Compliances Legal Agreements

A Critical Analysis on Memorandum of Association under the Companies Act, 2013

A company is made when a certain group of people come together to achieve a particular objective. Usually, such an objective is commercial in nature that allows them to make financial profits. There are a number of steps that must be followed to form a company. An application is filed with the Registrar of Companies (ROC), and that application is enclosed along with a number of documents. One such essential document that is to be submitted with the application is the Memorandum of Association. In this article, we shall have a complete review of the various aspects of the Memorandum of Association (MOA), including its objective, features and key contents.

Meaning of Memorandum of Association

Memorandum of Association (MOA) means the legal document which spells out the prime reason for a company’s incorporation.  An MOA specifies the powers of the company and the conditions that determine its working. The document contains the rules and regulations that regulate and governs the company’s relations with the people on the outside.

It is a mandatory legal document that defines the scope of the operations of a company. A company cannot function beyond the scope or the terms of the document. In case a company works beyond the scope of the document, then such work shall be ultra vires act and will be considered void.

The Companies Act 2013 defines the meaning of MOA in section 2(56). It says that the Memorandum means two things (a) the Memorandum of Association of a company originally framed or (b) as altered from time to time in pursuance of any previous company law. The whole structure of the company is specified in the MOA. It can be noted that the MOA is also a public document that means if a person wants to enter into any contract with a company, then he or she can pay the requisite fee to the Registrar of companies and thereafter obtain the MOA. The memorandum document shall contain all the details of the company.

Significance of the Memorandum of Association

The significance and the importance of the MOA can be deduced from the fact that without such a legal document, a company cannot be formed. All companies formed under the Companies Act in India must have the MOA. It applies to all kinds of companies. The MOA governs the relationship between the company and its stakeholders. It is an essential document for the registration of a company. The Memorandum of Association and the Articles of Association should be signed by the subscribers and filed with the Registrar for the incorporation of a company.

In addition to this, it allows the shareholders to understand the company before buying its shares. The MOA helps them to ascertain the capital they should invest in the company. The document provides access to information to all the stakeholders who are looking to associate with the company. Therefore if you are looking to enter into a contractual relationship with the company, then you may refer to its MOA in order to gain knowledge about the company.

A Memorandum of Association is called the charter of the company because of its key contents that include the details of the company and its members along with their liabilities. Thus, one can imagine why such importance is given to this document. It is a crucial document in the registration process as well, without which the company cannot be incorporated.

Different Forms of Memorandum of Association

The Companies Act 2013 under section 4(5) says that a memorandum must be in accordance with the forms mentioned below as provided in different tables depending upon the type of company. A company is required to choose from the table applicable to it.

• Table A- shall apply to a company limited by shares.
• Table B- shall apply to a company limited by guarantee and not having a share capital.
• Table C- shall apply to a company limited by guarantee and having a share capital.
• Table D- shall apply to an unlimited company which doesn’t have a share capital.
• Table E- shall apply to an unlimited company having a share capital.

What are the key contents of the Memorandum of Association?

The Companies Act 2013 under section 4^[1] states the essential contents of the Memorandum. There are few essential clauses that a memorandum contains, and they are specified in detail below.

• Name Clause

The first key content of a memorandum is the name clause, where the name of the company is mentioned. There are certain conditions that determine what names can or cannot be chosen. The name of the company should not be similar to or identical to any company that is already registered. In the case of a public company, the word “Limited” must be used necessarily in that name, and in the case of a private company, the word “Private Limited” must be included with the name.

However, it must be noted that such a condition doesn’t apply to Section 8 companies. A section 8 company means the companies that are established to promote arts, sports, education, research, social welfare, etc.

A name that is undesirable shall not be allowed. Undesirable names are such names that are:

• Prohibited under Emblem and Names Act, 1950.
• Names that are in resemblance to each other and that are selected in order to deceive.
• The name that includes a registered trademark.
• A name that is offensive or contains any word or words that are offensive.
• A name that is similar to or resembles the name of already incorporated LLP.

• Registered Office

Under the registered office clause, the place where the company’s registered office is situated shall be specified. Such a location of the registered office of a company shall determine the nationality and the jurisdiction of courts. It is a place where statutory books of the company are kept, and from there, the business is operated. In order to communicate with the company, the registered office is useful.

A company may mention the state where the company is located before it is formed, but when it is being incorporated or within 30 days after it is incorporated, the details of the location of the registered office must be clearly mentioned. In case of a change in the registered office clause, the same should be communicated to the Registrar of Companies within the prescribed time.

• Object Clause

Now, the object clause is considered the most critical clause in the Memorandum of Association. Section 4(c) of the Companies Act mentions the object clause. Under the object clause, the prime reason behind the incorporation of the company is specified, or the activities to be conducted by the company shall be mentioned. It sets the limits of operation of the company.

The objects must be well defined, and the object clause shall contain:

• The main objects of the company that the company will aim for on its incorporation.
• The matter that is required to achieve the object of the company known as the objects incidental or ancillary.

The object clause is vital for shareholders as it states the information about the operations that the company shall perform. It shall allow the shareholders to know the purpose their investment will be used. Due to the object clause, the company shall be dealing with a limited number of matters which will prohibit diversification of the activities of the company. The company also will have to limit itself to operate within the scope of powers in the object clause, in case it goes beyond such scope of powers, then the activity of the company shall be termed as Ultra Vires.

• Liability Clause

The liability clause in the MOA safeguards the shareholders by providing legal protection from being held liable for any loss in the company. Under the Act, there are two forms of limited liabilities:

• A company limited by Shares- under the Companies Act in a company limited by shares, the shareholders just need to pay for the shares that they have subscribed to. In case of failure to pay such amount and if the company winds up, then they shall be only liable to pay that unpaid amount.
• A company limited by guarantee- under the Companies Act, a company limited by guarantee consists of members and not shareholders. The members decide to contribute to the assets of the company when it’s winding up. The members guarantee to pay a fixed amount, and they shall be liable for that.

• Capital Clause

It is only valid for companies that have share capital. Such companies must mention the capital divided into shares of a fixed amount. The name and the number of shares that the members have must also be mentioned.

• Subscription Clause

This clause mentions the subscribers who are signing the Memorandum. Every subscriber must mention the number of shares he subscribes and the signing of the Memorandum by the subscribers must be done on the presence of two witnesses. At least one share must be subscribed by every subscriber.

• Association Clause

In the association clause, the subscribers make a declaration of association with the company. It is also a vital clause as it contains the particulars of the shareholders or the promoters of the company.

Subscription of MOA

The first shareholders of a company are called subscribers. They come together and form a company. Thus, their names and their other relevant details are mentioned in the Memorandum.

The requirement of subscribers would be different from company to company. It all depends on the type of company.

For a private company, a minimum of 2 subscribers are required to form a company, and for public companies, 7 or more subscribers are needed. When it comes to one Person Company, then as the name itself suggests, only one person is required.

Signing of the Memorandum of Association

The Memorandum should be signed by all the subscribers. Along with the signature, the subscriber must mention other relevant details like his name, address, occupation, and the shares he is subscribing to. It must be done in the presence of a minimum one witness. The witness shall also give his details.

Further, the Memorandum should be in printed form under the Companies Act, 2013.

Alteration in the Memorandum of Association under Companies Act, 2013

Alteration means any change in the existing thing. From the purpose of the MOA, alteration means any addition, substitution or omission to the Memorandum. The company has the right to alter the Memorandum, but it is only limited to an extent permissible under the Act. Any alteration in the clauses can be made after passing a special resolution.

The resolution is a term used to denote a formal decision made in a meeting. A special resolution requires a 2/3^rd majority. The alteration is a critical undertaking that can happen for different reasons. It may be to enable the company to work more efficiently or to amalgamate with any other company. It can also be altered to achieve the objectives or to help companies dispose of the undertaking.

How can different clauses under the MOA be altered?

The clauses of the Memorandum of Association can be altered in different ways depending upon the clauses. Name clause can be altered after a special resolution is passed. Thereafter, the copy is sent to the Registrar. Once it is changed, a new certificate shall be issued.

Alteration in the registered office clause requires the approval of the central government. An application can be filed along with the prescribed fee for such a change. The object clause can be altered after passing a special resolution. In case the company is a public company, then the alteration of the Memorandum should be published in the local newspaper under the jurisdiction of the registered office of the company.

Alteration in the capital clause can be achieved by passing an ordinary resolution. The altered Memorandum must be provided to the Registrar in 30 days after the resolution is passed.

Difference between Articles of Association and Memorandum of Association (MOA)

1. An Article of Association regulates the internal affairs of the company; in contrast, the MOA deals with the relationship of the company with the outside world.
2. An Article of Association contains all the rules of the company, whereas the MOA consists of the objects of the company.
3. In case where alteration is required in the Article of Association, approval from the Central Government is not required, but MOA requires such approval.
4. An act that is ultra vires can be made legitimate under Article of Association through ratification of shareholders, but it is not possible in the MOA.
5. The forms of Article of Association can be found in Tables F to J of schedule 1, whereas the Forms of MOA are in Tables A to E of schedule 1.

Conclusion

The Memorandum of Association is an essential legal document for the incorporation of a company. It is the foundation upon which a company is formed. Every company must have it. An MOA can serve as guidance to shareholders, creditors, etc. about the activities of a company. Therefore, it must be well-drafted by seeking the advice of a professional because you don’t want to take a chance with or be complacent with such an indispensable document.