NEED OF MEMORANDUM OF ASSOCIATION

    Memorandum of association is the fundamental document for the incorporation of the company. [1] “Charter” is the other name used for memorandum of association. This is the basic document that defines the company’s objectives and the rights of the members. Without the memorandum of association, no company can be incorporated. Memorandum of association sets the boundaries for the company that they can’t perform any activity beyond these boundaries. MOA is the foundation on which the company is based. It prescribes the name of the company, its registered office, its objectives, and capital and also defines the extent of its powers. It defines the relations of a company with creditors, shareholders, and outsiders. It protects the interest of shareholders, creditors, and also of the public. The company cannot be involved in any immoral or illegal activity.

    The court held that the memorandum of association defines the limitations of the powers of the company; it states affirmatively the ambit and extent of vitality and powers which by law are given to the corporation and its state negatively if it is necessary to state that nothing shall be done beyond that ambit.[2]

    IMPORTANCE

    Memorandum of Association is a very important document of a company that provides the information to shareholders, creditors, and also to outsiders. Nothing can be performed if not mentioned in the memorandum of association. If a person wants to purchase a company’s shares, he/she will decide it by getting information from the memorandum of association as it describes how the capital was being invested by the company and in what business the company is engaged in.

    FUNDAMENTAL DOCUMENT

    Whether private or public company they are bound to prepare a memorandum of association. The company cannot be incorporated without a memorandum of association. It is the basic document of the company.

    COMPANY’S OPERATION

    There is only one document that defines the nature of the company, its scope, and also the various activities in which the company will engage. The company cannot engage in any other activity which is not mentioned in this document. Nothing shall be done beyond the ambit of the memorandum of association.

    PROSPECTIVE SHAREHOLDERS

    Who has not yet invested in the company is known as prospective shareholders means they decide on the basis of a memorandum of association. With the help of a memorandum of association, they will know whether their funds are safe or not and what will be the risk involved in investing money in that company.

    RELATIONSHIP WITH OUTSIDERS

    This is a public document, everyone will be able to know what kind of contract they are going to enter. It states the objective of the company. If anyone enters into a contract that is beyond the scope of the memorandum of association then that contract is not binding on the company.

    CONTENTS

    The memorandum of association must contain:

    1. The name of the company,
    2. The address of the company’s registered office,
    3. The objects of the company,
    4. The liabilities of the company,
    5. The capital of the company,
    6. The association or subscription of the company.

    NAME CLAUSE

    This clause states the name of the company, this clause is the identification clause of the company. This clause states whether it is a private or public company. There are as such no restrictions on a company for choosing names for their company but there are certain guidelines which are mandatory for the companies to follow. The Companies Act, 2013 defines these guidelines[3] as such:

    1. It should contain the word “limited”, in the case of a public company “Public Limited Company” and in case of a private company “Private Limited Company.[4]
    2. The name should not contain any such word which represents any political support or government protection.
    3. It should not be identical or resemble an already registered company. In one of the cases two companies were registered containing the same word i.e., “Exxon”, then in this case court held that a similar name can’t be used, so the plaintiff gets right over the name because he is the one who first registered with that name.[5]

    REGISTERED OFFICE CLAUSE

    This clause contains all the information about the company’s registered office. This is the place where all legal documents and records of books of accounts of the company are available. This clause states the full address (state and city) of the registered office. Through this clause, it describes whether it is an Indian or Foreign Company.[6]

    ALTERATION IN REGISTERED OFFICE

    A company may change the situation of its registered office for the smooth running of its business and the realisation of its objects. Such change in registered office can be:

    1. Shifting from one place to another in the same city or town: If the registered office of the company is to be shifted from one place to another in the same city or town, the board of directors must have to pass a resolution to that effect and give the new address of its registered office to the Registrar of Companies within 30 days after the date of the change of the address.
    2. Shifting from one town to another in the same state: if the company wants to shift its registered office from one town to another in the state, it shall pass a special resolution to that effect at its general meeting and send the notification to the Registrar within 30 days. It shall give the new address of its registered office to the Registrar.
    3. Shifting from one state to another: It can be done by passing a special resolution to change the place of its registered office.

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    OBJECTS CLAUSE

    This is the main clause of the memorandum of the association because this defines the objects and aims of the company incorporated. The company cannot perform any activity beyond the scope of the object clause. If the company performs any activity beyond this, then the act of the company will not be held valid. That’s why the company has to state their object for which they have incorporated and also all other activities they might be involved in future.[7] There is also a certain restriction defined in the Companies Act, certain activities in which the company can’t involve.

    1. It should not be involved in any illegal activity, for example, gambling.
    2. It should not involve in any activity which is against the provision of the Companies Act, 2013.

    IMPORTANCE OF OBJECT CLAUSE

    1. PROTECTION TO SHAREHOLDERS: It enables the subscribers to know the use where their investment money is put and thus, extends protection to shareholders.
    2. PROTECTION TO CREDITORS: It also extends a certain degree of protection to creditors as the company cannot spend its capital on any other activities which are not within the purview of the object clause.
    3. TO PUBLIC AT LARGE: The object clause also serves the public interest, as the company cannot diversify its activities beyond those which are specified in the object clause.

    ALTERATIONS IN OBJECT CLAUSE

    1.Object clause can be altered by passing a special resolution with a 75% majority.

    1. Altered with the permission of the central government.
    2. Alteration should also be registered with the registrar;[8] if not then all activities performed after alteration will become void.

    LIABILITY CLAUSE

    This clause defines the liability of members whether it is limited by shares or limited by guarantee.[9] This clause cannot be amended. Limited by shares[10] means the member is only liable to pay the unpaid price of their shares. For example, if a person has one share of Rs. 100, and he did not pay any amount yet then at the time of termination he is only bound to pay Rs. 100.

    In case of limited by guarantee[11], if the company is not able to pay creditors at the time of winding up then members will pay them through their personal accounts in addition to their shares. The members are liable to pay that much amount on which they agree to contribute.

    CAPITAL CLAUSE

    This clause states how much capital the company will have. The amount of nominal or authorized capital with which the company proposes to be registered and value of the shares into which it is divided. There is no limited amount prescribed for the company. It depends on the company that how much will be the fixed capital, and what is the value of the individual share.[12]

    ALTERATION OF SHARE CAPITAL

    Share capital can be altered but it should be mentioned in Articles of Association that the company can increase or decrease its capital and also describe the procedure for the same whether by ordinary resolution or by any other procedure. There are 5 cases in which a company can change its share capital.[13]

    1. When the company wants to issue new shares,
    2. When the company wants to consolidate existing shares into large shares,
    3. When the company wants to sub-divide the shares into smaller amounts,
    4. When the company wants to change fully paid-up shares into stock or vice-versa,
    5. When the company wants to reduce unissued shares.

    ASSOCIATION CLAUSE

    This is the declaration clause in the memorandum of association. The members give their consent for the formation of a company by duly signed the document in presence of witnesses. In the case of the private company two witnesses are required and seven in the case of a public company. All the details of the members were also testified by witnesses.

    CONCLUSION

    Memorandum of association is the most basic document for the incorporation of the company. The company has to submit this document to the registrar for the registration of the company. Without this document, the company cannot be incorporated. Memorandum of association can be altered by passing a special resolution or by getting consent from the central government. It specifies all the information about the company, the powers of the company. This is a public document and all persons relied on this document while they want to invest in the company or not. If anything is done beyond the scope of the memorandum then the company will not be held liable for such an act. For the smooth and proper working of the company, there is a need for a memorandum of association.

    REFERENCES

    [1] The Companies Act, 2013 (18 of 2013), s. 2(56).

    [2] Ashbury Railway Carriage and Iron Co Ltd v. Riche, (1875) LR 7 HL 653.

    [3] The Companies Act, 2013 (18 of 2013), s. 4(2).

    [4] The Companies Act, 2013 (18 of 2013), s. 4(1)(a).

    [5] Exxon Corp. v. Exxon Insurance Consultants International Ltd, [1982] Ch. 119.

    [6] The Companies Act, 2013 (18 of 2013), s. 4(1)(b).

    [7] The Companies Act, 2013 (18 of 2013), s. 4(1)(c).

    [8] The Companies Act, 2013 (18 of 2013), s. 13.

    [9] The Companies Act, 2013 (18 of 2013), s. 4(1)(d).

    [10] The Companies Act, 2013 (18 of 2013), s. 4(1)(d)(i).

    [11] The Companies Act, 2013 (18 of 2013), s. 4(1)(d)(ii).

    [12] The Companies Act, 2013 (18 of 2013), s. 4(1)(e).

    [13] The Companies Act, 2013 (18 of 2013), s. 61.


    BY NIDHI | GEETA INSTITUTE OF LAW | DELHI, NCR

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