IMPORTANCE OF SUBSCRIBERS TO MEMORANDUM AND ARTICLES OF ASSOCIATION OF COMPANY


Subscribers of a company, particularly of a startup are ignorant tribe as far as company law is concerned. They need proper handholding. A subscriber to the memorandum of association and articles of association of a company is a neglected person though otherwise celebrated as member shareholder of a company.

Subscribers are indeed first promoters of a company.

We all know, once incorporated a company will survive, the subscriber may die (if an individual) or windup (if body corporate) but a fact always remain. No amendment to memorandum or articles can remove or amend the name of a subscriber from these documents or history of the company. The reason is explained hereunder.

This is consoling fact for many ousted founders of companies (particularly startups), their name as subscribers to the memorandum and articles are well protected and remain intact. The name of these subscribers will remain in the history of the company even after winding up or merger of the company to another.

Subscriber’s brain is mother womb for a company, its business idea. Their legal footprints shall always remain there.

Subscribers enter into a highly standardized legal contract to incorporate a company. Section 4 and Section of the Companies Act, 2013 discuss a fundamental contractual document forming a company. Once, a fine tunes contract is ready to sign after all negotiations, discussion and drafting subscribing promoters turn to the subscriber sheet to sign it.

This subscriber sheet, being a signing clause of the contract of formation of a company, cannot be modified. You can amend a contract but the signing clause. For more clarity read the subscription clause which precedes the subscriber sheet:

We, the several persons, whose names and addresses are subscribed, are desirous of being formed into a company in pursuance of this memorandum of association … … …

When Memorandum of Association and Articles of Association are ready, Section 7 of the Companies Act, 2013 and Schedule I of the Companies Act, 2013 governs the law relating to the manner of singing of the Contract of Company formation. Section 7(1) mandates, the memorandum and articles of the company duly shall be signed by all the subscribers to the memorandum in such manner as may be prescribed. Rule 13 of the Companies (Incorporation) Rules, 2014 discussed earlier here fully described the manner of the signing of the memorandum and articles.

Once formalities of incorporation completed on issuing of the certificate of incorporation by the Registrar of Companies, a subscriber need do the most important duty towards the newly incorporated company – inject the lifeblood – the capital of the company as agreed at the time of signing of Memorandum of Association.

A company having a share capital may not commence its business or exercise any borrowing power without complying Section 10A. Be careful, a company having a share capital may or may not be a —company limited by share. {Section 10A(1)} The company must satisfy two conditions before the commencement of business:

  1. Every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of the making of such declaration; and
  2. The company has its registered office. {Section 10A(1)}

Only thereafter, a company may complete formalities for getting a certificate of commencement of Business.

Note: this post is inspired by a story of ousting of founders of a tech startup by its investors.

Aishwarya Mohan Gahrana

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