Law Revolving Around Memorandum of Association

To obtain the registration of a company, an application needs to be filed to the Registrar of Companies (ROC) and the application must be accompanied by Memorandum of association (MOA), articles of association and an agreement if any which the company proposes to enter into with any individual for his appointment as its manager or whole time director or manager.

The documents must be submitted along with a declaration stating that all the requirements of the Act relating to registration have been complied with. An advocate of the Supreme Court or High Court or an attorney must also sign this declaration or pleader entitled to appear before the HC or a Secretary or chartered accountant practicing in India. (Section 33 (2)). [1]

As per Section 12 of the Act, any seven persons or two persons in case of a private company can associate themselves for any lawful purpose and get themselves incorporated into a company with or without limited liability. They need to subscribe their names to the MOA and comply with other requirements.

After the documents have been submitted to the ROC, then the ROC will see whether the requirements have been fulfilled. Then the ROC will register the company and other documents and place the name of the company in the Register of Companies. [2] The ROC will then release a certificate of incorporation certifying “under his hand that the company is incorporated and, in the case of a limited company, that the company is limited.” [3]

The aim of this paper is to briefly study the law revolving around Memorandum of Association and Articles of Association in Company Law.

The main issues that the researcher posed to him to write the project paper were:

A detailed analysis of the related Law.

A critical appraisal of the Supreme Court’s position.

The changes made in the Bill of 2006 after the Irani Committee Report.

The Company Law Bill 2008 and 2009.

CONTENTS OF THE MEMORANDUM OF ASSOCIATION

Under Section 2(28) [4] of the Companies Act, 1956 the memorandum means the memorandum of association of the company as originally framed or as altered from time to time in pursuance with any of the previous companies’ law or the Companies Act, 1956. Section 14 of the Companies Act stipulates that a memorandum of association should be in any of the one form specified in the tables B,C,D and E of Schedule 1 to the Companies Act, 1956. Form in Table B is applicable in case of companies limited by the shares, form in Table C is applicable to the companies limited by guarantee and not having share capital, form in Table D is applicable to company limited by guarantee and having a share capital and form in table E is applicable to unlimited companies.

The prescribed scheme in the Indian Company Law requires the memorandum to be printed, divided into paragraphs, numbered and signed by at least 7 (in case of public) and 2 (in case of private) persons in the presence of one witness.

Section 13 imposes certain requirements with respect to the memorandum. The memorandum of association of every company must contain the following clauses :-

Name clause [5] : The name of the company is mentioned in the name clause. A public limited company must end with the word ‘Limited’ and a private limited company must end with the words ‘Private Limited’. The company cannot have a name which in the opinion of the Central Government is undesirable. [6] A name which is identical with or nearly resembles the name of another company in existence will not be allowed. [7] A name which resembles a trade mark or which is subject to such an application will also, subject to the approval of the Trade Mark owner, be considered undesirable. The Registrar of Trade Marks will be consulted by the Central Government before granting a name to a company. [8] The question whether a name is too similar to another name is a question of fact, and must be discussed on merit in each case. In Montari Overseas Ltd. v. Montari Industries Ltd., it was held that there was a sufficient level of similarity between the names and the respondent would be liable for passing off.

A company cannot use a name which is prohibited under the Names and Emblems (Prevention of Misuse Act, 1950 or use a name suggestive of connection to government or State patronage.

Domicile clause [9] : The state in which the registered office of company is to be situated is mentioned in this clause. If it is not possible to state the exact location of the registered office, the company must state it provide the exact address either on the day on which commences to carry on its business or within 30 days from the date of incorporation of the company, whichever is earlier. Notice in form no 18 must be given to the Registrar of Companies within 30 days of the date of incorporation of the company. Similarly, any change in the registered office must also be intimated in form no 18 to the Registrar of Companies within 30 days. The registered office of the company is the official address of the company where the statutory books and records must be normally be kept. Every company must affix or paint its name and address of its registered office on the outside of the every office or place at which its activities are carried on in. The name must be written in one of the local languages and in English.

Objects clause [10] : This clause is the most important clause of the company. It specifies the activities which a company can carry on and which activities it cannot carry on. The company cannot carry on any activity which is not authorized by its MOA. Any activity carried out beyond or outside the objects will be ultra vires and void. However the company may do anything incidental to the objects specified. This clause must specify :-

Main objects of the company to be pursued by the company on its incorporation

Objects incidental or ancillary to the attainment of the main objects

Other objects of the company not included in (i) and (ii) above.

In case of the companies other than trading corporations whose objects are not confined to one state, the states to whose territories the objects of the company extend must be specified.

A new business mentioned in ‘other objects’ cannot be commenced without the prior approval of shareholder through a special resolution. [11] Though, it is clarified that a ‘new business’ is a business which is not germane to the running of the current activity.

Company law prescribes that any activity beyond the scope of the objects will be ultra vires and hence void. This brings out a question of interpreting the law. That is to determine which act would be considered to be beyond the scope of the objects and which acts would be considered to be within the objects. To clarify this ambiguity in the law the court has formed a doctrine called the doctrine of Ultra Vires.

Doctrine of Ultra-Vires: Any transaction which is outside the scope of the powers specified in the objects clause of the MOA, and are not reasonable incidentally or necessary to the attainment of objects is ultra-vires to the company and therefore void. No rights and liabilities on the part of the company arise out of such transactions and it is a nullity even if every member agrees to it [12] . The powers in respect to the object may be express or implied. The test for determining whether a power can be implied is to assume that a company has power to do all acts that are reasonably necessary in attaining its objects.

Consequences of an ultra vires act: If an act is deemed to be an ultra-vires transaction it has the following consequences [13] :

The company cannot sue any person for enforcement of any of its rights.

No person can sue the company for enforcement of its rights.

The directors of the company may be held personally liable to outsiders for an ultra vires act. A director may be compelled to restore to the company the funds that have been employed in an ultra vires transaction. [14]

The ultra vires acts are deemed to be void ab initio. Hence, the company is not bound by the act and cannot sue or be sued upon it. [15] The members in a company have a right to get an injunction from the Court if he finds out that the company is going ahead with an ultra vires act.

However, the doctrine of ultra-vires does not apply in the following cases [16] :-

If an act is ultra-vires of powers the directors but intra-vires of company, the company is liable.

If an act is ultra-vires the articles of the company but it is intra-vires of the memorandum, the articles can be altered to rectify the error.

If an act is within the powers of the company but is irregualarly done, consent of the shareholders will validate it.

Where there is ultra-vires borrowing by the company or it obtains deliver of the property under an ultra-vires contract, then the third party has no claim against the company on the basis of the loan but he has right to follow his money or property if it exist as it is and obtain an injunction from the Court restraining the company from parting with it provided that he intervenes before is money spent on or the identity of the property is lost.

The lender of the money to a company under the ultra-vires contract has a right to make director personally liable.

In the case of K. Leela Kumar v. Government of India [17] , the Court held that Memorandum of Association cannot contain anything contrary to Companies Act, 1956 however articles of association in many cases deals with personal matters and may not be challenged on the above ground. In Sivashanmugam v. Butterfly Marketing (P.) Ltd. [18] , the Court held that where the objects clause provided that the company may enter into any partnership for any purpose which may benefit the company, it was held that this enabled the company enter into partnership for manufacturing garments. In NEPC India Ltd. v. Registrar of Companies [19] , the Court held that a complaint alleging that a company was indulging in activities not mentioned in the objects clause of the Memorandum of Association had to be filed within six months of the date of knowledge.

Liability clause [20] : A declaration that the liability of the members is limited in case of the company limited by the shares or guarantee must be given. The MA of a company limited by guarantee must also state that each member undertakes to contribute to the assets of the company such amount not exceeding specified amounts as may be required in the event of the liquidation of the company. A declaration that the liability of the members is unlimited in case of the unlimited companies must be given. The effect of this clause is that in a company limited by shares, no member can be called upon to pay more than the uncalled amount on his shares. If his shares are already fully paid up, he has no liability towards the company.

The following are exceptions to the rule of limited liability of members:-

If a member agrees in writing to be bound by the alteration of MA / AA requiring him to take more shares or increasing his liability, he shall be liable upto the amount agreed to by him.

If every member agrees in writing to re-register the company as an unlimited company and the company is re-registered as such, such members will have unlimited liability.

If to the knowledge of a member, the number of shareholders has fallen below the legal minimum, (seven in the case of a public limited company and two in case of a private limited company) and the company has carried on business for more than 6 months, while the number is so reduced, the members for the time being constituting the company would be personally liable for the debts of the company contracted during that time.

Capital clause [21] : The amount of share capital with which the company is to be registered divided into shares must be specified giving details of the number of shares and types of shares. A company cannot issue share capital greater than the maximum amount of share capital mentioned in this clause without altering the memorandum.

Subscription clause [22] : A statement declaring the desire to form a company in pursuance of the memorandum. There are certain statutory requirements in making a memorandum.

The memorandum must be signed by each subscriber in the presence of atleast one witness.

Each subscriber must have at least one share.

Each subscriber must write opposite his name the number of shares he takes.

ALTERATION OF MEMORANDUM OF ASSOCIATION

Section 16 provides that a company cannot alter the provisions contained in the memorandum except in the cases and through the procedure prescribed by the Act. These statutory exceptions can be divided, broadly, into three heads.

Change of Name:

The Company Act prescribes a procedure, along with a list of conditions, to alter the name contained in the memorandum. [23] The name of a company may be changed at any time by passing a special resolution at a general meeting of the company and with a written approval of the central government. However, the approval is not required if the change requires changing ‘public’ from ‘private’ or vice versa. An application for change of name is required to be made to the Registrar of Companies in Form No. 1A with the prescribe fee. The change must be communicated to the Registrar by filing Form No. 23. The Registrar makes a decision in light of the guidelines provided by the Central Government.

Though, through inadvertence if a company registers a name which is identical with or too closely resembles the name of an existing company, the company may change the name by passing an ordinary resolution. [24] The central government can direct a company to change its name but it must do so within twelve months of the company’s registration. The change of name does not affect any rights or obligations of the company. [25] It is curable defect in a civil suit and the plaint can be amended. [26]

Change of Place of Registered Office:

The scheme in the Companies Act may be divided as follows:

Change of registered office in the same city, town or village: A company may change its registered office in the same city by passing a resolution of the Board of directors with the registrar. [27] It is important to note that here the memorandum is not altered as in a memorandum only the state is mentioned.

Change of registered office from one town city or village in one state to another town city or village in another state [28] : A special resolution is required for such a change. A confirmation by the Regional Director is also required in case of a change from a jurisdiction of one registrar of companies to another. A copy of the resolution is to be filed with the ROC who has to then register it.

Change of registered office from one state to another [29] : A company may change its registered office from one state to another by passing a special resolution and getting sanction by the Central Government, [30] which has to give sufficient notice to all interested parties before so confirming the alteration. The memorandum is required to be altered in such a change.

Amending the Objects Clause in the Memorandum:

Section 17 provides for alteration of the provisions of the memorandum with respect to the objects of the company. The Companies Act provides certain specific instances where it is permitted for the company to amend its objects clause.

To carry on business more economically and more efficiently.

To attain its main purpose by new or improved means.

To enlarge or change the local area of its operation.

To carry on some business which under existing circumstances may conveniently or advantageously be combines with the business of the company.

To restrict or abandon any of the objects specified in the memorandum.

To sell or dispose of the whole or any part of the undertaking or any of the undertakings.

To amalgamate with any other company or body of persons.

The objects clause of the company may be changed by passing a special resolution at a meeting of the shareholders. The special resolution in relation to one of the clauses provided in Section 17 (1) must be filed within the registrar within one month of the date of such resolution. The registrar must register the alterations within a month of the filing of the application. [31]

Alteration of liability clause: the liability of members in a company may be increased or reduced. Though, the intention has to be in writing. [32]

BINDING FORCE OF MEMORANDUM OF ASSOCIATION

The folowing are the legal implications of the MOA: [33]

Members bound to the company: Each member must observe the provisions as laid down in the MOA of the company and is bound by whatever it contains.

Company bound to the members: A company is bound to the members of the company by whatever is provided for in the MOA of the company. The company is bound not only to the “members as a body” but also to the individual members as to their individual rights. An individual member can restrain the company from making ultra vires transactions and can also make the company fulfill their obligations such as sending of notices for meetings.

Company and members not bound to the outsiders: The MOA do not confer any contractual rights on outsiders against the company or its members, even though the name of the outsider is mentioned in the articles.

company law bill 2009

The main objectives of the Company law bill 2009 are as follows:

(a) to revise and modify the Companies Act, 1956 in consonance with the changes in the national and international economy;

(b) to bring about compactness by deleting the provisions that had become redundant over time and by regrouping the scattered provisions relating to specific subjects;

(c) to re-write various provisions of the Act to enable easy interpretation; and

(d) to delink the procedural aspects from the substantive law and provide greater flexibility in rule making to enable adaptation to the changing economic and technical environment.

CONCLUSION

The Memorandum of Association of a company, often simply called the Memorandum, is the document that governs the relationship between the company and the outside world. A company may alter particular parts of its Memorandum at any time by a special resolution of its shareholders, provided that the amendment complies with company law. The objects of the company state what a company is permitted to do, and therefore limit its capacity to act. For instance if the Company is to be a non-profit making company limited by guarantee, there will be statement saying that the profits shall not be distributed to the members. The Memorandum of association is designed to communicate to the public the state of affairs of the company and its purpose of being and operating. This aids various stakeholders of the company (creditors, suppliers, shareholders, etc.) to evaluate the extent of their risk and also possibilities of the company to over come them at a future date. The basic aim of communicating the essential characteristics of a company is effectuated through the constituent documents for incorporation throughout the world, though there might be changes in the actual manifestation of the memorandum.