Explain Memorandum and Articles of Association. Explain Doctrine of Ultra Vires and Doctrine of Indoor Management.

(4)Explain Memorandum and Articles of Association. Explain Doctrine of Ultra Vires and Doctrine of Indoor Management.

Part A — Memorandum of Association (MoA)

The MoA is the charter / fundamental constitution of the company, governing its external relations — Section 4. It is a public document filed with the RoC at incorporation and defines the outer limits within which the company must operate.

Six compulsory clauses: (1) Name Clause; (2) Registered Office Clause (state of registration); (3) Object Clause (main and ancillary objects); (4) Liability Clause (limited by shares, guarantee, or unlimited); (5) Capital Clause (authorised capital and division into shares); (6) Association/Subscription Clause (subscribers' undertaking). A 7th clause (Nominee/Succession) applies to One Person Companies.

The MoA can be altered only by following the specific statutory procedures prescribed for each clause — the Object Clause requires a Special Resolution and RoC filing; the Name Clause requires Central Government approval.

Part B — Articles of Association (AoA)

The AoA are the internal bye-laws of the company regulating its internal management — Section 5. They cover meetings, voting, directors, dividends, accounts, etc. The AoA are subordinate to the MoA and to the Companies Act; any AoA provision inconsistent with the MoA is void. Under Section 10, the AoA bind the company and its members as if signed by each member — creating a statutory contract between them. The AoA may be altered by Special Resolution at any time.

Part C — Doctrine of Ultra Vires

Ultra vires (Latin: "beyond the powers") refers to any act by a company that falls outside the scope of its Object Clause in the MoA or is beyond the powers conferred by the Companies Act. Such acts are void and cannot be ratified — even by the unanimous consent of all shareholders.

Rationale: the MoA is a public document; persons dealing with the company are deemed to have notice of its contents. If the company could validly act beyond its objects, creditors and investors who extended money relying on the company's stated purposes would be unprotected.

Consequences of an ultra vires act:

The act is void and unenforceable — neither the company nor the other party can enforce it.
The company cannot sue on the contract, and the other party cannot enforce it against the company.
Directors who committed the company to an ultra vires transaction are personally liable to restore the money/property to the company.
Any shareholder may obtain an injunction to restrain the company from proceeding with the ultra vires act.

Ashbury Railway Carriage & Iron Co. Ltd. v. Riche (1875) LR 7 HL 653 — The company's MoA authorised it to make and sell railway carriages. It entered a contract to build a Belgian railway (construction of tracks). The House of Lords held the contract was ultra vires the MoA, void, and unenforceable even though all shareholders had ratified it. The MoA cannot be amended retrospectively to validate an ultra vires act.

Part D — Doctrine of Indoor Management (Turquand's Rule)

The Doctrine of Indoor Management is the counterpoise to constructive notice. It protects innocent third parties dealing with a company from the effects of irregularities in the internal management of the company that are not visible from the public documents.

Principle: an outsider dealing in good faith with a company is entitled to assume that all internal requirements prescribed by the AoA (e.g., passing of a board resolution, obtaining a shareholder's resolution) have been duly complied with — even if they have not. The outsider is not expected to peer into the internal workings of the company beyond what the public documents reveal.

Royal British Bank v. Turquand (1856) 6 E&B 327 — The company's AoA permitted borrowing with a shareholders' resolution. The company borrowed from the bank; no resolution had actually been passed. Held: the bank could assume the resolution had been passed — it was not required to verify internal proceedings. The company was bound by the borrowing.

Exceptions — when Indoor Management does not protect the outsider:

Actual notice of irregularity: if the outsider actually knew the internal requirement had not been met, they cannot plead ignorance.
Suspicious circumstances / negligence: where the circumstances were such that a reasonable person would have inquired but the outsider failed to do so, protection is denied.
Forgery: the rule does not protect a person relying on a forged document — the company is not bound by forgery.
Acts beyond powers of the directing mind: if the very person who purported to bind the company on its behalf (e.g., a director acting without authority even under the AoA) caused the irregularity, protection is unavailable.
Ultra vires acts: the Turquand rule cannot validate an ultra vires act — it only cures procedural internal irregularities, not acts that exceed the company's constitutional powers altogether.