Memorandum of Association (MoA)

The word memorandum, as defined in Section 2(56) of the Companies Act refers to the Memorandum of Association (MoA) of a company. Subscribing one’s name to a document means appending your signature or thumb impression thereby acknowledging the content of the document. The people who subscribe to the memorandum of a company by signing it are called subscribers.

In this article, Ashish Agarwal outlines the important aspects of the concept.

I. What is the Memorandum of Association (MoA)?

The formation of a company is introduced in Section 3 of the Companies Act, 2013 (“the Act”) wherein it says that any 7 people or more in case of a public company, 2 people or more in case of a private company and a person alone in case of a one-person company can form such company by subscribing their names to a memorandum provided they comply with the requirements of registration under the Act.

A memorandum thus is an essential prerequisite for forming a company. It is the charter of the company, laying down the constitution of the company, the object it strives for, the share capital it has (if any), the name of its directors and so on. It is an open-to-access document from which a person interested in the company may gather all essential information about the company and its business before deciding whether to be associated with it or not. It is the self-defined limits of the company and shall operate only within its confines.

In the landmark case of Ashbury Railway Carriage & Iron Co. Ltd. v. Riche [1], Lord Cairn defined the memorandum of association as the charter of a company which defines the limitations of the power of the company. Lord Cairn observes that it contains both affirmative and negative limitations – such as affirmatively stating the ambit and extent of the powers legally given to the company and it states negatively, if necessary, that nothing will be done beyond that ambit.

II. What Constitutes a Memorandum?

The Memorandum is a detailed document which will legally bind the operations of the company within its limits. It has to be drawn carefully and meticulously. There are certain fixed clauses in a memorandum, as discussed in Section 4 read with Schedule 1.

• Name Clause: Name of the company should indicate whether the company is private or public. A private company name ends with “private limited” while a public company ends with just “limited”. Further, the name should not contain any undesirable name as specified in Rule 8 of Companies (Incorporation) Rules, 2014. No identical name that resembles the name of an existing company can be used.

In Ewing v. Buttercup Margarine Co. Ltd. [2], the company Buttercup Dairy Co. successfully obtained an injunction against Buttercup Margarine on the ground that “buttercup” being a fancy word, people might construe the companies to be connected.

• Situation Clause: This specifies the State in which the registered office of the company is to be situated. Companies are required to have a registered office within 15 days of their incorporation. The Registrar of Companies is to be intimated within 30 days of incorporation about the details of the registered office or within 15 days of any change in the details, in accordance with Form INC-22.
• Object Clause: The MoA must state the object the company is working for. The mandatory bifurcation of main and ancillary objects as required before has been dispensed with by the new Act of 2013. They may still be provided for clarity. Although the statement of express powers is necessary, powers incidental to, or necessary for the use of express powers shall be read into the MoA without being expressly written. This was held in Attorney General v. G.E. Rly. Co. [3]
• Liability Clause: This states whether the liability of the members is limited or unlimited. If limited, it answers the question of whether they are limited by shares or guarantee.
  1. Limited by Share: This means that the liability of a shareholder (subscriber) exists only to the amount due on the shares issued to him. If he has already paid the amount due on his shares, no more liability can be imposed on him.
  2. Limited by Guarantee: This means that the subscribers have chosen to limit their liability to a given maximum amount. In case of any dispute or situation which requires them to pay, the amount shall go to a maximum of the amount mentioned in the MoA. It is given here that if this is the situation of a company, the MoA should mention the guaranteed amount of each subscriber.
  3. Unlimited: A company may be formed with unlimited liability for its subscribers. Here, if such a situation arises, the personal property of the subscribers may also be taken as their liability is not limited.
• Capital Clause: This states the amount of capital with which the company is registered. The shares into which the capital is divided must be of a fixed amount and the number of shares which the subscribers to the memorandum agree to subscribe to shall not be less than 1. The share capital is usually a statement such as “Capital of 10 Lakhs = 10000 equity shares of Rs. 100 each.”
• Subscription Clause (Schedule 1): This is a statement of declaration that the subscribers whose names and addresses are mentioned agree to subscribe to the prescribed number of shares stated against their name in the memorandum. The statutory requirements regarding the subscription of the memorandum are that each subscriber must take at least one share and he should mention the number of shares he agrees to take against his name in the memorandum. This part is followed by the names, addresses and occupations of all subscribers, the number of shares they have taken, and their signature.

III. Alteration of an MoA

Section 13 of the Companies Act deals with the alteration of most parts of a Memorandum of Association. The basic procedure is to pass a special resolution to that effect with the subscribers, file the passed resolution with the Registrar, and if all procedures laid down in this Section are strictly complied with, upon registration of the alteration it will come into effect.

However, any alteration in the Share Capital is regulated by other provisions of the Act. Section 61 governs the alteration of share capital, Section 66 governs its reduction, and Sections 230 to 237 deal with its reorganization.

The procedure for alteration given in the provisions have to be strictly complied with, i.e., complying with a substantial part of it with minor lapses will not be deemed as complied. Any lapse of the procedure will render the alteration a nullity.

Alterations to specific clauses of the memorandum have been discussed below:

• Alteration to the Name Clause: A special resolution is to be passed with the subscribers. Approval of the Central government is needed, except in case of a private company converting to a public company, the approval to delete the word “private” is not needed. An alteration of name does not create a new entity. However, a suit in the former name of a company after the alteration has come to effect is not valid. It needs to be substituted by the new name, and then can be continued. These were held in Malhati Tea Syndicate Ltd. v. Revenue Officer [4], and Solvex Oils and Fertilizers v. Bhandari Cross-Fields (P) Ltd. [5]
• Alteration to Situation Clause: A change in the registered office address has different procedure depending on the exact nature of change. For a change of address within local limits, a Board resolution and a Special resolution is to be passed, and a notice of the change is to be served to the Registrar under INC-22 within 15 days. In case of change of address to a different State, approval of Central Government under INC-23 is required. This approval is to be filed and registered with the Registrar.

The court held in Mackinnon v. Mackenzie & Co [6] that in case of transfer of office from a State, the State has no inherent power to intervene. The loss of revenue that will happen because of a company’s alteration of the registered office is not a factor on which the company’s right to alter its memorandum can be curtailed.

• Alteration to Object Clause: A special resolution is to be passed, and filed with the Registrar. The registrar should certify the special resolution within 30 days of filing.
• Alteration in Liability: A special resolution is to be passed, and filed with the Registrar under Form MGT 14.
• Alteration in Capital: A limited company which has a share capital may make certain alterations to it through an ordinary resolution in a general meeting itself under Section 61.

It may increase its share capital as is expedient to do. It may divide its share capital into shares of larger or smaller values than the previously held. For instance, share capital of 10 lakh as divided previously into shares of Rs. 100 each may be altered to fewer shares of Rs 200 or reduced to more shares of Rs.50 each.

Further, a share or shares may be sub-divided into more shares of smaller amount than previously mentioned. It may convert its fully paid-up shares into stock, and reconvert the same. It may cancel some shares which have not been taken by any person, and diminish the amount of share capital by the amount of the shares so cancelled. This is not deemed to be a reduction of the share capital.

Only in alterations which cause a change in the percentage of voting rights of any shareholder, the confirmation of the Tribunal is needed. In the rest of cases, no confirmation is needed.

However, the alteration must be notified by filing it along with the altered memorandum with the Registrar within 30 days of passing it.

IV. The Binding Nature of a Memorandum

The Memorandum of Association (MoA) is a boundary set on the powers and operations of the company stating the powers it can exercise and the area in which it can exercise those powers. Although alterations are allowed to the memorandum following the prescribed procedure, this self-imposed limit is binding on the company. It cannot breach the line drawn by its memorandum without the procedure of alteration to that effect or it can be made liable for that breach legally. This evolves into the Doctrine of Ultra Vires, which declares any act of a company ultra vires its memorandum, i.e., out of the scope envisaged by its memorandum as void. This will be dealt with in detail in a later article.

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References

[1] (1875) L.R. 7 H.L. 653.

[2] (1917) 2 Ch. 1

[3] (1880) 5 A.C. 473.

[4] (1973) 43 Com Cases 337

[5] (1978) 48 Com Cases 260 (P & H)

[6] 1967 37 CompCas 516 Cal

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