Memorandum of Association (MOA): Brief Concept

Law and You > Corporate Laws > Companies Act, 2013 > Concept Application: Memorandum of Association

In this article, we shall see some frequently asked questions on memorandum of association (MOA).

1.What is meant by ‘Memorandum of a Company’?

According to Section 2(56) of the Companies Act 2013, the “Memorandum” refers to the memorandum of the company as drawn up initially during the formation of the company or as changed periodically to carry out any action as per any other law of the Act. The Memorandum of Association or MOA of a company defines the objectives, extent of authority, competency, liabilities and legal rights of the company.

2. Which are the essential clauses of MOA?

Name clause, Registered office clause, Object clause, Liability clause, Capital clause, and Subscription clause are the essential clauses of MOA.

3. How can a company alter its Name Clause?

Under Section 13 (2-3) a company may change its name by passing a special resolution and with the approval of the Central Government signified in writing. The alteration becomes effective when it is registered with the Registrar of Companies and a new certificate of incorporation with the new name is issued.

4. Which companies have license to drop word “Limited: from their names?

Section 8 companies also called Non-Profit Making Companies have license to drop word “Limited: from their names.

5. How can a company alter its Object Clause?

Under Section 17 (1) of the Company Act, 1956, a company may, by special resolution, alter the provisions of its memorandum so as to change the place of its registered office from one State to another, or with respect to the objects of the company specified in the Act.

6. Give two purposes for which the company can change its Object Clause.

(a) to carry on its business more economically or more efficiently;

(b) to attain its main purpose by new or improved means;

(d) to carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company;

(e) to restrict or abandon any of the objects specified in the memorandum;

(f) to sell or dispose of the whole, or any part, of the undertaking, or of any of the undertakings, of the company; or

(g) to amalgamate with any other company or body of persons.

7. How can a company limited by shares alter its Capital Clause?

Under Section 61 of the Act, a company can alter the capital clause of its memorandum passing an ordinary resolution in a general meeting, provided it is authorized to do so by its articles.

Short Notes

1. Memorandum of Association:

According to Section 4 of the Companies Act, 2013, companies must draw the MOA in the form given in Tables A-E in Schedule I of the Act. Name clause, Registered office clause, Object clause, Liability clause, Capital clause, and Subscription clause are the essential clauses of MOA. Thus, it is a document which actually forms the charter of the company and defines its powers and objects.

It is the basic document on which the company is built and it states how the company is to be constituted and what work it will perform at the same time. It contains rules regarding the capital structure, the liability of the members, the objects clause, and other important matters of the company. It is a public document according to Section 399 of the Companies Act, 2013. Hence, any person who enters into a contract with the company is expected to have knowledge of the MOA.

The MOA defines the area beyond which the company cannot go i.e. under no circumstance can the company depart from the provisions specified in the memorandum. If it does so, then it would be ultra vires the company and void.

It is also to be noted that the provisions of the Companies Act, 2013 have the overriding effect over the memorandum and Articles of a company. If there is any provision in the memorandum of articles of a company which is repugnant to anything contained in the Act, such a provision would, to that extent, be void.

2. Object Clause of Memorandum of Association:

This clause is perhaps the most significant and always the lengthiest clause in the company’s memorandum and it enumerates the business activities which can be undertaken by the company. Any business falling within the ambit of object clause would be intra vires but any business not falling within the ambit of the object clause would be ultra vires. For ultra vires activity company can be sued and penalized.

The objects clause states the ambit and extent of a Company’s powers. The purpose of this statement is to enable creditors and other persons dealing with the company to know the extent of the company’s power and authority, and to protect the subscribers who will know the purposes to which their money can be applied. Similarly, this provision ensures that a company does not diversify into fields which are not stated in its memorandum and are totally unrelated to the activities for which it was incorporated.

(a) to carry on its business more economically or more efficiently;

(b) to attain its main purpose by new or improved means;

(d) to carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company;

(e) to restrict or abandon any of the objects specified in the memorandum;

(f) to sell or dispose of the whole, or any part, of the undertaking, or of any of the undertakings, of the company; or

(g) to amalgamate with any other company or body of persons.

3. Doctrine of Ultra Vires in relation to its objects:

Section 4 (1)(c) of the Companies Act, 2013, states that all the objects for which incorporation of the company is proposed any other matter which is considered necessary in its furtherance should be stated in the memorandum of association of the company. The object clause of the memorandum of the company contains the object for which the company is formed. If a company departs from its MOA, then such an act is called ultra vires.

The Doctrine of Ultra Vires is a fundamental rule of Company Law. It states that the objects of a company, as specified in its Memorandum of Association, can be departed from only to the extent permitted by the Act. Hence, if the company does an act, or enters into a contract beyond the powers of the directors and/or the company itself, then the said act/contract is void and not legally binding on the company. This doctrine assures the creditors and the shareholders of the company that the funds of the company will be utilized only for the purpose specified in the memorandum of the company.

In Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1878) L.R. 7 H.L. 653 case, the company, and M/s. Riche entered into a contract where the company agreed to finance the construction of a railway line. Later on, directors repudiated the contract on the ground of its being ultra-vires of the memorandum of the company. Riche filed a suit demanding damages from the company. According to Riche, the words “general contracts” in the objects clause of the company meant any kind of contract. Thus, according to Riche, the company had all the powers and authority to enter and perform such kind of contracts. Later, the majority of the shareholders of the company ratified the contract. However, directors of the company still refused to perform the contract as according to them the act was ultra-vires and the shareholders of the company cannot ratify any ultra-vires act. The House of Lords held that the contract was ultra-vires the memorandum of the company, and, thus, null and void. They also stated that even if every shareholder of the company would have ratified this act, then also it had been null and void as it was ultra-vires the memorandum of the company. Memorandum of the company cannot be amended retrospectively, and any ultra-vires act cannot be ratified.

Essay Type Questions:

1. What is Memorandum of association? Which different clauses must it contain? OR, What are the compulsory clauses in a Memorandum of Association? In what mode and what extent can alter these clauses? OR, Discuss the contents of Memorandum of Association and explain the procedure for altering the object clause.

Memorandum of Association:

Name Clause:

A Company being a legal entity must have a name of its own to establish its separate identity. The name of the company is a symbol of its independent corporate existence. The first clause in the memorandum of association of the company states the name by which a company is known. The company may adopt any suitable name provided it is not undesirable. Following rules must be followed during the finalization of the name of the company.

For a public limited company, the name of the company must have the word ‘Limited’ as the last word.
For the private limited company, the name of the company must have the words ‘Private Limited’ as the last words.
This is not applicable to companies formed under Section 8 of the Act who must include one of the following words, as applicable: Foundation, Forum, Association, Federation, Chambers, Confederation, Council, Electoral Trust, etc.

In Osborn v. the United States, 6 L Ed 204 case, Johnson J. opined that: “The name of corporation is the symbol of its personal existence”.

Registered Office Clause:

The MOA must specify the State in which the registered office of the company will be situated. The name of the state in which the registered office of the company is to be situated must be given in the memorandum within 30 days of incorporation or in the day when it commences a business, whichever is earlier, the company must have a registered office to which all communication and notices may be sent. The company must also give notice of the situation of the registered office to the Registrar.

Under Section 13(4) the alteration in the registered office can be done in a prescribed manner. The registered office can be moved from one state to another by a special resolution and sanction of the Central Government.

In Metal Box India Ltd, re (2000) 2 Comp LJ 300 (CLB) case, the Court held that a company can shift its registered office from one place to another within the same city, town, or village. But if it is proposed to carry the registered office from one city to another, within a same state, a special resolution to that effect must be passed.

Object Clause

Liability Clause:

The fourth compulsory clause must state that liability of the members is limited if it is so intended that the company be limited by share or by guarantee. It should specify the liability of the members of the company, whether limited or unlimited. The effect of this clause is that, in a company limited by shares, no member can be called upon to pay more than what remains unpaid. If his shares are fully paid, his liability is nil. In a company limited by guarantee, the liability clause will state the amount which each member should undertake to contribute to the assets of the company in the event of liquidation of the company. He cannot be called upon to pay anything before the company goes into liquidation.

The liability clause cannot be altered so as to make the liability of the members unlimited, But if all the members agree, and if the Articles permit, the liability of all the directors or any of the directors can be altered.

Capital Clause

This is the fifth compulsory clause which must state the amount of the capital with which the company is registered unless the company is an unlimited company. This is valid only for companies having share capital. The shares into which the capital is divided must be of fixed value, which is commonly known as the nominal value of the share. The capital is variously described as ‘nominal’, ‘authorized’ or ‘registered’. Further, it must state the names of each member and the number of shares against their names.

Under Section 61 of the Act, a company can alter the capital clause of its memorandum passing an ordinary resolution in a general meeting, provided it is authorised to do so by its articles.

Association or Subscription Clause:

This is the last clause. The memorandum has to be subscribed by at least seven persons in the case of a public company and by at least two in the case of a private company. Each subscriber must sign the document and must write opposite his name the number of shares he takes. But no subscriber shall take less than one share. After incorporation, no subscriber can withdraw his name on any ground whatsoever. The MOA must clearly specify the desire of the subscriber to form a company.

Once subscriber has affixed his signature and other details on memorandum and the documents are filed with the ROC, he cannot withdraw his name for any reason whatsoever.

In case of One Person Company the MOA must specify the name of the person who becomes a member of the company in the event of the death of the subscriber.

Other Things Required:

Ensure that at least seven people sign it (2 in the case of a private limited company and one in case of a One Person Company).
Check that there is at least one witness who has seen above people signing.
Give address, description, occupation, etc. of all the signatories and witnesses.

Conclusion:

2. Discuss the various provisions regarding the name clause of a company.

Memorandum of Association:

Name Clause:

In Osborn v. the United States, 6 L Ed 204 case, Johnson J. opined that: “The name of corporation is the symbol of its personal existence”.

Reservation of Name for Company:

The first step in the formation of a company, even before necessary documents are submitted to the ROC, is to apply to ROC for the reservation of the name of the company.

Under Section 4(4) of the Companies Act, 2013 a person may make an application in prescribed form and manner and on payment of the prescribed fee for reserving the name for the proposed company or for changing the name of an existing company. Such name may be reserved for 60 days from the date of application.

Under Section 4(5)(a) of the Companies Act, 2013 if the company has not been incorporated, the reserved name shall be cancelled and the person making an application under Section 4(4) of the Companies Act, 2013 shall be liable to a penalty which may extend to one lakh rupees.

Under Section 4(5)(b) of the Companies Act, 2013 if the company has been incorporated, the Registrar may, after giving the company an opportunity of being heard either direct the company to change its name within a period of three months, after passing an ordinary resolution; or take action for striking off the name of the company from the register of companies; or make a petition for winding up of the company.

How to Choose the Name of Company?

Under Section 4 of the Companies Act, 2013 a company may select any name that it prefers but no company shall be registered by a name which in the opinion of the central government is undesirable and in particular which is identical or which too nearly resembles the name of an existing company. Where a company is registered by a name so similar to that of another company, that the public is likely to be deceived, the court will grant an injunction restraining it from using that name. The Central Government may consult the Registrar of Trade Marks before declaring a name to be undesirable.

How to Choose the Name of Company?

In Society of Motor Manufacturers and Traders Ld. V. Motor Manufacturers and Traders Mutual Insurance C. Ltd, (1925) 1 Ch 675 case, Lawrence J said: “Under the Companies Act, a company by registering its name gains the monopoly of the use of the name since no other company can be registered under a name identical with it or so nearly resembling it as to be calculated to device”.

In order not to mislead the public a company must not use a name which is prohibited under the Emblems and Names (Prevention of Improper Use) Act of 1950. A company is restricted from using any name which may connect it to the government of the state, without obtaining prior permission from the government. This act prohibits the use of the name and emblems of the united nation, and the world health organization, the official seal and emblem of the central and the state governments, the Indian National Flag, the name and pictorial representation of Mahatma Gandhi and the prime minister of India. A company should restrain from using words like “National, Bank, Stock Exchange, King, Queen, Emperor, Government Bodies and names of World Bodies like U.N.O., W.H.O., World Bank etc”.

The chosen name of the company as it appears in the Memorandum of Association should be exactly the same as the one approved by the Registrar of Companies. A Public Limited Company should end with the word “Limited” and likewise, a Private Limited Company should end with the words “Private Limited”. A non-profit company may be allowed by the Central Government to omit the words “Limited” or “Private Limited” from its name if it fulfils certain conditions.

Section 8 of the Companies Act, 2013 describes companies which are established to promote commerce, art, sports, education, research, social welfare, religion etc. Section 8 companies are similar to Trust and Societies but they have better recognition and legal standing than Trust and Societies.

Change of the Name of the Company:

Under Section 13 (2-3) a company may change its name by passing a special resolution and with the approval of the Central Government signified in writing. The change in name does not affect the rights and obligations of the company. The alteration becomes effective when it is registered with the Registrar of Companies and a new certificate of incorporation with the new name is issued.

Conclusion:

A Company being a legal entity must have a name of its own to establish its separate identity. The name of the company is a symbol of its independent corporate existence. The first clause in the memorandum of association of the company states the name by which a company is known. Companies Act, 2013 gives various provisions regarding selection of name and its alteration.

3. Explain the various provisions regarding the object clause of a company.

Memorandum of Association:

Under Section 4 of the Company Act, 2013, the memorandum of association of the company must contain the objects of the company for which it is incorporated and all matters considered necessary in furtherance thereof. These objects are specified in the object clause of the memorandum of association. This clause is perhaps the most significant and always the lengthiest clause in the company’s memorandum and it enumerates the business activities which can be undertaken by the company. Any business falling within the ambit of object clause would be intra vires but any business not falling within the ambit of the object clause would be ultra vires. For ultra vires activity company can be sued and penalized. The objects clause states the ambit and extent of a Company’s powers. The purpose of this statement is to enable creditors and other persons dealing with the company to know the extent of the company’s power and authority, and to protect the subscribers who will know the purposes to which their money can be applied. Similarly, this provision ensures that a company does not diversify into fields which are not stated in its memorandum and are totally unrelated to the activities for which it was incorporated.

Purpose of Object Clause:

The capital has been contributed by the shareholders and is held by the Company as though in trust for them. Therefore, such a fund must obviously be dedicated to some defined objects so that the contributors may know the purpose to which it can be lawfully applied.

It affirmatively determines what shall be the powers of the Company, for the stated objects conferred on the company to the attainment thereof.
It limits and restricts the powers of the company to those, thus conferred. Any act of the Company outside the area of the objects is ultra vires. The company and even the unanimous consent of all the shareholders cannot ratify it.

Constituents of Object Clause:

Under the Company Act, 2013, for the Company to be registered, the objects clauses must be divided into three sub-clauses, namely:-

Main objects,
Incidental or Ancillary objects,
Other objects,

Main Objects:

In this sub-clause the company must state the main objects to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of the main object. The ‘Main Objects’ shall be pursued by the Company immediately on its incorporation. The incidental or ancillary objects are nothing but the part of the main object which the Act requires to be clearly stated in order to avoid any ambiguity. A Company which has a main object together with a number of subsidiary objects, cannot continue to pursue the subsidiary objects after the main-object has come to an end.

Incidental or Ancillary Objects:

The objects under this category are not independent objects and cannot be entered upon by the Company independent of the main objects as stated in memorandum. These are such objects which, upon a fair and, reasonable construction, may be regarded as incidental or conducive to the attainment of the main objects, but noting further. These records cannot be construed as widening the scope of the objects clause, but will only be taken to include such incidental powers as are necessarily implied in carrying out the main object. In other words, incidental acts are those which have a reasonably proximate connection with the specified main objects.

In Evans v. Brunner Mond & Company, (1921) Ch 359 case, a company was incorporated for carrying on business of manufacturing chemicals. The objects clause in the memorandum of the company authorized the company to do “all such business and things as may be incidental or conducive to the attainment of the above objects or any of them”. By a resolution, the directors were authorized to distribute some amount out of surplus reserve account to such universities in the U.K. for scientific research and education. The resolution was challenged on the ground that it was ultra vires the power of the company. The directors proved that such help to students of the university was to encourage the scientific training of more men to enable the company to recruit staff and continue its progress. The court held that the expenditure authorized by the resolution was necessary for the continued progress of the company as chemical manufacturers and thus the resolution was incidental or conducive to the attainment of the main object of the company and consequently, it was not ultra vires.

Other Objects:

The third part of the objects clause enumerates the objects which are covered neither by the main objects nor by objects ancillary or incidental there to, but which are nevertheless necessary to enable the company to undertake all types of business activities which the company may anticipate to pursue. By providing this sub-cause the Act seeks that the Company should state its objects in clear, plain and unambiguous terms for which the funds of the Company can be used or the field of business within which the Company’s activities have to be extended.

Alteration in Object Clause:

(a) to carry on its business more economically or more efficiently;

(b) to attain its main purpose by new or improved means;

(d) to carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company;

(e) to restrict or abandon any of the objects specified in the memorandum;

(f) to sell or dispose of the whole, or any part, of the undertaking, or of any of the undertakings, of the company; or (g) to amalgamate with any other company or body of persons.

Conclusion:

The object clause is perhaps the most significant and always the lengthiest clause in the company’s memorandum and it enumerates the business activities which can be undertaken by the company. The objects clause states the ambit and extent of a Company’s powers. The purpose of this statement is to enable creditors and other persons dealing with the company to know the extent of the company’s power and authority, and to protect the subscribers who will know the purposes to which their money can be applied. Similarly, this provision ensures that a company does not diversify into fields which are not stated in its memorandum and are totally unrelated to the activities for which it was incorporated.

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Concept Application: Memorandum of Association

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Concept Application: Memorandum of Association

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