PRINCIPAL DOCUMENTS OF A COMPANY- MEMORANDUM AND ARTICLES

SANKALP JAIN*

INTRODUCTION

There are certain steps involved in the formation of a company. In the present paper the
prominent steps in the formation, documents and certain important doctrines of company
law in general would be discussed. The first step is to prepare the Memorandum of
Association.1 The Memorandum of Association is the document which lays down the
foundation of a company.2 It is the constitution of the company and provides the edifice on
which its structure is built. It is the principal document of the company and no company can
be registered without the memorandum of association. It defines the scope of the company’s
activities as well as its relation with the outside world.3 While the memorandum must comply
with the provisions of the Companies act, all other documents of the company cannot go
beyond the memorandum.4 The memorandum controls the business field of the company
and the conduct of its management through its object clause. The company has to keep itself
within the limits of the memorandum. The result is that the outsiders who come into contact
with the company have also to observe the conditions stated in the memorandum.5

DEFINITION OF MEMORANDUM

Blacks’ Law Dictionary defines memorandum of association as a legal document setting up a

corporation either with or without limited liability which includes the company’s name
purpose and duration.

*
Email: sankalp_jain11@yahoo.com.
1
S M Shah, Lectures On Company Law 23 (15th ed. N. M. Tripathi Pvt. Ltd. Bombay, 1968).
2
A. Ramaiya, Guide to the Companies Act, Part I at 343 (Wadhwa & Co. Sixteenth Ed. Nagpur, 2004).
3
Ibid.
4
Ibid.
5
Ibid.

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According to Lord Macmillan, “The purpose of the memorandum is to enable the shareholder,
creditors and those who deal with the company to know what is permitted range of
enterprise.”

In the words of Charles Worth, “The memorandum of association is the company’s charter
and defines the limitations of its powers. Its purpose is to enable shareholders; creditors and
those who deal with the company, to know what its permitted range of enterprise is. It is the
document which informs all persons dealing with the company, what the company is formed
to do. It regulates the company’s external affairs, while the articles of association regulate its
internal affairs.”6

This is an exhaustive definition which explains the nature and scope of memorandum. Section
2(28) of the Companies Act, 1956 defines memorandum as under

“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.”

The contents of the memorandum are explained in Section B of the Act.

PURPOSE AND IMPORTANCE OF MEMORANDUM

According to Palmer, the memorandum of association is a document of great importance in

relation to the proposed company. It contains the objects for which the company is formed
and therefore, identifies the possible scope beyond which its actions cannot go. The main
purpose of the memorandum is to explain the scope of activities of the company. The
prospective shareholders know the areas where company will invest their money and the risk
they are taking in investing the money. The outsiders will understand the limits of the working
of the company and their dealings with it should remain within the prescribed scope.7

6
Egyptian Salt & Soda Co. Ltd. v. Port Said Salt Association Ltd. (1931) A.C. 677.
7
N. D. Kapoor, Elements of Company Law 75 (Sultan Chand & Sons, 24th ed. New Delhi, 1999). Also see Cotman
v. Brougham, (1918) A.C. 514.

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Memorandum is the fundamental document of a company which contain conditions upon
which the company is incorporated. This document is important for the following reasons:

• Memorandum defines the limitations on the powers of the company established

under the Act.

• The whole structure of the company is built upon memorandum.

• It explains the scope of activities of the company. The investment knows where their
money will be spent and outsiders also know the nature of activities the company is
authorized to take up.

• It is a basic document of the company with regard to its constitution.

• It is a charter of the company which sets out its written goals.8

CLAUSES OF THE MEMORANDUM

The memorandum of association contains the following clauses:

1. Name Clause: A company being a separate legal entity must have a name. The name of a
company establishes its identity and is the symbol of its existence.9 The last word in the name
of the company if limited by shares or guarantee is ‘limited’ or ‘private limited’ as the case
may be. The name of the company should not be identical with or should not too nearly
resemble the name of another registered company, for such a name may be declared
undesirable by the Central Government. 10 A company may select any name which does not
resemble the name of any other company and it should not contain the words like king,
queen, emperor, Government bodies and the names of world bodies like UNO, WHO, World
Bank etc. The name should not be objectionable in the opinion of the Government. The word
‘limited’ must be used at the end of the name of public company and ‘Private Limited’ is used
by a Private Company. These words are used to ensure that all persons dealing with the

8
Ashbury Rly. Carriage & Iron Co. Ltd v. Riche (1875) L.R. 7 H.L.
9
S. 13(1)(a); Johnson J in Osborn v. the Bank of US, 9 Wheat 22 US 738.
10
S. 20(2).

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company should know that the liability of its members is limited. The name of the company
must be painted outside every place where business of the company is carried on.11 A
company may change its name by passing a special resolution and with the approval of the
Central Government signified in writing.12 In Society of Motor Manufacturers and Traders Ltd.
v. Motor Manufacturers and Traders Mutual insurance Co Ltd.,13 Lawrence J. said:

“Under the companies Act, a company by registering its name gains a monopoly of the use of
that name since no other can be registered under a name identical with it or so nearly
resembling it as to be calculate to deceive”.14

2. Registered Office Clause: The memorandum must mention the State in which the
registered office of the company is to be situated. Every company should have a registered
office, the address of which should be communicated to the Registrar of Companies within.15
This helps the Registrar to have correspondence with the company. The place of registered
office can be intimated to the Registrar within 30 days of incorporation or commencement of
business, whichever is earlier.16 A company can shift its registered office from one place to
another in the same town with intimation to the Register.17 But if the company wants to shift
its registered office from one town to another town in the same state, a special resolution is
required to be passed.18 If the office is to be shifted from one state to another state it involves
alteration in the memorandum as provided under section 17 of the Companies Act, 1956.19 It
can be done by passing special resolution and confirmation thereof by the Central
government. The Central government would satisfy itself that sufficient notice has been given
in this respect.20 In Minerva Mills Ltd. v. Govt. of Maharashtra21 Justice Ray of the Bombay
High court held that the Company Law Board (CLB) cannot refuse confirmation of the shifting

11
Supra note 7 at 78.
12
S. 21. Also see proviso.
13
(1925) 1 Ch 675.
14
Avtar Singh, Company Law 39 (Eastern Book Co, Lucknow, 12th ed. 2005)
15
S. 146.
16
Ibid.
17
S. 146(2).
18
S. 146(4).
19
A K Majumdar, Company Law and Practice 115 (Taxmann, 1995).
20
Ibid.
21
(1975) Company Cases 1 (Bom).

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of the registered office on the ground that the change would cause loss of revenue to the
general economy of the state.22 After the amendment of 2002 the Central Government has
to be satisfied in this regard and not the CLB.

3. Object Clause: The statement of objects in a memorandum defines the sphere of the
company’s activities and hence, is one of the important clauses of the memorandum of
association. It determines the rights and powers of the company and also defines its sphere
of activities.23 It has a twofold effect:

a) affirmative i.e. It determines what are to be the powers of the company, and
b) negative, i.e. it restricts the powers to those actually conferred by it.24

No activity can be taken up by the company which is not mentioned in the object clause.
Moreover, the investors i.e., shareholders will know the sphere of activities which the
company can undertake. The choice of the object clause lies with the subscribers to the
memorandum and their freedom in this respect is almost unrestricted. They are free to add
anything to it provided it is not contrary to the provisions of the Companies Act and other
laws of the land.25 The memorandum must state separately the main objects and other
objects. Main objects will include objects to be pursued by the company on incorporation and
objects incidental or ancillary to the attainment of the main objects. Other objects will include
all other objects which are not included in the main objects.26 The object clause offers
protection to the shareholders by ensuring that the funds raised for the undertaking are not
going to be risked in any other undertaking. The creditors also feel protected by this clause.
By confining the activities within a specified field, it serves the public interest also. Stressing
the need for statement of objects in the memorandum, Lord Parker observed in Cotman v.
Brougham27 as follows:

22
Rank Film Distributors of India Ltd v. Registrar of Companies, West Bengal AIR 1969 Cal. 32.
23
Ss. 13(1)(c) & 13(1)(d).
24
Supra note 1 at 27.
25
Supra note 14 at 59.
26
Supra note 7 at 79.
27
(1918) A. C. 514.

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”The narrower the objects expressed in the memorandum the less is the subscribers’ risk but
the wider such objects the greater is the security of those who transact business with the
company”.

The object clause can be changed to enable a company to carry on its activities more
economically, or by improved means to carry on some business which under existing
circumstances may conveniently by combined with the object clause.

4. Liability Clause: This clause states that the liability of the members is limited whether it is
by shares or by guarantee.28 It means that the members will be liable to pay only the unpaid
balance of their shares. The liability of the members may be limited by guarantee. It states
the amount which every member will undertake to contribute to the assets of the company
in the event of its winding up in case a company is limited by guarantee.29

5. Capital Clause: This clause states the total capital of the proposed company. The division
of capital into equity share capital and preference share capital should also be mentioned.
The number of shares in each category and their value should be given. If some special rights
and privileges are conferred on any type of shareholders, mention may also be made in the
clause to enable the public to know the exact nature of capital structure of the company. This
clause lays down the limit beyond which the company cannot issue shares without altering
the memorandum as provided by Section 94 of the Companies Act.30

6. Association Clause: This clause contains the names of signatories to the memorandum of
association. The memorandum must be signed by at least seven persons in the cause of public
limited company and by at least two persons in the case of private limited company. Each
subscriber must take at least one share in the company. The subscribers declare that they
agree to incorporate the company and agree to take the shares stated against their names.

28
S. 13(2).
29
Supra note 19 at 112.
30
Ibid.

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The signatures of subscriber are attested by at least one witness each. The full addresses and
occupations of subscribers and the witnesses are also given.31

ALTERATION OF MEMORANDUM OF ASSOCIATION

Section 16 provides that the company cannot alter the conditions contained in memorandum
except in the cases and in the mode and to the extent as expressly provided by the Act.
Memorandum of Association is a basic document of the company. A memorandum can be
altered in regard to:

a) the name of the company;

b) the place of the registered office;
c) its objects;
d) its capital;
e) the rights attached to different classes of shares by the memorandum;
f) the limited liability of its directors32

Any change in various clauses of memorandum may have an adverse effect on any of the
parties connected with the company. Company Law has prescribed a particular procedure for
making a change in the memorandum.33 The procedure provided for different clauses varies.
The change in situation and objects clause is allowed only under certain situations. It will be
allowed when it is necessary for any of the following reasons:

• The change is necessary to allow the company to carry on its business more
economically or efficiently.

• The company will be able to attain its objectives by new and improved means.

• The company may enlarge the local area of its operations.

• The company is enabled by change to carry on some new business with convenience
and advantage.

31
S. 13(4)(c); also see Supra note 19 at 112.
32
Supra note 1 at 33.
33
Supra note 19 at 113.

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 • To restrict or abandon any of the objects specified in the memorandum.

• To sell whole of part of the company’s property.

• To amalgamate with any other company or body of persons.34

ARTICLES OF ASSOCIATION

Next important document in the incorporation of a company is ‘the articles of association’. A

company is an incorporated body. So there should be some rules and regulations to be
formed for the management of its internal affairs and conduct of its business as well as the
relation between the members and the company. Moreover, the rights and duties of its
members and the company are to be recorded. There comes the need and origin of Articles
of Association. The main provisions regarding the articles of association will be found in
Sections 26 to 31 and 38 of the Act.

The articles of association of a company are its bye-laws or rules and regulations that govern
the management of its internal affairs and the conduct of its business.35 Table A of Schedule
1 of the Companies Act, 1956 provides model regulations for the management of the
company limited by shares. All or any of the regulations contained in Table A may be adopted
by a company limited by shares. Articles of Association is a document which all companies
should prepare.36

MEANING AND PURPOSE OF ARTICLES

Section 2(2) of the Companies Act defines Articles as under:

the Articles of Association of a company as originally framed or as altered from time to time
in pursuance of any previous companies’ law or of this Act. But it is not clearly defined what
is an Article of Association.

34
Supra note 1 at 33.
35
Supra note 21 at 127.
36
Supra note 1 at 36.

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Basically Article of Association contains the rules and regulations relating to the management
of companies internal affairs. It is similar to as a partnership deed in a partnership.37 The
Article of Association contains the following details:

1. The powers of directors, officers and the shareholders as to voting etc.

2. The mode and form in which the business of the company is to be carried out.
3. The mode and form in which the changes in the internal regulations can be made, etc.

The articles are binding not only to the existing members, but also to the future members
who may join in the future. The heirs of members, successors and legal representatives are
also bound by whatever is contained in the Article. The Articles bind the company and its
members as soon as they sign the document. It is a contract between the company and its
members. Members have certain rights and duties towards the company and the company
have certain obligations towards its members. At the same time the company also expects
some duties and obligations which the members have to fulfil for the smooth functioning of
the company.38

REGISTRATION OF ARTICLES

Every private company, an unlimited company and a company limited by guarantee must
have their own article and it should be registered with the Registrar of Companies along with
the memorandum as per Section 26 of the Companies Act, 1956. But it is not necessary for a
Company limited by shares to have their own articles. It may either have its own articles or it
may adopt either wholly or partly Table A of Schedule I of the companies Act as Table A of
schedule I of the Companies Act will automatically apply to such companies. The articles of
association must be printed, divided into paragraphs, numbered consecutively and signed by
each subscriber of the memorandum of association in the presence of at least one witness
who shall attest the signature and shall likewise add his address, description and occupation,
if any as per Section 30.

37
Ibid.
38
Supra note 14 at 82.

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RELATION BETWEEN MEMORANDUM AND ARTICLES

The articles have always been held to be subordinate to the memorandum. Thus, if they both
are in conflict with each other the articles must give way.39 Lord Cairns in Ashbury’s40 case
described the relationship between the memorandum and the articles as follows:

“The memorandum is as it were, the area beyond which the actions of the company cannot
go; inside the area the shareholders may make such regulations for their own governance as
they think fit.”

The memorandum, however, must be read in conjunction with the articles. This shall be done
in order to remove the ambiguity in the memorandum if any or to supplement the
memorandum.41 The memorandum and articles, when registered bind a company and the
members thereof to the same extent as if they had been signed by the company and each
member. The effect is that of a contract between each member and the company.42

DOCTRINE OF ULTRA VIRES

The object clause of the memorandum of the company contains the object for which the
company is formed. An act of the company must not be beyond the objects clause, otherwise
it will be ultra vires and, therefore, void and cannot be ratified even if all the members wish
to ratify it. This is known as the doctrine of ultra vires, which has been firmly established in
the case of Ashbury Railway Carriage and Iron Company Ltd v. Riche.43 Thus the expression
ultra vires means an act beyond the powers. Here the expression ultra vires is used to indicate
an act of the company which is beyond the powers conferred on the company by the objects
clause of its memorandum.44 An ultra vires act is void and cannot be ratified even if all the
directors wish to ratify it. Sometimes the expression ultra vires is used to describe the
situation when the directors of a company have exceeded the powers delegated to them.

39
Supra note 14 at 83.
40
Supra note 8.
41
N D Kapoor, Elements of Mercantile Law 47 (28th ed., Sultan Chand & Sons, New Delhi, 2005).
42
Ibid.
43
Supra note 7 at 86.
44
Supra note 7 at 86; also see supra note 14 at 60.

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Where a company exceeds its power as conferred on it by the objects clause of its
memorandum, it is not bound by it because it lacks legal capacity to incur responsibility for
the action, but when the directors of a company have exceeded the powers delegated to
them. This use must be avoided for it is apt to cause confusion between two entirely distinct
legal principles. Consequently, here we restrict the meaning of ultra vires objects clause of
the company’s memorandum.

The doctrine of estoppel usually precludes reliance on the defence of ultra vires where the
transaction was fully performed by one party a fortiori, a transaction which was fully
performed by both parties could not be attacked. If the contract was fully executory, the
defense of ultra vires might be raised by either party. If the contract was partially performed,
and the performance was held to be insufficient to bring the doctrine of estoppel into play, a
suit for quasi contract for recovery of benefits conferred was available. If an agent of the
corporation committed a tort within the scope of his or her employment, the corporation
could not defend on the ground the act was ultra vires.45

Doctrine of ultra vires has been developed to protect the investors and creditors of the
company. The doctrine of ultra vires could not be established firmly until 1875 when the
Ashbury Railway Carriage and Iron Company (Limited) v. Hector Riche46 was decided by the
House of Lords. A company called “The Ashbury Railway Carriage and Iron Company,” was
incorporated under the Companies Act, 1862. Its objects, as stated in the Memorandum of
Association, were “to make, and sell, or lend on hire, railway carriages and waggons, and all
kinds of railway plant, fittings, machinery, and rolling-stock; to carry on the business of
mechanical engineers and general contractors; to purchase, lease, work, and sell mines,
minerals, land, and buildings; to purchase and sell, as merchants, timber, coal, metals, or
other materials, and to buy and sell any such materials on commission or as agents.” The
directors agreed to purchase a concession for making a railway in a foreign country, and
afterwards (on account of difficulties existing by the law of that country), agreed to assign the
concession to a Société Anonyme formed in that country, which société was to supply the
materials for the construction of the railway, and to receive periodical payments from the

45
Supra note 7 at 86-90; see generally supra note 14 at 60-73.
46
Supra note 8 at 653.

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English company. The objects of this company, as stated in the Memorandum of Association,
were to supply and sell the materials required to construct railways, but not to undertake
their construction. The contract here was to construct a railway. That was contrary to the
memorandum of association; what was done by the directors in entering into that contract
was therefore in direct contravention of the provisions of the Company Act, 1862. It was held
that this contract, being of a nature not included in the Memorandum of Association, was
ultra vires not only of the directors but of the whole company, such that even the subsequent
assent of the whole body of shareholders would have no power to ratify it. The shareholders
might have passed a resolution sanctioning the release, or altering the terms in the articles of
association upon which releases might be granted. If they had sanctioned what had been
done without the formality of a resolution, that would have been perfectly sufficient.47 Thus,
the contract entered into by the company was not a voidable contract merely, but being in
violation of the prohibition contained in the Companies Act, was absolutely void. It is exactly
in the same condition as if no contract at all had been made, and therefore a ratification of it
is not possible. If there had been an actual ratification, it could not have given life to a contract
which had no existence in itself; but at the utmost it would have amounted to a sanction by
the shareholders to the act of the directors, which, if given before the contract was entered
into, would not have made it valid, as it does not relate to an object within the scope of the
memorandum of association. Later on, in the case of Attorney General v. Great Eastern
Railway Co.48 this doctrine was made clearer. In this case the House of Lords affirmed the
principle laid down in Ashbury Railway Carriage and Iron Company Ltd v. Riche49 but held that
the doctrine of ultra vires “ought to be reasonable, and not unreasonably understood and
applied and whatever may fairly be regarded as incidental to, or consequential upon, those
things which the legislature has authorized, ought not to be held, by judicial construction, to
be ultra vires.” The doctrine of ultra vires was recognised in Indian in the case of Jahangir R.
Modi v. Shamji Ladha50 and has been well established and explained by the Supreme Court
in the case of A. Lakshmanaswami Mudaliar v. Life Insurance Corporation Of India.51 Even in
India it has been held that the company has power to carry out the objects as set out in the

47
Ibid.
48
(1880) 5 AC 473.
49
Supra note 8 at 653.
50
[1866-67] 4 Bom. H. Cr 1855.
51
AIR 1963 SC 1185.

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objects clause of its memorandum, and also everything, which is reasonably necessary to
carry out those objects. For example, a company which has been authorized by its
memorandum to purchase land had implied authority to let it and if necessary, to sell it.
However, it has been made clear by the Supreme Court that the company has, no doubt, the
power to carry out the objects stated in the objects clause of its memorandum and also what
is conclusive to or incidental to those objects, but it has no power to travel beyond the objects
or to do any act which has not a reasonable proximate connection with the object or object
which would only bring an indirect or remote benefit to the company. To ascertain whether
a particular act is ultra vires or not, the main purpose must first be ascertained, then special
powers for effecting that purpose must be looked for, if the act is neither within the main
purpose nor the special powers expressly given by the statute, the inquiry should be made
whether the act is incidental to or consequential upon. An act is not ultra vires if it is found:

a) within the main purpose, or

b) within the special powers expressly given by the statute to effectuate the main
purpose, or

c) neither within the main purpose nor the special powers expressly given by the statute
but incidental to or consequential upon the main purpose and a thing reasonably done
for effectuating the main purpose.52

EFFECT OF ULTRA VIRES TRANSACTIONS:

A contract beyond the objects clause of the company’s memorandum is an ultra vires contract
and cannot be enforced by or against the company as was decided in the cases of In Re: Jon
Beaufore (London) Ltd.53 In S. Sivashanmugham And Others v. Butterfly Marketing Private
Ltd.54 a borrowing beyond the power of the company (i.e. beyond the objects clause of the
memorandum of the company) was held to be ultra vires borrowing. However, the courts
have developed certain principles in the interest of justice to protect such lenders. Thus, even

52
L.C.B. Grover, The Principle of Modern Company Law, 83-99 (Stevens & Sons, London 1969).
53
(1953) Ch. 131.
54
(2001) 105 CompCas Mad 763.

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in a case of ultra vires borrowing, the lender may be allowed by the courts the following
reliefs:

a) Injunction- if the money lent to the company has not been spent the lender can get
the injunction to prevent the company from parting with it.

b) Tracing- the lender can recover his money so long as it is found in the hands of the
company in its original form.

c) Subrogation- if the borrowed money is applied in paying off lawful debts of the
company, the lender can claim a right of subrogation and consequently as he will stand
in the shoes of the creditor who has paid off with his money and can sue the company
to the extent the money advanced by him has been so applied but this subrogation
does not give the lender the same priority that the original creditor may have or had
over the other creditors of the company.

EXCEPTIONS TO THE DOCTRINE OF ULTRA VIRES

There are, however, certain exceptions to this doctrine, which are as follows:

a) An act, which is intra vires the company but outside the authority of the directors may
be ratified by the shareholders in proper form.

b) An act which is intra vires the company but done in an irregular manner, may be
validated by the consent of the shareholders. The law, however, does not require that
the consent of all the shareholders should be obtained at the same place and in the
same meeting.

c) If the company has acquired any property through an investment, which is ultra vires,
the company’s right over such a property shall still be secured.

d) While applying doctrine of ultra vires, the effects which are incidental or consequential
to the act shall not be invalid unless they are expressly prohibited by the Company’s
Act.

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 e) There are certain acts under the company law, which though not expressly stated in
the memorandum, are deemed impliedly within the authority of the company and
therefore they are not deemed ultra vires. For example, a business company can raise
its capital by borrowing.

f) If an act of the company is ultra vires the articles of association, the company can alter
its articles in order to validate the act.55

CASE LAWS

1. Eley v. The Positive Government Security Life Assurance Company, Limited:56 It was
held that the articles of association were a matter between the shareholders inter se,
or the shareholders and the directors, and did not create any contract between the
plaintiff and the company and article is either a stipulation which would bind the
members, or else a mandate to the directors. In either case it is a matter between the
directors and shareholders, and not between them and the plaintiff.

2. Shuttleworth v. Cox Brothers and Company (Maidenhead), Limited and Others:57 It

was held that the contract, if any, between the plaintiff and the company contained
in the articles in their original form was subject to the statutory power of alteration
and if the alteration was bona fide for the benefit of the company it was valid and
there was no breach of that contract. There was no ground for saying that the
alteration could not reasonably be considered for the benefit of the company. There
being no evidence of bad faith, there was no ground for questioning the decision of
the shareholders that the alteration was for the benefit of the company and the
plaintiff was not entitled to the relief claimed.

3. In Re: New British Iron Company:58 It was held that the article is not in itself a contract
between the company and the directors; it is only part of the contract constituted by

55
Supra note 14 at 60-73.
56
(1875-76) L.R. 1 Ex. D.
57
[1927] 2 K.B.
58
[1898] 1 Ch. 324.

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 the articles of association between the members of the company inter se. Under the
article as thus embodied the directors obtain a contractual right to an annual sum of
1000 as remuneration. It was also held that although these provisions in the articles
were only part of the contract between the shareholders inter se, the provisions were
on the directors being employed and accepting office on the footing of them,
embodied in the contract between the company and the directors. The remuneration
was not due to the directors in their character of members, but under the contract so
embodying the provisions, and that in the winding-up of the company, the directors
were entitled to rank as ordinary creditors in respect of the remuneration due to them
at the commencement of the winding-up.

4. Rayfield v. Hands and Others:59 Field-Davis Ltd. was a private company carrying on
business as builders and contractors, incorporated in 1941 under the Companies Act,
1929, as a company limited by shares, having a share capital of £4,000, divided into
4,000 ordinary shares of £1 each, of which 2,900 fully-paid shares had been issued.
The plaintiff, Frank Leslie Rayfield, was the registered holder of 725 of those shares,
and the defendants, Gordon Wyndham Hands, Alfred William Scales and Donald
Davies were at all material times the sole directors of the company. The plaintiff was
a shareholder in a company. Article 11 of the articles of association of the company
required to inform the directors of his intention to transfer 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 the plaintiff notified the directors, who
contended that they need not take and pay for the plaintiff’s shares, on the ground
that the articles imposed no such liability upon them. The plaintiffs claimed for the
determination of the fair value of his shares, and for an order that the directors should
purchase such shares at a fair value. It was found that true construction of the articles
required the directors to purchase the plaintiff’s shares at a fair price. Article 11 was
concerned with the relationship between the plaintiff as a member and the
defendants, not as directors, but as members of the company.

59
1957 R. No. 603.

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DOCTRINE OF CONSTRUCTIVE NOTICE

This doctrine provides that persons dealing with a company are deemed to have knowledge
of whatever is contained in the company's constitution and other public documents of the
company, especially as it relates to the powers, functions and duties of the company’s
directors.60 The basis of this imputation is that these are public documents and therefore,
open to inspection by anybody. The doctrine operates on the assumption that people doing
business with a company will be sufficiently motivated to check the company's constitution
or other public documents to ensure that the transaction they are entering into is not only
allowed but to determine whether there are any internal formalities that must be complied
with.61 The end result of the doctrine of constructive notice is that an individual or juristic
entity that deals with a company is presumed to be informed of any required internal
formalities or constraints prescribed by the company's public documents, mainly the
constitution, relating to the transaction and the authority of the person representing the
company in the transaction. The individual or entity is thus prohibited from denying
knowledge of the formalities or constraints.62

The built in proviso to the doctrine as held in Central Merchant Bank Ltd v. Orange Benefit
Society63 is that a company that fraudulently misleads a person into contracting with it on the
basis that its directors or agents have the necessary authority to do so, cannot then use the
doctrine as a defence in a subsequent claim against the company by alleging that the directors
did not have the necessary authority to transact and that the claimant had constructive
knowledge of this fact.

DOCTRINE OF INDOOR MANAGEMENT

The doctrine of indoor management is an exception to the rule of constructive notice. It

imposes an important limitation on the doctrine of constructive notice. According to this

60
Supra note 19 at 142.
61
Supra note 14 at 94-108.
62
Ibid.
63
1975 4 SA 588.

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doctrine" persons dealing with the company are entitled to presume that internal
requirements prescribed in memorandum and articles have been properly observed".64

The doctrine of constructive notice is mitigated by the rule developed in the English case
of Royal British Bank v. Turquand.65 In this case the rule, known as the Turquand rule, was put
forward as being that although a person dealing with a company has constructive notice of
all the internal formalities required by the company's constitution with regards to the
transaction, the person does not have constructive knowledge of whether the internal
formalities have been complied with and the person is not obliged to enquire if the formalities
have been complied with. The effect of the rule is that where a party completes a transaction
with a company and the transaction is deemed void due to the fact that the person
representing the company lacked authority and the only reason the representative lacked
authority was due to non-compliance with an internal formality, the company may still be
held liable and may not rely on the doctrine of constructive knowledge. The Turquand Rule
only applies where the persons purporting to act for the company holds the positions they
purport to hold either de facto or de jure and the other party was transacting with the
company in good faith.66

A transaction has two aspects, namely, substantive and procedural. An outsider dealing with
the company can only find out the substantive aspect by reading the memorandum and
articles. Even though he may find out the procedural aspect, he cannot find out whether the
procedure has been followed or not. For example, a company may have borrowing powers
by passing a resolution according to its memorandum and articles. An outsider can only find
out the borrowing powers of the company. But he cannot find out whether the resolution has
in fact been passed or not. The outsiders dealing with the company are presumed to have
read and understood the memorandum and articles and to see that the proposed dealing is
not inconsistent therewith, but they are not bound to do more; they need not inquire into
the regularity of the internal proceedings as required by the memorandum and articles. They
can presume that all is being done regularly. The doctrine of indoor management is also

64
Supra note 41 at 50.
65
1856 119 ER 886.
66
Ibid.

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known as the TURQUAND rule. The internal procedure is not a matter of public knowledge.
An outsider is presumed to know the constitution of a company, but not what may or may
not have taken place within the doors that are closed to him.

EXCEPTIONS TO DOCTRINE OF INDOOR MANAGEMENT:

a) Knowledge of irregularity: When a person dealing with a company has actual

or constructive notice of the irregularity as regards internal management, he cannot
claim benefit under the rule of indoor management. He may in some cases, be himself
a part of the internal procedure. The rule is based on common sense and any other
rule would encourage ignorance and condone dereliction of duty.

b) Negligence: Where a person dealing with a company could discover the irregularity if
he had made proper inquiries, he cannot claim the benefit of the rule of
indoor management. 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. If an officer of a
company purports to act outside the scope of his apparent authority, suspicion should
arise and the outsider should make proper inquiry before entering into a contract with
the company.

c) Forgery: The rule in Turquand's case 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.

d) Acts outside the scope of apparent authority: if an officer of a company enters into a
contract with a third party and if the act of the officer is beyond the scope of his
authority, the company is not bound. In such a case, the plaintiff cannot claim
the protection of the rule of indoor management simply because under the articles
the power to do the act could have been delegated to him. The plaintiff can sue the

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 company only if the power to act has in fact been delegated to the officer with whom
he entered into the contract.67

CONCLUSION

The memorandum of association is thus, the basic and fundamental document in the
formation of a company. It is so sacred that any other document or provision of the company
cannot violate it. Anything beyond the memorandum particularly its object clause would be
ultra vires. The articles though subsidiary to the memorandum compliment and supplement
it whenever required and has its own importance in the day to day functioning of the
company. The memorandum is the source of all powers, functions and authority of a
company. It also provides all information regarding the company and is very much open to
all. The doctrine of indoor management seeks to protect the interest of the shareholders
who are in minority or who remains in dark about whether the working of the internal affairs
of the company are being carried out in accordance with the memorandum and articles. It
lays down that persons dealing with a company having satisfied themselves that the proposed
transaction is not in its nature inconsistent with the memorandum and articles, are not bound
to inquire the regularity of any internal proceeding.

67
Supra note 41 at 51.

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 LIST OF CASES REFERRED

1. Ashbury Rly. Carriage & Iron Co. Ltd v. Riche (1875) L.R. 7 H.L.

2. Attorney General v. Great Eastern Railway Co. (1880) 5 AC 473.

3. Central Merchant Bank Ltd v. Orange Benefit Society, 1975 4 SA 588

4. Cotman v. Brougham, (1918) A.C. 514

5. Egyptian Salt & Soda Co. Ltd. v. Port Said Salt Association Ltd. (1931) A.C. 677

6. Eley v. The Positive Government Security Life Assurance Company, Limited, (1875-76)
L.R. 1 Ex. D.

7. In Re: Jon Beaufore (London) Ltd. (1953) Ch. 131.

8. In Re: New British Iron Company, [1898] 1 Ch. 324

9. Jahangir R. Modi v. Shamji Ladha, [1866-67] 4 Bom. H. Cr 1855

10. Minerva Mills Ltd. v. Govt. of Maharashtra, (1975) Company Cases 1 (Bom)

11. Osborn v. the Bank of US, 9 Wheat 22 US 738

12. Rank Film Distributors of India Ltd v. Registrar of Companies, West Bengal, AIR 1969
Cal. 32

13. Rayfield v. Hands and Others, 1957 R. No. 603

14. Royal British Bank v. Turquand, 1856 119 ER 886

15. Society of Motor Manufacturers and Traders Ltd. v. Motor Manufacturers and Traders
Mutual insurance Co Ltd. (1925) 1 Ch 675

16. S. Sivashanmugham And Others v. Butterfly Marketing Private Ltd. (2001) 105
CompCas Mad 763

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 BIBLIOGRAPHY

PRIMARY SOURCES

1. Companies Act, 1956

SECONDARY SOURCES

1. A K Majumdar, Company Law and Practice 115 (Taxmann, 1995)

2. A. Ramaiya, Guide to the Companies Act (Wadhwa & Co. Sixteenth Ed. Nagpur, 2004)

3. Avtar Singh, Company Law (Eastern Book Co, Lucknow, 12th ed. 2005)

4. L.C.B. Grover, The Principle of Modern Company Law, 83-99 (Stevens & Sons, London
1969)

5. N. D. Kapoor, Elements of Company Law (Sultan Chand & Sons, 24th ed. New Delhi,

1999)

6. N. D. Kapoor, Elements of Mercantile Law (28th ed., Sultan Chand & Sons, New Delhi,
2005)

7. S M Shah, Lectures On Company Law (15th ed. N. M. Tripathi Pvt. Ltd. Bombay, 1968)

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