Memorandum of Association & Articles of Association ( Formation of a Company)

MEMORANDUM OF ASSOCIATION & ARTICLES OF ASSOCIATION

MEMORANDUM OF ASSOCIATION & ARTICLES OF ASSOCIATION

BY PRANSHU SINHA

 

 

 

Memorandum of Association

 

Memorandum of Association (M.O.A.) or usually called as just ‘Memorandum’ is the most essential document in the formation of a company. The main object for which a company is formed is stated in it’s MOA. If we were to draw an analogy between MOA and company then company is the country while MOA is the constitution of it. It contains all the rights, privileges, and powers of the corporation. It is necessary for the incorporation of a company since the MOA states business/businesses that would be undertaken by it.

 

Contents of MOA

MOA contains 6 clauses which are as follows:

 

  • Name clause: Contains the name of the company.
  • Registered Office Clause: Contains the Office address of the company that was registered at the time of incorporation.
  • Object Clause: Contains the object of the companies.
  • Association Clause: Contains the information about the initial shareholders and the number of shares given to each one of them.
  • Capital Clause: Contains the details about various capitals of company. E.g Share capital, minimum paid up capital etc.
  • Liability Clause: States the liability of each member of the company.

 

Doctrine of Ultra Vires

 

The doctrine of ultra vires applies to MOA of a company. Ultra vires is basically acts which are performed by company which are beyond the purview of the business/acts mentioned in the Object clause of MOA, i.e. when the company transacts or deals or starts a business in something which it was not essentially built for. Example, A coffee making company after its incorporation starts manufacturing tea. Then this act of the company would be ultra vires.

Effects of Ultra Vires actions

 

  • Injunction: Any member/shareholder of the company can get an injunction to freeze the assets/money lent to the company to prevent the company from spending it.
  • Personal Liability: A director of a company would be personally liable to make good the amount lost due to his ultra vires act.
  • Void Contracts: Any contract outside the scope of object clause would be void ab initio. However a company cannot be held liable for such contracts and the individuals are themselves responsible.
  • Ultra vires property acquired: If the property has already been acquired by an ultra vires act then the company cannot be held liable. This is because although the property has been acquired wrongly it represents the corporate capital. But if the rights and ownership haven’t been transferred then a tracing order can be brought against the company to prevent it from doing the same.

 

 

ARTICLES OF ASSOCIATION

 

Article of Association (A.O.A) of a company is a document which states the purpose of the company. It regulates the operations of the company. It specifies the duties of the various members including directors and lays down procedures regarding their appointment. It also deals with how a company would handle it’s financial records.

AOA generally include Shares and variation of rights, provisions regarding handling the capital and finances of company, managing board of directors and rights and duties of them as well as each member, different shares issued by company and regualtions regarding them, provisions for winding up, indemnity, voting rights of each members, rules regarding holding the annual general meeting regularly and the agenda of it, etc.

 

 

Alteration of AOA: Articles of Association can be altered by convening an annual general meeting which includes of the directors, members and auditors of the company. The issue is discussed and put to vote. After such an alteration is approved by a special majority of members of the company, (i.e. 3/4th of the members present) it is brought to the notice of the registrar of companies by filing an application for the same with him. He makes the required amendments in the copies of AOA with him.

 

Doctrine of Constructive Notice

 

This doctrine propounds the idea that members of a company are taken to be in knowledge and fully aware of the AOA and MOA of the company they are working in. These documents when submitted to the registrar during the incorporation of the company attain the status of public documents and hence knowledge or notice of such documents to the members of the company is presumed. This protects the company against the actions of outsiders.

 

Doctrine of Indoor Management

 

This doctrine is an exception to the doctrine of constructive notice. It states that people transacting/dealing with the company need not inquire whether all the internal proceedings regarding the contracts are followed correctly, once they are satisfied that the transaction/deal is in accordance with the MOA and AOA of the company. E.g. Shareholders, need not inquire whether the necessary meeting was held properly or whether necessary resolution was passed properly. They are entitled to take it for granted that the company had gone through all these proceedings as it does normally.

The doctrine protects outsiders from the company and states that the people are entitled to take it for granted that internal proceedings of a company are as per the rules and regulations laid down in the MOA and AOA.

 

Exceptions to Indoor management

 

  • Knowledge of Irregularity: Any person who knows or has knowledge of an irregularity in the internal management of the company cannot claim benefit under this rule.
  • Illegality of Acts: This doctrine would not be applicable to acts of the company which are void ab initio i.e. which are void from the beginning. Illegal acts cannot be continued under the garb of this doctrine.
  • No Knowledge: If a member of the company has no knowledge of AOA he cannot seek defence under this doctrine.
  • Acts Beyond Scope of Authority: No defence is available to any member of company who transacts beyond the scope of his authority.

 

Differences between MOA and AOA

 

MOA

Memorandum of Association is an essential document that contains all the fundamental information which are required for the registration of the company. It is defined under section 2(56) of the Companies Act,2013 and contains the powers and objects of the company. It is subordinate to the Companies Act.

The MOA of a company cannot be amended retrospectively. A memorandum necessarily contains six clauses. It is compulsory for all companies as it defines the relation between company and an outsider to the company and also for registration of the company. Any act done beyond the scope of MOA is absolutely void.

 

 

AOA

 

Articles of Association is a document containing all the rules and regulations that governs the functioning of a company. It is described in Section 2 (5) of the Companies Act, 2013 and contains rules of the company. It is subordinate to the MOA. The articles of association can be amended retrospectively.
The articles can be drafted as per the choice of the company.
It is not necessary for a company to have an AOA. A public company limited by shares can adopt Table A in place of articles of association.

Regulates the relationship between company and its members and also between the members among themselves.

Acts done beyond the scope of AOA are not void ab initio. Such acts can become valid if they are subsequently ratified by shareholders.

 

Pranshu Sinha is an avid researcher & writer and is currently the 3rd year Law student at Dr. Ram Manohar Lohia National Law University, Lucknow.

 

 

 

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