Unit 2: Memorandum, articles & prospectus

The MOA is the charter of the company — it defines its constitution and the scope of its powers. Defined in Section 2(56); contents in Section 4.

Form

• Must be in the form given in Tables A to E of Schedule I (Table A — company limited by shares; B — limited by guarantee without share capital; C — guarantee with share capital; D — unlimited without share capital; E — unlimited with share capital).

Contents (clauses)

Alteration of MOA (Section 13)

Ultra vires means "beyond the powers". An act beyond the objects in the MOA is void ab initio and cannot be ratified even by all members.

• Effects: void contract; directors personally liable; injunction can be obtained; property acquired with company money ultra vires is held by the company.
• Acts ultra vires the directors (but within the company's powers) can be ratified by members; acts ultra vires the articles can be ratified by altering the articles.

The AOA contains the rules and regulations for internal management — Section 2(5); contents in Section 5.

• Forms in Tables F to J of Schedule I (Table F — company limited by shares).
• A company limited by shares may adopt Table F wholly or partly.
• Contents: share capital, rights of shareholders, transfer and transmission, calls, forfeiture, meetings and voting, directors and their powers, borrowing powers, dividends, accounts, audit, winding up.
• Entrenchment provisions (Section 5(3)): specified provisions can be altered only if stricter conditions are met.
• Alteration (Section 14): by special resolution; conversion of public to private requires Tribunal/Central Government approval.
• Alteration must not conflict with the Act or the MOA, must be bona fide for the benefit of the company as a whole, and cannot increase a member's liability without consent.

Doctrine of constructive notice and indoor management

• Constructive notice: the MOA and AOA are public documents, so every outsider is deemed to know their contents.
• Indoor management (Turquand's rule): outsiders dealing with the company in good faith are entitled to assume that internal procedures have been properly followed — Royal British Bank v. Turquand (1856).
• Exceptions to indoor management: knowledge of irregularity, negligence (failure to inquire when suspicious), forgery (Ruben v. Great Fingall Consolidated, 1906), acts outside apparent authority.

Section 2(70): a prospectus is any document described or issued as a prospectus, including a red herring prospectus, shelf prospectus, or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of securities.

Types

Statutory requirements

• Must be dated and the date deemed the date of publication.
• Filed with the Registrar before issue, signed by every director or proposed director.
• Contents as per Section 26 and SEBI (ICDR) Regulations, 2018: company details, objects of the issue, capital structure, risk factors, financial information, management, legal proceedings, expert reports, minimum subscription.
• Must be issued within 90 days of filing with the ROC.
• Experts' consent required for their statements.

Liability for misstatement

• Civil liability (Section 35): directors, promoters, experts liable to compensate investors for loss.
• Criminal liability (Section 34): punishable as fraud under Section 447.
• Defences: withdrawal of consent before issue, issue without knowledge, reasonable belief in truth, statement by an expert.
• Golden rule of framing a prospectus (New Brunswick and Canada Railway Co. v. Muggeridge): the truth, the whole truth and nothing but the truth.