Company Law XHL 601 – Notes

Unit 2
Company’s constitutional Documents
a. Memorandum of Association and Articles of Association - Importance,
Registration, and its Effect; Binding Nature; Clauses in Memorandum of
Association, Alteration of Memorandum of Association and Articles of
Association
In the realm of company law, the constitutional documents of a company, comprising the
Memorandum of Association (MOA) and Articles of Association (AOA), serve as the
foundational pillars upon which the company is built. These documents outline the
company's constitution, objectives, internal regulations, and the relationship between its
members and the company itself. Here’s an elaboration on the importance, registration,
effect, binding nature, clauses, alteration, and significance of the MOA and AOA:

Importance of MOA and AOA:

MOA: The MOA sets forth the company’s fundamental objectives, defining its scope of
operations and the powers with which it is endowed. It provides clarity regarding the
company’s raison d'être and the permissible activities it can engage in.

AOA: The AOA complements the MOA by laying down the rules and regulations governing
the internal management, administration, and conduct of the company's affairs. It
delineates the rights, duties, and responsibilities of shareholders, directors, and officers
within the company.

Registration and Effect:

Registration: Both the MOA and AOA must be registered with the Registrar of Companies
(ROC) during the incorporation process. These documents, along with other necessary
filings, form the basis of the company's legal existence.

Effect: Upon registration, the MOA and AOA become legally binding on the company and its
members. They represent a contract between the company and its members, as well as
among the members themselves.
Binding Nature:
The MOA and AOA bind the company and its members to the provisions contained therein.
They establish the rights and obligations of the company and its members, providing a
framework for governance and operation.
Third parties dealing with the company are also bound by the provisions of the MOA and
AOA, as they represent the company’s constitution and the rules governing its actions.
Clauses in MOA:
The MOA typically includes clauses such as:

Name Clause: Specifies the name of the company.

Registered Office Clause: Indicates the location of the company's registered office.
Object Clause: Defines the primary and ancillary objects for which the company is formed.
Liability Clause: Specifies the liability of members, whether limited by shares, guarantee, or
unlimited.
Capital Clause: States the authorized share capital of the company and its division into
shares.
Alteration of MOA and AOA:

While the MOA and AOA form the company’s constitution, they are not immutable. They
can be altered, subject to compliance with the provisions of the Companies Act, 2013.
Alteration may involve changes to the name, registered office, objects, share capital, or any
other provisions contained in the MOA or AOA.
Any alteration to the MOA or AOA requires the approval of the shareholders by way of
special resolution, and subsequent approval from the ROC.
In conclusion, the Memorandum of Association and Articles of Association serve as the
bedrock of a company's legal framework, defining its purpose, structure, and internal
governance. Their registration and compliance are crucial for establishing the legal identity
and functioning of the company. While they provide stability and clarity, their flexibility
allows for adaptation to changing circumstances through proper alteration procedures,
ensuring the company remains relevant and compliant with evolving legal requirements.

b. Doctrine of ultra vires – Effect of ultra vires transactions critical

analysis
Ashbury Railway Carriage and Iron Co. Ltd. V. Riche (1875) L.R. 7 H.L. : (1874-
80) AII ER Rep. 2219 (HL) 79

The doctrine of ultra vires, a fundamental principle in company law, refers to acts or
transactions that are beyond the powers or objectives outlined in a company's
Memorandum of Association (MOA). When a company engages in ultra vires activities, it
acts beyond its legal capacity and authority, rendering such actions void and unenforceable.
Let's analyze the effect of ultra vires transactions and discuss the landmark case of Ashbury
Railway Carriage and Iron Co. Ltd. v. Riche (1875):

Effect of Ultra Vires Transactions:

Void and Unenforceable: Ultra vires transactions are considered void ab initio, meaning
they are null and void from the outset. As such, they cannot be enforced by or against the
company or any other party involved in the transaction.
Inability to Ratify: Unlike intra vires transactions (those within the company's legal
capacity), ultra vires transactions cannot be ratified by the company's shareholders or
directors. Ratification attempts are ineffective because the company lacked the legal
capacity to enter into such transactions.
Personal Liability: Directors or officers who authorize ultra vires transactions may be held
personally liable for any losses incurred by the company or third parties as a result of such
transactions. This liability arises due to their breach of fiduciary duty and duty of care
towards the company.

Exceptions: While ultra vires transactions are generally void, courts may provide certain
exceptions to prevent unjust outcomes. For example, if a third party enters into a
transaction with the company in good faith and without knowledge of the transaction's ultra
vires nature, the court may grant relief to prevent unjust enrichment.

Critical Analysis of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1875):
In this landmark case, Ashbury Railway Carriage and Iron Co. Ltd. contracted with Riche to
construct a railway line in Belgium, a transaction beyond the objects specified in its MOA.
When Ashbury refused to honor the contract, Riche sued for breach. The House of Lords
held that the contract was ultra vires and therefore void. This case solidified the principle
that ultra vires transactions are void and unenforceable.
Key Takeaways from the Case:
Confirmation of Ultra Vires Doctrine: The case reaffirmed the doctrine of ultra vires,
emphasizing that companies must act within the powers and objects specified in their MOA.
No Ratification: The decision clarified that ultra vires transactions cannot be ratified by
shareholders or directors, regardless of subsequent approval or acknowledgment.
Limits on Corporate Authority: The case underscored the importance of adhering to the
objects clause in a company's MOA and highlighted the limits of corporate authority.

Impact on Third Parties: The case highlighted the potential risks for third parties dealing
with companies and underscored the need for due diligence to ensure transactions are intra
vires.
In conclusion, the doctrine of ultra vires plays a crucial role in defining the scope of a
company's authority and protecting stakeholders' interests. The Ashbury case remains a
seminal authority in company law, establishing the principle that ultra vires transactions are
void and unenforceable, with significant implications for corporate governance and
transactions involving companies.

c. Doctrine of Indoor Management : Binding Nature of Articles of

Association between members/shareholders inter se and also
outsiders ; Rule of Constructive Notice; ‘Indoor Management’ -
Exceptions – knowledge of irregularity, suspicion of irregularity ,
forgery , representation through articles
The doctrine of indoor management, also known as the rule of internal management or
Turquand's rule, acts as a counterbalance to the doctrine of ultra vires in company law. It
essentially protects outsiders who transact with a company in good faith by presuming that
they need not inquire into the company's internal affairs. Let's delve into the binding nature
of the Articles of Association (AOA) between members/shareholders and outsiders, the rule
of constructive notice, exceptions to the indoor management rule, and the significance of
AOA in this context:
Binding Nature of AOA between Members/Shareholders and Outsiders:
AOA constitutes a contract between the company and its members/shareholders, defining
their rights, duties, and obligations.

However, the AOA is not binding on outsiders dealing with the company, as they are
presumed to be unaware of its internal rules and regulations.
Rule of Constructive Notice:
The rule of constructive notice states that outsiders dealing with a company are deemed to
have constructive notice of its public documents, such as the Memorandum of Association
(MOA) and AOA.
However, this rule does not apply to the AOA's internal regulations, as they are not publicly
available and are considered private documents.
‘Indoor Management’ - Exceptions:

The indoor management rule provides exceptions to the rule of constructive notice,
protecting outsiders who transact with the company in good faith. Exceptions include:
Knowledge of Irregularity: If an outsider has actual knowledge of an irregularity in the
company's internal affairs, they cannot rely on the indoor management rule.
Suspicion of Irregularity: If an outsider has grounds to suspect an irregularity, they are
obligated to inquire further and cannot claim the protection of the indoor management
rule.

Forgery: If the irregularity involves forgery or fraud, the indoor management rule does not
apply, and the transaction may be deemed void.
Representation through Articles: If the company's AOA holds out a particular person as
having authority to act on behalf of the company, outsiders dealing with that person are
entitled to assume they have authority, even if the AOA is not followed internally.
Significance of Articles of Association:
AOA play a pivotal role in determining the internal governance structure of a company and
the authority of its officers and agents.

They provide clarity and guidance to members/shareholders regarding their rights and
responsibilities within the company.
AOA also serve as a safeguard for outsiders dealing with the company, ensuring
transparency and accountability in corporate transactions.
In conclusion, while the AOA are binding between the company and its
members/shareholders, outsiders are protected by the doctrine of indoor management,
which presumes their ignorance of the company's internal affairs. However, this protection
is not absolute, as there are exceptions where outsiders may be held accountable if they
have actual knowledge or suspicion of irregularities within the company. Therefore, while
AOA are essential for internal governance, they also have implications for transactions
involving outsiders, highlighting the delicate balance between internal management and
external dealings in company law.