A Primer on Memorandum of Association

A company is a legal entity established by an individual or a group of people to generally earn profit through its commercial operations. It is recognized as a separate entity under law and functions through its Board of Directors, inter alia. Establishing and registering a company is a herculean task and requires tremendous effort and time, though the process has now been made easier. A company must be registered under the Registrar of Companies through a formal application by submitting documents for incorporation. One such document is the Memorandum of Association. It is one of the most fundamental documents that sustain this legal entity and is considered to be the “Constitution” of a company, governing its relationship with the outside world. Important aspects of this document will be highlighted in the article to provide an understanding of the legal intricacies related to it.

Introduction

Memorandum of Association is a document that is a pre-requisite for the incorporation of the company. The document defines the scope of operation of the company and provides the rules and regulations governing the relationship of the company with the shareholders and the outside world. A company cannot operate outside the scope defined in the Memorandum of Association. A company is incorporated by persons: seven or more in case of a public company, two or more in case of private and one person for a One Person Company by subscribing their names to the memorandum and complying with all requirements under the law. This memorandum states the name of the company, name of the State where the registered office is located, objects of the company, liability of the members, and details of share capital if applicable. This document is crafted with utmost scrutiny as it forms the foundation of the company.

Importance

Apart from being a necessary document for the incorporation of a company, it is a public document that can be easily available by paying a fee to the Registrar under Section 399 of the Companies Act, 2013 (“Act”). This ensures that everyone who wishes to form a relationship with the company has access to vital information such as the objectives and powers of the company and the liability of its members. The potential investors can gauge all the activities that the company is pursuing or can potentially pursue along with the responsibilities of its members. The details of the people responsible for the incorporation of the company, the promotors, are also available to facilitate transparency of the company and its functioning. The memorandum limits the powers and objects of the company making its compliances mandatory and binding on all the members. Reliance is placed on the document along with articles of association when entities form a relationship with a company.

Clauses of the Memorandum

The format for the preparation of the memorandum of association is given under the Companies Act. Table A prescribes the form for the MOA of a company limited by shares, Table B – MOA of a company limited by guarantee and not having a share capital, Table C – MOA of a company limited by guarantee and having a share capital, Table D – MOA of an unlimited company and not having a share capital, Table E – MOA of an unlimited company and having a share capital. The memorandum must contain the following clauses as per section 4 of the Act –

·         Name Clause

The name clause requires the name of the company along with “Limited” or “Private Limited” as appropriate in the case. The name is subject to the condition that it should not be identical with or closely resemble the name of any other existing registered company. Secondly, the name should include a word that gives the impression that the company is associated with any Government body unless approval from the Central Government has been taken. A company may ask the Registrar to reserve the company name set out in the application for a period of sixty days by paying the fee prescribed. The conditions for the name clause as under Section 4 of the Act does not apply to companies that have been constituted for charitable objects under section 8.

·         Domicile Clause

The domicile clause requires the name of the State where the registered office of the company is situated. The registered office should then be verified by furnishing the address to the Registrar within thirty days after the incorporation of the company.

·         Objects Clause

The object clause requires the company to set out all the objects for which the company is proposed to have been incorporated. This includes incidental matters which are necessary to achieve the main objects. It is pertinent to draft this clause carefully as a company is not empowered to pursue activities for objects that are not mentioned under this clause. It limits the operations and powers of the company. If a company does operate beyond the scope of power as defined under its Memorandum, the action of the company will be ultra vires and therefore, be declared void. This is called the doctrine of Ultra Vires and is developed to protect the stakeholders of the company. The company cannot commence activities and employ its assets in a manner contrary to as specified by it in its memorandum since creditors and investors rely on this document to assess the activities of the company.

The doctrine was developed in the case, Ashbury Railway Carriage and Iron Co Ltd. v Riche ((1875) L.R. 7 H.L. 653) and has been widely accepted in India. In this case, the objects of the company included making, selling, or hiring railway carriages and wagons and all materials to carry on the business of mechanical engineers and general contractors to purchase and sell materials. The company entered into a contract to finance the construction of a railway line and the objects did not include this activity. The Court held that the contract breached the “charter” of the company and could not be ratified even if all the members agreed to it. Since the company did not have the legal capacity to enter into the contract in the first place, the same was void and without any legal effect. Further, the articles of association cannot be interpreted to extend the scope of objects contained in the memorandum.

·         Liability Clause

The liability clause requires the memorandum to mention whether the liability of the members of the company is limited or unlimited. This clause clearly defines the liability of the members of the company in case the company is winding up. In case of companies where the liability is limited by shares, it is required to state that the liability is limited to the extent of unpaid shares held by the members and in case of companies where the liability is limited by guarantee, it is required to state the amount up to which the members can be held liable. It should mention that amount undertaken to contribute to the assets of the company in case of winding up, the costs, charges, and expenses regarding the wind-up and the adjustment of rights of contributors among the members themselves. This clause protects the personal assets of the members and they are only required to repay up to the amount mentioned in the memorandum.

·         Capital Clause

In the case of a company having a share capital, the capital clause requires the company to state the authorised capital. That is the maximum capital that the company is registered with and it cannot issue shares exceeding the amount mentioned in the authorised capital. The company must also provide the division of capital into shares of a fixed amount and the kind of shares the capital is divided into.

·         Subscription Clause

The subscription clause requires the company to state the number of shares that each subscriber of the memorandum intends to take along with other particulars. Each subscriber has to agree to subscribe at the minimum, one share.

·         Nomination clause (in case of a One Person Company)

In the case of a One Person Company, the nomination clause requires that in the event of the death of the subscriber to the memorandum, the name of the person who shall become a member of the company should be specified.

All the subscribers must sign the memorandum of association in the presence of witnesses and as per the manner prescribed under Rule 13 of the Company (Incorporation) Rules, 2014. The particular of every subscriber along with their proof of identity is furnished at the time of filing an application for the incorporation of a company.

·        Hierarchy

It is now clear that the memorandum of association is binding upon the company and all the members. All other company documents are subservient to it, including the articles of association, as it defines and limits the scope of power of the company. However, the memorandum is subject to the rules and regulations framed under Companies Act, 2013 as per section 6 and cannot permit acts which are in fact, prohibited by law. It can only include lawful objects. This leads to the conclusion that if a company is empowered to do an act under the law but is limited by its memorandum, the act will be void ab initio and have no legal effect. Conversely, if an act is prohibited by law but is permitted by the memorandum of the company, the company will still not have to right to perform the act as legal provisions superseded the constitution of the company.

·        Alteration of the Memorandum

This vital document is not inflexible but can be amended after the incorporation of the company as and when it evolves and expands its operation. However, the process is strenuous and time-consuming. Section 13 of the Act provides the conditions and the process for amending the memorandum. The amendment requires a special resolution to be passed, i.e. the votes in favour of the resolution must be three times the number of votes against the resolution. The notice calling for a meeting should indicate the intention of proposing a special resolution and the process of such a resolution should be duly followed by the company. For an amendment to the name clause, a special resolution along with the approval of the Central Government is required after which a fresh certificate of incorporation is issued by the Registrar bearing the new company name.

In case of change of the registered office from one State to another, approval from the Central Government is required who shall dispose the application within sixty days after the satisfaction that all the stakeholders of the company have consented to the amendment or that sufficient provision or security has been made by the company to discharge its debts and obligations. If approved, an application must be filed with the Registrar of each State and the Registrar of the State where the office has shifted shall issue a fresh certificate of incorporation indicating the alteration. For an amendment to the object clause by a company that raised money through a prospectus (public company), a special resolution is required, and the details of such resolution must be published in the newspapers and the website of the company to circulate the information. Any dissenting shareholders should be afforded an opportunity to exit from the company as per the rules of the SEBI. Any amendment to the object clause must be registered and certified by the Registrar within thirty days of filing the special resolution.

The liability clause of the memorandum can also be altered by way of a special resolution. However, a company can alter the share capital in a general meeting itself, if authorized under the articles of association according to Section 64 of the Act. The notice of such alteration should be sent to the Registrar within thirty days in the prescribed form along with the altered memorandum of association. The company may increase the authorized share capital, consolidate, or divide capital into shares of a larger amount, convert shares into stock, sub-divide shares or cancel them as per Section 61. It appears the subscription clause, where the details of the subscribers of the memorandum and their respective shares are enlisted cannot be modified by way of an alteration to the memorandum and remains the same.

Conclusion

This concludes the primer on the memorandum of association of a company. The document constitutes the foundation of the company which incorporates and defines the limits for the functioning of the company and its members. This indispensable document governs the relationship of the company with the outsiders and along with the articles of association that governs the internal management of the company forms the “constitution” of the legal entity. Hence, drafting the memorandum is a task which involves careful planning and execution to ensure smooth incorporation and functioning of the company.

FAQs

1.       Can you incorporate a company without a memorandum of association?

No. The memorandum of association is a mandatory document for the incorporation of a company and is required to be submitted along with other documents at the time of application for incorporation.

2.       What is the difference between memorandum and articles of association?

While the memorandum of association creates the relationship between the company and the outsiders, the articles of association creates the relationship between members and governs the internal affairs of the company. The objectives of the company are mentioned in the memorandum while the articles contain the rules. The memorandum supersedes the articles; therefore, the article of association must be framed in a manner that does not contradict or expand the scope of the memorandum. Since the articles are concerned with the internal management of the company, the alteration is a much easier process.

3.       What happens to the contract formed when the company acts ultra vires to its object?

The legal effect of the doctrine results in the contract being void ab initio. It will have no binding effect upon the parties to the contract at all since there was no authority to enter into such a contract from the beginning. The directors of the company can be held personally liable for acts that are ultra vires of the memorandum.

4.       If all the members of the company agree, can a contract be admitted that breaches the objects?

Even if all the members of the company agree to enter into a contract for a purpose not mentioned in the object clause of the memorandum, the contract will be void. An alteration needs to be made in the memorandum to include the object through a special resolution. After the alteration has come into effect, the contract can then be entered into as it will no longer be an ultra vires act.

5.       When does an alteration to the memorandum take effect?

The alterations to the memorandum come in effect only after they have been registered with the Registrar in accordance with the procedure laid down in section 13 of the Companies Act, 2013.

References

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