MOA AND AOA

 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.

 However, the disadvantages of this doctrine outweigh its main advantage, namely to provide protection to the shareholders and creditors. Although it may be useful to members in restraining the activities of the directors, it is only a nuisance in so far as it prevents the company from changing its activities in a direction which is agreed by all. Again, the purpose of doctrine of ultravires has been defeated as now the object clause can be easily altered, by passing just a special resolution of the shareholders.

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

 1. A Person dealing with the company is considered not only to have read those documents but to have understood them according to their proper meaning.

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. 

In Short:  The benefit of doctrine of indoor, management can be availed only if the person dealing with the company –

 * 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



Comments