Memorandum of association is one of the basic and most important documents in the formation of a company. Hence, to understand what a memorandum of association is, one needs to know what the meaning of company is. A company can basically be termed as a legal entity formed by a group of people to gain profit with a common objective. Since a company is an artificial person, it needs to be formed according to the legal provisions. In India, All the legal provisions related to company have been provided in The Companies Act, 2013.
The Companies Act, 2013 lays down some procedure for formation and incorporation of the company. It says that the company is incorporated by submitting to the ROC (Registrar of companies) memorandum of association of the proposed company. Let us understand in detail about this topic.
Section 2(56) of the companies act gives the definition of the word memorandum as follows:
“Memorandum” means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this act.” The importance of the memorandum lies in the fact that it contains the six important clauses that govern the company throughout its existence, namely,-
- Name clause
- Registered office clause
- Object clause.
- Liability clause
- Capital abuse
- Subscription clause.
In simple words, a memorandum of association is a document which contains fundamental information of a company which incorporates the most basic features of a company.
Contents of MOA:
All the above clauses are prescribed by the companies act, 2013.
- Name clause:
This clause specifies the name of the company. The name of the public company must end with “limited” and the name of the private company must end with “private limited.” The name of the company should not be identical with the previous company. The name of the company must be displayed outside every place where the business of the company is being carried on.
- Registered office clause:
This clause specifies the name of state in which the company is situated. Under section. 12 of the act, a company must have, within fifteen days of its incorporation, a registered office which is capable of receiving and acknowledging all communications and notices addressed to it.
- Object clause:
This clause is the most significant clause and the lengthiest clause as it contains all the objectives/ activities which are to be undertaken by the company. Section 4 of the act lays down that, this clause must contain the objects for which the company is proposed to be incorporated and all matters considered necessary in furtherance thereof. A company cannot engage in any business not falling within this list.
- Liability clause:
This clause states the nature and liabilities of its members. In case of a company with limited liability, the members have to pay only the unpaid amount on the face value of shares held by him. In case of company with unlimited liability, the liability of members is unlimited
- Capital clause:
This clause of the memorandum states the amount of nominal or authorized or registered capital of a company and the number and value of the shares into which it is divided.
- Subscription clause:
This clause contains the names and information of the members subscribed to the company. The subscription clause is the last clause in the memorandum of a company and is usually worded as:
“We the several persons whose names and addresses are subscribed below, are desirous of being formed into a company in pursuance of this memorandum of association and we respectively agree to take the number of shares in the capital of the company set opposite our respective names.”
Doctrine of ultra vires
As seen above in the business clause, a company must limit itself with the business activities which are intra viers, i.e., those which are listed in the object clause of its memorandum. All the other activities would be ultra vires as they would fall outside the scope of its permitted business. The purpose of this doctrine is three- fold:
- To protect its shareholders;
- To protect its creditors;
- To protect public interest.
In Ashbury railway carriage and Iron co. LTD vs. Richie (1875)1, Incorporated under the Companies Act 1862, the Ashbury Railway Carriage and Iron Company Ltd. memorandum, clause 3, stated that its objects were “to make and sell, or lend on hire, railway-carriages…” and clause 4 stated that activities beyond this needed a special resolution. But the company agreed to give Riche and his brother a loan to build a railway from Antwerp to Tournai in Belgium.Later, the company repudiated the agreement. Riche sued, and the company pleaded that the action was ultra vires. Rejecting this argument, the house of lord held that the contract lay outside the four corners of the company’s memorandum, and was therefore, ultra vires.
Consequences of an ultra vires transaction
- Injunction to restrain the company.
It was held in Attorney-general vs. Great Eastern Rly co. Ltd, that if a company has entered into an ultra vires transaction, any shareholder of the company can approach the court for an injunction restraining the company from proceeding with such a transaction.
- Personal liability of directors.
It is a duty of directors to ensure that the Shareholders funds are used only for the legitimate business of the company. Therefore if such funds are directed towards ultra vires activities, the directors become personally liable to replace such funds.
- Liability of directors for breach of warranty of authority.
The directors are said to be agents of the company, if they induce a third party to enter into a contract with the company in respect in which the company itself has no authority to act, they become personally liable to compensate.
- Effect on property acquired under an ultra vires contract
When money of a company is spent ultra vires in acquiring a property, the right of the company over that property would be secure. This is because the property represents corporate capital, though acquired wrongly
- Effect of ultra vires contracts
Any contract made by a company which falls outside its objects is wholly void and is a nullity in the eyes of law.
- Effect of ultra vires torts
In tort the exact extent of the liability is proved if its employee commits: The activity in the course of which the tort was committed falls within the scope of its activities as defined in its memorandum and the servant had committed the tort in the course of his employment.
Doctrine of constructive notice:
The memorandum and articles of every company are registered with the ROC and are available for public inspection. The basic idea behind this doctrine is that, since the MOA is open to the general public, it is the duty of every person dealing with a company to read relevant parts of these documents and that person cannot later argue or prove that he had, in fact, not read such provisions. In simpler words, this doctrine gives third parties the authority to be aware of any fraud done by the company.
653, L. 7. (n.d.).
singh, a. (2017). company law. lucknow: Eastern book company.