the event of the subscriber’s death or incapacity.
• The nominee must be an Indian citizen and resident of India, having lived in India for at least 182 days in the preceding year.
• Minors cannot be nominated.

Consent and Filing

• The individual named in the Nomination Clause must give written consent, which is required to be filed with the Registrar of Companies at the time of incorporation.

Withdrawal of Nominee

• If the nominee wishes to withdraw, they must do so in writing.
• The owner of the company is then required to nominate a new person within 15 days.

Memorandum of Association

The structure offers flexibility and security for one-person companies while ensuring compliance with regulatory requirements.

What is the Purpose of the Memorandum of Association?

• It outlines the scope and powers of a company, setting the limits within which the company can operate.
• It governs the company's relationship with external parties.
• It is a crucial part of the registration process; without it, the company cannot be incorporated.
• It provides essential information for anyone looking to enter into a contractual agreement with the company.
• Often referred to as the charter of the company, it contains detailed information about the company, its members, and their liabilities.

Subscription of Memorandum of Association

Subscribers are the initial shareholders of the company, the individuals who agree to come together to form the company. Their names and details are listed in the memorandum.

The number of subscribers needed for incorporation varies based on the type of company:

• Private Company: A minimum of 2 subscribers is required.
• Public Company: At least 7 subscribers are needed.
• One-Person Company: Only 1 subscriber is necessary.

Who Can Subscribe to the Memorandum?

According to Rule 13 of the Companies (Incorporation) Rules, 2014, there are specific categories of individuals and entities that are eligible to subscribe to the memorandum of a company.

Eligible Subscribers

• Individuals: Any individual or group of individuals can subscribe to the memorandum.
• Foreign Citizens and Non-Resident Indians (NRIs): Foreign citizens wishing to subscribe must have their signature, address, and proof of identity notarized. Additionally, they must have visited India on a Business Visa. NRIs need to have their photograph, address, and identity proof attested at the Embassy, along with a certified copy of their passport. A Business Visa is not required for NRIs.
• Minors: A minor can only subscribe through a legal guardian.
• Companies: A company incorporated under the Companies Act can subscribe to the memorandum. This includes directors, officers, employees, or any other person authorized by the board.
• Foreign Companies: A company incorporated outside India can subscribe to the memorandum by fulfilling additional formalities as defined in Section 2(42) of the Companies Act.
• Societies: Societies registered under the Societies Registration Act, 1860 are eligible to subscribe.
• Limited Liability Partnerships (LLPs): Partners of an LLP can subscribe with the agreement of all other partners.
• Body Corporates: Body corporates incorporated under an Act of Parliament or State Legislature can also subscribe to the memorandum.

Subscription Process

• Every subscriber must sign the memorandum in the presence of at least one witness.
• The following details of the witness should be included:
• Name of the witness
• Address
• Description
• Occupation
• If the signature is in a language other than English, an affidavit is required to confirm the authenticity of the signature.
• Subscribers can authorize another person to sign on their behalf by granting a power of attorney. According to Department Circular No. 1/95, only one power of attorney is necessary.
• The agent acting on behalf of the subscriber must also provide the following details in the memorandum:
• Name of the agent
• Address
• Description
• Occupation

Particulars to be Mentioned in Memorandum of Association

• Rule 16 of the Companies (Incorporation) Rules, 2014 outlines the specific particulars that must be included in the memorandum of association.

Details of Every Subscriber

When submitting the memorandum, it is important to include specific details for each subscriber. These details ensure proper identification and verification of the subscribers involved in the agreement.

1. Name and Photograph

• Provide the full name of the subscriber, including the last name and family name.
• A photograph should be affixed and scanned along with the memorandum.

2. Parents' Names

• Include the names of the subscriber's father and mother.

3. Nationality

• Specify the nationality of the subscriber.

4. Date of Birth

• Provide the subscriber's date of birth.

5. Place of Birth

• Indicate the place where the subscriber was born.

6. Qualifications

• List the qualifications of the subscriber.

7. Occupation

• Specify the occupation of the subscriber.

8. Permanent Account Number (PAN)

• Include the subscriber's Permanent Account Number (PAN).

9. Addresses

• Provide both the permanent and current addresses of the subscriber.

10. Contact Number

• Include a contact number for the subscriber.

11. Fax Number (Optional)

• If applicable, provide a fax number for the subscriber.

12. Identity Proofs

• Submit two identity proofs, with the Permanent Account Number (PAN) being mandatory.

13. Residential Proof

• Include a residential proof document not older than two months.

14. Proof of Nationality (for Foreign Nationals)

• If the subscriber is a foreign national, provide proof of nationality.

15. Current Director or Promoter (if applicable)

• If the subscriber is a current director or promoter, include their designation, name, and Company Identity Number.

Details for Body Corporate Subscribers

If a body corporate is subscribing to the memorandum, the following particulars should be mentioned:

• Name of the body corporate.
• Registration number or Corporate Identity Number (CIN).
• Registered office address.
• Name and designation of the person signing the memorandum on behalf of the body corporate.
• Details of the resolution or authority under which the person is signing on behalf of the body corporate.

Introduction

The Memorandum of Association (MOA) is a crucial document for the incorporation of a company in India. It outlines the fundamental aspects of the company and is required to be filed with the Registrar of Companies (RoC) during the incorporation process.

Who can subscribe to the MOA?

Individuals or entities who wish to become part of the company by subscribing to its Memorandum of Association (MOA) must meet specific criteria. Here's a breakdown of who can subscribe:

• Indian Residents: Any individual who is a resident of India can subscribe to the MOA.
• Foreign Nationals: Foreign nationals can also subscribe to the MOA, provided they have a valid passport and comply with any applicable regulations.
• Companies: Companies, whether registered in India or abroad, can subscribe to the MOA. However, foreign companies must ensure compliance with Indian laws.
• Limited Liability Partnerships (LLPs): LLPs can subscribe to the MOA as well.
• Other Bodies Corporate: Various other bodies corporate, such as trusts or societies, may also be eligible to subscribe, subject to legal requirements.

Details Required for Subscription

• Corporate Identity Number (CIN) or Registration Number: Provide the corporate identity number or registration number of the body corporate.
• Global Location Number (Optional): This number helps identify the legal entity's location.
• Name of the Body Corporate: Include the name of the body corporate subscribing to the MOA.
• Registered Address: Provide the registered address of the business.
• Email Address: Include the email address for communication purposes.

If the Body Corporate is a Company:

When the body corporate subscribing to the Memorandum of Association (MOA) is a company, specific requirements must be met. Here's what is needed:

• Certified Copy of Board Resolution: A certified copy of the board resolution authorizing the subscription to the memorandum is required.
• Particulars Required:The following particulars should be provided:
  • Number of Shares: Specify the number of shares to be subscribed by the body corporate.
  • Authorized Person: Provide the name, designation, and address of the authorized person acting on behalf of the body corporate.

If the Body Corporate is a Limited Liability Partnership (LLP):

When the body corporate subscribing to the Memorandum of Association (MOA) is a Limited Liability Partnership (LLP), specific requirements must be fulfilled. Here's what is needed:

• Certified Copy of the Resolution: A certified copy of the resolution authorizing the subscription to the memorandum is required.
• Particulars Required:The following particulars should be provided:
  • Number of Shares: Specify the number of shares that the LLP is subscribing to.
  • Authorized Partner: Provide the name of the authorized partner who is subscribing on behalf of the LLP.

If the Body Corporate is Registered Outside the Country:

When the body corporate subscribing to the Memorandum of Association (MOA) is registered outside the country, specific requirements must be met. Here's what is needed:

• Copy of Certificate of Incorporation: A copy of the certificate of incorporation of the body corporate is required to verify its registration.
• Address of Registered Office: Provide the address of the registered office of the body corporate as per its registration details.

Printing and Signing of Memorandum of Association

According to Section 7(1)(a) of the Companies Act, 2013, the Memorandum of Association (MOA) must be signed by all subscribers in a manner prescribed by the Act. Rule 13 of the Company (Incorporation) Rules, 2014 outlines the specific requirements for signing the MOA.

Signing Requirements:

• Signature by Subscribers: The MOA should be signed by each subscriber, who must provide their name, address, occupation, and the number of shares they are subscribing to.
• Presence of Witness: The signing of the MOA must be done in the presence of at least one witness. The witness must also provide their name, address, and occupation.
• Witness Declaration: By signing the MOA, the witness declares that they witnessed the subscriber(s) signing the document and verifies their identity details.
• Illiterate Subscribers: If a subscriber is illiterate, they can authorize an agent to sign the document on their behalf or provide a thumb impression. The person writing for the illiterate subscriber must explain the contents of the document to them.
• Artificial Persons: If the subscriber is an artificial person (e.g., a body corporate), the MOA should be signed by an employee, officer, or authorized person as per the Board Resolution.
• Foreign Nationals: Foreign nationals subscribing to the MOA must comply with the signing requirements applicable to individuals.

Introduction

• Incorporating a company in India involves several crucial steps and compliance with legal requirements outlined in the Companies Act, 2013. One of the fundamental aspects of this process is the Memorandum of Association (MoA), a key document that defines the company's objectives, powers, and structure.
• This article aims to provide a clear and comprehensive guide on the process of incorporating a company in India, focusing on the essential aspects of the Memorandum of Association and the overall incorporation procedure.

Notarization of Signatures and Proof of Identity

• When incorporating a company, the signatures and proof of identity on the memorandum must be notarized based on the location of the individual:
• Commonwealth Countries: If the individual is in any part of the Commonwealth, a Notary Public in that area must notarize the signatures and address on the memorandum, along with proof of identity.
• Hague Apostille Convention Countries: In countries that are signatories to the Hague Apostille Convention, 1961, the signatures and proof of identity and address on the memorandum should be notarized by a Notary Public in the individual's country of origin and approved according to the Hague Convention.
• Non-Hague Countries: In countries outside the Commonwealth and not party to the Hague Apostille Convention, the signatures and address on the memorandum, along with proof of identity, must be notarized by a Notary Public in that country. The Notary Public's certificate should then be authenticated by a Diplomatic or Consular Officer as per the Diplomatic and Consular Officers (Oaths and Fees) Act, 1948.

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Role of Diplomatic and Consular Officers

• Section 3 of the Diplomatic and Consular Officers (Oaths and Fees) Act, 1948 empowers diplomats and consular officers to perform notarial functions abroad. In cases where a Diplomatic or Consular officer is not available, officials mentioned in section 6 of the Commissioners of Oaths Act, 1889 can perform the notarial functions.
• If a foreign national visits India with the intention to incorporate a company, the incorporation is permissible if the individual holds a valid Business Visa.

Format and Submission of Memorandum

• Section 15 of the Companies Act, 2013 mandates that the memorandum should be in printed form. The Ministry of Corporate Affairs has clarified that documents printed using laser printers are valid as long as they are legible and meet other requirements.
• Submission of xerox copies is not permitted; however, xerox copies can be provided to the members of the company.

Alteration, Amendment & Change in Memorandum of Association under Companies Act, 2013

• Definition of Alteration: As per Section 2(3) of the Companies Act, 2013, 'alter' or 'alteration' refers to any additions, omissions, or substitutions made to the Memorandum of Association (MoA).
• Permissibility: A company can only alter its memorandum to the extent permitted by the Act.

Process of Alteration

• Special Resolution Requirement: According to Section 13 of the Act, altering the clauses in the memorandum requires passing a special resolution during a company meeting.
• Definition of Resolution: A resolution is a formal decision taken in a meeting. There are two types of resolutions: ordinary and special. A special resolution needs at least a two-thirds majority to be effective.
• Approval from Central Government: In addition to passing a special resolution, the alteration must also receive written approval from the Central Government.

Reasons for Alteration

• Alterations to the memorandum can be made for various reasons, including:
• Enhancing Business Effectiveness: Enabling the company to conduct its business more efficiently.
• Achieving Objectives: Facilitating the achievement of the company’s objectives.
• Amalgamation: Assisting in the amalgamation with another company.
• Disposal of Undertaking: Facilitating the disposal of any undertaking.

Procedures for Specific Clause Alterations

• Alteration to the Name Clause:
• Special Resolution Requirement: To change the company name, a special resolution must be passed.
• Registrar Notification: After passing the resolution, a copy is sent to the registrar.
• Application Filing: File application in Form INC-24 with prescribed fees.
• Certificate Issuance: Upon name change, a new certificate of incorporation is issued.
• Alteration to the Registered Office Clause:
• Application Filing: Change of Registered Office requires filing with Central Government in Form INC-23 with fees.
• Central Government Approval: Necessary for changing Registered Office location.
• Stakeholder Consent: Change must have consent from all stakeholders.
• Alteration to the Object Clause:
• Special Resolution Requirement: Changing the object clause requires a special resolution.
• Authority Confirmation: Changes must be confirmed by relevant authority.
• Registrar Filing: File altered memorandum with Registrar.
• Public Notification: If public company, publish alteration in local newspaper.
• Website Update: Mention changes on company’s website.
• Alteration to the Liability Clause:
• Member Consent: Altering liability clause needs written consent from all members.
• Liability Changes: Can make directors’ liability unlimited, but not shareholders.
• Resolution Requirement: Pass a special resolution and notify Registrar.
• Alteration to the Capital Clause:
• Ordinary Resolution: Capital clause can be altered by ordinary resolution.
• Actions Allowed: Increase authorized share capital, convert shares to stock, consolidate/divide shares, cancel unsubscribed shares, diminish share capital.
• Submission Timeline: Submit altered Memorandum to Registrar within 30 days of passing resolution.