ACS Ridhi Singhi

ACS Ridhi Singhi

The memorandum and articles of association of a company are the most important documents for the formation of a company and for its functioning thereafter. It defines the scope of activities of the company and its purpose of incorporation. Before dealing with a company, it is advisable to read the memorandum and articles of the company to understand various aspects, such as intended business activities, liability of members, powers of Board and members, etc. and its relationship with the outside world. The memorandum and articles bind the members to the company; the company to the members; the members inter se; and the company to outsiders.  A company is governed by its memorandum and articles and any act beyond it shall be considered as ultra vires. According to Lord Macmillan, the purpose of memorandum of association is “to enable the shareholders, creditors and those who deal with the company to know what is the permitted range of enterprise’’.

According to sub-section (56) of Section 2 of the Companies Act, 2013, “memorandum” means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act. In the celebrated case of Ashbury Railway Carriage & Iron Co. Ltd. v. Riche, (1875) L.R. 7 H.L. 653, Lord Cairn observed: “The memorandum of association of a company is its charter and defines the limitations of the powers of the company………. it contains in it both that which is affirmative and that which is negative. It states affirmatively the ambit and extent of vitality and powers which by law are given to the corporation, and it states negatively, if it is necessary to state, that nothing shall be done beyond that ambit………” Section 3 of the Companies Act, 2013 provides the mode of formation of a Company and lays down that A company may be formed for any lawful purpose by—

(a) seven or more persons, where the company to be formed is to be a public company;

(b) two or more persons, where the company to be formed is to be a private company; or

(c) one person, where the company to be formed is to be One Person Company that is to say, a private company,

by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration.

Section 9 of the Companies Act, 2013 provides for the effect of registration. As per the aforementioned section, from the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name.

As per Section 10 of the Companies Act, 2013, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles and  all monies payable by any member to the company under the memorandum or articles shall be a debt due from him to the company.

A certificate of incorporation given by the Registrar in respect of any association shall be conclusive evidence that all the requirements of this Act in respect of registration and of matters precedent and incidental thereto have been complied with, and that the association is a company authorised to be registered and duly registered under this Act. This particular thing has been discussed in the acknowledged case COTMAN V. BROUGHAM [1918-19] ALL E.R. REP. 265(HL) wherein Lord Wrenbury has held that “before registering a memorandum of association the registrar ought to consider whether the requirements of the Companies Acts have been complied with, and to refuse registration if he conceives that they have not. The memorandum must delimit and identify the field of industry within which the corporate activities are to be confined”.

Q.1 Whether the subscribers to Memorandum of Association automatically become shareholder/member on the date of incorporation of the Company?

Let us first understand who is considered as a member of the Company.

As per sub-section (55) of Section 2 of the Companies Act, 2013, a member, in relation to a company, means—

(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members;

(ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;

(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository

From the above it is understood that the first members of the Company are the subscribers to the memorandum. After incorporation, the Company may issue further shares and every person who agrees in writing to become a member thereafter and whose name is entered in the register of members shall be a member of the Company. The condition herein is cumulative for members other than first subscribers.

In Sri Arthanari Transport (P) Ltd. and Ors. Vs. K.P. Swami Gounder and Ors. (AIR1966Mad231, (1965)2MLJ504), the Hon’ble High Court of Madras held that, “Section 12 of the Indian Companies Act, 1956, relates to the mode of forming incorporated companies and says that two or more persons associated for any lawful purpose may term a private company by subscribing their names to a Memorandum of Association and otherwise complying with the requirements of the Act in respect of registration. It is important to note that subscribing their names to a Memorandum of Association” implies an agreement between the persons concerned to associate each other into a body corporate and subscribing in the context means the signing by such persons or their nominees in the Memorandum in token of their agreement to so associate themselves respective names. The signatories are thus parties to the agreement which is in the form of a declaration. A Memorandum of Association of a company is required by S. 14 to be, where it is a private company, in the form prescribed in Table B in Schedule I. This form, after providing for the name of the company, the place of its registered office, its objects limited liability of its members and share capital contains, at the end a declaration:

We, the several persons whose names and addresses are subscribed are desirous of being formed into a company in pursuance of this memorandum of association and we respectively agree to take the number of shares in the capital of the company set opposite our respective names.

Then follow the columns relating to the names, addresses, descriptions and occupations of subscribers and the number of shares taken by each subscriber. At the very last comes the column “witness to the above signatures”. The declaration in that form obviously embodies two matters on which the signatories thereto agree

(1) they that is the several members whose names and addresses are subscribed, desire to form themselves into a company in pursuance of the Memorandum and

(2) they agree respectively to take the number of shares in the capital of the company set opposite to their respective names.

It is plain that those who do not subscribe their signatures to the declaration in token of their desire to form themselves into a company and do not agree to take shares as required in the declaration, cannot be considered to be subscribers to the Memorandum of Association.

Section 13 mentions the requirements with respect to a memorandum and two of them are that no subscriber to the Memorandum shall take less than one share and each subscriber of the Memorandum shall take less than one share and each subscriber of the Memorandum shall write opposite to his name the number of shares he takes.

It is true that by subsection (1) of S. 41, subscribers of the Memorandum of a company shall be deemed to have agreed to become members of the company and on its registration, shall be entered as members in its register of members”.

 It was also held in the aforementioned case that “subscribers of the Memorandum and subscription to a Memorandum of Association means not merely signing at every one of its pages but signing their names in token of entering into an agreement both as to the signatories forming themselves into a company but also their undertaking to take the number of shares indicated against their names. We do not think that from the plaintiff’s signatures elsewhere in the Memorandum than in token of their being parties to a declaration as to the formation of the association and undertaking to accept the number of shares mentioned, they can be regarded as subscribers to the Memorandum of Association, for, they are not by their signatures parties to the declaration which is the vital part of the Memorandum”.

Thus, the subscribers are parties to an agreement which is in the form of a declaration.  By subscribing to the memorandum of association it incurs a contractual obligation on their part. The subscribers by signing the memorandum at intended place declare that they agree to subscribe to the number of shares provided against their name and they are desirous of incorporating a Company for a lawful purpose which is covered in the objects clause of the memorandum of association. Also, the subscriber is required to sign at the appropriate place in the list of subscribers and merely signing the other pages of the memorandum shall not be sufficient to declare or consider them as subscribers or deemed members of the Company.

In Official Liquidator of the U.P. Oil Mills Company Ltd.Vs. Jamna Prasad and Ors [ (1933) 1 AWR 587, 143Ind. Cas.762], it has been held that “the words shall be deemed to have agreed to become members of the company” mean that the subscribers of the memorandum of a company are to be treated as having become members of the company by the fact of the subscription. This view was taken in the matter of the Union Bank, Allahabad (1925) 23 A.L.J. 473 : A.I.R. 1525 All. 519 : 47 All. 669 : 88 Ind. Cas. 785 and in the case of the Official Liquidator of J.H. Chandler and Co. v. H.I. Phillips (1920) 24 A.L.J. 691 : A.I.R. 1920 All, 550 :48 All. 280: 95 Ind. Cas. 92.7.

In Re: J. H. Chandler & Co., Ltd. (in Liquidation) Official Liquidator Vs. H. I. Phillips (95Ind. Cas.927), it has been held that “in the language of Section 30 of the Indian Companies Act,1913 the subscribers to the memorandum of a Company shall be deemed to have agreed to become members of the Company. It is true that the section lays down that on the registration of the Company the names of the subscribers of the memorandum shall be entered as members in the register of members. But, from the mere omission of the entry of the names in the share register, it does riot follow that the subscribers to the memorandum are not to be deemed to have agreed to become members. The first portion of the first paragraph of Section 30 lays down a rule of substantive law and the second portion lays down a rule of procedure, viz., what is to be done. The subsequent portion does not, in my opinion, govern the earlier portion”.

In Sant Chemicals Pvt. Ltd. Vs. Sant Chemicals Pvt. Ltd. with Aviat Chemicals Pvt. Ltd. and Jagmohansingh Arora and others [1999(3)ALLMR680, 1999(3)BomCR454, 1999(101(2))BOMLR399] it has been held that “Section 30 of the 1913 Act, is para materia to section 41 of the 1956 Act”.

The subscribers to the memorandum of association become members of the Company on registration/ incorporation of the Company. Entry in the register of members is a matter of procedure and that is to be performed by the authorised director/secretary post incorporation of the company. The entry in the register of members is for maintenance of records of the Company and mere omission of entry shall not revoke his membership once the Company is incorporated.

In Clariant International Ltd. and Anr. Vs Securities and Exchange Board of India [AIR2004SC4236, IV(2004)BC449, 2004(106(4))BOMLR940, [2004]122CompCas112(SC), (2004)4CompLJ52(SC), JT2004(7)SC69, (2004)4MLJ122(SC), 2004(7)SCALE180, (2004)8SCC524, [2004]54SCL519(SC), [2004]Supp(3)SCR843, 2005(1)UJ12], the Supreme Court of India held that,

In Palmer’s Company Law, 23rd Edn. at page 154, para 12-07, it is stated :

“12-07 Subscribers as members – The subscribers of the memorandum are deemed to have agreed to become members of the company, and on its registration shall be entered as members in its register of members (1948 Act, s. 26(1)).”

It is further stated :

“49.04. Other members _ In the case of members other than the subscribers to the memorandum two essential conditions have to be satisfied to constitute a person a member:

(1) an agreement to become a member; and

(2) entry on the register.

These two conditions are cumulative: unless they are both satisfied, the person in question has not acquired the status of member.”

In Collector of Maradabad Vs. Equity Insurance Co. Ltd. [AIR1948Oudh197, [1948]18CompCas309], The Hon’ble High Court of Oudh referred to the case of Lindley Alexandar v. Automatic Telephone Co. (1900) 2 Ch. 56 that subscribers to the memorandum of association of a company limited by shares are liable, but only liable, by virtue of their subscription to pay up the amount of their Shares as and when called up. A subscriber of a memorandum of association becomes by Section 23 (the Master of Bolls was dealing with the Act of 1862) a member in respect of the number of shares subscribed by him without any further application by him or allotment of shares to him. Every such subscriber; becomes a member ipso facto on the incorporation of the company, and liable as the holder of whatever number of shares he has subscribed for. Section 30 of our Act is the same as Section 25 of the English Act of 1929.

The section deals with two classes

(1) persons who have subscribed the company’s memorandum of association, and

(2) those who have agreed to be members and whose names are entered in the register.

 A person may become a member or a shareholder in any of the following ways:

(1) By subscribing the memorandum of association before its registration;

(2) by agreeing with the company to take a share or shares and being placed on the register of members;

(3) by taking a transfer of a share or shares, and being placed on the register of members;

(4) by registration on succession to a deceased or bankrupt member, and

(5) by allowing his name to be on the register of members or otherwise holding himself out or allowing himself to be held out as a member.

The original subscribers are by the act of Legislature deemed to have taken shares set opposite their names, the object being that the public might rely with confidence on the subscribers of the Memorandum becoming members of the company. In the case of subscribers of the memorandum, no allotment of shares is necessary: see In re London and Provincial etc. Co. (1877) 5 Ch. D. 525. Nor is the entry of their names on the registers of members necessary, In re Florence Land and Public Works (1885) 29 Ch. D 421 and Vazirmal Kevalram v. Makran Coast Steam Navigation Co. Ltd. A.I.R. 1938 Sind 187.

Thus, to conclude, a person subscribing to the Memorandum shall become a member of the company on its incorporation. Such a person continues to remain a member of the Company until there is an instance of transfer, transmission, surrender of shares of the Company and the same is reflected in the records of the Company.  Neither an omission of entry in the register of members nor non-allotment of shares can disregard a subscriber from being considered as a member of the Company.

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