Law And Policy

This post comprises summaries of –

1. Chrispas Nyombi, “The gradual erosion of the ultra vires doctrine in English company law” International Journal of Law and Management, 2014
2. Sudheendhra Putty, “Memorandum of Association & Articles of Association”, [2013] 38 taxmann.com 290 (Article)

“Memorandum of Association & Articles of Association” by Sudheendhra Putty (Taxmann, 2013)

This article provides an analytical overview of the Memorandum of Association (MoA) and Articles of Association (AoA) under the Companies Act, 2013, contrasting it with the 1956 Act and English company law. It explains the content, legal status, alteration, and binding effect of these two charter documents, the constitutional foundation of any company.

1. Introduction

The Companies Act, 2013, passed after two decades of deliberation, codifies corporate structure and internal governance. The MoA and AoA together form the “charter documents” of a company. The MoA defines the company’s external boundaries—its powers, scope, and existence while the AoA governs internal management, procedures, and administrative control.

2. Memorandum of Association

Section 2(56) and Section 4 of the Act define the MoA as the document specifying a company’s constitution and fundamental conditions of incorporation. It contains mandatory clauses:

• Name Clause: The legal name ending with “Limited” or “Private Limited”.
• Registered Office Clause: Identifies the State of registration.
• Objects Clause: Specifies the purposes for which the company is incorporated.
• Liability Clause: States members’ liability (limited or unlimited).
• Capital Clause: Specifies the authorized share capital and share division.
• Subscription Clause: Lists subscribers and their shares.
• For a One Person Company (OPC), it must include a nominee’s name to succeed membership upon the sole member’s death.

Section 4(1)(c) modernizes the objects clause, allowing companies flexibility by removing the earlier tripartite classification- main, ancillary, and other objects. It now simply includes “objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof,” giving wider operational freedom.

The reservation and approval of names are detailed under Section 4(4)–(5), including penalties for false information. The MoA forms are given under Tables A–E of Schedule I, covering different company types (e.g., limited by shares, guarantee, or unlimited liability).

3. Alteration of the MoA (Section 13)

Alteration procedures are simplified under the 2013 Act:

• Central Government approval is required only when shifting the registered office from one State to another.
• The Registrar of the new State issues a fresh certificate of incorporation post-approval.
• For alteration of the objects clause, only a special resolution is required.
• However, if a company has unutilized public funds raised through a prospectus, it must:
  • Pass a special resolution,
  • Publish details and justifications in English and vernacular newspapers,
  • Provide an exit option to dissenting shareholders as per SEBI regulations.
• The alteration takes effect only upon registration by the Registrar within 30 days.

4. Doctrine of Ultra Vires

The doctrine holds that a company cannot act beyond its MoA. Acts outside the scope of its objects are void and cannot be ratified, even unanimously by shareholders. This rule was established in Ashbury Railway Carriage & Iron Co. v. Riche (1875) and reaffirmed in Lakshmanaswami Mudaliar v. LIC (1963). Such acts are “ultra vires the company” and not legally binding.
However, the doctrine has been abolished in England by Section 40 of the Companies Act, 2006, which gives directors full authority to bind the company, provided third parties act in good faith. India, by contrast, continues to recognize ultra vires limitations, though in practice the scope is narrower under the 2013 Act.

5. Articles of Association

Section 2(5) defines AoA as the internal rulebook of a company, outlining its management and governance framework. Section 5 mandates that articles:

• Contain regulations for management and may include prescribed or additional matters.
• May have entrenchment provisions—requiring stricter procedures than a special resolution for alteration.
• Entrenchment can be introduced at incorporation or later by unanimous consent (private companies) or special resolution (public companies).
• Companies must notify the Registrar if such provisions exist.

Model AoA formats appear in Tables F–J of Schedule I. Companies may adopt or modify these model provisions. The Act also simplifies alteration procedures (Section 14):

• Requires a special resolution for amendments or conversion between public and private company forms.
• Conversion from public to private needs Tribunal approval.
• Alterations must be filed with the Registrar within 15 days, down from one month under the 1956 Act.

6. Binding Effect and Legal Status

Under Section 10, the MoA and AoA, once registered, bind the company and its members as if signed by each. They create a statutory contract:

• Between company and its members;
• Among members inter se.
  They do not bind outsiders unless expressly incorporated into contracts. As held in V.B. Rangaraj v. V.B. Gopalakrishnan (1992), external shareholder agreements have no legal force unless included in the articles.

7. Conclusion

While the Companies Act, 2013 modernizes India’s corporate law, the MoA and AoA remain central pillars, largely retaining their traditional form. The Act introduces flexibility (removal of “other objects”, entrenchment, simplified alteration) but maintains the classical structure ensuring balance between corporate autonomy and legal control. The article underscores that, although India follows the English model, it remains more conservative in maintaining the ultra vires principle.

“The Gradual Erosion of the Ultra Vires Doctrine in English Company Law” by Chrispas Nyombi (2014, Int. J. Law & Management)

This research paper by Chrispas Nyombi traces the historical evolution and eventual abolition of the doctrine of ultra vires in English company law. The doctrine, once a cornerstone of corporate limitation, gradually eroded through judicial reinterpretation and legislative reform, culminating in its near extinction under the Companies Act, 2006.

1. Introduction and Historical Context

The doctrine of ultra vires meaning “beyond the powers” originated from public law to restrict corporations from acting outside their defined authority. Introduced to protect shareholders and creditors, it became integral to company law from the 16th century onward. The Bubble Act of 1720, enacted after the South Sea Bubble crisis, restricted companies from operating outside their constitutions, thereby setting the foundation for ultra vires.

Initially, charter companies had powers akin to natural persons, but statutory companies (e.g., railways and canals) were constrained by legislative objectives. With the Joint Stock Companies Acts of 1844, 1855, and 1856, corporate personality was established but capacity was restricted through an objects clause in the memorandum, defining the legal boundaries of a company’s activities.

2. Judicial Development and Early Rulings

The seminal case Ashbury Railway Carriage & Iron Co. v. Riche (1875) solidified ultra vires as a binding limitation: acts outside the objects clause were void and incapable of ratification. The courts justified this to protect investors and creditors. However, it produced hardship for third parties, leading to later judicial relaxation:

• Attorney-General v. Great Eastern Railway Co. (1880) held that acts “reasonably incidental or consequential” to the company’s objects were valid.
• Courts later allowed ancillary or implied powers, expanding corporate freedom.
  Subsequent cases- Cotman v. Brougham (1918), Re Haven Gold Mining Co., and Bell Houses v. City Wall Properties (1966)– gradually broadened companies’ capacity by treating long “catch-all” clauses as sufficient to cover diverse activities.

3. Judicial Confusion and Doctrinal Erosion

Despite relaxation, inconsistencies persisted between corporate capacity and directors’ powers. Cases like Re David Payne (1904), Re Lee Behrens (1932), and Rolled Steel Products Ltd. v. British Steel Corporation (1985) blurred this distinction. Courts alternated between deeming unauthorized acts ultra vires the company or merely beyond the directors’ authority. Later rulings, such as Charterbridge Corp. v. Lloyds Bank (1970), clarified that ultra vires concerns corporate capacity, not misuse of managerial power.

The constructive notice rule compounded the problem—third parties were presumed to know a company’s objects clause. The Royal British Bank v. Turquand (1856) introduced the indoor management rule, allowing outsiders to assume internal compliance, but the ultra vires doctrine still deterred transactions and complicated commerce.

4. Legislative Reforms and European Influence

Reform began with the Cohen Committee (1945) and Jenkins Committee (1962), which sought to mitigate ultra vires’ rigidity but stopped short of abolishing it. The decisive shift came with European Community (EC) Directive 68/151/EEC, Article 9, mandating that acts of a company’s organs bind the company even if beyond its objects, provided the third party acts in good faith.

This led to Section 35 of the Companies Act 1985, deeming all acts of directors in good faith within corporate capacity. The Companies Act 1989 further liberalized corporate power through:

• Section 35(1): Company acts cannot be questioned for lack of capacity.
• Section 3A: Introduced a standard objects clause, allowing companies to pursue any business within their commercial sector.
• Sections 35A–35B: Protected bona fide third parties and abolished the constructive notice rule.

These provisions effectively removed ultra vires as a defense in contractual disputes, though it still applied to directors’ accountability toward shareholders.

5. Final Abolition under the Companies Act, 2006

The Company Law Review (1998–2001) and Modern Company Law White Paper (2002) recommended the doctrine’s total elimination. The Companies Act, 2006, through Section 39, formally abolished ultra vires by granting unlimited capacity to companies and codifying directors’ duties under Sections 170–177. The objects clause was eliminated from the memorandum, replaced by a single constitutional document—the Articles of Association.

Only charitable companies retained limited capacity to safeguard public interest. For ordinary companies, transactions can no longer be voided for exceeding objects; disputes are governed by directors’ fiduciary duties and shareholder remedies under Section 172 (duty to promote success of the company).

6. Conclusion

The ultra vires doctrine evolved from a protective mechanism into a commercial impediment. Judicial reinterpretation, European harmonization, and legislative reforms successively eroded its relevance. The 2006 Act represents the final phase- corporate acts cannot be invalidated for lack of capacity, and third parties are fully protected. The doctrine now survives only as a “ghost haunting management,” serving historical and academic significance but no longer a constraint on corporate freedom.