Incorporation of Company & Matters

Incidental thereto Chapter 2

Introduction to incorporation of company
A company is a separate legal entity from its members. It has perpetual
succession and can be incorporated only for lawful purposes. Prior to 31
incorporation, promotion activities are essential. Promotion signifies a number
of business operations familiar to the commercial world by which a company is
brought into existence (Whaley Bridge Printing Co. v. Green (1880) 5 B.D.
109).
Persons who undertake promotion activities in order to incorporate the company
are generally known as promoters. The section 2(69) of Companies Act, 20132
(herein after referred to as ‘the Act’) defines the term “Promoter” (already
mentioned in chapter 1 of module; elaborated here).

Promoter (Section 2(69))

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)],
Example: the solicitor, banker, accountant etc. are not regarded as promoters.

Statement – To be a promoter one necessarily be associated with the initial

formation of the company.
Answer - False, one who subsequently helps company to keep going, raise fund
& advice to board (other than in professional capacity) will equally be regarded
as a promoter.

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 Formation of Company (Section 3)
Earlier companies were granted rights by royal charter, but now a company may
be incorporated by either a special Act of the legislature or under the Companies
Act, 2013. Accordingly, an incorporated
company may be either Chartered Company,
Statutory Company, or Registered Company. Section 3
of the Act deals with registered companies.
32
FORMS OF COMPANIES
The Companies are broadly classified into categories shown below in figure.
Definitions of many of these are already covered under chapter 1 of this module.

Kind of companies

Sub-section 1 to section 3 provides that for lawful purpose, by subscribing their

name to memorandum and complying with requirement of this Act;
a. A public company may be formed by seven (7) or more persons
b. A private company may be formed by two (2) or more persons
c. A one person company (as a private company) may be formed by one (1)
person.

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 Further, sub-section 2 to section 3 provides that, a company formed as
specified above may be incorporated either as;
a. Companies limited by shares; or
b. Companies limited by guarantee; or
c. Unlimited liability companies.
Note: Limited liability companies may be Companies limited by guarantee as
well as shares.
Specified IFSC Public or Specified IFSC Private Company shall be formed only 33
as a company limited by shares. IFSC Company means a company licensed to
set up businesses in any International Financial Services Center in India, like in
Gujarat International Finance Tec-City.

ONE PERSON COMPANY (OPC)

The Companies Act, 2013 for the first time allowed the formation of a company
by just one person with limited liability,
called one person company: such a company is described
as a private company under section 3(1)(c). Further
section 3(1) along with rule 3 and 4 of the Companies
(Incorporation) Rules, 2014, provides certain provisions
specifically applicable in case of One Person Company listed below;

Who can form a one-person company?

Only a natural person, other than minor, who is an Indian citizen and whether
resident in India or otherwise shall be eligible to incorporate a One Person
Company.
Resident in India means a person who has stayed in India for a period of not
less than one hundred and twenty days during the immediately preceding
financial year.
OPC can't be incorporated or converted into a company under section 8 of the
Act. Further, OPC can't carry out Non-Banking Financial Investment activities
including investment in securities of any body-corporates.

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 Indicate Name & Consent Nominee
The memorandum of One Person Company shall also indicate the name of the
natural person, other than minor, who is an Indian citizen, whether resident in
India or otherwise (as nominee), along with his prior written consent in the
Form No. INC-3, who shall, in the event of the subscriber's death or his
incapacity to contract become the member of the company.
Authors Note: This provision is to ensure perpetual succession of legal existence
of OPC. 34

Example - Ms. Madhu formed an OPC wherein Mr. Sudan is nominee as his
name is specified in MOA along with his consent. Ms. Madhu declared insolvent,
pending to discharge insolvency, she becomes incompetent to contract, hence,
Mr. Sudan becomes the member of such OPC.

The name of such nominated person in Form No. INC-32 (SPICe) along with
consent of such nominee obtained in Form No. INC-3 and fee as provided in
the Companies (Registration offices and fees) Rules, 2014 shall be filed with
the Registrar at the time of incorporation of the company along with its
memorandum and articles.
Authors Note: A natural person shall not be member of more than a One
Person Company at any point of time and the said person shall not be a
nominee of more than a One Person Company

Where a natural person, being member in One Person Company in accordance

with this rule becomes a member in another such Company by virtue of his
being a nominee in that One Person Company, such person shall meet the above
specified criteria (can be member of only one OPC) within a period of one
hundred and eighty days.

Withdraw of Consent by Nominee

Such other person (nominee) may withdraw his consent by giving a notice in
writing to such sole member and to the One Person Company
In this case, the sole member shall nominate another person as nominee within
fifteen days of the receipt of the notice of withdrawal and shall send an
intimation of such nomination in writing to the Company, along with the
written consent of such other person so nominated in Form No. INC-3.

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 Authors Note: Despite name of such other (old nominee) and another person
(new nominee) specified in memorandum, any such change in the name of the
person shall not be deemed to be an alteration of the memorandum.

Replacing Nominee with another one

The member may change the name of the person nominated by him at any
time for any reason including in case of death or incapacity to contract the
nominee and nominate another person (new nominee) after obtaining the prior 35
consent of such another person in Form No. INC-3.
Members can do so by intimation in writing to the company.

This is not specified, either in Act or rules, whether intimation shall be prior
to making change or can be made afterward, but if we consider reasonable
construction the intimation shall be 'Prior Intimation'.
Any such change in the name of the person shall not be deemed to be an
alteration of the memorandum.

Example - Rajesh has formed a 'One Person Company (OPC), wherein his wife
Roopali is named 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.

When Nominee become Member

Where the sole member ceases to be the member and nominee becomes new
member, then such new member shall nominate within fifteen days of becoming
member, a person (new nominee) who shall in the event of his death or his
incapacity to contract become the member of such company.

Notice of change to Registrar

In all the three case of change discussed above (Withdraw of Consent by
Nominee, Replacing Nominee with another one and When Nominee become
Member) the company within thirty days of receipt of notice of withdrawal of

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 consent by nominee, intimation of change of nominee from member, or
cessation, shall file the notice with the Registrar of such withdrawal of consent,
change or cessation respectively and intimate the name of such another person
(new nominee) in Form No. INC-4 along with the fee as provided in the
Companies (Registration offices and fees) Rules, 2014 along with the prior
written consent of such another person so nominated in Form No. INC-3.

Authors Note: All the notices and intimations required above shall be in writing 36
only, whether specific form provided or otherwise.

Illustration (True/False)
Statement-Even a Non-Resident Indian can form and become a member of OPC.
Answer - True, Rule 3(1) of The Companies (Incorporation) Rules, 2014.
Only a natural person, other than a minor, who is an Indian citizen and whether
resident in India or otherwise shall be eligible to incorporate a One Person
Company.

Additional reading
Relaxations available to an OPC include:
• Not required to prepare a cash-flow statement with effect of section
2(40).
• The annual return furnished under section 92 can be signed by the
Director and not necessarily a Company Secretary, even abridged annual
return may be prescribed.
• Further, following the similar line, section 134 provides it would suffice
if one director signs the audited financial statements and an abridged
form of director report may be prescribed.
• Holding an annual general meeting as required under section 96 is not
necessary in case of OPC. Moreover, certain specific provisions related to
general meetings and extraordinary general meetings, specified under
sections 100 to 111 not applicable to OPC.
• Even relaxation is also there in convening board meetings section 173
requires an OPC to hold only one meeting of the Board of Directors in
each half of a calendar year.

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 • Vide section 137, the OPC are allowed to file financial statements within
six months from the close of the financial year as against 30 days.

MEMBERS SEVERALLY LIABLE IN CERTAIN CASES i.e.

REDUCTION IN MINIMUM MEMBERSHIP [SECTION 3A]
Members may have limited or unlimited liability depending upon the nature of
the company. Generally, the members are jointly liable for the debt of company,
but they shall be severally liable for the payment of the debts of the company 37
and may be severally sued therefore; if at any time:
1. The number of members of a company is reduced below seven (7) and two
(2) in case of a public and private company, respectively; and
2. Such company carries on business for more than six months with reduced
number of members; and
3. Every such person who carries on business after those six months is cognizant
(aware) of the fact that business is carried reduced members
Such members are liable for the payment of the whole debts of the company
contracted during that time (after elapse of six months)

Example-Amar, Akbar, and Anthony along with five of their friends were
members of Harmony Limited. Amar and Akbar died on 18th August 2022,
resultantly members count reduced to 6 and everyone aware about it. Harmony
limited continued its operation without increasing members. In March 2023,
Company took loan for business operations, and defaulted in payment thereof.
The lender of such loan can sue company, or Anthony or any of the rest of
five friends, because members shall be severely liable for said loan in a given
case.

Illustration (True/False)
Statement - Members who knowingly operate the company for more than six
months with less than the minimum number of members specified in Section
3(1) are severely liable for the payment of all debts contracted by the company
during the period since the number of members was first reduced.
Answer-False, refer section 3A of the Act. Such members are liable severally
for the payment of the whole debts of the company contracted during that
time (after elapse of six months)

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 INCORPORATION OF COMPANY [SECTION 7]
Section 7 of the Act provides for the procedure to be followed for incorporation
of a company. The steps involved in the process of incorporation are enumerated
in Figure shown below (Steps for Incorporation). Majority of steps are covered
under section 7 while some other related to documents such as MOA and AOA
governed by section 4 and 5 respectively. Corresponding procedural aspects are
described by rule 12 to 18 of the Companies (Incorporation) Rules, 2014 and 38
Fees are notified through rule 12 of the Companies (Registration Offices and
Fees) Rules, 2014.

Steps for Incorporation

Note: Now, it is also required to submit a declaration that all the subscribers
have paid the value of shares agreed to be taken by him apart from filling of
verification of the registered office before the commencement of business.

FILING OF THE DOCUMENTS AND INFORMATION WITH

THE REGISTRAR [SUB-SECTION 1]
An application for registration of a company shall be filed, with the Registrar
within whose jurisdiction the registered office of the company is proposed to
be situated, in SPICE+ (Simplified Proforma for Incorporating company
Electronically Plus: INC- 32) along with the fee as provided under the Companies

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 (Registration offices and fees) Rules, 2014 accompanied by following documents
and information;

SPICe+ is an integrated Web form offering 10 services by 3 Central Govt.

Ministries & Departments. (Ministry of Corporate Affairs, Ministry of Labour
& Department of Revenue in the Ministry of Finance) thereby saving as many
procedures, time and cost for starting a business in India. SPICe+ is an initiative
towards Ease of Doing Business. Students may refer to FAQs on SPICe+ format 39
MCAs' website for more details
https://www.mca.gov.in/MinistryV2/spicefaq.html

The duly signed memorandum of association and articles of association

The memorandum (e-MOA in Form No. INC-33) and article (e-AOA in Form
No. INC-34) of company so furnished shall be duly signed by all the subscribers
to the memorandum in the manner prescribed by rule 13 of the Companies
(Incorporation) Rules, 2014 as stated below:
a. Each subscriber shall add his name, address, description & occupation, if any,
in the presence of at least one witness who shall attest the signature, shall
sign and add his name, address, description and occupation, if any.
b. Where a subscriber is illiterate, he shall affix his thumb impression or mark
which shall be described as such by the person, writing for him, who shall place
the name of the subscriber against or below the mark and authenticate it by
his own signature and he shall also write against the name of the subscriber,
the number of shares taken by him.
Note: The typewritten or printed particulars of the subscribers and witnesses
shall be allowed as if it is written, so long as appends signature or thumb
impression
с. Where the subscriber is a body corporate, the memorandum and articles of
association shall be signed by director, officer or employee of the body corporate
duly authorized in this behalf by a resolution of the board of directors.
d. Where the subscriber is a Limited Liability Partnership, it shall be signed by
a partner of the Limited Liability Partnership, duly authorized by a resolution
approved by all the partners of the Limited Liability Partnership:

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 Note: In either case c or d stated above, the person so authorized shall not,
at the same time, be a subscriber to the memorandum and articles of
Association

e.Where subscriber to the memorandum is a foreign national residing outside

India his signatures and address on the memorandum and articles of association
and proof of identity shall be notarized by a Notary (Public) with a certificate.
Further, if such person residing in a country outside the Commonwealth or 40
which is not a party to the Hague Apostille Convention, 1961, the certificate
of the Notary (Public) shall be authenticated by a Diplomatic or Consular
Officer.
f. Where subscriber to the memorandum is a foreign national residing outside
India and visited in India and intended to incorporate a company, in such case
the incorporation shall be allowed if he/she is having a valid Business Visa. In
case of Person is of Indian Origin or Overseas Citizen of India, requirement of
business Visa shall not be applicable.

Declaration of Compliance by Professional & Director, Manager or Secretary of

company
A declaration 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 shall be filled in Form No. INC-8 by:
a. an advocate, a chartered accountant, cost accountant or company secretary
in practice who is engaged in the formation of the company and
b.a person named in the articles as director, manager or secretary of the
company.

Declaration by subscribers to the memorandum and persons named as the first

directors
A declaration in Form No. INC-9 from each of the subscribers to the
memorandum and from persons named as the first directors (if any) in the
articles, stating that all the documents filed with the Registrar for registration

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 of the company contain information that is correct and complete and true to
the best of his knowledge and belief
a. He is not convicted of any offense 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,
41
Address for correspondence
The address for correspondence till its registered office is established.

Particulars of persons named as the first directors

The particulars ie name, including surname or family name, the Director
Identification Number (DIN), residential address, nationality and such other
particulars including proof of identity of each person mentioned in the articles
as first director of the company and his interest in other firms or bodies
corporate along with his consent (Form No. DIR-2) to act as director of the
company shall be filed in Form No. DIR-12 along with the fee as provided in
the Companies (Registration offices and fees) Rules, 2014.

Particulars of subscribers to the memorandum

The following particulars of every subscriber to the memorandum shall be filled;
a. Name (including surname or family name) and recent Photograph affixed
b. Father's/Mother's name
C. Nationality, Proof of nationality in case the subscriber is a foreign national
d. Date and Place of Birth (District and State)
e. educational qualification and Occupation
f. Permanent Account Number
g..Email id and Phone number of Subscriber
h.Permanent residential address and also Present address
i.Residential proof such as Bank Statement, Electricity Bill, Telephone / Mobile
Bill, provided that Bank statement Electricity bill, Telephone or Mobile bill shall
not be more than two months old

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 j. Proof of Identity (For Indian Nationals - Voter's identity card, Passport
copy, Driving License copy. Unique Identification Number (UIN) & for Foreign
nationals and Non Resident Indians - Passport)
k. If the subscriber is already a director or promoter of a company(s), the
particulars relating to name of the company; Corporate Identity Number;
Whether interested as a director or promoter

Where the subscriber to the memorandum is a body corporate, then the 42

following particulars shall be filed with the Registrar
a. The name of the body corporate and Corporate Identity Number of the
Company or Registration number of the body corporate, if any
b. GLN, if any
C. The registered office address or principal place of business
d. E-mail Id
e. If the body corporate is a company, certified true copy of the board
resolution specifying inter-alia the authorization to subscribe to the MOA
f. If the body corporate is a limited liability partnership or partnership firm,
certified true copy of the resolution agreed to by all the partners specifying
inter alia the authorization to subscribe to the MOA
g. In case of foreign bodies corporate, the details relating to the copy of
certificate of incorporation of the foreign body corporate; & the registered
office address.

As per rule 12 of the Companies (Incorporation) Rules, 2014

In case any of the objects of a company requires registration or approval from
sectoral regulators such as the RBI and SEBI, then such registration or approval
shall be obtained by the proposed company before pursuing such objects and a
declaration in this behalf shall be submitted at the stage of incorporation.
In case of a Company being incorporated as a Nidhi, the declaration by the
Central Government under Section 406 of the Act shall be obtained by the
Nidhi before commencing the business and a declaration in this behalf shall be
submitted at the stage of incorporation by the Company.

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 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 Form No. INC-11 to the effect that the proposed company
is incorporated under this Act. Certificate of Incorporation shall mention
permanent account number of the company where if it is issued by the Income-
tax Department
43
Practical Insight Certificate of Incorporation
Students are advised to take note; The Certificate contains the name of the
company, the date of its issue, CIN (Corporate Identity Number) and the
signature of the Registrar with his seal.
Certificate of incorporation is evidence of registration
(existence of separate legal entity with perpetual
succession). Its effects are highlighted by section 9,
explained later in this chapter. Earlier, the certificate
of incorporation was considered as conclusive proof,
but as per the Companies Act, 2013, certificate of
Incorporation is not conclusive proof of everything prior to incorporation being
in order. Sub-section (6) and (7) of section 7 signify this understanding

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 of incorporation.
CIN is a 21 alpha-numeric digit based unique identification number, comprising
data sections/elements that reveals the basis aspects about the company.

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 Example - Decode the CIN
CIN of Infosys Limited is L85110KA1981PLC013115
The first character - L (reveals listing status, L for listed and U for unlisted,
for instance Infosys is Listed one)
The next five digits - 85110
The next two letters - KA (reveals the Indian state where the company is
registered, for instance KA is for Karnataka)
The next four digits - 1981 (reveals the year of incorporation of a company) 44
The next three characters - PLC (reveals the company classification - PLC for
public,
PTC for private, FTC for foreign, and GOI for government)
The last six digits-013115 (reveals registration number with concerned ROC)

Maintenance of copies of all documents and information

The company shall maintain and preserve copies of all the documents and
information as originally filed at its registered office, till its dissolution under
this Act.

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.

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
a. furnishing any false or incorrect information or representation or
b. by suppressing any material fact or information in any of the documents or
declaration filed or made for incorporating such company, or
c. by any fraudulent action

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 Then, 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.

ORDER OF THE TRIBUNAL

Where a company has been got incorporated by
a.furnishing false or incorrect information or representation, or
b. by suppressing any material fact or information in any of the documents or 45
declaration filed or made for incorporating such company or
c. by any fraudulent action,
Then, the tribunal (NCLT) on being satisfied that the situation so warrants,
in response to an application made to it, may pass order as it may deem fit
including;
a. 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.winding up of the company; or

Provided that before making any such order:

a. the company shall be given a reasonable opportunity of being heard in the
matter; and
b. The Tribunal shall take into consideration the transactions entered into by
the company, including the obligations, if any, contracted or payment of any
liability Tribunal means the National Company Law Tribunal (NCLT) constituted
on 1 June, 2016 under section 408 of the Companies Act, 2013. The NCLT
is a quasi-judicial
body in India that adjudicates issues relating to companies in India.

Example - The Certificate of incorporation is not the conclusive proof with

respect to the legality of the objects of the company mentioned in the objects
clause of the memorandum of association. As such, if a company has been
registered whose objects are illegal, the incorporation does not validate the

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 illegal objects. In such a case, the only remedy available is to wind up the
company.

Formation of companies with charitable objects, etc. [section

8]
The underlying purpose of formation of a company is not always making profit
through operating economic activities, it may have charitable or social objectives.
To illustrate, Tata Foundation (CIN U85191MH2014NPL253500) and Azim 46
Premji Foundation (CIN U93090KA2001NPL028740). Students are advised
to take note that 5 data sections of both the CIN comprises NPL, which
signify Not-for-Profit License Company.
Such companies are licensed by Central Government under section 8 of the
Companies Act, 2013, relevant provisions of section 8 and applicable rules
thereto are described below.

Note: The power of *Central Government under section 8 delegated to:

(i) ROCs to the extent and for purpose of:
• sub-section (1);
• clause (i) to sub-section (4), except for alteration of memorandum in
case of conversion into another kind of company; and
• sub-section (5)
(ii)Regional Directors to the extent and for purpose of clause (1) to sub-
section (4), for alteration of memorandum in case of conversion into another
kind of company; and sub-section (6)

Who can issue and get the license under section 8(1)?
As per section 8, the Central Government (ROC in its behalf) may grant such
a license if it is proved to the satisfaction that a person or an association of
persons proposed to be registered under this Act as a limited company
a. 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,
b. intends to apply its profits (if any) or other income in promoting its objects;
and
C. intends to prohibit payment of any dividend to its members.

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 Note: The use of the word 'person' appears to allow even a single person to
form a company for the objects specified. However, as discussed earlier also
(under heading 'OPC' of this chapter) that rule 3(5) of the Companies
(Incorporation) Rules, 2014 prohibits the OPC to be incorporated or converted
into a company under section 8. Likewise, as per section 2(85), a small
company cannot be incorporated or converted into a section 8 company. A firm
may be a member of the company registered under section 8. 47
Although members' liability is limited, the words 'Limited' or 'Private Limited'
shall not be added to its name. But on registration, the company shall enjoy
the same privileges and obligations as of a limited company.
License issued may on such conditions as Central Government (ROC) deems fit.

Registration of company using license

After granting license, an application shall be made to the registrar under
section 8(1) itself for registration of the company in the manner specified in
rule 19 of the Companies (Incorporation) Rules 2014.

Application for registration

A person or an association of persons desirous of incorporating a company with
limited liability under section 8(1), shall make an application to registrar in
Form SPICE+ (Simplified Proforma for Incorporating company Electronically Plus:
INC- 32) along with the fee as provided in the Companies (Registration offices
and fees) Rules, 2014.

Supporting document along with Application

The application furnished as specified above shall be accompanied by the following
documents;
a. The memorandum and articles of association of the proposed company in the
Form No. INC-13 and Form No. INC-31, respectively.
b. An estimate of the future annual income and expenditure of the company
for next three years, specifying the sources of the income and the objects of
the expenditure;

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 C. The declaration is by an Advocate, a Chartered Accountant, cost accountant
or Company Secretary in practice Form No. INC-14 and by each of the persons
making the application in Form No. INC-15, that:
• the memorandum and articles of association have been drawn up in
conformity with the provisions of section 8 and rules made thereunder
and
• all the requirements of the Act and the rules made thereunder relating
to registration of the company under section 8 and matters incidental 48
or supplemental thereto have been complied with;

Alteration of memorandum permission of government and articles

requires prior
A company registered under this section requires prior permission from;
a. Central Government (power delegated to regional directors) for alteration
of its memorandum and
b. Central Government (power delegated to ROCs) for alteration of its articles.

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
in rule 21 and 22 of the Companies (Incorporation) Rule 2014 as described
below,
a. A company shall pass a special resolution at a general meeting for approving
such conversion
b. An explanatory statement to notice of such general meeting must set-out
the details on the reason for such conversion.
C. The company shall file an application in Form No. INC-18 with the Regional
Director with the fee along with a certified true copy of the special resolution
and a copy of the Notice convening the meeting including the explanatory
statement for approval for conversion.
Also attach the proof of serving of the notice served by registered post or
hand delivery, to:
• the Chief Commissioner of Income Tax having jurisdiction over the
company,
• Income Tax Officer who has jurisdiction over the company,

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 • the Charity Commissioner,
• the Chief Secretary of the State in which the registered office of the
company is situated,
• any organization or Department of the Central Government or State
Government or other authority under whose jurisdiction the company has
been operating.
Note: If any of these authorities wish to make any representation to the
Regional Director, it shall do so within sixty days of the receipt of the notice, 49
after giving an opportunity to the Company.
d. A copy of the application with annexures as filed with the Regional Director
shall also be filed with the Registrar.

e. The company shall, within a week from the date of submitting the application
to the Regional Director, publish a notice at its own expense, and a copy of
The notice, as published, shall be sent forthwith to the Regional Director and
the said notice shall be in Form No. INC-19 and shall be published; at least
once in a vernacular newspaper in the principal vernacular language of the district
in which the registered office of the company is situated, and having a wide
circulation in that district, and at least once in English language in an English
newspaper having a wide circulation in that district; and on the website of the
company, if any, and as may be notified or directed by the Central Government.

f. The company should have filed all its financial statements and Annual Returns
up to the financial year preceding the submission of the application to the
Regional Director and all other returns required to be filed under the Act up
to the date of submitting the application to the Regional Director

Note: In the event the application is made after the expiry of three months
from the date of preceding financial year to which the financial statement has
been filed, a statement of the financial position duly certified by chartered
accountant made up to a date not preceding thirty days of filing the application
shall be attached.
g. On receipt of the application, and on being satisfied, the Regional Director
shall issue an order approving the conversion of the company into a company

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 of any other kind subject to such terms and conditions as may be imposed in
the facts and circumstances of each case.

h. Before imposing the conditions or rejecting the application, the company shall
be given a reasonable opportunity of being heard by the Regional Director

i. On receipt of the approval of the Regional Director, the company shall

convene a general meeting of its members to pass a special resolution for 50
amending its memorandum of association and articles of association and the
Company shall thereafter file these with the Registrar (with declaration to
adhere conditions if any, imposed by Regional Director)

j. On receipt of the documents referred above, the Registrar shall register the
documents and issue the fresh Certificate of Incorporation.

REVOCATION OF LICENSE
a. The Central Government (power delegated to regional director) may by order
revoke the license of the company where;
• the company contravenes any of the requirements or the conditions of
this sections subject to which a license is issued or
• the affairs of the company are conducted fraudulently, or in violation of
the objects of the company or prejudicial to public interest.

Authors Note: On revocation, the Registrar shall put 'Limited' or 'Private

Limited' against the company's name in the register.
Before such revocation a written notice must be served on such company and
opportunity to be heard in the matter shall be given.
b. Where a license is revoked and the Central Government is satisfied, that it
is essential in the public interest; then after giving a reasonable opportunity of
being heard; by order it may direct that
• Companies are wound up under this Act. Excess assets on the winding up
or dissolution, after the satisfaction of its debts and liabilities, may be
transferred to;
• Another company registered under this section and having similar
objects, subject to such conditions as the Tribunal may impose, or

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 • May be sold and proceeds thereof credited to the Insolvency and
Bankruptcy Fund formed under section 224 of the Insolvency and
Bankruptcy Code, 2016.
• Company be amalgamated with another company registered under this
section and having similar objects. The Central Government empowered
with overriding effects to provide the said amalgamation to form a single
entity with such constitution, properties, powers, rights, interest,
authorities and privileges and with such liabilities, duties and obligations 51
as may be specified in the order.

Penalty/ punishment in contravention

Penalty for offences under section 8 are summarised below;
Offence
o company makes any default in complying with any of the requirements
laid down in this section
o the affairs of the company were conducted fraudulently
Penalty
o company shall, be punishable with fine varying from ten lakh rupees to
one crore rupees
o directors and every officer of the company who is in default shall be
punishable with fine varying from twenty-five thousand rupees to twenty-
five lakh rupees
o every officer in default shall be liable for action under section 447

Figure- summary of sub-section 6 to 11 of section 8

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 Additional reading
Relaxations available to a Section 8 Company include;
• Can call its general meeting by giving a clear 14 days' notice instead of
21 days.
• Requirement of minimum number of directors, independent directors etc.
does not apply.
• Need not constitute Nomination and Remuneration Committee and
Shareholders Relationship Committee. 52

Effect of Registration (Section 9)

Once company is incorporated then from the date of incorporation mentioned
in COI, it become a Body corporate having

Power to acquire
hold, dispose
To sue &
property both Power to
Separate Perpetual be
movable, enter into
legal entity succession sued by its
immovable, contracts.
tangible own name.
& intangible.

Certain case laws

HariNagar Sugar Mills Company is separate from its incorporators &
Ltd. vs. S.S. Jhunjhunwala those exists contract between company & its
members
State Trading Corporation of Company is separate from its members.
India vs. Commercial Tax
Officer
Spencer & Co. Ltd. If entire share capital is held by another
Madras vs. CWT Madras company,
still both will have separate entities.

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 Heavy Electrical Union vs. If the govt/president holds the entire share
State of Bihar capital of the company, the company is
separate & not its agent.

53

Memorandum of Association (Section 4)

Memorandum of association (MOA) is the fundamental document for the
formation of the company, hence considered as its charter or constitution.
Memorandum defines the relationship of the company with outsiders because it
enables all those who deal with the company to know what its powers are and
what activities it can engage in.
The memorandum shall contain the following clauses:
a. Name Clause
b. Situation Clause (also called registered office clause)
c. Objects Clause
d. Liability Clause
e.Capital Clause (applicable, if company is formed with share capital)
f. Association Clause or Subscription Clause (specifically drafted in case of OPC)
g. Nomination Clause (applicable, in case of OPC)

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 Section 4 of the Act along with relevant rules from the Companies
(Incorporation) Rules 2014, provides for the requirements with respect to
memorandum.

NAME CLAUSE [SECTION 4 (1) (a) READ WITH SUB-SECTION 2

TO 5]
The name of the company with the last word "Limited" in the case of a public
limited company, or "Private Limited" in the case of a private limited company. 54
The above clause is not applicable in case of section 8 companies. In case of
Specified IFSC Public Company" & IFSC Private Company, name shall have the
suffix, "International Financial Service Company" or "IFSC"

Application for reserving name for proposed company [sub-section 4]

A person may make an application in SPICe+ (Simplified Proforma for
Incorporating Company Electronically Plus: INC-32) accompanied by fee, as
provided in the Companies (Registration Offices and Fees) Rules, 2014, to the
Registrar for reservation of a name set out in the application as name of the
proposed company.
Resubmission shall be allowed within 15 days, for rectification of defect, if any.

Application for reserving the name for the changing name of existing company
[sub-section 4]
A person may make an application, using web service RUN (Reserve Unique
Name) along with fee as provided in the Companies (Registration Offices and
Fees) Rules, 2014, to the Registrar for the reservation of a name set out in
the application as the name to which the company proposes to change its name.
Resubmission shall be allowed within 15 days, for rectification of defect, if any.

Restriction regarding names and use of words & expressions therein [sub-
section 2 and 3]
Sub-section 2 states that the name mentioned in the memorandum shall not
be,
a. Identical with or resemble too nearly to the name of an existing company
registered under this Act or any previous company law; or
b. Such, use of which by the company will constitute an offence under any law
for the time being in force; or

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 c. Such, use of which by the company is undesirable in the opinion of the
Central Government (this power of Central Government has been delegated to
ROC)
Further, sub-section 3 provides, unless the previous approval of the Central
Government has been obtained; a company shall not be registered with that
name;
55
d. Which contains any word or expression that 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

e. Which includes words or expressions namely Board, Commission; Authority;

Undertaking: National Union; Central; Federal Republic; President; Rashtrapati;
Small Scale Industries: Khadi and Village Industries Corporation; Financial
Corporation and the like; Municipal:: Development Authority, Prime Minister
or Chief Minister, Minister; Nation; Forest corporation; Development Scheme;
Statute or Statutory, Court or Judiciary, Governor, Bureau; and the use of
word Scheme with the name of Government (s), State, India, Bharat or any
Government authority or in any manner resembling with the schemes launched
by Central, State or local Governments and authorities.

A name is said to 'resemble' when difference is only and only of

a. Plural or singular form of words in one or both names (Green Technology
Ltd. is the same as Greens Technology Ltd, and Greens Technologies Ltd.)

b.Type and case of letters, spacing between letters, and punctuation marks
used in one or both names (ABC Ltd. is the same as A.B.C. Ltd. and A B C
Ltd.)

c.Use of different tenses in one or both names (Ascend Solutions Ltd. is the
same as Ascended Solutions Ltd. and Ascending Solutions Ltd.)

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 d. Slight variation in the spelling of the two names including a grammatical
variation thereof (Disc Solutions Ltd. is same as Disk Solutions Ltd. but it is
not same as Disco Solutions Ltd)

e.Use of different phonetic spellings including use of misspelt words of an

expression (Bee Kay Ltd is same as BK Ltd, Be Kay Ltd., B Kay Ltd., Bee K
Ltd. B.K. Ltd. and Beee Kay Ltd)
56
f.Complete translation or transliteration, and not part thereof, of an existing
name, in Hindi or in English (National Electricity Corporation Ltd. is same as
Rashtriya Vidyut Nigam Ltd.)

g. Use of host name such as 'www' or a domain extension such as net org. 'dot'
or 'com in one or both names (Ultra Solutions Ltd. is the same as
Ultrasolutions.com Ltd. But Supreme Ultra Solutions Ltd. is not the same as
Ultrasolutions.com Ltd.)

h. The order of words in the names (Ravi Builders and Contractors Ltd. is the
same as Ravi Contractors and Builders Ltd.)

i. Use of the definite or indefinite article in one or both names (Congenial

Tours Ltd. is same as A Congenial Tours Ltd. and The Congenial Tours Ltd.
But Isha Industries Limited is not the same as Anisha Industries Limited.)

j. Addition of the name of a place to an existing name, which does not contain
the name of any place; (If Salvage Technologies Ltd. is an existing name, it is
the same as Salvage Technologies Delhi Ltd. But Retro Pharmaceuticals Ranchi
Ltd. is not the same as Retro Pharmaceuticals Chennai Ltd.)

k. addition, deletion, or modification of numerals or expressions denoting

numerals in an existing name, unless the numeral represents any brand (Thunder
Services Ltd is the same as Thunder 11 Services Ltd and One Thunder Services
Ltd.)
Students may also refer to 23 instances specified in rule 8A of the Companies
(Incorporation) Rules 2014 that tantamount to "undesirable names

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 Reservation of name [sub-section 5]
Upon receipt of an application 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.
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.
1. While allotting names, the Registrar of Companies concerned should exercise 57
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.
14
2. An application for extension of reservation of name under rule 9A of the
Companies (Incorporation) Rules 2014 can be made before expiry of 20 days;
a. For another 20 days (total of 40 days) with fee of 1000, which may be
further extended by another 20 days (total of 60 days) with fee of 2000.
Or
b. For another 40 days (total of 60 days) with fee of 3000

Cancellation of reserved name [sub-section 5]

Where after reservation of name, it is found that name was applied by furnishing
wrong or incorrect information, then
a. 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;
b. if the company has been incorporated, the Registrar may, after giving the
company an opportunity of being heard;
• Either direct the company to change its name within a period of 3
months, after passing an ordinary resolution;
• Take action for striking off the name of the company from the register
of companies; or
• Make a petition for winding up of the company.

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 Example: Mr. Anil Desai, has applied for reservation of company name with a
prefix "Sanwariya". He claimed that the Prefix "Sanwariya" is a registered
trademark in his name. Later on, it is found that the said prefix is not
registered with Mr. Anil Desai, however, has formed a company by giving
incorrect documents/ information while applying the name of the company. In
such a case, the Registrar shall take action as per the provisions of the Act
after giving the opportunity of being heard.
58
SITUATION CLAUSE - SECTION 4 (1) (b)
Section 4(1)(b) requires, the memorandum of a company shall mention the
name of the state where the registered office is proposed to be situated.
The situation (place) of registered office is important from perspective of
a. Establishing the domicile of a company for the purpose of determining
jurisdictions in context to compliance (ROC, RD etc.), judicial aspects (bench
of NCLT, high court etc.), fiscal aspects (taxation), and for many other
purposes.
b. Place at which the company's statutory books must normally be kept (in
case of a public company, a general meeting is also required to be conducted at
a registered office or in the city where it is situated).
c. Act as the address to which notices and other communications can be sent.
A company shall, within thirty days 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.

Object clause & doctrine of ultra vires

Section 4(1)(c), requires the memorandum of a company shall state the objects
for which the company is proposed to be incorporated and any matter considered
necessary in furtherance thereof.
Specified IFSC Public Company & IFSC Private company shall state its objects
to do financial services activities as permitted under the Special Economic Zones
Act, 2005 read with SEZ Rules, 2006 and any matter considered necessary
in furtherance thereof in accordance with licence to operate, from International
Financial Services Centre located in an approved multi services Special Economic
Zone, granted by the RBI, SEBI, or IRDA.

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 A company can't depart away to do anything beyond or outside its objects
stated in memorandum and if any act done beyond that will be ultra vires and
void, the same can't be ratified even by the assent of the whole body of
shareholders.

Note: Acts ultra-vires to the authority of the directors may be ratified by

the company." Articles provide for regulations inside scope established by MOA,
hence acts beyond (ultra-vires) the articles, can be ratified by the shareholders 59
provided the relevant provisions are not beyond the memorandum. To illustrate,
One of the directors is authorised to issue a cheque of 10000, but he issued
for 12000, the company can ratify so.

It is worth noting here that Memorandum of company can be altered to widen

the scope of objects, but such alteration shall have prospective effect only; not
the retrospective, hence an act once ultra-vires remain so ever.
A company may do anything which is incidental to and consequential upon the
objects specified and such act will not be an ultra vires act. To illustrate for
trade one has to rent or own a building, issue invoices, make and receive
payments.

Essence of the Doctrine of Ultra Vires

The Doctrine of Ultra Vires is meant to protect shareholders and the creditors
of the company or anyone who deals with the company.

Enunciation of Doctrine of Ultra Vires

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."
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

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 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 the making generally of such contracts as are connected with the
business of mechanical engineers. The Court held that if every shareholder of 60
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.

Effects of Doctrine of Ultra Vires

The key effect will be as under;
a. Whenever an ultra vires act has been or is about to be undertaken, any
member of the company can get an injunction to restrain it from proceeding
with it.
b. Neither party (even outsider) can sue for enforcement or specific
performance of such agreement. Reason explained under heading Constructive
Notice

LIABILITY CLAUSE
Section 4(1)(d) requires, the memorandum of a company shall state;
a. In the case of a company limited by shares the liability of its members is
limited to the amount unpaid, if any, on the shares held by them; and
b. In the case of a company limited by guarantee, the amount up to which
each member undertakes to contribute:
• 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

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 • to the costs, charges and expenses of winding-up and for adjustment of
the rights of the contributories among themselves

Note: Those shareholders who are members of the company at the time of its
winding-up are included in list 'A'. They are primarily liable for making payment
to the company at the time of its winding-up. While list 'B' consists of those
persons who were the members of the company during the 12 months preceding
the date of winding-up. B list contributories are liable to contribute if the 61
amount realised from the contributories of list 'A' is not sufficient to discharge
the liabilities of the company.

Example - Modern Furniture limited, a company limited by shares having share

capital divided into shares with face value of ₹ 10 each, out of which 8 is called
up. Mr. Singh who is having 200 share paid all ₹ 8 on each of share he hold,
while Ms. Sarla owning 100 shares paid 10 (Rupee 2 in advance); whereas Mr.
Sanju owning 250 shares paid * 6 per share (7 2 in arrear per share). Liability
of Mr. Singh, Ms. Sarla, and Mr. Sanju shall be maximum up to 400, Nil, and
1000 only; respectively.

CAPITAL CLAUSE
Section 4 (1) (e) (i) requires, in the case of a company having a share capital,
the memorandum of a company shall state;
a. The amount of share capital with which the company is to be registered
(usually termed as authorised or nominal capital); and
b.The division thereof into shares of a fixed amount (i.e. face value and number
of shares); and
c. The number of shares which the subscribers to the memorandum agree to
subscribe which shall not be less than one share.

SUBSCRIPTION CLAUSE
Section 4 (1) (e) (ii) requires, the memorandum of a company shall state,
the number of shares each subscriber to the memorandum intends to take,
indicated opposite his name, in the case of a company having a share capital.

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 Nomination clause (only in case of one person company)
Section 4 (1) (f), requires, the memorandum of a company shall state the
name of the person (nominee) who, in the event of death of the subscriber,
shall become the member of the company, in the case of One Person Company.
Note: This provision is corresponding to the first proviso to section 3 (1)
already discussed earlier in this chapter.

Forms and schedule related to memorandum [sub-section 6] 62

The memorandum of a company shall be in respective forms specified in Tables
A, B, C, D and E in Schedule I to the Act, as the case shown in figure;

Forms of MOA

1. As per section 399 of the Act, a memorandum is a public document.

Consequently, every person entering into a contract with the company is
presumed to have the knowledge of the conditions contained therein.
2. As per section 4 (7), 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.

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 Article of Association (Section 5)
Actually, articles of association of a company contains internal rules and
regulations of the company. It is complementary to Memorandum and together
give effect as charter of the company. Article establish a contract between the
company and the members and between the members inter se. This contract
governs the ordinary rights and obligations incidental to membership in the
company (Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd.
AIR 1971 SC 422) 63

Section 5 of the Companies Act, 2013 and rule 10 and 11 of the Companies
(Incorporation) Rules, 2014 seeks to provide the contents and model of articles
of association. The provisions are state below;

Contents and matters to be included [sub-section 1 and 2]

The articles of a company shall contain;
a. The regulations for management of the company.
b. Such matters as may be prescribed (rules 11 of the Companies (Incorporation)
Rules, 2014 refers to the matters specified in the model forms given under
schedule I to the Act).
However, a company may also include such additional matters in its articles as
may be considered necessary for its management.

Provision for entrenchment [sub-section 3 to 5]

Entrenchment is the chronic or deep-rooted fact of an attitude, habit, or belief
that is firmly established or accustomed, therefore it become difficult or unlikely
to change. To illustrate – Men don’t cry
Entrenchment may be possible for processes, as well as procedures in both way;
that processes are so well established, it become difficult to change them or
make process of change so rigid that process become well established.
Students, here we are studying the word entrenchment with sense of making
the process of alteration in articles more difficult, in order to enhance the
protection.

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 Usually, an article of association may be altered by passing special resolution
but entrenchment makes it more difficult to change the articles, in manner
specified ahead;

Article may contain provisions for entrenchment [Sub-section 3]

The articles may provide that specified provisions contained in it may be altered
only if conditions that are more restrictive and harder than those applicable in
the case of a special resolution, are met or complied with. 64

Manner of inclusion of the entrenchment provision [Sub-section 4]

The provisions for entrenchment shall only be made either:
a. On formation of a company, or
b. By an amendment in the articles agreed to
♦ By all the members of the company in the case of a private company
&
♦ By a special resolution in the case of a public company

Notice to the registrar of the entrenchment provision [Sub-section 5 read with

Rule 10 of the Companies (Incorporation) Rules, 2014]
The company shall give notice to the Registrar of entrenchment provisions included in
article
a. In the SPICe+(Simplified Proforma for Incorporating company Electronically Plus:
INC-32), along with the fee as provided in the Companies (Registration offices and
fees) Rules, 2014 at the time of incorporation of the company, and
b. In case of existing companies, in Form No. MGT-14 within thirty days from the
date of entrenchment of the articles, along with the fee as provided in the Companies
(Registration offices and fees) Rules, 2014.

Model forms of articles [sub-section 6 to 8]

Sub-section 6 provides that the articles of a company shall be in respective
forms specified in Tables, F, G, H, I and J in Schedule I to the Act as specified
in figure. Such forms are called model forms.
Further, sub-section 7 provides leeway to company, in adopting all or any of
the regulations contained in the model articles applicable to such company.

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 Forms of AOA

65

Students are advised to take note:

Sub-section 8 provides that 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 - Either
exclude or modify expressly or else it applies what stated in model applicable
to company.
Sub-section 9 restricts the scope of section to the articles either registered
or amended under this Act - Hence no provision of this section (section 5)
shall be applicable to articles registered under previous company law; provided
not amended under this Act.

Illustration - Question & Answer

Question - Highlight differences between the MOA and AOA
Answer - The key differences between the MOA and AOA includes;
1. Content - The memorandum contains the fundamental conditions as basis of
incorporation. It lays down the parameters that define relation of company
with outsiders. The Articles contain internal regulations of the company; hence
regulate the relationship between company and the members and members inter
se.

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 2. Supremacy - Memorandum cannot include any clause that is contrary to the
provisions of the law, whereas the articles shall be subordinate to both the law
and memorandum. Therefore, in case on conflict among the two, the MOA
shall prevail.
3. Scope -Memorandum lays down the scope beyond which the activities of the
company cannot go. An act done by a company beyond the scope of the
memorandum are ultra vires and void. They cannot be ratified even by all the
shareholders. Articles provide for regulations inside scope established by MOA, 66
hence acts beyond the articles can be ratified by the shareholders provided the
relevant provisions are not beyond the memorandum.

DOCTRINE OF CONSTRUCTIVE NOTICE

Essence of Doctrine of Constructive Notice
All those who are dealing with company deemed to be aware of what is stated
in its MOA and AOA, in its true perspective, because both these documents
are public documents.
Section 399 (is not part of syllabus, but essential to develop understanding.)
provides that the Memorandum and Articles when registered with Registrar of
Companies ‘become public documents’ and then they can be inspected by any
one by electronic means on payment of the prescribed fee.
Section 17 provides that a company shall on payment of the prescribed fee
send a copy of each of the following documents to a member within seven days
of the request being made by him
a. Memorandum;
b. Articles;
c. Every agreement and every resolution referred to in sub-section (1) of
section 117, if and so far, as they have not been embodied in the memorandum
and articles.
Any failure will make the company as well as every officer in default liable to
a fine of one thousand rupees for each day during which default continues or
one lac rupee whichever is less.

Enunciation of Doctrine of Constructive Notice

The doctrine of constructive notice is based on the rule laid down in (Ernest
v Nicholls). It was held for the first time that any person who is dealing with

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 the company is deemed to be familiar with the contents of all the public
documents of the company. The memorandum and the articles of association
of every company are registered with the Registrar of Companies. The office
of the Registrar is a public office. Hence, the memorandum and the articles of
association become public documents. It is therefore the duty of person dealing
with a company to inspect its public documents and make sure that his contract
is in conformity with their provisions.
67
As observed by Lord Hatherley whether a person actually reads them or not,
he is to be in the same position as if he had read them.

Effect of Doctrine of Constructive Notice

Every person (dealing with company) shall be presumed to know the contents
of the documents and understood them in their true perspective. Absence of
notice of MOA and AOA cannot be an excuse to claim relief for outsiders.
Case Law: Kotla Venkataswamy v. Chinta Ramamurthy
Even if the party dealing with the company does not have actual notice of the
contents of these documents, it is presumed that he has an implied
(constructive) notice of them.

Example - One of the articles of a Modern Furniture Limited provides that a

cheque below 1 lac may be signed by single director but if above 1 lac shall be
signed by at-least two directors. Similar instructions issued to bank with which
MFL have account, as well. M/s Sagwan Wood Works, a vendor accepts a cheque
of 2.20 lacs, signed only by single director. Considering Doctrine of Constructive
Notice, the M/s Sagwan Wood Works (payee) has no right to claim, when
cheque will be returned without payment by bank.

Criticism of Doctrine of Constructive Notice

The 'Doctrine of Constructive Notice' is an unreal doctrine. People know a
company through its officers and not through its documents. Since it does not
take notice of the realities of business life, hence caused inconvenient for
business transaction.
To illustrate, where the directors or other officers of the company were
empowered under the articles to exercise certain powers subject only to certain

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 prior approvals or sanctions of the shareholders, it is difficult for an outsider
to ascertain whether necessary sanctions and approvals have been obtained
before a certain officer exercises his powers or not.
Therefore, to mitigate such a situation, those dealing with the company can
assume that if the directors or other officers are entering into those
transactions, they would have obtained the necessary sanctions. This is known
as the 'Doctrine of Indoor Management' or Turquand's Rule, and act as an
exception to the constructive notice. 68
The Europe Communities Act, 1972 has abrogated this doctrine through effect
of its section 9. Even in India also the Calcutta High Court (Charnock Collieries
Co Ltd v. Bholanath Dhar. ILR (1912) 39 Cal 810) enforced a security which
was not signed in accordance with the company's articles.

Doctrine of Indoor Management (DIM)

Essence of Doctrine of Indoor Management
The people who are dealing with company are entitled to presume that internal
proceedings and requirements has been duly met.

Enunciation of Doctrine of Indoor Management

The Doctrine of Indoor Management was first laid down in the case of Royal
British Bank v. Turquand.
The directors of a company were authorised by the articles to borrow on bonds
such sums of money as should from time to time, by a resolution of the
company in general meeting, be authorised to be borrowed. The directors gave
a bond to Turquand without the authority of any such resolution. The question
arose whether the company was liable on the bond. Held, the company was
liable on the bond, as Turquand was entitled to assume that the resolution of
the company in general meeting had been passed.

Rationale of Doctrine of Indoor Management

What happens internally in 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.
If not for the doctrine, the company could escape creditors by denying the
authority of officials to act on its behalf.

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 Exceptions:
1. Knowledge of irregularity: In case this ‘outsider’ has actual knowledge of
irregularity within the company, the benefit under DIM would no longer
be available. In fact, he/she may well be considered part of the
irregularity. Case Law: Howard vs. Patent Ivory Manufacturing co.

2. Negligence: If with a minimum of effort, the irregularities within a

company could be discovered, the benefit of the DIM would not apply. 69
The protection of the rule is also not available where the circumstances
surrounding the contract are so suspicious as to invite inquiry, and the
outsider dealing with the company does not make proper inquiry.
Case Law: Anand Bihari Lal vs Dinshaw.

3. 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. Case Law: Ruben v Great Fingall Consolidated.

4. Where the question is in regard to the very existence of an agency.

5. Where a pre-condition is required to be fulfilled before company itself

can exercise a particular power. In other words, the act done is not
merely ultra vires the directors/officers but ultra vires the company
itself.
Illustration The doctrine of indoor management is considered to be ______ to
the doctrine of constructive notice.
a. Exception b. Extension c. Alternative d. Not related
Answer – a. Exception

Act to Override Memorandum, Articles, etc. (Section 6)

The provisions of this Act shall have overridden effect to the provisions
contained in;
a. Memorandum of company; or
b. Articles of company; or
C. Any agreement executed by it; or

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 d. Any resolution passed by the company in general meeting or by its
Board of Directors
Whether the same be registered, executed or passed, as the case may be, before
or after the commencement of this Act
Any provision contained in the memorandum, articles, agreement or resolution,
to the extent in conflict to the provisions of the Act, shall be void.

Example - Section 123 declares that no dividend shall be paid by a company 70

except out of profits. The force of this section cannot be undone by any
provision in the articles of association, because the articles cannot sanction
something which is forbidden by the Act. Even still it attempts then shall be
void.

Authors Note: This section starts with saving clause i.e. “Save as otherwise
….”, means if any other section of the Act says that provisions contained in
the memorandum, articles, agreement or resolution is superior then we will
treat it accordingly.

Example - Section 47 of the Act deals with voting power of members. A

notification dated 5th June, 2015 says that section 47 is applicable to a
private company subject to its Article of Association (AOA). Now if AOA of a
private company says that section 47 is not applicable to it then, in this case
AOA will become superior and section 47 of the Act will not be applicable.

Effect of Memorandum and Articles (Section 10)

Sub-section 1 to Section 10 aims to impart contractual force to the
Memorandum and Articles. It provides, when the memorandum and articles got
registered; it shall bind the
a. Members to the company;
b. Company to the members;
c. Members to the members;
To observe all the provisions of the memorandum and of the articles, as
signatory thereof.

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 Example (Member to the Company)
The articles of association of the Steel Bros & Co Ltd contained clauses to the
effect that on the bankruptcy of a member his shares would be sold to a
person and at a price fixed by the directors. Borland, a shareholder, was
adjudicated bankrupt. His trustee in bankruptcy claimed that he (Borland) was
not bound by these provisions and should be at liberty to sell the shares at
their true value. But it was held that contracts contained in the articles of
association is one of the original incidents of the shares. Shares having been 71
purchased on those terms and conditions, it is impossible to say that those
terms and conditions are not to be observed. (Borland's Trustee v Steel Bros
& Co Ltd (1901) 1 Ch 279)

Example (Company to the Member)

The articles of the Odessa Waterworks Co provided that "the directors may,
with the sanction of the company at general meeting, declare a dividend to be
paid to the members". Instead of paying the dividend in cash to the shareholders
a resolution was passed to give them debenture bonds. In an action by Mr.
Wood, a member to restrain the directors from acting on the resolution, it
was held that "The question is whether that which is proposed to be done in
the present case is in accordance with the articles of association of the company.
Those articles provide that the directors may, with the sanction of a general
meeting, declare a dividend to be paid to shareholders. Prima facie that means
to be paid in cash. The debenture bonds proposed to be issued are not a
payment in cash." (Wood v Odessa Waterworks Co (1889) 42Ch D 636)
Example (Member to the Member)
Mr. Rayfield was a shareholder in a company. Clause 11 of the articles of
company required him to inform the directors of his intention to transfer his
shares in the company and which provided that the directors will take the said
shares equally between them at a fair value. In accordance with this provision
the Mr. Rayfield so notified the directors (who are members as well), who
contended that they were not bound to take and pay for the shares. They
said, articles could not impose such obligation upon them in their capacity as
directors. Their argument was set aside by the court by treating those directors
as members. Accordingly, the directors (being members) were compelled to take
the Mr. Rayfield’s shares at a fair value. (Rayfield v Hands (1958) 2 WLR
851)

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 Authors note: 1. Articles bind the members to the company and the company
to the members. But neither of them is bound to an outsider to give effect
to the articles. "No Article can constitute a contract between the company
and a third person.
Example - The articles of association of a company, La Trinidad contained a
clause to the effect that Browne should be a director and should not be
removable till after 1888. He was, however, removed earlier and had brought
an action to restrain the company from excluding him. It was held that there 72
was no contract between Browne and the company. No outsider can enforce
articles against the Company even if they purport to give him certain rights.
(Browne v La Trinidad (1887)37 Ch D 1)

2. Further sub-section 2 to section 10 provides, all monies payable by any

member to the company under the memorandum or articles shall be a debt due
from him to the company.
Example - A company can recover calls in arrear from a member as forcefully
as it is recovering loan due.

Alteration of Memorandum (Section 13)

Procedure of alteration of memorandum
Alteration includes the making of additions, omissions and substitutions. Section
13 of the Act along with Rules 29 to 32 of the Companies (Incorporation)
Rules, 2014 provides the provisions that deals with the alteration of the
memorandum, detailed below;

Alteration by special resolution [Sub-section 1]

Company may alter the provisions of its memorandum with the approval of the
members by a special resolution. Further, as per section 13(6) (a) company
shall file with the Registrar, such special resolution.

Name change of the company [Sub-section 2 and 3]

As per sub-section 1, any change in the name of a company shall be effected
only with the approval of the Central Government (power delegated to ROC
by Central Government) in writing in Form No. INC-24 along with fee.

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 However, no such approval shall be necessary where the change in the name of
the company is only the addition/deletion of the word "Private", on the
conversion of any one class of companies to another class in accordance with
the provisions of the Act.

The change of name shall not be allowed to a company which has not filed
annual returns or financial statements due for filing with the Registrar or which
has failed to pay or repay matured deposits or debentures or interest thereon. 73
Once the necessary documents filled or payment or repayment made then change
shall be allowed.

As per clause (b) to sub-section 6 to section 13, the approval from the Central
Government, shall be filed with registrar by the company. Practically importance
of provision is demeaned as power of central government is already delegated
to ROC.
Further, as per sub-section 2, on any change in the name of a company, the
Registrar shall enter the new name in the register of companies in place of the
old name and issue a fresh certificate of incorporation in the Form No. INC-
25 with the new name and the change in the name shall be complete and
effective only on the issue of such a certificate.

Example: Tata Sky Limited Tata Sky Limited changed its Name to Tata Play
Limited (CIN U92120MH2001PLC130365).

Industrial Insight
On August 24, 1910, a company was registered in India under the name Imperial
Tobacco Company of India Limited. As the Company's ownership progressively
Indianised, the name of the Company was changed to India Tobacco Company
Limited in 1970 and then to I.T.C. Limited in 1974. In recognition of the ITC's
multi- business portfolio encompassing a wide range of businesses, the full stops
in the Company's name were removed effective September 18, 2001. The
Company now stands rechristened 'ITC Limited,' where 'ITC' is today no longer
an acronym or an initialised form.

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 Students are advised to that note that: Even If a company has to rectify its
name under section 16, then also, nothing shall prevent such company from
subsequently changing its name in accordance with the provisions of section 13.

Rectification of Name of Company [Section 16]

Where Central Government (power of Central Government under this section
conferred (delegated) upon Regional Directors by section 458 of the Act) is
of opinion that name (original or revised/new) of company is identical with or 74
too nearly resembles to the name by which a company in existence;
a. On its own or
b. On an application by a proprietor of already registered trade mark under the
Trade Marks Act, 1999
Then it may direct the company to change its name;
The company shall change its name or new name, as the case may be, within a
period of three months from the issue of such direction, after adopting an
ordinary resolution for the purpose.

Note - Application by a proprietor of registered trade mark shall be made

within three years of incorporation or registration or change of name of the
company
Further, the company, after changing its name or obtains a new name shall give
notice of the change to the Registrar along with the order of the Central
Government (Regional Directors) within a period of fifteen days from the date
of such change.
Registrar on receipt of notice shall carry out necessary changes in the certificate
of incorporation and the memorandum.

If a company makes default in complying with any directions for rectification;

a. company shall be punishable with fine of ₹ 1,000 for every day during which
the default continues and
b. every officer who is in default shall be punishable with fine which shall not
be less than 5000 but which may extend to 1,00,000.

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 Change in the registered office [Sub-section 4, 5, and 7]
Application [sub-section 4]
The alteration of the memorandum relating to the place of the registered office
from one State to another shall not have any effect unless it is approved by
the Central Government (power delegated to Regional Director by Central
Government) on an application in Form No. INC-23 along with the fee and
shall be accompanied by the following documents, namely;
a. Copy of Memorandum of Association, with proposed alterations; 75
b. Copy of the minutes of the general meeting at which the resolution
authorising such alteration was passed, giving details of the number of votes
cast in favour or against the resolution;
C. Copy of Board Resolution or Power of Attorney or the executed vakalatnama,
as the case may be.
d. List of creditors and debenture holders
e. Acknowledgment of service of a copy of the application with complete
annexures to the Registrar and Chief Secretary of the State Government or
Union territory where the registered office is situated at the time of filing the
application.

Advertisement in Newspapers
The Company not more than thirty days before the date of filing the above
application, shall advertise in the Form No. INC-26 in the vernacular newspaper
in the principal vernacular language in the district and in English language in an
English newspaper with wide circulation in the state in which the registered
office of the company is situated.

Dispose of the application by central government [sub-section

5]
The Central Government (power delegated to Regional Director by Central
Government) shall dispose of the application of change of place of the registered
office within a period of 60 days. Before passing of order, Central Government
may satisfy itself that-
a. the alteration has the consent of the creditors, debenture-holders and other
persons concerned with the company, or

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 b. the sufficient provision has been made by the company either for the due
discharge of all its debts and obligations, or
C. adequate security has been provided for such discharge.

Filing of the certified copy of the order with the registrar [sub-
section 7]
76
Where an alteration of the memorandum results in the transfer of the
registered office of a company from one State to another, a certified copy of
the order of the Central Government approving the alteration shall be filed by
the company with the Registrar of each of the States in Form No. INC-28
along with the fee within thirty days from the date of receipt of certified
copy of the order, who shall register the same.

Issue of fresh certificate of incorporation [sub-section 7]

The Registrar of the State where the registered office is being shifted to, shall
issue a fresh certificate of incorporation indicating the alteration.

Change in the object of the company [Sub-section 8 and 9]

Who can make change in object clause & How? [Sub-section 8]
Where the company has raised money from public through prospectus and has
any un-utilised amount out of the money so raised, can change the objects for
which the money so raised is to be applied only after passing a special resolution
through postal ballot and the notice in respect of the resolution for altering
the objects shall contain the following particulars, namely;
a. Total money received;
b. Total money utilized for the objects stated in the prospectus;
C. Un-utilized amount out of the money so raised through prospectus,
d. Particulars of the proposed alteration or change in the objects;
e. Justification for the alteration or change in the objects;
f. Amount proposed to be utilised for the new objects;
g. Estimated financial impact of the proposed alteration on the earnings and
cash flow of the company;
h. Other relevant information which is necessary for the members to take an
informed decision on the proposed resolution;

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 i. Place from where any interested person may obtain a copy of the notice of
resolution to be passed.

Advertisement [Sub-section 8]
The advertisement giving details of each resolution to be passed for change in
objects, simultaneously to the dispatch of postal ballot notices to shareholders;
shall be:
a. Published in the newspapers (one in English and one in vernacular language) 77
which is in circulation at the place where the registered office of the company
is situated and
b. Hosted on the website of the company, if any.

Dissenting shareholders to change of object [Sub-section 8]

The dissenting shareholders shall be given an opportunity to exit by the
promoters and shareholders having control in accordance with regulations to be
specified by the Securities and Exchange Board of India.

Registrar to certify the registration on alteration of the objects [sub-section

9]
The Registrar shall register any alteration of the memorandum with respect to
the objects of the company and certify the registration within a period of 30
days from the date of filing of the special resolution under clause (a) to sub-
section 6 of this section.
Sub-section 10 provides that alteration made under this section (section 13)
shall have effect only after it has been registered in accordance with provisions
of section.

Sub-section 11 states any alteration of the memorandum, in the case of a

company limited by guarantee and not having a share capital, intending to give
any person a right to participate in the divisible profits of the company
otherwise than as a member, shall be void. This provision is confirming and
extending provision to Section 4(7).

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 Alteration of Articles [Section 14]
Section 14 of the Companies Act, 2013, vests companies with power to alter
its articles. A company cannot divest itself of these powers (Andrews vs. Gas
Meter Co. (1897) 1 Ch. 161) .Matters as to which the memorandum is silent
can be dealt with by the alteration of article.
The law with respect to alteration of articles is as follows:

Alteration by Special Resolution [Sub-section 1] 78

A company may alter its articles by a special resolution, subject to the provisions
of this Act and the conditions contained in its memorandum. Alteration of
articles include alterations having the effect of conversion of a private company
into a public company or vice-versa,
Any alteration having the effect of conversion of a public company into a private
company shall not be valid unless it is approved by an order of the Central
Government on an application made within sixty days from the date of passing
of special resolution, be filed with Regional Director in e-Form No. RD-1 along
with the fee as provided in the Companies (Registration Offices and Fees)
Rules, 2014 and shall be accompanied by the following documents, namely;
a. Draft copy of Memorandum of Association and Articles of Association, with
proposed alterations;
b. Copy of the minutes of the general meeting at which the special resolution
authorising such alteration was passed together with details of votes cast in
favour and or against with names of dissenters;
C. Copy of Board resolution or Power of Attorney dated not earlier than thirty
days, as the case may be, authorising to file application for such conversion;
d. Declaration by a key managerial personnel regarding the compliance under
difference section of the Act and rules made there under;
In case of a private company, where post alteration the articles no longer
include the restrictions and limitations which are required to be included in the
articles of a private company under this Act, then such company shall cease to
be a private company, from the date of such alteration.

Filing of alteration with the registrar [sub-section 2]

Every alteration of the articles and a copy of the order of the Central
Government approving the alteration, shall be filed with the Registrar, together

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 with a printed copy of the altered articles, within a period of fifteen days in
Form No. INC 27 along with fee, who (Registrar) shall register the same.
Sub-section 3 provides that alteration made under sub-section 1 and registered
under sub-section 2 subject to provision of this, shall be valid and have effect
as if it were originally contained in the Articles.

Alteration of memorandum or articles to be noted in every

copy [section 15] 79
Section 15 of the Act requires that every alteration made in memorandum and
articles of a company shall be noted in every copy. Be it issued in electronic
form or otherwise; because MOA and AOA considered to be public document
under section 399.
If a company makes any default in complying with the stated provisions, the
company and every officer who is in default shall be liable to a penalty of one
thousand rupees for every copy of the articles issued without such alteration.

Registered office of company [section 12]

A company is considered to be a separate legal entity from the members. Once
a company gets incorporated, it is required to maintain a registered office. This
is a physical office where the corporation will receive service of legal documents
from ROC or in case of a lawsuit, etc.
This address cannot be a P.O. Box but must be a physical location where
someone is present, to receive service of legal documents during normal business
hours. It could be different from a Head Office or Corporate office.
Section 12 of the Companies Act, 2013 seeks to provide for the registered
office of the companies for the communication and serving of necessary
documents, notices, letters etc. The domicile and the nationality of a company
is determined by the place of its registered officer. This is also important for
determining the jurisdiction of the court.

Registered office & verification thereof [sub-section 1 & 2]

As per sub-section 1, a company shall, within thirty days 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.

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 Further, sub-section 2 requires the company shall furnish to the Registrar
verification of its registered office within a period of thirty days of its
incorporation.
With the respected specified IFSC public & IFSC private companies, they shall
have its registered office at the IFSC located in the approved multiservice SEZ
set up under the SEZ Act, 2005 read with SEZ Rules, 2006.
In case of specified IFSC public & IFSC private company word "thirty days" will
be read as "sixty days". 80

Labeling of company [sub-section 3]

Every company shall;
a. 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, in a conspicuous position, in legible letters, and if the
characters employed are not those of the language/s in general use in that
locality, then also in the characters of that language/s.
b. Have its name engraved in legible characters on its seal, if any;
C. Get its name, address of its registered office and the Corporate Identity
Number along with telephone number, fax number, if any, e-mail and website
addresses, if any, printed in all its business letters, billheads, letter papers and
in all its notices and other official publications; and
d. Have its name printed on hundies, promissory notes, bills of exchange and
such other documents as may be prescribed:

Authors Note: Where a company has changed its name(s) during the last two
years, it shall paint or affix or print, both or all such names in case of point
a as well as c above.
In case of One person company, the words "One Person Company" shall be
mentioned in brackets below the name of such company, wherever its name is
printed, affixed or engraved.

Notice of change & verification to registrar [sub-section 4]

Notice of every change of the situation of the registered office after the date
of incorporation of the company, verified in the Form No. INC-22, along with

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 fee as prescribed shall be given to the Registrar within 30 days of the change,
who shall record the same.
In case of specified IFSC public & IFSC private company word "thirty days" will
be read as "sixty days".
Approval/confirmation of change [sub-setion 5]
Change by passing of special resolution
The registered office of the company shall be changed only by passing of special
resolution by a company, outside the local limits of any city, town or village 81
where such office is situated or where it may be situated later by virtue of a
special resolution passed by the company.

Change of registered office outside the jurisdiction of registrar

Where a company changes the place of its registered office from the jurisdiction
of one Registrar to the jurisdiction of another Registrar within the same State,
there such change is to be confirmed by the Regional Director on an application
made by the company. Application shall be made in Form No. INC-23 along
with fee.
In case of specified IFSC public & IFSC private company Board resolution will
sufficient, provided that such Company shall not change the place of its
registered office to any other place outside the said International Financial
Services Centre.

Communication and filing of confirmation [sub-section 6]

The confirmation of change of registered office from jurisdiction of one registrar
to another registrar within the same state, shall be:
a. Communicated within 30 days from the date of receipt of application by
the Regional Director to the company, and
b. The company shall file the confirmation with the Registrar within a period
of 60 days of the date of confirmation who shall register the same, and
C. Certify the registration within a period of thirty days from the date of
filing of such confirmation.
The certificate so issued by registrar shall be conclusive evidence that all the
requirements of this Act with respect to change of registered office have been
complied with and the change shall take effect from the date of the certificate.

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 If the Registrar has reasonable cause to believe that the company is not carrying
on any business or operations, he may cause a physical verification of the
registered office of the company in such manner as may be prescribed and if
any default is found to be made in complying with the requirements of sub-
section (1), he may without prejudice to the provisions contained in this section
regarding the penalties, initiate action for the removal of the name of the
company from the register of companies under Chapter XVIII.
82
Penalties in case of defaults [sub-section 8]
If any default is made in complying with the requirements of this section, the
company and every officer who is in default shall be liable to a penalty of one
thousand rupees for every day during which the default continues but not
exceeding one lakh rupees.

Commencement of business etc. (Section 10A)

Conditions for commencement of business
A company incorporated
a. After the commencement of the Companies (Amendment) Ordinance, 2019
and

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 b. Having a share capital
Shall commence any business or exercise any borrowing powers only if;
a. The company has filed with the Registrar a verification of its registered
office as provided in sub-section (2) of section 12, and
b. A declaration is filed with the Registrar, by a director, within a period of
180 days of the date of incorporation of the company, in Form No. INC-20A,
duly verified by a Company Secretary or a Chartered Accountant or a Cost
Accountant, in practice, along with prescribed fee; that every subscriber to the 83
memorandum has paid the value of the shares agreed to be taken by
him on the date of making of such declaration

Authors Note: 1. Section 12(2) i.e., Verification of registered office with

registrar, discussed earlier heading i.e. 15 in this chapter.
2. In the case of a company pursuing objects requiring registration or approval
from any sectoral regulators such as the Reserve Bank of India, Securities and
Exchange Board of India, etc., the registration or approval, as the case may be
from such regulator shall also be obtained and attached with the declaration.

Outcome where conditions are not satisfied

Penalty
If any default is made in complying with the requirements of this section, the
penalty shall be:
Liable Quantum of penalty
Company Rs. 50,000
Every officer who is in default ₹1,000 for each day during which
such default continues but not
exceeding an amount of ₹1,00,000.

Declaration not filled by director within 180 days

Where no declaration has been filed by directors within a period of 180 days of
the date of incorporation with the Registrar and the Registrar has reasonable
cause to believe that the company is not carrying on any business or operations,

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 he may initiate action for the removal of the name of the company from the
register of companies.

Authors Note: Action by registrar for removal of name can be take place
simultaneously with levy of penalty.

Example – Modern Furniture incorporated on 27th June 2022; its directors

filled a declaration regarding receipt of payment i.e., value of share (against 84
share subscribed by subscriber) to registrar on 30th January 2023. The
company shall be charged with penalty of ₹50,000, while penalty of its officers
(officers who are in default) shall be ₹34000 (for 34 days i.e., 4 days of
December 2022 and 30 days of January 2023).

CONVERSION OF COMPANIES ALREADY REGISTERED

[SECTION 18]
Section 18 of the Act, empower a company to convert itself into some other
class of company by altering its memorandum and articles of association.
Following is the law with respect to the conversion of the companies already
registered.

By alteration of memorandum and articles

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 this Chapter.

File an application to the registrar

Wherever conversion to be done under section 18, Registrar on basis of an
application filled with it by company, shall after satisfying himself that the
provisions applicable for registration of companies have been complied with,
a. Close the former registration of the company; and
b. After registering the required documents, issue a certificate of incorporation
in the same manner as its first registration.
Students may also refer to: Rule 6, 7, 7A, and 20 to 22 of the Companies
(Incorporation) Rules, 2014 and 37 and 38 of the Companies (Incorporation)

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 Rules, 2016 & Form Nos. INC-5 & INC-6 under the Companies (Incorporation)
Rules, 2014 and INC-27 under the Companies (Incorporation) Rules, 2016.

No effect on the debts, liabilities etc. Incurred before conversion

The registration of a company under this section shall not affect any debts,
liabilities, obligations or contracts incurred or entered into, by or on behalf of
the company before conversion and such debts, liabilities, obligations and
contracts may be enforced in the manner as if such registration had not been 85
done.
To put in more simple way, the company remains the same entity as it was
before in respect of its debts and liabilities, obligations or contracts.

Subsidiary Company not to hold Shares in its Holding

Company (Section 19)
As per section 19 of the Act, a subsidiary company is not allowed to hold
shares of its holding company. The prohibition also extends up to the nominees
of the subsidiary company.
Consequently, any allotment or transfer of shares in a holding company to its
subsidiary shall be void. If the holding company is a guarantee or unlimited
company, not having a share capital the above restriction will apply on holding
the interest, whatever be the form of interest.
The prohibition does not apply to the following cases:
a. Where the subsidiary is concerned as a legal representative of a deceased
member of the holding company; or
b. Where the subsidiary holds such shares as a trustee; or
c. Where the subsidiary company is a shareholder even before it became a
subsidiary company of the holding company.

Authors Note: a. Right to vote at a meeting of the holding company only in

respect of the shares held by it as a legal representative or as a trustee
b. The prohibition does not apply to the case of a subsidiary company which
already had shares in its holding company at the commencement of the Act
c. A subsidiary can buy shares in its holding company where it is a part of a
scheme of amalgamation sanctioned by the court/tribunal.
Case Law: Himachal Telematics Ltd v Himachal Futuristic Communications Ltd

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 Example - RPIP Ltd. has invested 51% in the shares of SSP Pvt. Ltd. on 31st
March 2019. SSP Pvt. Ltd. have been holding 2% equity of RPIP Ltd. since
2013. SSP Pvt. Ltd. cannot increase its equity beyond that 2% on or after
31st March 2019. However, it could continue to hold or reduce its initial 2%
stake.

Service of Documents (Section 20)

Section 20 of the Companies Act, 2013 read with Rule 35 (Service of 86
Documents) of Companies (Incorporation) Rules, 2014, provides the mode in
which documents may be served on the company, on the members and also on
the registrars. Law with respect to the service of documents is as follows-

Serving of document to company or an officer thereof

A document may be served on a company or an officer thereof by sending it
to the company or the officer at the registered office of the company by-
a. registered post, or
b. speed post, or
C. courier service, or
d. leaving it at its registered office, or
e. means of such electronic or other mode as may be prescribed
However, where securities are held with a depository, the records of the
beneficial ownership may be served by such depository on the company by means
of electronic or other mode.

Serving of document to registrar or members

Save as provided in this Act or the rules made thereunder for filing of
documents with the Registrar in electronic mode, a document may be served
on Registrar or any member by sending it to him by-
a. Post, or
b. registered post, or
C. speed post, or
d. courier, or
e. by delivering at his office or address, or
f. by such electronic or other mode as may be prescribed.

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 However, a member may request for delivery of any document through a
particular mode, for which he shall pay such fees as may be determined by the
company in its annual general meeting.

For the purposes of this section, the term "courier" means a person or agency
which delivers the document and provides proof of its delivery.
The term "electronic transmission" means a communication that creates a record
that is capable of retention, retrieval (recovery) and review, and which may 87
thereafter be rendered into clearly legible tangible form. It may be made by
▪ Facsimile telecommunication (fax) or electronic mail (email), which the
company or the officer has provided from time to time for sending
communications,
▪ Posting of an electronic message board or network that the Registrar or
the member has designated for those communications, and which
transmission shall be validly delivered upon the posting, or
▪ Other means of electronic communication, in respect of which the
company or the officer has put in place reasonable systems to verify that
the sender is the person purporting to send the transmission.

Further sub-section 2 provides, in case of delivery by post, such service shall

be deemed to have been effected:
a. In the case of a notice of a meeting, at the expiration of 48 hours after
the letter containing the same is posted; and
b. In any other case, at the time at which the letter would be delivered in
the ordinary course of post.

Section 20 (2) shall apply to a Nidhi Company, subject to the modification;

that
a. The document may be served only on members who hold shares of more
than 1,000 in face value or more than 1% of the total paid-up share capital;
whichever is less.
b. For other shareholders, document may be served by a public notice in
newspaper circulated in the district where the Registered Office of the Nidhi
is situated; and publication of the same on the notice board of the Nidhi.

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 Example – Modern Furniture sent the notice of general meeting through postal
mail 48 hours after the post of letter containing such notice, shall be deemed
to be served. Hence, requirement of 21 clear days’ notice under section 101 of
the Act, if seen in this context, Modern Furniture Limited should have posted
the letter containing notice 23 days prior to meeting day (48 hours of post-
delivery+21 clear days).

Authentication of documents, proceedings and contracts 88

(Section 21)
As per section 21 of the Act:
a. A document or proceeding requiring authentication by a company or
b. Contracts made by or on behalf of a company
May be signed by:
a. Any key managerial personnel, or
b. An officer or employee of the company duly authorized by the Board in this
behalf.
In the case of specified IFSC public company and IFSC private company, for the
word "An officer" read as "An officer or any other person".

Any KMP Any officer or employee

authorized by BOD

Example – Modern Furniture sent the notice of general meeting through postal
mail 48 hours after the post of letter containing such notice, shall be deemed
to be served. Hence, requirement of 21 clear days’ notice under section 101 of
the Act, if seen in this context, Modern Furniture Limited should have posted
the letter containing notice 23 days prior to meeting day (48 hours of post-
delivery+21 clear days).

Execution of bills of exchange (BOE), etc. (Section 22)

Sub-section 1 provides, 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

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 account of, the company by any person acting under its authority. Authority
can be either express or implied.
Formal deeds can be executed only through a power of attorney. Therefore sub-
section 2 and 3 together provides;
a. A company may, by writing under
▪ Its common seal, if any,
▪ Where in case a company does not have a common seal, then authorized
by 2 directors or by a director and the Company Secretary, wherever 89
the company has appointed a Company Secretary.
b. Authorize any person,
C. Either generally or in respect of any specified matters,
d. As its attorney to execute other deeds on its behalf
e. In any place either in or outside India.
f. Deed signed by such an attorney on behalf of the company and under his
seal shall bind the company.

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 Authors Note: It can be observed from above that a company may or may not
have a common seal. If company decides to have a common seal, then it has
to affix the same for specified matters, execution of deeds on behalf of the
company.
The seal is a method of making a physical impression upon the documents of
the company, of its name, etc.
Section 22 comes into play when a person wants to enforce obligations against
a company arising out of a contract and the company denies the contract or 90
disputes its liability. The section cannot be used where the proceeding is by
the company.

Student Notes:

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