Procedure for Introduction of Share Capital Clause in the Memorandum of a Company Limited by Guarantee

PROCEDURE FOR INTRODUCTION OF A SHARE CAPITAL CLAUSE IN THE MEMORANDUM OF A COMPANY LIMITED BY GUARANTEE

Ishita Chatterjee

Lecturer, Faculty of Law,

UniversityofAllahabad,

Allahabad(U.P.),India

Introduction

For the formation of a company, the Memorandum of Association is regarded as a fundamental document of a company. In the view of Palmer[1]- It is a document of great important in relation to the proposed company.

In other words the Memorandum of Association is a Charter of Company, it contains the fundamental conditions upon which the company is allowed to be incorporated[2]. The Memorandum of Association shows the basic details of a company and conditions under which company is framed. Thus, this document is of great important for the creditors and the outside public and also for shareholders, who deal with the company as an investor.

The Capital clause is compulsory only in the case of limited company. In the Memorandum of Association of a company limited by shares, capital clause of such company must state the amount of nominal capital, the number of shares into which it is divided and the amount of each share.

In case of a company limited by guarantee the capital clause in its Memorandum states the guarantee which every member undertakes in the event of the company winding up and being unable to pay its debts. If, the company limited by guarantee also has share capital, the capital clause of such a company has two capital clauses:- One relating to the guarantee, and another, relating to share capital.

The Companies Act, 1956 does not lay down any specific procedure for introduction of a share capital clause in the Memorandum of Association of a company limited by guarantee. Being a condition of the Memorandum under Section 16, the share capital can only be altered pursuant to a specific authorization under the Act. In absence of a clearly laid down procedure, the only possible manner in which a share capital clause can be introduced in the memorandum is by re-registering the company under Section 32(1)(b) of Companies Act, 1956 by following the procedure laid down therein.

Re-registration of Memorandum of a Company by introducing share-capital clause into it

My attempt is to document the procedure for introduction of a share capital clause in the memorandum of association of a company limited by guarantee i.e. the procedure for conversion of a company limited by guarantee into a company limited by guarantee and having share capital. The issue under consideration gains particular importance in light of the fact that the otherwise comprehensive Companies Act, 1956 seems to be silent on this aspect.

 Company limited by guarantee and having a share capital

In view of the extreme rarity of such companies, it would be pertinent, at the outset, to briefly explain the nature of a company limited by guarantee and having share capital before going on to examine the procedure for incorporation of a share capital clause in the memorandum of a company.

A company limited by guarantee and having a share capital is a hybrid form combining the elements of the guarantee and the share company. Every member of such a company is subject to twofold liability viz. to the guarantee which may become effective on the winding up of the company and to the liability to pay up the nominal amount of his shareholding. Ordinarily, the liability of the members on the guarantee is equal, whereas their liability on the shares varies according to their shareholding. The voting power in such companies is determined by the shareholding and not by the guarantee. The memorandum of such a company, therefore, provides for the liability of the members in two clauses viz. in the guarantee clause and the capital clause.

InEngland, the Companies Act, 1980 has prohibited the formation of companies limited by guarantee and having share capital. Thus, Section 1(2) thereof provides that such companies cannot come into existence on or after 22-12-1980. However, inIndiathere is no such prohibition on formation of companies limited by guarantee and having share capital.

Absence of a specific procedure

It must be noted that Section 13(4) of the Act requires that the amount of share capital must be stated in the memorandum of a company. Furthermore, Section 16 lays down that:

“16. Alteration of memorandum.- (1) A company shall not alter the conditions contained in its memorandum except in the cases, in the mode, and to the extent, for which express provision is made in this Act.

(2) Only those provisions which are required by Section 13 or by any other specific provision contained in this Act, to be stated in the memorandum of the company concerned shall be deemed to be conditions contained in its memorandum.”

As the share capital clause is a provision “required by Section 13”, it is clearly a “condition” of the memorandum and can, therefore, be altered only in the manner expressly provided in the Act.

Moreover, in light of the broad definition of “alteration” given under Section 2(1-A), it is manifest that introduction of a share capital clause would amount to alteration of one of the conditions of the memorandum. The argument that mere introduction of a share capital clause to the memorandum would not amount to “altering” the memorandum is, therefore, not sustainable.

As such, it is clear that being a condition of the memorandum, introduction of the share capital clause would require specific authorization under the Act. On an analysis of the various provisions permitting alteration of the memorandum, it is submitted that none of them deals with the introduction of a share capital clause.

Though Section 17 is titled in general terms as dealing with “alteration of memorandum”, yet a brief scrutiny of its provisions reveals that it is limited in application to changing the place of registered office and changing the objects of the company. This is clear from Section 17(1) itself, which categorically lays down that:

“17. (1) A company may, by special resolution, alter the provisions of its memorandum so as to change the place of its registered office from one State to another, or with respect to the objects of the company….”

Similarly, the newly inserted Section 17-A is also not applicable as it only deals with situations where the registered office of a company changes from one place to another within a State. Moreover, Sections 21-24 deal with the procedure for changing the name of the company as stated in its memorandum.

It is further submitted that even Section 94 of the Act is not of any use for the purpose of introduction of a share capital clause. Section 94 is restricted in scope to limited companies already having a share capital and provides the procedure for altering such share capital. It would be pertinent here to take a look at the provisions of Section 94 which provide:

“94. Power of limited company to alter its share capital.-(1) Alimited company having a share capital, may, if so authorised by its articles, alter the conditions of its memorandum as follows, that is to say, it may-

(a) increase its share capital by such amount as it thinks expedient by issuing new shares;

(b) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares;

(c) convert all or any of its fully paid-up shares into stock, and reconvert that stock into full paid-up shares of any denomination;

(d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived;

(e) cancel shares which, at the date of passing of the resolution in the behalf have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.”

The submission that Section 94 applies only to limited companies already having a share capital is strengthened by clauses (a) to (e), all of which presuppose the existence of authorised share capital. It is therefore maintained that Section 94 would not be applicable to the present case. Furthermore, that Section 100 (dealing with reduction of share capital) is also not applicable is beyond dispute.

In the light of the above, it is asserted that none of the various provisions of the Act which deal with making of alterations in the memorandum, are applicable to the unique and extremely uncommon case of a company limited by guarantee seeking to become a company limited by guarantee and having share capital.

Applicability of Section 32(1)(b)

The absence of a clearly laid-down procedure brings forward quite an interesting problem”Section 16 says that one needs express authorization under the Act to introduce the share capital clause and there seems to be no such express authorization in the Act.

It is submitted that the solution to the said problem lies in Section 32(1)(b). It would be useful here to set out the provision of Section 32(1)(b), which states that:

“32. Registration of unlimited company as limited, etc.-(1) Subject to the provisions of this section,-

(a) * * *

(b) a company already registered as a limited company may re-register under this Act.”

Prima facie, the section deals with conversion of a company limited by shares into a company limited by guarantee and vice versa. However, it is submitted that the generality of the provision suggests that a company limited by guarantee may re-register as a company limited by guarantee and having share capital.

This submission is based on the fact that in so introducing a share capital clause, the company undergoes a transformation in its very nature and character. Since transformation of a company is carried out by re-registration of the new avtar, it is reiterated that such transformation can only be carried out under Section 32(1)(b) of the Act. The members of a company cannot, by a mere resolution, alter the memorandum of association of the company so as to transform the company. In addition to the resolution, re-registration is necessary. The limited commentary on Section 32(1)(b) also indicates the same.

Procedure for re-registration

The procedure for re-registration has been elaborated upon in Section 32(2) and it is provided therein that re-registration is to be in the same manner and shall have the same effect as if it were the first registration of the company under the Act.

The Registrar has the discretion at the time of re-registration to dispense with the delivery to him of copies of any documents, the copies of which had already been furnished on the occasion of the original registration of the company. However, it must be noted that it is only when the documents required to be filed for re-registration are verbatim copies of the documents already in the Registrar’s possession, can the Registrar dispense with the requirement of filing fresh documents.⁵ Pursuant to the re-registration, the Registrar is required to close the former registration of the company.

Though the section is silent on this aspect, it has been suggested that the re-registration must be authorised by a special resolution of a general meeting setting out the company’s share capital and making the necessary alterations to its memorandum and articles of association. The conversion is then effected by the company filing copies of its altered memorandum and articles with the Registrar, who issues a new certificate of incorporation. The new certificate is the conclusive evidence of the effectiveness of the conversion.

Effect of re-registration

Regarding the effect of re-registration, Palmer has categorically stated that:

“Despite the requirement of re-registration and the issue of a new certificate of incorporation, the legal personality of the old company is continued in the new form. It is not the law that the old persona of the company is extinguished and a new one has come into existence. Consequently, no transfer of property is required from the old to the new company and legal proceedings by or against the company may be continued, but the designation of the company on the pleadings may have to be suitably altered.”

However, it is submitted that this position of English law might not be applicable to the Indian scenario. Section 32(2) expressly states that on re-registration the Registrar is to close the former registration of the company and that the re-registration shall have the same effect “as if it were the first registration of the company under this Act”.

Conclusion

It is, therefore, submitted that on re-registration the old company ceases to exist and instead a new company having a separate and distinct legal personality is formed. As such, the debts and liabilities of the former company cannot automatically be transferred to the new company. This submission also draws strength from Section 32(3) which makes a distinction between the nature of the debts, liabilities, obligations and contracts entered into or incurred before the re-registration from those entered into or incurred after the re-registration.

References

1. Clive Schmitthoff, Ed., Palmer’s Company Law, 24th Edn., Vol. 1, Stevens and Sons, (1987), at pp. 38, 39.
2. Palmer’s Company Law, supra fn 1, at p. 66.
3. A. Ramaiya, Guide to the Companies Act, 15th Edn., Wadhwa & Co., (2001), Part 1, at pp. 353-54; A.M. Chakraborti, Taxmann’s Company Law, Taxmann Allied Services (P) Ltd., (1994), Vol. 1, at pp. 151-52.
4. Taxmann’s Company Law, ibid., at p. 152.
5. S. Kannan and V.S. Sowrirajan, Taxmann’s Company Law Procedures, Taxmann Allied Services (P) Ltd., (2001), Vol. 1, at pp. 173-90; Robert Pennington, Company Law, 8th Edn., Butterworths, (2001), at pp. 81-83.
6. Palmer’s Company Law, supra fn 1, at p. 66.