MEMORANDUM OF ASSOCIATION [Sec. 2(56)]
Statutory definition
'Memorandum' means the
memorandum of association of a company as originally framed or as altered from
time to time in pursuance of any previous companies law or of this Act [Sec.
2(56)].
IMPORTANCE OF MEMORANDUM
Key document
Memorandum is a key
document containing vital details about the company. It is the most important
document as regards incorporation of the company is concerned. This is the most
fundamental document of the company specifying the most important information
relating to the company. Therefore, memorandum is also called as the charter
of the company.
Public Document
Memorandum is a public
document, i.e. any person (whether a member of document of the company or not)
can inspect it in the office of Registrar.
Every company must have
its own memorandum
No company can be
registered without a memorandum. It is one of the main documents that are
required to be filed with the Registrar at the time of registration of the
company.
Object of registering a
memorandum of association :
• It contains the object
for which the company is formed and therefore identifies the possible scope of
its operations beyond which its actions cannot go.
• It enables
shareholders, creditors and all those who deal with company to know what its
powers are and what activities it can engage in.
• A memorandum is a
public document under Section 399 of the Companies Act, 2013. Consequently,
every person entering into a contract with the company is presumed to have the
knowledge of the conditions contained therein.
• The shareholders must
know the purposes for which his money can be used by the company and what risks
he is taking in making the investment.
• A company cannot depart
from the provisions contained in the memorandum however imperative may be the
necessity for the departure. It cannot enter into a contract or engage in any
trade or business, which is beyond the power confessed on it by the memorandum.
If it does so, it would be ultra vires the company and void.
Total Clauses: 06 (In OPC-07 Clauses)
CONTENTS OF MEMORANDUM
(CLAUSES CONTAINED IN MEMORANDUM) (Sec. 4)
1. Name Clause
The ‘name clause’ of
memorandum shall state the name of the company.
In the case of a public
company, the word ‘limited’ shall be the last word of the name of the company.
In the case of a private
company, the words ‘private limited’ shall be the last words of the name of the
company.
In the case of One Person
Company, the words “One Person Company”, should be included below its name.
For the Companies under section 8 of the Act, the name shall include the words foundation, Forum, Association, Federation, Chambers, Confederation, council, Electoral trust and the like etc. [The Companies (Incorporation) Rules, 2014]
2. Situation
clause/Registered office Clause
The ‘situation clause’ of
memorandum shall state the name of the State in which the registered office of
the company is proposed to be situated.
3. Objects clause
The ‘objects clause’ of
memorandum shall state the objects for which the company is proposed to be incorporated
and any matter considered necessary in furtherance thereof.
If any company has
changed its activities which are not reflected in its name, it shall change its
name in line with its activities within a period of six months from the change of
activities after complying with all the provisions as applicable to change of
name
4. Liability clause
(a) The ‘liability
clause’ of memorandum shall state as to whether the liability of members of the
company is limited or unlimited.
(b) In case of a company
limited by shares, the memorandum shall state that liability of every member
shall be
limited to the amount
unpaid on the shares held by him.
(c) In case of a company
limited by guarantee, the memorandum shall state that liability of every member
shall be limited to the amount that he has undertaken to pay to the company, in
the event of winding up of the company.
5. Capital clause
(a) In case of a company
having a share capital, the memorandum shall contain the ‘Capital Clause’.
(b) The ‘capital clause’
of memorandum shall state—
(i) the amount of share
capital with which the company is registered (viz. the authorized Share
Capital);and
(ii) the division of the
authorized share capital into shares of a fixed amount.
6. Subscription (Association)
clause
(a) The ‘Subscription
clause’ of memorandum shall state the number of shares that each subscriber to
Member has
agreed to subscribe.
(b) Every subscriber
shall agree to subscribe for at least 1 share.
(c) The number of shares
subscribed by each subscriber shall be indicated opposite to his name.
7. Nomination Clause
In the case of a One
Person Company, the memorandum shall state the name of a person, who, in the
event of death of the subscriber, shall become the member of the company.
The above clauses of the
Memorandum are called compulsory clauses, or “Conditions”. In addition to these
a memorandum may contain other provisions, for example rights attached to
various classes of shares.
Form of memorandum
(a) Various forms of memorandum
have been specified in Tables A, B, C, D and E in Schedule I, as explained
hereunder:
Table A: Memorandum of a
company limited by shares
Table B: Memorandum of a
company limited by guarantee and having no share Capital
Table C: Memorandum of a
company limited by guarantee and having a share capital
Table D: Memorandum of an
unlimited company having no share capital
Table E: Memorandum of an
unlimited company having a share capital
(b) The memorandum and
articles of a company must be as close to model forms, as possible, depending
upon the circumstances.
A company being a legal
person can through its agent, subscribe to the memorandum. However, a minor
cannot
be a signatory to the
memorandum as he is not competent to contract. The guardian of a minor, who
subscribes
to the memorandum on his
behalf, will be deemed to have subscribed in his personal capacity
Definition of ‘articles’
‘Articles’ means the
articles of association of a company as originally framed or as altered from
time to time or
applied in pursuance of
any previous companies law or of this Act [Sec. 2(5) of the Companies Act,
2013].
Meaning
- Articles are the rules
and regulations framed by a company for its own governance.
- Just as the memorandum
contains the fundamental conditions upon which the company is allowed to be
incorporated, so also the articles are the internal regulations of the company
Functions of the
articles:
• The articles play a
part subsidiary to memorandum of association.
• They accept the
memorandum as the charter of incorporation, and so accepting it the articles
proceed to define the duties, the rights and powers of the governing body as
between themselves and the company and
• the mode and form in which
the business of the company is to be carried on, and
• the mode and form in
which changes in the internal regulation of the company may from time to time
be made.
Significance of Articles:
• Object of Memorandum is
to state the purposes for which the company has been established, while
the Articles provide the manner in which the objects are to be carried
out.
• The document containing
the Articles of Association of a company is a business document, hence it has
to be construed strictly. It regulates the domestic management of a company and
creates certain rights and obligations between the members and the company
[S.S. Rajkumar Vs. Perfect Castings Pvt. Ltd).
• The Articles of
Association are in fact the bye-laws of the company according to which director
and other officers are required to perform their functions as regards the
management of the company.
Differences between the Memorandum of Association Vs. Articles Of Association
1. Objectives:
Memorandum of Association defines and delimits the objectives of the company
whereas the Articles of association lays down the rules and regulations for the
internal management of the company. Articles determine how the objectives of
the company are to be achieved.
2. Relationship:
Memorandum defines the relationship of the company with the outside world
and Articles define the relationship between the company and its members.
3. Alteration:
Memorandum of association can be altered only under certain circumstances and
in the manner provided for in the Act. In most cases permission of the Regional
Director or the Tribunal is required. The articles can be altered simply by
passing a special resolution.
4. Ultra Vires:
Acts done by the company beyond the scope of the memorandum are ultra-vires and
void. These cannot be ratified even by the unanimous consent of all the
shareholders. The acts ultra-vires the articles can be ratified by a special
resolution of the shareholders, provided they are not beyond the provisions of
the memorandum.
5. Relation: The
memorandum limits the area beyond which articles cannot go. In this sense,
articles are subsidiary to the memorandum
DOCTRINE OF ULTRA VIRES
Meaning
Ultra means 'beyond' or
'in excess of’ and vires means 'powers'. Thus, ultra vires means an act or
transaction beyond or in excess of the powers of the company.
An act or transaction
shall be ultra vires if- -
it is not permitted or
authorised by the Companies Act, 2013 -
it falls outside the object clause of
memorandum; and -
its attainment is not incidental or ancillary
to the attainment of main objects.
Purpose of Doctrine:
a. To protect the
interest of shareholders by ensuring that the Co.’s funds are not wasted in
unauthorised activities.
b. Protect the interest
of creditors by ensuring that the loan funds are not wasted in unauthorised
activities.
The whole position
regarding the doctrine of ultra vires can be summed up as:
(i) When an act is
performed, which though legal in itself, is not authorized by the object clause
of the memorandum, or by the statute, it is said to be ultravires the company,
and hence null and void.
(ii) An act which is
ultravires, the company cannot be ratified even by the unanimous consent of all
the shareholders.
(iii) An act which is ultravires the
directors, but intravires the company can be ratified by the members of the
company through a resolution passed at a general meeting.
E.g.: The Company has
power to borrow money but the articles of the company provided that in case the
directors want to borrow more than Rs.5 lakhs they should get prior approval of
the company in general meeting. The directors issued debentures to the extent
of Rs.7 lakhs without getting the prior approval of shareholders. In such a
case the company in general meeting may ratify the act of directors as it is
intra vires the company though ultra vires the articles / directors.
(iv) If an act is
ultravires the Articles, it can be ratified by altering the Articles by a
Special Resolution at a general meeting.
Doctrine of Constructive Notice
From
this, it is inferred that every person who is dealing with the company has
read, understood and has knowledge of these public documents.
This
is to ensure that no person dealing with the company shall hold the company
liable for an activity mentioned in the article and memorandum of association
2. Person dealing with the company cannot
plead ignorance. Actually. this doctrine talks about duty of third party. As in
contract act we have studied that ignorance of law is no excuse. In the same
way, here also , its is presumed that third party has read MOA and AOA
irrespective of facts, whether he has read or not.
What is the
Doctrine of Indoor Management?
The doctrine of Indoor management can be considered as an exception to
the above-mentioned doctrine. According to the Doctrine of Constructive notice,
the public has access to only the public documents i.e. which were used for the
registration of a company and not the internal details.
It is impossible for an outsider or the general public to know the
internal details of a company. Hence, it is a reasonable assumption made by the
general public that any activity mentioned in the Article and Memorandum of
associates is taking place following all the required procedures. This Doctrine
tries to convey a fact that indoor operations of a company are solely the
company’s burden. This Doctrine initially
came into existence with the:
Royal British Bank v
Turquand
In this case, directors of a company borrowed money from the plaintiff.
In the memorandum of associations, it was mentioned that the company cannot
borrow money without the assent from the general meeting. Since the directors
borrowed without the assent from the general meeting, they declared themselves
not liable to repay the money borrowed. Court held that it was a reasonable
assumption of the plaintiff that the directors borrowed the money post the
assent from the general meeting. Further, it held that the directors are liable
to repay.
* has the knowledge of the
memorandum and articles;
* has no knowledge of internal irregularity
The exception of Doctrine of Indoor Management
Knowledge of Irregularity
Negligence
Forgery
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