Understanding Section 4: Memorandum

Introduction

Section 4 of Companies Act, 2013, part of chapter II, lays down the provision with respect to memorandum of a company. This section was enforced vide notification dated 1st April 2014. Memorandum of a company is a document very essential, given identity to the company, letting the people outside know the nature of the company. Memorandum is defined as “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”[1]. It is the charter of the company and defines the scope of its activities. It lays down the relation that a company has with its members as well the relation it has vis-à-vis the rights of the member and the interest of the company. This analysis will lay down the requirements of the memorandum in detail and analyse its important aspects.

Purpose of Section 4

This section under the act, 2013 is quite explanative and lays down the requirements with respect to memorandum of a company, which shall mention the name of a company, State in which the registered office of the company is to be situated, objects for which the company is proposed to be incorporated, liability of members, amount of share capital with which the company is to be registered. Section 4 briefly is as follows:

1. Name Clause: Every memorandum must state the name of the company with which it is to be registered. Name of a company shall indicate whether it is a public or a private company, by adding the last word as Limited or Private Limited. In government companies the word Private Limited or Limited must be omitted[2]. This exception as per notification is only applicable to those government companies, which has not committed any default in filing annual returns and financial statements. When a name must be registered it has to confer with the requirements of Emblems and Names (Prevention of improper use) Act, 1950[3].
2. Any name as selected and that appears in the memorandum should not be identical or resemble any name of any existing company registered under this act or previous acts. Further it is essential that a company should not be registered by any name if its use will constitute an offence under any law for the time being in force. Further the name should be one, which is not considered undesirable for use in the opinion of the central government. According to the MCA notification dated 21st May 2014, this power of the central government is delegated to the registrar of companies. A name is undesirable if it falls under the Rule 8 of Companies (Incorporation) Rules 2014.
3. A company is also not allowed under this section to use a name, which is in any way likely to give an impression, that the company relates to the central government, any state government, or any local authority. This type of name cannot be used except with the approval of the centre government.
4. An application for reservation of name can be made by any company through the web service by using RUN (Reserve Unique Name) along with fee as provided in the Companies (Registration offices and fees) Rules, 2014, which may either be approved or rejected by the Registrar[4].
5. The registrar for a newly incorporated company, will according to this section, reserve the name on application, for twenty days.
6. When an application for reservation of name is made by an existing company changing its name, the registrar on application will reserve such name for sixty days from date of approval.
7. Companies (Amendment) Act, 2017 has reduced the time period for reservation of name in case of incorporation of a new company from 60 days from the date of application to 20 days from the date of approval.
8. Where after reservation of name is done by registrar, it is brought to notice that name was applied by furnishing wrong information, then
   (i) if the company is a new company, which is yet to be incorporated, then the reserved name will be cancelled and the person making application will be liable and penalized to the extent of one lakh rupees
   (ii) if the company has been incorporated, then it will be given an opportunity of being heard, and then the registrar may either direct the company to change its name within a period of three months, after passing an ordinary resolution, or take action for striking off the name of the company from the register of companies, or make a petition for winding up of the company. As seen from above the registrar has wide powers with respect to submission of incorrect information by companies.
9. Domicile clause: This clause is an important clause of the memorandum and here the company must state the name of the State in which the registered office of the company is there. This is very important for all official communication with the company.
10. Object clause: The memorandum must specify the objects for which the company is proposed to be incorporated. The requirement of bifurcation of object clause into main, ancillary and other objects as specified under section 13 of the 1956 Act, has been dispensed with in the act, 2013.  The object gives the basic information about the reason for incorporation of the company and helped the investor understand and identify the nature of the company.
11. Liability clause: When a company is a limited liability company, having share capital, it is important under this clause that the company states the liability of its members to be limited to the amount unpaid, if any, on the shares held by them. This helps the investor take caution when investing in a company.
12. Capital clause: This clause is not applicable to companies not having share capital. The company incorporated under this act, can be a company limited by shares or guarantee as per section 3 of this act, having share capital has to under this clause state the total amount of share capital the company is registered with and authorized or nominal capital must be stated in the memorandum.
13. Association clause/Subscription clause: Following have to be stated in the memorandum of a company having share capital (i) the number of shares which the subscribers to the memorandum agree to subscribe (ii) the number of shares each subscriber to the memorandum intends to take.
14. Nominee clause in case of one person company: In case of an one person company, it is important that to make sure there is perpetual succession, this clause is important and gives that the memorandum of an OPC should state the name of the person who shall be the member of the company on the death of the subscriber.
15. Form of Memorandum: Memorandum shall be in respective forms specified in tables A, B, C, D and E in schedule I of the act, as may be applicable to the company, according to this section.

Any provision in the memorandum or articles, in the case of a company limited by guarantee and not having a share capital, giving any person a right to participate in the divisible profits of the company otherwise than as a member, shall be void. This is a new provision under the act, 2013.

Situation Before Enactment of Section 4

Section 4 corresponds to section 13 (Requirements with respect to memorandum), section 14 (Form of memorandum) section 20 (Companies not to be registered with undesirable names) and section 23 (Registration of change of name and effect thereof) of the old 1956 act. In the memorandum under the new act, 2013 there is no requirement to specifically bifurcate the objects clause into main, ancillary and other objects. Only objects for which company is incorporated along with matters considered necessary for its furtherance have been mentioned.

The old act, 1956 which provided for an additional period of 30 days for which the name can be reserved by the company after expiry of its original period on payment of necessary fees has been dispensed with by the new act, 2013. The New Act provides that a name will be reserved for a period of 60 days from the date of application.

The new act, 2013 now specifically provides that the approval of the central government will be a prerequisite in case the companies propose to be registered with a name which contains any word or expression which is likely to give the impression that the company is in anyway connected with, or having the patronage of the central/state government/ local authority/governmental body etc. Furthermore, the central government has power to prescribe a list of words or expressions, which cannot be used as a part of a corporate name, unless specific approval of the central government has been obtained.

The new act, 2013 now also provides extensive powers to the central government which amongst others also include: (i) to order striking off the name of the company from the register of companies (ii) order making of petition for winding up of the company, in case it is found that name was obtained by furnishing wrong and incorrect information. Furthermore, the new act, 2013 now also clearly specify that if any person get the name reserved (but the company is yet to be incorporated) by furnishing wrong and incorrect information, the said person shall be liable to a penalty which may extend to Rs. 1,00,000 and the name so reserved shall be cancelled.

The new act, 2013 specifically provides that in case of a company limited by guarantee and not having share capital, a provision empowering any person other than the member the right to participate in the divisible profits shall be void, which was not there in the old act, 1956.

Application of Section 4

This section basically comes into application, during incorporation of any company under the companies act. This is a mandatory requirement, which must be fulfilled by any new company. Every company needs to have a memorandum.

Amendments

Section 4 has been amended after its incorporation under the act, 2013. Further various circulars and notifications also supplement it, which clarifies the provisions of section 4 of the act, 2013. MCA vide a circular has clarified that the use of the word “Commodity Exchange” may be allowed only where a “No Objection Certificate” from the Forward Markets Commission (FMC) is furnished by the applicant. However, all other provisions of the Companies (Incorporation) Rules, 2014 will continue to be applicable. The said Circular has further clarified that the said certificate will also be required in cases of companies registered with the words “Commodity Exchange” before the issue of the aforesaid circular[5].

Vide a notification, MCA have set up a Centre Registration Center (CRC), to be located at Indian Institute of Corporate Affairs, Gurgaon[6]. It will discharge or carry out the function of processing and disposal of applications for reservation of names. It will function under the administrative control of registrar of companies, Delhi (ROC Delhi), who shall act as the registrar of the CRC until a separate registrar is appointed to the CRC. Processing and approval of name or names proposed in e-Form No. INC-29 will now be done by CRC rather than the respective registrar of companies having jurisdiction over incorporation of companies under the act, 2013 as per the provisions of the act and the rules made thereunder. Further CRC has also been given power for exercising functional jurisdiction of processing and disposal of e-forms and all related matters pertaining to registration of companies under section 7, 8 and 366 of the act, 2013 having territorial jurisdiction all over India.

Section 4 has been amended by companies (amendment) act, 2017. In sub-section (5), the time period was amended for reservation of names. Before the time period of reservation of name was sixty days for both the new companies and companies already incorporated but by way of this amendment the time period for newly incorporated companies the time period for reservation was reduced to twenty days.

Cases at a Glance

Following are the cases pertaining to this section:

• Society of Motor Manufacturing and Traders Ltd. v. Motor Manufacturers and Traders Mutual Insurance Co. Ltd[7].:
  In this case the court emphasized on the monopoly of a name of business by companies. The court held that the name of the company is a part of its business reputation and that would be injured if a new company could adopt an allied name. The court also held here that the resemblance between the two names must be such as to be “calculated to deceive”. A name is said to be calculated to deceive when it suggests that the corporation adopting it is in some way connected or associated with the existing corporation.
• Dermatine Company Ltd. v. Ashworth[8]:
  In this case the court held that the non-use of the words Limited and Private Limited should be deliberate and not just negligent and accidental for it to be punishable under the companies act. In this case a bill of exchange was drawn upon by a limited company in its proper name and two directors of the company accepted it. The word ‘limited’ did not appeal in the acceptance. It was justified by the fact that the rubber stamp by which the words of acceptance were impressed on the bill was longer than the paper of the bill, and therefore the word ‘limited’ overlapped the paper. On the company’s failure to pay the bill it was held that the directors would not be personally liable as it was an obvious error of trifling kind and the mischief aimed by the act was not present in this case.

Concluding Summary

Section 4 lays down the requirements of a fundamental document for incorporation of a company. It is fundamental as it gives the basic information about the company that the outside world needs to know for its proper functioning. This document lays down the identity and the nature of the company and is of utmost importance for people who are investing in the company. Further and most importantly the object clause provides a restrain and stability to the activities of a company and any action done outside the purview of the object clause is considered ultra-vires and thus void. This protects both the company and its investors.

References:

[1] Companies Act, 2013, No. 18, Acts of Parliament, § 2(56) (2013).

[2] MCA Notification GSR 463(E) dated 5th June 2015.

[3] MCA Circular No. 29/ 2014 dated 11th July 2014.

[4] Companies Incorporation Rules, 2014, r. 9 (MCA).

[5] MCA General Circular No. 26/ 2014 dated 27th June 2014.

[6] MCA Notification No. SO 218(E) dated 22nd January 2016

[7] Society of Motor Manufacturing and Traders Ltd. v. Motor Manufacturers and Traders Mutual Insurance Co. Ltd (1925) 1 Ch 675.

[8] Dermatine Company Ltd. v. Ashworth (1905) 21 TLR 510.