Explain the following terms/concepts.
1) Memorandum of Association
(1) Meaning: The Memorandum of Association is the basic, fundamental, and principal document of a company with which the company is registered. It serves as the constitution of the company. It defines the scope of the activities of the company, the relationship of the company with the outside world, its objects, the extent of and limitations to the powers of a company.
It contains six clauses, viz.,
(1) the name clause
(2) the address clause
(3) the objects clause
(4) the liability clause
(5) the capital clause
(6) the association or subscription clause.
The purpose of the Memorandum is to enable the shareholders, creditors and all those who deal with the company to know the permitted range of the activities of the company.
2) Articles of Association
The Articles of Association is the second important document of the company. This document is subordinate (Secondary) to Memorandum of Association which contains the by-Laws, the rules and regulations relating to the internal management of the company. It sets out the rights, duties and powers of the Board of Directors, officers and members of the company.
Articles of Association contains rules and regulations of issue of share, calls on shares, forfeiture of shares, procedure for transfer and transmission of shares and debentures, etc. It also lays down the powers, duties and rights of the governing body of the company.
(3) Other information :
Articles of Association establishes the relationship between company and members and between the members. Companies Act has shown the format in the form of Model Articles of Association, tables F, G, H, I and J for preparing the Articles of Association for different types of companies.
3) Name Clause
Ans:- The name clause mentions the name of the company. A company can choose any suitable name subject to the following restrictions:
(a) The name of the company should not resemble or be identical with the name of any other existing company.
(b) The name should not use words like ‘Government’, ‘State’, ‘Municipality’, Emperor, King, Royal, Imperial, President of India, or any words that denote the government support or the patronage of the ruling power.
(c) The name of a public company must end with the word ‘Limited’. The name of a private company must end with the words ‘Private Limited’.
(d) The name of the company should not be suggestive of the support of any political party.
(e) The name or its words should not offend any section of people or society.
(f) The name of the company should not be objectionable under the provisions of the Emblems and Name Act, 1950.
(g) The name of the company should not be related to a person, leader, or party.
(h) The company should suggest at least 3 names.
(i) The name of the company can be altered at any time by the company by passing a special resolution in general meeting and by getting the approval of the Central Government in Writing.
4) Object Clause
According to Section 13 (1) (d) of the Companies Act, 1956, the objects clause of the Memorandum of Association states the objects and purposes of the company for which it is formed. It lays down the boundaries for the operations and the powers of the company. The shareholders also come to know as to how and where their investment is employed.
The objects are classified as
(1) the main objects
(2) incidental objects and
(3) other objects. Under the ‘main objects’, the main objects to be pursued by the company on its incorporation are stated. In ‘incidental objects’, the secondary Objects to be achieved along with the attainment of the main objects are stated. Under the ‘other objects’, any other objects, not stated under ‘main objects’ and ‘incidental objects’ are stated.
5) Liability Clause
Ans:- As per Section 13 (2) of the Companies Act, 1956, the liability clause of the Memorandum of Association of a company limited by shares states that the liability of its shareholders is limited to the face value of shares purchased by them. It means the shareholders are liable to pay the unpaid amount on their shares.
In the initial stages, the company may make the liability of the Directors unlimited, if it is agreed by the Directors. This is to create confidence in the minds of the investors.
An unlimited company does not have this clause in the Memorandum of Association. In the case of a company limited by guarantee, this clause states that the liability of its members is limited to the amount of the guarantee given by them. The amount payable by each member in the case of the winding-up of the company is mentioned in this clause.
6) Capital Clause
1) The capital clause mentions the total share capital of the company with which it is registered, i.e. authorized capital. This is the maximum capital which the company is authorised to raise.
2) This clause also mentions types of shares, the face value of each type of shares, their number, etc. This clause further states the rights attached to each class of shares. According to provisions of the Companies Act, 1956, the company is permitted to issue two types of shares, viz. Equity shares and Preference shares. The company has to alter this clause if a company needs more funds than the amount of authorised capital.
3) The Articles of Association of a company gives power to the company to alter its capital clause. A company can alter capital clause by passing an ordinary resolution in the General meeting of the company.
7) Registered Office Clause
This clause of the Memorandum of Association mentions the state in which the registered office of the company is to be situated. The company which is incorporated must have its registered office within 30 days of its incorporation. The address of the registered office helps to :
(i) determine its domicile, nationality, and jurisdiction of the court under Which it comes
(ii) know the place where its various statutory books such as the register of members, register of debenture holders, register of charges, minutes books, documents, and papers, etc., must be kept
(iii) show where all notices and other communications can be sent.
8) Ultra Vires act
(1) the term ‘ultra’ means beyond and the term ‘Vires’ means powers. Accordingly ‘Ultra Vires’ means beyond or outside the scope of powers or authorities of Memorandum. Thus the doctrine of ultra Vires specifies that any activity done by a company which is beyond the power or authority of Memorandum or company will be null and void.
(2) The act which is ultra Vires is legally ineffective even if such an act is ratified by the members later on. For ultra Vires acts, the company cannot sue anybody in the court of law. Similarly, the third party for such an ultra Vires act cannot sue the company in the court of Law for any compensation. The members of the company can get an order issued from the court to stop the company from doing the ultra Vires act.
9) Doctrine of Indoor management
(1) In order to maintain business secrecy, it is obligatory on the part of the company management and its officers that certain information which is important and confidential should not be leaked or known to the outsiders. Therefore, directors and officers of the company must act in accordance with the information they get from the Memorandum of Association and Articles of Association.
(2) The doctrine indoor management explains that the third parties or persons entering into a contract With the company are not bound to inquire Whether the company or its officers have followed the internal proceedings mentioned in the Articles of the company or not. It is presumed that the company acts as per the provisions made in its Memorandum of Association and Articles of Association. Thus, the doctrine of indoor management safeguards the interest of outsiders Who deal with the company in good faith and without malafide interest.
(1) Prospectus refers to any document, statement, notice, circular or advertisement, issued by the company to invite the public to purchase its shares or debentures or to deposit money with it. In other words, a prospectus is a document issued by public company publishing the highlights and business prospects of the company and thereby wishing to sell newly issued shares or debentures to the public.
(2) It should satisfy two conditions, viz.
(a) It Invites subscriptions for shares or debentures invites deposits
(b) This invitation is made to the public at large. A private need not me a prospectus With the Registrar.
(c) Every person connected with the issue of the prospectus is liable for misstatement in the prospectus. Such liability may be a civil and/or criminal liability.
11) Mis-statements in Prospectus
1) Misstatement means and includes a false statement, irrelevant statement, or omission to disclose relevant statements. Prospectus constitutes the basis of the company’s contract between the company and the shareholders.
2) Hence. it should contain true and correct information. There should be a full and honest disclosure of all essential facts. A prospectus that contains false. misleading, ambiguous, or fraudulent statement of material facts, or which suppresses material facts. is considered to be a misleading prospectus.
12) Abridged Prospectus
(1) Accordingly, the abridged prospectus is a summary of the prospectus containing such details as prescribed by the Securities Exchange Board of India (SEBI). ‘The Companies Act 2013 defines Abridged prospectus as a memorandum containing such salient features of a prospectus as may be specified by the Securities Exchange Board by making regulations in this behalf.
(2) In brief, it contains the main contents of a prospectus but in brief. Abridged prospectus 15 always attached to the application form issued by the company while offering its securities. It is issued only in case of a public offer made by 3 companies.
13) Shelf Prospectus
(1) Shelf prospectus is a type of public offering where certain issuers (companies) are allowed to offer and sell securities to the public without a separate prospectus for each act of offering and without the‘ issue of further prospectus. Instead, there is a single prospectus for multiple, undefined future offerings. The prospectus may be used to offer securities for up to one year from the date of the first offering of securities under that prospectus.
(2) The issuer (company) is required to file an Information Memorandum which contains the latest information about the company With the ROC every time a subsequent offer of securities is made during the validity period of the shelf prospectus.
14) Red Herring Prospectus
(1) A red herring prospectus is a first or preliminary prospectus is a document submitted by the issuer (company) as a part of a public offering of securities. Potential investors may not place buy orders for the securities based solely on the information contained within the preliminary prospectus.
(2) Red herring prospectus is an incomplete prospectus as it does not include complete information on the quality of securities offered and issued the price of securities being offered. It is usually issued by the newly established company at the time of Initial Public Offer (IPO) of the company. A company must file a Red herring prospectus with Registrar of Companies (ROC) at least 3 days prior to the opening of the subscription list and the offer.