Memorandum and Articles of Association, Prospectus notes — Unit 2

The MoA (Section 4) is the fundamental charter or constitution of a company. It defines the company's relationship with the outside world and establishes the absolute boundaries of its powers.

⇒The Six Mandatory Clauses of the MoA

• 1. Name Clause: The name of the company (must end with 'Limited' or 'Private Limited').
• 2. Registered Office (Situation) Clause: The State in which the registered office will be situated (determines the ROC's jurisdiction).
• 3. Object Clause (Most Important): The exact business purposes for which the company is formed. A company CANNOT do any business outside this clause.
• 4. Liability Clause: States whether member liability is limited by shares, limited by guarantee, or unlimited.
• 5. Capital Clause: The maximum authorized share capital the company can raise.
• 6. Subscription/Association Clause: The declaration by the initial promoters that they agree to form the company and take a specified number of shares.

Ultra = Beyond; Vires = Powers. Any act done by the company which goes beyond the powers explicitly stated in its Object Clause is Ultra Vires and absolutely void.

⇒The Landmark Case: Ashbury Railway Carriage & Iron Co. Ltd v. Riche (1875)

• Facts: The Object Clause of Ashbury Railway Co. allowed them 'to make and sell railway carriages'. The directors signed a contract with Riche to finance the construction of a railway line in Belgium.
• The company later repudiated the contract, and Riche sued for breach.
• Judgment: The House of Lords held the contract was Ultra Vires. Financing a railway line is fundamentally different from making railway carriages. Because the act was beyond the Object Clause, it was void from the beginning.
• Crucial Rule: Even if 100% of the shareholders vote to approve and ratify an ultra vires act, it remains void. The company cannot be bound by it.

⇒Effects of Ultra Vires Transactions

1. The contract is void ab initio.
2. Directors can be held personally liable for applying company funds to ultra vires purposes.
3. An injunction can be obtained by any member to stop an ultra vires act.

The AoA (Section 5) contains the internal rules, regulations, and bye-laws for the management of the company. If the MoA is the constitution, the AoA is the procedural rulebook.

⇒Relationship between MoA and AoA

• The MoA is supreme. The AoA is subordinate to the MoA.
• If there is any conflict between the two, the MoA prevails.
• Neither the MoA nor the AoA can override the Companies Act, 2013.

⇒Alteration of Articles (Section 14)

A company can alter its AoA by passing a Special Resolution (75% majority) in a general meeting. However, the alteration must not be illegal, must not violate the MoA, and must be bona fide for the benefit of the company as a whole.

These two opposing doctrines balance the protection of the company against the protection of outsiders dealing with the company.

⇒Doctrine of Constructive Notice (Protects the Company)

The MoA and AoA are public documents registered with the ROC. The law presumes that anyone dealing with the company has read, understood, and has 'constructive notice' of their contents.

• Effect: If an outsider enters into a contract that violates the AoA, they cannot sue the company, even if they actually never read the AoA.

⇒Doctrine of Indoor Management / Turquand's Rule (Protects the Outsider)

This is an exception to Constructive Notice. While outsiders must know the external rules (AoA), they are not required to check if the company's internal procedures were followed correctly.

• Royal British Bank v. Turquand (1856): The AoA allowed directors to borrow money ONLY if authorized by a shareholder resolution. The directors borrowed money from Turquand without getting the resolution. The company tried to avoid paying, claiming Turquand had constructive notice.
• Judgment: The Court held the company liable. Turquand had the right to assume that the internal requirement (passing the resolution) had been properly fulfilled. Outsiders cannot peek 'indoors' to check internal management.

Turquand's Rule will NOT protect an outsider in the following situations:

• 1. Knowledge of Irregularity: If the outsider actually knew that internal procedures were not followed, they cannot claim protection.
• 2. Suspicious Circumstances: If the transaction is highly unusual (e.g., an accountant trying to sign a multi-million dollar property deed instead of a director), the outsider is put on inquiry. If they don't investigate, they lose protection.
• 3. Forgery: Turquand's rule applies to procedural irregularities, NOT to forgery. If a director's signature is completely forged, the contract is entirely void (See Ruben v. Great Fingall Consolidated).

A prospectus is any document (notice, circular, advertisement) issued by a Public Company inviting the general public to subscribe to its shares or debentures.

⇒The Golden Rule of Prospectus

Because the public invests based on the prospectus, it must contain the absolute, unvarnished truth. There must be no misrepresentation or concealment of material facts.

⇒Types of Prospectus

• Red Herring Prospectus (Sec 32): Used in Book Building (IPO). It does not contain complete details about the exact price or quantity of shares being offered.
• Shelf Prospectus (Sec 31): Used by financial institutions issuing bonds multiple times a year. It allows them to issue securities repeatedly over 1 year without filing a new prospectus every time.
• Abridged Prospectus (Sec 33): A summarized version of the prospectus containing salient features, which must be attached to every share application form.

⇒Liability for Misstatement

If a prospectus contains false or misleading statements, the directors and promoters face severe consequences:
Civil Liability (Sec 35): Paying compensation to every investor who suffered a loss.
Criminal Liability (Sec 34): Imprisonment for fraud (under the draconian Section 447).

⇒Summary of Master Concepts

• MoA vs AoA: MoA is external boundaries (Constitution). AoA is internal management (Rulebook).
• Ultra Vires: Acts beyond the MoA's Object Clause are completely void (Ashbury Railway).
• Constructive Notice: Presumes outsiders know the MoA/AoA. Protects the company.
• Indoor Management (Turquand): Outsiders aren't responsible for internal procedural failures. Protects the outsider.
• Prospectus: The invitation to the public. Must be 100% truthful; misstatements attract severe fraud charges.

⇒University Exam Tips for this Unit (Premium Advice)

• The Triangle of Doctrines: Exam papers frequently ask to explain the relationship between Ultra Vires, Constructive Notice, and Indoor Management. Structure your answer showing how Constructive Notice created an unfair burden on outsiders, leading the courts to invent the Indoor Management exception.
• Cite Turquand: For any problem-based question involving a company refusing to honor a contract because a 'resolution wasn't passed' or a 'meeting lacked quorum', apply Royal British Bank v. Turquand immediately.
• Red Herring: Often asked as a short note. Emphasize that it lacks the specific price or quantum of shares.