Memorandum of Association (MoA) is commonly known as “Memorandum” or “Charter of the Company” and defines its reason of existence (raison d’être) is a document that governs the relationship between the company with other entities. MoA is a fundamental document as it comprises of the fundamental conditions upon which alone the company is allowed to be incorporated. MoA shows the object of the formation of the company along with the utmost possible scope of it. It creates a limitation for the actions of the company which cannot be exceeded. (Ashbury Rly. Carriage & Iron Co. Ltd. v Richie (1857) L.R. 7 H.L. 658)
What is the purpose of MoA?
• It allows the prospective shareholders to get a basic idea about the company and understand the risks involved with their investments.
• The outsiders dealing with the company can obtain the objects of the company and understand whether the contract between them fall within the object of the company.
Features of MoA
1. It states the nature of business activities undertaken by the company
2. MoA is prepared by promoters
3. To be signed by 7 people in case of a public company and by 2 people in case of a private company.
4. MoA is submitted to the Registrar of the company to get a certification of incorporation.
5. It is generally considered an unalterable charter as it is very difficult to amend.
6. It is a Public document.
What are the contents of MoA? (Section 13 of Company Act, 2013)
The Memorandum of every company should include
1. Name of the company
2. State where the company is registered
3. Objects of the company to be classified into
• Main objects refer to the object primarily persuaded by the company and the other objects which help in achieving the said objects.
• Other objects
4. If the company’s object is not confined to a single state then the states till where the objective extends up to.
5. Limited Liability
6.Amount of share capital the company is registered with and the division of them into a fixed amount.
Rules regarding Name (Section 20 of Company Act, 2013)
• A name that may be deemed undesirable to be avoided.
• A company cannot register with a name that is deemed undesirable by the central government. Resemble closely to another company.
• Misleading in nature.
• Name to end with Limited (Ltd.) in case of Public Limited Company and by Private Limited (Pvt Ltd.) in the case of Private Limited Company.
• Name of the company not to be prohibited as specified under the Prevention of Improper Use Act, 1950.
• Some keywords to be used according to the authorized capital. A word such as a corporation, India, Bharat, etc. to be used only after proper authorization.
The Registered Office Clause (Section 146 of Company Act, 2013)
A company should have a registered office either from the day it begins to carry on business or from the 30th day of incorporation whichever is earlier.
Registered office determines the companies’ nationality, domiciles (Daimler Co. Ltd. v. Continental Tyre & Rubber Co. Ltd. (1916) 2 A.C. 307) and Jurisdiction of the court. Further, it is used for the purpose of all communications with the company.
The Objects Clause (Section 13(1) of Company Act, 2013)
The object of the company is clearly set forth in the Memorandum; these objects define and confine the scope of the company’s power. It is stated that the legal personality of the company exists for the purpose of incorporation as defined by the object clause. (Eastern Countries Rly. Co. b. Hawkes (1855) H.L.C. 331)
The purpose of an object clause is to:-
Stakeholders: The object clause defines the business the company will be undergoing. That enables subscribers to know the basics of investments the company will undergo and the risks involved.
Creditor: Objects enable creditors and persons dealing with the company to understand the company’s business range. (Egyptian Salt & Soda Co. Ltd.v. Port Said Salt Assn. Ltd. (1931) A.C. 677)
In the case of the Cotmanv. Brougham (Cotman v. Brougham (1981) A.C. 514) Lord Parker observed that the security, however, increases of those who transact business with a company with the widening of the objects. But the subscriber’s risk reduces when the objects are expressed narrower in the memorandum.
The Capital Clause (Section 13(4) of Company Act, 2013)
The memorandum of the company states the amount of share capital by which the company is to be registered. This capital is known as registered, authorized or nominal capital.
The shares issue later is either equity shares or preference share and they don’t hold Disproportionate Rights. (Section 85, 89 of Company Act, 2013), whereas the private company can issue a share of any kind with disproportionate rights. (Section 90 of Company Act, 2013)
Liability Clause (Section 13(2) of Company Act, 2013)
The Liability Clause in the Memorandum provides legal protection to the shareholders by protecting them this clause doesn’t hold shareholders personally liable for the loss of the company. Thus, maintaining the liability of members as limited.
The kinds of limited liabilities:
Limited By Shares –According to Section 2(22) of Company Act, 2013defines a company limited by shares. In such a company, the shareholders only have to pay the price of the shares they have subscribed to.
Limited By Guarantee –According to Section 2(21) of Company Act, 203 in a company limited by guarantee members are present instead of shareholders. These members contribute to the assets of the company at the time of winding up. The members are liable for a fixed amount for which guarantee has been undertaken.
Association Clause (Section 13(4) of Company Act, 2013)
In this clause, the subscribers of MoA make a formal declaration wanting to associate themselves with the company and form an association. This clause further states the name, address, description, number of shares held by the subscribers. The subscribers are to sign the MoA in front of two witnesses. The MoA is to be signed by at least 2 subscribers in case of a private company and by 7 in case of a public company.
The doctrine of Ultra Vires
Now, the question arises about what happens when the company goes beyond that defines object in the MoA. Any act done beyond the legal powers and authority of the company is Ultra Vires and hence void and hence a legal relationship for that action has not been formed.
Whether an act that is ultra vires in nature be rectified by the shareholders? In the case of Ashbury Rly. Carriage &Iron Co. Ltd. v. Richie [(1857) L.R. 7 H.L. 658] been held that an act that is Ultra Vires in absolutely void and even the whole body of shareholders cannot rectify it this was further affirmed by House of Lords in the case of Attorney General v. Great Eastern Rly. Co. [(1880) 5 App . Cas. 473]
Effects of ultra vires transactions:
• For an ultra vires act, any member can get an injunction from the Court restraining the company from acting further for such an act.
• Any member of the company can propose and maintain an action that compels the directors of the company to restore the funds of the company used for an ultra vires act. (Russel v. Wakerfield Water Wprks Co. (1857) L.R. 20 Eq. 474)
• When an agent (Directors are agents of the company) exceeds his authority he is personally liable for Breach of Warranty of authority in a suit brought by the third party.
• A contract ultra vires are void ab initiated hence has no legal effects.
• A property acquired by an ultra vires transaction. The company has the right to protect and hold that property. (National Telephone Co.v. St. Peter Constables (1900) A.C. 317)
• A company is not liable for any civil wrongdoing committed by the company’s agents or servants during the course of an ultra vires transaction.
Memorandum of Association is one of the documents that is required to incorporate a company in India. It contains specific information regarding the working of the company and defines the scope of activities undergone by the company. It is a document that explains the entire structure of the company.
“The views of the authors are personal“
Frequently asked questions
What is the importance of the Memorandum?
MoA determines the area of operation of the company along with the relationship of the company with outsiders. Further, it is the basis of the incorporation of a company.
What’s the use of MoA?
MoA helps establish the extent and scope of business activities that a particular company can carry out. MoA with Article of Association serves to constitute the company.
What is the effect of omission of limited or private limited in a name?
When limited or private limited forms part of the company’s name, the omission of this makes the name incorrect and a contract done under an incorrect name would be deemed personally liable.
What is the doctrine of ultra vires?
This doctrine states that any act done beyond the power of the company is void and hence has no legal obligation. The powers of the company are defined in the object clause of MoA. A company cannot go beyond the scope of the defined objects.