Incorporation of Company & Matters Incidental Thereto: Notes (Part - 1) - CA Intermediate PDF Download

Chapter Overview

Introduction to Incorporation of Companies

A company is a separate legal entity with perpetual succession for lawful purpose. Development of this concept is equally significant in economic terms as invention of steam engine is for the industrial revolution.
Persons who initiate promotion of a company are known as promoters. All persons who take steps for the registration of a company e.g., those associated with the preparation of a prospectus or in drawing up the Memorandum of Association of the company and assisting in its registration are regarded as promoters.
The Companies Act, 2013 defines the term “Promoter” under section 2(69) which means a person—
(a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or
(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.
However, a person who is acting merely in a professional Capacity, shall not be regarded as promoter [under (c)], e.g., the solicitor, banker, accountant etc. are not regarded as promoters.

Formation Of Company (Section 3)

Companies are broadly of below types:
As you can observe in above chart that companies could be with limited liability (by shares or guarantee) or with unlimited liability
Note: For Government Companies, suffix “Pvt. Ltd / Ltd.” not required (Notification dated 5th June 2015). This exception shall be applicable to a government company which has not committed a default in filing its financial statements under section 137 or annual return under section 92 with the Registrar of companies [Notification dated 13th June 2017].

Section 3 of the Companies Act, 2013 deals with the basic requirement with respect to the constitution of the company. In the case of a public company with or without limited liability, any 7 or more persons (i.e. minimum number of shareholders) can form a company for any lawful purpose by subscribing their names to memorandum and complying with the requirements of this Act in respect of registration. In exactly the same way, 2 or more persons can form a private company and 1 person where company to be formed is one person company (OPC).
However, that one person company (OPC) need to specify the name of one nominee in the Memorandum of Association (MOA) who would take his place in case of his death or his incapacity to contract. The nominee could be changed as per the process and this will not attract process for alteration of the Memorandum of Association.
Formation of Company [Section 3] 
(1) A company may be formed for any lawful purpose by—
(a) 7 or more persons, where the company to be formed is to be a public company;
(b) 2 or more persons, where the company to be formed is to be a private company; or
(c) 1 person, where the company to be formed is to be One Person Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration.
The memorandum of One Person Company shall indicate the name of the other person (i.e. Nominee), with his prior written consent in the prescribed form, who shall, in the event of the subscriber's death or his incapacity to contract become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation of the One Person Company along with its memorandum and articles. However, such other person may withdraw his consent in such manner as may be prescribed.
The member of One Person Company (OPC) may at any time change the name of Nominee by giving notice in such manner as may be prescribed.
It shall be the duty of the member of One Person Company (OPC) to intimate the company the change, if any, in the name of the other person nominated by him by indicating in the memorandum or otherwise within such time and in such manner as may be prescribed, and the company shall intimate the Registrar any such change within such time and in such manner as may be prescribed.
However, any such change in the name of the person shall not be deemed to be an alteration of the memorandum.
(2) A company formed under sub-section (1) may be either—
(a) a company limited by shares; or
(b) a company limited by guarantee; or
(c) an unlimited company.

Members severally liable in certain cases [Section 3A] 

• If at any time the number of members of a company is reduced,
  (i) in the case of a public company, below 7,
  (ii) in the case of a private company, below 2,
  and the company carries on business for more than six months while the number of members is so reduced, then
• every person who is a member of the company during the time that it so carries on business after those six months and is cognizant (aware) of the fact that it is carrying on business with less than seven members or two members, as the case may be,
• shall be severally liable for the payment of the whole debts of the company contracted during that time (after six months) and may be severally sued therefore.

Incorporation Of Company [Section 7]

I. Incorporation of Company: Section 7 of the Companies Act, 2013 provides for the procedure to be followed for incorporation of a company.
Steps for Incorporation

• Reservation of name by filing e- application
• Drafting & signing of MOA & AOA and its submission to ROC. These documents have to be e-filed and e-stamped
• Consent of persons nominated as directors to act as directors to be submittted electronically
• Submission of statutory declaration of compliances and other declarations
• Pay fees & amount of stamp duty electonically
• Obtain certificate of incorporation digitally signed by ROC
• File declaration about address of Registered office

Note: New requirement of submitting declaration that all subscribers have paid the value of shares agreed to be taken by him and verification of Registered office has been filed. This requirement is needed to be complied with before the commencement of business.

1. Filing of the documents and information with the registrar: For the registration of the company following documents and information are required to be filed with the registrar within whose jurisdiction the registered office of the company is proposed to be situated—
   (i) the memorandum of association and articles of association of the company duly signed by all the subscribers to the memorandum.
   (ii) a declaration by person who is engaged in the formation of the company (an advocate, a chartered accountant, cost accountant or company secretary in practice) and by a person named in the articles (director, manager or secretary of the company), that all the requirements of this act and the rules made thereunder in respect of registration and matters precedent or incidental thereto have been complied with.
   (iii) declaration from each of the subscribers to the memorandum and from persons named as the first directors, if any, in the articles stating that—
   (a) he is not convicted of any offence in connection with the promotion, formation or management of any company, or
   (b) he has not been found guilty of any fraud or misfeasance or of any breach of duty to any company under this Act or any previous company law during the last five years,
   (c) and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of his knowledge and belief;
   (iv) the address for correspondence till its registered office is established;
   (v) the particulars (names, including surnames or family names, residential address, nationality) of every subscriber to the memorandum along with proof of identity, and in the case of a subscriber being a body corporate, such particulars as may be prescribed.
   (vi) the particulars (name, including surname or family name, the Director Identification Number (DIN), residential address, nationality) of the persons mentioned in the articles as the first directors and such other particulars including proof of identity as may be prescribed; and
   (viii) the particulars of the interests of the persons mentioned in the articles as the first directors of the company in other firms or bodies corporate along with their consent to act as directors of the company in such form and manner as may be prescribed.
2. Issue of certificate of incorporation on registration: The Registrar on the basis of documents and information filed, shall register all the documents and information in the register and issue a certificate of incorporation in the prescribed form to the effect that the proposed company is incorporated under this Act.
3. Allotment of Corporate Identity Number (CIN): On and from the date mentioned in the certificate of incorporation, the Registrar shall allot to the company a corporate identity number, which shall be a distinct identity for the company and which shall also be included in the certificate. 
4. Maintenance of copies of all documents and information: The company shall maintain and preserve at its registered office copies of all documents and information as originally filed, till its dissolution under this Act. 
5. Furnishing of false or incorrect information or suppression of material fact at the time of incorporation (i.e. during incorporation process): If any person furnishes any false or incorrect particulars of any information or suppresses any material information, of which he is aware in any of the documents filed with the Registrar in relation to the registration of a company, he shall be liable for action for fraud under section 447.
6. Company already incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact (i.e. post Incorporation): where, at any time after the incorporation of a company, it is proved that the company has been got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company, or by any fraudulent action, the promoters, the persons named as the first directors of the company and the persons making declaration under this section shall each be liable for action for fraud under section 447. 
7. Order of the Tribunal: Where a company has been got incorporated by furnishing false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal may, on an application made to it, on being satisfied that the situation so warrants—
   (a) pass such orders, as it may think fit, for regulation of the management of the company including changes, if any, in its memorandum and articles, in public interest or in the interest of the company and its members and creditors; or
   (b) direct that liability of the members shall be unlimited; or
   (c) direct removal of the name of the company from the register of companies; or
   (d) pass an order for the winding up of the company; or
   (e) pass such other orders as it may deem fit:
   Provided that before making any order,—  (i) the company shall be given a reasonable opportunity of being heard in the matter; and
   (ii) the Tribunal shall take into consideration the transactions entered into by the company, including the obligations, if any, contracted or payment of any liability. 

Simplified Proforma for Incorporating Company Electronically (SPICe) 
The Ministry of Corporate Affairs has taken various initiatives for ease of business. In a step towards easy setting up of business, MCA has simplified the process of filing of forms for incorporation of a company through Simplified Proforma for incorporating company electronically.

Incorporation of One Person Company

Law with respect to formation of OPC provides that— 

• The memorandum of OPC shall indicate the name of the other person (nominee), who shall, in the event of the subscriber’s death or his incapacity to contract, become the member of the company. 
• The other person (nominee) whose name is given in the memorandum shall give his prior written consent in prescribed form and the same shall be filed with Registrar of companies at the time of incorporation along with its Memorandum of Association and Articles of Association. 
• Such other person (nominee) may be given the right to withdraw his consent. 
• The member of OPC may at any time change the name of such other person (nominee) by giving notice to the company and the company shall intimate the same to the Registrar. 
• Any such change in the name of the person shall not be deemed to be an alteration of the memorandum. 
• Only a natural person who is an Indian citizen and resident in India-
  (a) shall be eligible to incorporate One Person Company (OPC);
  (b) shall be a nominee for the sole member of One Person Company (OPC). Explanation I- For the purposes of this rule, the term "resident in India" means a person who has stayed in India for a period of not less than 182 days during the immediately preceding financial year. 
• A natural person shall not be a member of more than one OPC at any point of time and the said person shall not be a nominee of more than one OPC.
• Where a natural person being member in OPC becomes member in another such company by virtue of his being a nominee in that OPC, such person shall meet eligibility criteria (as given in point above) within a period of 182 days. 
• No minor shall become member or nominee of the OPC or can hold share with beneficial interest. 
• Such Company cannot be incorporated or converted into a company under section 8 of the Act. Though it may be converted to private or public companies in certain cases. The procedure of conversion is given in the rules 6 & 7 of Chapter II. 
• Such Company cannot carry out Non-Banking Financial Investment activities including investment in securities of anybody corporate. 
• OPC can not convert voluntarily into any kind of company unless two years have expired from the date of incorporation, except where the paid up share capital is increased beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees.

  Example 1: Rajesh has formed a ‘One Person Company (OPC)’ with his wife Roopali as nominee. For the last two years, his wife Roopali is suffering from terminal illness and due to this hard fact he wants to change her as nominee. He has a trusted and experienced friend Ramnivas who could be made nominee or his (Rajesh) son Rakshak who is of seventeen years of age. In the instant case, Rajesh can appoint his friend Ramnivas as nominee in his OPC and not Rakshak because Rakshak is a minor.
  Example 2: Abha formed a ‘One Person Company (OPC)’ on 15th October, 2017 with her husband Akhil as nominee and Rs. 10 lacs as Authorised and paid-up share capital. In the month of April, 2018 she got in touch with a foreigner and is expecting to receive a substantial export order by May, 2018 whose final delivery must be completed by December, 2018. She is contemplating to convert her OPC into a private limited company before she receives the export order in May 2018. In this case, Abha cannot voluntarily convert her OPC into a private limited company before expiry of two years from 15-10-2017 i.e. upto 14th October, 2019. 

Formation Of Companies With Charitable Objects, Etc. [Section 8]

1. Object of formation of Section 8 Company: Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to promote the charitable objects of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment etc. Such company intends to apply its profit in promoting its objects and prohibiting the payment of any dividend to its members.
   
2. Power of Central government to issue the license: This section allows the Central Government to register such person or association of persons as a company with limited liability without the addition of words ‘Limited’ or ‘Private limited’ to its name, by issuing licence on such conditions as it deems fit. The registrar shall on application register such person or association of persons as a company under this section. ‘Where it is proved to the satisfaction of the Central Government 5 that a limited company registered under this Act or under any previous company law has been formed with any of the objects and with the restrictions and prohibitions it may, by licence, allow the company to be registered under section 8 subject to such conditions as the Central Government deems fit and to change its name by omitting the word ―Limited, or as the case may be, the words ―Private Limited from its name and thereupon the Registrar shall, on application, in the prescribed form, register such company under this section and all the provisions of this section shall apply to that company’. 
3. Privileges of limited Company: On registration, the company shall enjoy same privileges and obligations as of a limited company. 
4. A firm may be a member of the company registered under section 8.
5. Alteration of Memorandum and Articles: A company registered under this section shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government. 
6. Conversion into any other kind of Company: A company registered under this section may convert itself into company of any other kind only after complying with such conditions as may be prescribed.A company registered under section 8 which intends to convert itself into a company of any other kind shall pass a special resolution at a general meeting for approving such conversion.
7. Revocation of license 
   (i) The Central Government may by order revoke the licence of the company where the company contravenes any of the requirements or the conditions of this sections subject to which a licence is issued or where the affairs of the company are conducted fraudulently, or in violation of the objects of the company or prejudicial to public interest, and on revocation, the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the register. But before such revocation, the Central Government must give it a written notice of its intention to revoke the licence and opportunity to be heard in the matter.
   (ii) Where a licence is revoked, the Central Government may, by order, if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section.
   However, no such order shall be made unless the company is given a reasonable opportunity of being heard.
   (iii) Where a licence is revoked and where the Central Government is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, notwithstanding anything to the contrary contained in this Act, the Central Government may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order.
   (iv) If on the winding up or dissolution of a company registered under this section, there remains, after the satisfaction of its debts and liabilities, any asset, they may be transferred to another company registered under this section and having similar objects, subject to such conditions as the Tribunal may impose, or may be sold and proceeds thereof credited to the Insolvency and Bankruptcy Fund formed under section 224 of the Insolvency and Bankruptcy Code, 2016.
   (v) A company registered under this section shall amalgamate only with another company registered under this section and having similar objects. 
8. Penalty/ punishment in contravention: If a company makes any default in complying with any of the requirements laid down in this section, the company shall, be punishable with fine varying from ten lakh rupees to one crore rupees and the directors and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine varying from twenty-five thousand rupees to twenty-five lakh rupees, or with both.
   And where it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447.
   
9. Exceptions: 
   (i) Can call its general meeting by giving a clear 14 days notice instead of 21 days.
   (ii) Requirement of minimum number of directors, independent directors etc. does not apply.
   (iii) Need not constitute Nomination and Remuneration Committee and Shareholders Relationship Committee.
   Formation
   • To promote Charitable objects
   Application of profits
   • To promote its objectives
   • No payment of dividends out of profits
   Type of Co.
   • Limited Liabilty
   • Without the addition of words "Ltd." or "Pvt Ltd."
   How status is granted
   • The CG can grant such status
   • However, CG has delegated the power to grant licence to ROC
   Revocation of licence
   • CG may revoke licence
   • If conditions of section 8 are contravened, or
   • affairs of the company are conducted fraudulently, or prejudicial to public interest
   Effect of revocation of licence
   • Co. has to use words "Ltd." or "Pvt Ltd."

Effect Of Registration [Section 9]

Section 9 of the Companies Act, 2013 provides for the effect of registration of a company.
According to section 9, from the date of incorporation (mentioned in the certificate of incorporation), the subscribers to the memorandum and all other persons, who may from time to time become members of the company, shall be a body corporate by the name contained in the memorandum. Such a registered company shall be capable of exercising all the functions of an incorporated company under this Act and 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.
From the date of incorporation mentioned in the certificate, the company becomes a legal person separate from the incorporators; and there comes into existence a binding contract between the company and its members as evidenced by the Memorandum and Articles of Association [Hari Nagar Sugar Mills Ltd. vs. S.S. Jhunjhunwala]. It has perpetual existence until it is dissolved by liquidation or struck out of the register. A shareholder who buys shares, does not buy any interest in the property of the company but in certain cases a writ petition will be maintainable by a company or its shareholders.
A legal personality emerges from the moment of registration of a company and from that moment the persons subscribing to the MOA and other persons joining as members are regarded as a body corporate or a corporation in aggregate and the legal person begins to function as an entity. A company on registration acquires a separate existence and the law recognizes it as a legal person separate and distinct from its members [State Trading Corporation of India vs. Commercial Tax Officer].
It may be noted that under the provisions of the Act, a company may purchase shares of another company and thus become a controlling company. However, merely because a company purchases all shares of another company, it will not serve as a means of putting an end to the corporate character of another company and each company is a separate juristic entity [Spencer & Co. Ltd. Madras vs. CWT Madras].
As stated above, the law recognizes such a company as a juristic person separate and distinct from its members. The mere fact that the entire share capital has been contributed by the Central Government and all its shares are held by the President of India and other officers of the Central Government does not make any difference in the position of registered company and it does not make a company an agent either of the President or the Central Government [Heavy Electrical Union vs. State of Bihar]

Memorandum Of Association – Moa [Section 4]

As per section 2(56) ― memorandum means the memorandum of association (MOA) of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act;
It is the base document for the formation of the company and along with, the Articles of Association (AOA) is regarded as the Constitution of the Company.
The MOA and AOA, similar to other company agreements and resolutions is subject to the Companies Act, 2013 (Section 6) and the law of the land and therefore all its contents need to be in compliance of the Companies Act, 2013 and other applicable legislations.
Section 4 of the Companies Act, 2013 seeks to provide for the requirements with respect to memorandum of a company. 

I. Object of registering a memorandum of association: 

• It contains the object for which the company is formed and therefore identifies the possible scope of its operations beyond which its actions cannot go. 
• It enables shareholders, creditors and all those who deal with company to know what its powers are and what activities it can engage in. 
• A memorandum is a public document under Section 399 of the Companies Act, 2013. Consequently, every person entering into a contract with the company is presumed to have the knowledge of the conditions contained therein. 
• The shareholders must know the purposes for which his money can be used by the company and what risks he is taking in making the investment.

A company cannot depart from the provisions contained in the memorandum however imperative may be the necessity for the departure. It cannot enter into a contract or engage in any trade or business, which is beyond the power confessed on it by the memorandum. If it does so, it would be ultra vires the company and void. 

II. The memorandum of a company shall state: 

• In relation to the name clause- the name of the company with the last word “Limited” in the case of a public limited company, or the last words “Private Limited” in the case of a private limited company. Exception: This clause is not applicable on the companies formed under section 8 of the Act.
• In relation to the Registered Office Clause- the State in which the registered office of the company is to be situated;
• In relation to the Object Clause- the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof; 

III.  Liability / Capital Clause: 
(a) This clause covers details on the liability of members of the company, whether limited or unlimited, and also state—  

• in the case of a company limited by shares, that the liability of its members is limited to the amount unpaid, if any, on the shares held by them; and 
• in the case of a company limited by guarantee, the amount up to which each member undertakes to contribute—  
  (i) 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, for payment of the debts and liabilities of the company or of such debts and liabilities as may have been contracted before he ceases to be a member, as the case may be; and
  (ii) to the costs, charges and expenses of winding-up and
  (iii) for adjustment of the rights of the contributories among themselves; 

(b) in the case of a company having a 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; and 
• the number of shares each subscriber to the memorandum intends to take, indicated opposite his name;

The clause, in the case of One Person Company, covers the name of the person (nominee) who, in the event of death of the subscriber, shall become the member of the company. 

IV. Name Clause:
Applying for the name of the company: The name stated in the memorandum shall not—
(a) be identical with or resemble too nearly to the name of an existing company registered under this Act or any previous company law; or
(b) be such that it’s use by the company— 

• will constitute an offence under any law for the time being in force; or 
• is undesirable in the opinion of the Central Government. 

(c) Undesirable Names: A company shall not be registered with a name which contains—
(i) any word or expression which is likely to give the impression that the company is in any way connected with, or having the patronage of, the Central Government, any State Government, or any local authority, corporation or body constituted by the Central Government or any State Government under any law for the time being in force; or
(ii) such word or expression, as may be prescribed, unless the previous approval of the Central Government has been obtained for the use of any such word or expression.

As per rule 8 of Companies (Incorporation) Rules, 2014, the following words and combinations thereof shall not be used in the name of a company unless the previous approval of the Central Government has been obtained for the use of any such word or expression-
Board; 

Commission; 

Authority; 

Undertaking;
National;
Union;
Central;
Federal;
Republic;
President etc.

If the proposed name include words such as ‘Insurance’, ‘Bank’, ‘Stock Exchange’, ‘Venture Capital’, ‘Asset Management’, ‘Nidhi’, ‘Mutual fund’ etc., unless a declaration is submitted by the applicant that the requirements mandated by the respective regulator, such as IRDA, RBI, SEBI, MCA etc. have been complied with by the applicant;
(d) Reservation of name: Applying for name: A person may make an application, in such form and manner and accompanied by such fee, as may be prescribed, to the Registrar for the reservation of a name set out in the application as—  
(i) the name of the proposed company; or
(ii) the name to which the company proposes to change its name. 

Reserving the name: Upon receipt of an application under sub-section (4), the Registrar may, on the basis of information and documents furnished along with the application, reserve the name for a period of twenty days from the date of approval or such other period as may be prescribed.
Provided that in case of an application for reservation of name or for change of its name by an existing company, the Registrar may reserve the name for a period of sixty days from the date of approval.
Cancelling name: Where after reservation of name, it is found that name was applied by furnishing wrong or incorrect information, then—  
(i) if the company has not been incorporated, the reserved name shall be cancelled and the person who has made the application shall be liable to a penalty which may extend to one lakh rupees;
(ii) if the company has been incorporated, the Registrar may, after giving the company an opportunity of being heard—  

1. either direct the company to change its name within a period of 3 months, after passing an ordinary resolution; 
2. take action for striking off the name of the company from the register of companies; or
3. make a petition for winding up of the company.

Example 3: Mr. Anil Desai, has applied for reservation of company name with a prefix “Sanwariya”. He claimed that the Prefix “Sanwariya” is registered trademark in his name. Later on, it is found that the said prefix is not registered with Mr. Anil Desai, however, he has formed company by giving incorrect documents/information while applying the name of the company.
In such case, The Registrar shall take action as per the provisions of the act after giving opportunity of being heard.
Circular: As per the General Circular No. 29/2014, dated 11th of July, 2014, Government directed that while allotting names to Companies/Limited Liability Partnerships, the Registrar of Companies concerned should exercise due care to ensure that the names are not in contravention of the provisions of the Emblems and Names (Prevention of Improper Use) Act, 1950. It is necessary that Registrars are fully familiar with the provisions of the said Act.

Note: Rule 8–Undesirable Names of the Companies (Incorporation) Rules, 2014, determines whether a proposed name is identical with another or other rules which may be kept in mind while dealing with the Name clause of the MOA.

V. Domicile Clause:
The name of federal state is mentioned where the registered office is to be situated.
Registered office is the permanent address of the company. It is residence of company.

VI. Objects Clause: 
Covers the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof.

Doctrine of Ultra Vires 

• In the case of a company, whatever is not stated in the memorandum as the objects or powers is prohibited by the doctrine of ultra vires. As a result, an act which is ultra vires is void, and does not bind the company. Neither the company nor the contracting party can sue on it. The company cannot make it valid, even if every member assents to it.
• The general rule is that an act which is ultra vires the company is incapable of ratification. An act which is intra vires the company but outside the authority of the directors may be ratified by the company in proper form [Rajendra Nath Dutta v. Shilendra Nath Mukherjee, (1982) 52 Com Cases 293 (Cal.)]. 
• If the act is ultra vires (beyond the powers of) the directors only, the shareholders can ratify it. If it is ultra vires the articles of association, the company can alter its articles in the proper way. 
• The rule is meant to protect shareholders and the creditors of the company. The doctrine of ultra vires was first enunciated by the House of Lords in a classic case, Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1878) L.R. 7 H.L. 653. The memorandum of the company in the said case defined its objects thus: “The objects for which the company is established are to make and sell, or lend or hire, railway plants to carry on the business of mechanical engineers and general contractors…….”.
• The company entered into a contract with M/s. Riche, a firm of railway contractors to finance the construction of a railway line in Belgium. On subsequent repudiation of this contract by the company on the ground of its being ultra vires, Riche brought a case for damages on the ground of breach of contract, as according to him the words “general contractors” in the objects clause gave power to the company to enter into such a contract and, therefore, it was within the powers of the company. More so because the contract was ratified by a majority of shareholders.
• The House of Lords held that the contract was ultra vires the company and, therefore, null and void. The term “general contractor” was interpreted to indicate as the making generally of such contracts as are connected with the business of mechanical engineers. The Court held that if every shareholder of the company had been in the room and had said, “That is a contract which we desire to make, which we authorise the directors to make”, still it would be ultra vires. The shareholders cannot ratify such a contract, as the contract was ultra vires the objects clause, which by Act of Parliament, they were prohibited from doing.
• The purpose of doctrine of ultravires has been defeated as now the object clause can be easily altered, by passing just a special resolution by the shareholders.

VII. Subscription Clause: 
According to section 7(1)(a) there shall be filed with the Registrar within whose jurisdiction the registered office of a company is proposed to be situated, the memorandum and articles of the company duly signed by all the subscribers to the memorandum in such manner as may be prescribed in Rule 13 of the Companies (Incorporation) Rules, 2014.

VIII. Forms and schedule related to Memorandum: 
The memorandum of a company shall be in respective forms specified in Tables A, B, C, D and E in Schedule I as may be applicable to such company.

The MOA and AOA shall be in respective forms as provided in Schedule I to the Companies Act, 2013:

Table –A

• Memorandum of Association of a Company Limited by Shares

Table – B

• Memorandum of Association of a Company Limited by Guarantee and not Having a Share Capital

Table - C

• Memorandum of Association of a Company Limited by Guarantee and Having a Share Capital

Table - D

• Memorandum of Association of an Unlimited Company and not Having Share Capital

Table - E

• Memorandum of Association of an Unlimited Company and Having Share Capital

Table - F

• Articles of Association of A Company Limited by Shares

Table – G

• Articles of Association of a Company Limited by Guarantee and Having a Share Capital

Table - H

• Articles of Association of a Company Limited by Guarantee and not Having Share Capital

Table – I

• Articles of Association of an Unlimited Company and Having a Share Capital

Table - J

• Articles of Association of an Unlimited Company and not Having Share Capital

IX. Any provision in the memorandum or articles, in the case of a company limited by guarantee and not having a share capital, shall not give any person a right to participate in the divisible profits of the company otherwise than as a member. If the contrary is done, it shall be void.

Articles of Association – Aoa [Section 5]

As per Section 2(5) ―articles means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act.
Actually, article of association of a company contains internal rules and regulations of the company.

Section 5 of the Companies Act, 2013 seeks to provide the contents and model of articles of association. The section lays the following law— 

1. Contains regulations: The articles of a company shall contain the regulations for management of the company. 
2. Inclusion of matters: The articles shall also contain such matters, as are prescribed under the rules. However, a company may also include such additional matters in its articles as may be considered necessary for its management. 
3. Entrenchment: Usually an article of association may be altered by passing special resolution but entrenchment makes it more difficult to change it. So entrenchment means making something more protective.
   (i) Contain provisions for entrenchment: The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with.
   (ii) Manner of inclusion of the entrenchment provision: The provisions for entrenchment shall only be made either on formation of a company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company.
   (iii) Notice to the registrar of the entrenchment provision: Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed.
   
4. Forms of articles: The articles of a company shall be in respective forms specified in Tables, F, G, H, I and J in Schedule I as may be applicable to such company. 
5. Model articles: A company may adopt all or any of the regulations contained in the model articles applicable to such company. 
6. Company registered after the commencement of this Act: In case of any company, which is registered after the commencement of this Act, in so far as the registered articles of such company do not exclude or modify the regulations contained in the model articles applicable to such company, those regulations shall, so far as applicable, be the regulations of that company in the same manner and to the extent as if they were contained in the duly registered articles of the company. 
7. Section not apply on company registered under any previous company law: Nothing in this section shall apply to the articles of a company registered under any previous company law, unless amended under this Act.

Doctrine of Indoor Management 

• According to this doctrine, persons dealing with the company cannot be assumed to have knowledge of internal problems of the company. He can simply assume that all the required things were get done properly in the company.
• Stakeholders need not enquire whether the necessary meeting was convened and held properly or whether necessary resolution was passed properly. They are entitled to take it for granted that the company had gone through all these proceedings in a regular manner.
• The doctrine helps protect external members from the company and states that the people are entitled to presume that internal proceedings are as per documents submitted with the Registrar of Companies.
• The doctrine of indoor management evolved around 150 years ago in the context of the doctrine of constructive notice. The role of doctrine of indoor management is opposed to the role of doctrine of constructive notice.  Whereas the doctrine of constructive notice protects a company against outsiders, the doctrine of indoor management protects outsiders against the actions of a company. This doctrine also is a possible safeguard against the possibility of abusing the doctrine of constructive notice.

Basis for Doctrine of Indoor Management 

1. What happens internal to a company is not a matter of public knowledge. An outsider can only presume the intentions of a company, but not know the information he/she is not privy to. 
2. If not for the doctrine, the company could escape creditors by denying the authority of officials to act on its behalf.

Exceptions to Doctrine of Indoor Management (Applicability of doctrine of constructive notice) 
Knowledge of irregularity: In case this ‘outsider’ has actual knowledge of irregularity within the company, the benefit under the rule of indoor management would no longer be available. In fact, he/she may well be considered part of the irregularity.
Negligence: If, with a minimum of effort, the irregularities within a company could be discovered, the benefit of the rule of indoor management would not apply. The protection of the rule is also not available in the circumstances company does not make proper inquiry.
Forgery: The rule does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery. A company can never be held bound for forgeries committed by its officers.