A DETAILED STUDY ON MEMORANDUM AND ARTICLES OF ASSOCIATION

This article is written by Usha G of 6^th Semester of Christ Academy Institute of Law, Bengaluru, an intern under Legal Vidhiya

ABSTRACT

This article addresses the company’s two most crucial documents, the Articles of Association and the Memorandum of Association. The purpose of the company’s establishment is explained in the memorandum of association, while the articles of association deal with the regulations, bylaws, etc., which are necessary to achieve that purpose. This paper aims to provide a keen explanation of the concepts of memorandum and articles of association, as well as the associated doctrines such as ultra vires, constructive notice, and indoor management.

Keywords: Memorandum of association, Articles of association, Company, Formation, Doctrine.

INTRODUCTION

The process of forming a company involves several steps. The most important stages in the formation of company law in general, will be explored in this study. The most crucial document in a company is the memorandum of association. It outlines the objective for which the business was established. It includes the company’s advantages, rights, and powers. It is therefore referred to as the company’s charter. It is also regarded as the company’s constitution.[1]

The company’s bylaws, or set of rules and regulations, are contained in the articles of association. They are concerned with the company’s internal affairs or management. In a company’s operations, it is absolutely crucial. It discusses the rights that company members have to one another. The articles of association’s contents should not conflict with the MoA or the Companies Act. If the document contains anything that is in conflict with the Companies Act or the Memorandum of Association, it will be considered ultra vires.

OBJECTIVES

The objectives of the research article are;

1. To give an in-depth analysis of the concepts of MOA and AOA in company law.
2. To investigate the laws, rules, and court decisions that have shaped these documents.
3. Assess how MOA and AOA are interrelated in company law.
4. Examine the significance of MOA as the charter document and AOA as the internal rulebook for companies.

HYPOTHESIS

The research article is based on an assumption that, corporate transparency and disclosure are positively correlated with the clarity and comprehensiveness of MOA and AOA.

RESEARCH METHODOLOGY

The research methodology adopted in this research paper is essentially analytical and doctrinal mixed framework, where qualitative approach is adopted. And Reliance is placed on books, journals, research papers as well as articles and judicial decisions on the topic “A Detailed Study on Memorandum and Articles of Association”.

MEMORANDUM OF ASSOCIATION

“The memorandum of association is a document of great importance in relation to the proposed company.”

-Palmer

The drafting of a memorandum of association is one of the initial steps in the formation of a company. A company’s memorandum of association provides the fundamental terms under which the company was established/incorporated.

According to section 2(56) of the Companies Act, 2013, “Memorandum” means “Memorandum of association of a company as originally framed or altered from time to time in pursuance of any provision of any previous company law or of this Act”.

The company’s powers are both defined and constrained by the Memorandum of Association. A company is only authorized to take actions specified in the Memorandum. Anything that is done outside of the Memorandum’s content is null and void. The Memorandum serves as a tool for informing the company’s creditors, shareholders, and other stakeholders about the spectrum of operations that are allowed. It informs the shareholders about the anticipated uses of their money. It is therefore unambiguously obvious that the Memorandum of Association serves as the foundation for the formation of a company. As a result, it is preferable that the clauses in this MoA not to be modified regularly. It is for this purpose that the Companies Act has laid down procedures for making alterations in the Memorandum. Section 4, section 12, section 13 and section 16 of companies act, 2013 mainly deals with memorandum of association.

Format of Memorandum of Association (MOA)

According to Section 4 of the Act, Companies shall draft the MOA as set forth in Tables A-E of Schedule I of the Companies Act. The form details are outlined below:

• Table A: Form for the memorandum of association of a company limited by shares.
• Table B: Form for the memorandum of association of a company limited by guarantee and not having a share capital.
• Table C: Form for the memorandum of association of a company limited by guarantee and having a share capital.
• Table D: Form for the memorandum of association of an unlimited company and not having share capital.
• Table E: Form for the memorandum of association of an unlimited company and having share capital.

Contents of MoA

1. Name Clause- states the name of the proposed company.
2. Registered Office clause- It specify the place in which the registered office of the company is to be situated.
3. Object Clause- The purpose for which company is established.
4. Liability Clause- It states the nature of liability that the members incur.
5. Capital Clause- states the amount of the nominal capital of the company.

Doctrine of Ultra Vires

The Memorandum of Association (MoA) comprises the purposes for which the firm is founded and thereby determines the probable scope of its operations beyond which its actions cannot extend. It both defines and limits the company’s powers. Anything done beyond these powers is ultra vires (beyond the company’s powers) and so null and void. Ultra vires is a Latin term made up of two words: “ultra” which means “beyond” and “vires” which means “power.” So, the phrase “acts done beyond the power or authority” refers to ultra vires acts. Thus, the term ultra vires refers to an act that goes beyond the authority granted to the company by its objectives clause in its memorandum. An ultra vires act is void and cannot be ratified even if all the director’s desires to ratify it.[2]

• In the famous case of Ashbury Railway Carriage & Iron Co. Ltd. v. Riche[3] this doctrine of ultra vires was firmly established,

In this case, the objects of the company as stated in the objects clause of its memorandum, were based on railway carriages and wagons, The directors of the company entered into a contract with Riches for financing a railway line construction in Belgium. The contract was approved by all the members of the company, but later on it was repudiated by the company. Hence, Riche sued the company for breach of contract. The House of Lords has held that an ultra vires act or contract is void in its inception and it is void because the company have no capacity to make it and since the company lacks the capacity to make such contract, how it can have capacity to ratify it.

ARTICLES OF ASSOCIATION

The articles of association are companies’ bye-laws or rules and regulations that govern the management of its internal affairs and the conduct of its business.

According to section 2(5) of the companies Act ‘articles’ means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous company laws or of the present Act.

A company’s articles of association are the rules and regulations that govern the administration of companies’ internal affairs and the conduct of its operations.

Thus, company’s internal management is governed by the articles. They specify the authority of its officers. They also create a contract between the members and the company, as well as between the members individually. This contract governs the rights and obligations associated with companies’ member.[4]

Every type of company whether public or private and whether limited by shares or limited by guarantee having a share capital or not having a share capital or, having limited liability or an unlimited liability, company must register their articles of association. These articles bind not only current members, but also potential future members. The Article also applies to members’ heirs, successors, and legal representatives. As soon as the members of the company sign the Articles, they become legally bound by them.

Alteration of AoA & procedure for its alteration:

The procedures for amending a company’s articles of association are outlined in Section 14 of the Companies Act of 2013. Any part of the AoA may be added, modified, or removed by a company in the following ways:

• Board Meeting: The first step is to call a meeting of the company’s Board of Directors to examine the proposed amendments to the AOA. And The Board must approve the proposed changes by passing a resolution.
• Shareholder Meeting: In order to discuss and adopt the changes to the AOA, the company must then call a general meeting of its shareholders. All shareholders shall receive notice of the meeting and the proposed modifications at least twenty-one days prior to the meeting. A paragraph providing an explanation of the rationale behind the suggested changes must also be included in the notice.
• Passing of Special Resolution: In order to approve the changes to the AOA, the shareholders must adopt a special resolution at the general meeting. A minimum of three-fourths of the shareholders in person or by proxy must vote in favour of the proposed modifications.
• Form MGT-14 Filing: The company is required to file Form MGT-14 with the Registrar of Companies (ROC) within thirty days after passing the special resolution. Copies of the modified AOA, the special resolution, and any other required documents must be included to the form.
• Approval by the ROC: After reviewing the company’s submitted documents, the ROC will decide whether to accept or reject the changes made to the AOA. A Certificate of Registration of the Special Resolution will be issued by the ROC if the modifications are approved.
• Update the Company’s Records: Once the alterations are approved by the ROC, the company must update its records, including the AOA and other internal documents, to reflect the changes made.[5]

Features of Articles of Association:

1. AoA is an important document which regulates the internal management of a company. 

2. It contains Rules, regulations and by-laws of the company. 

3. It is an alterable document, which can be done by complying with section 14 of companies act, 2013.

4. Articles are framed in accordance with the provisions of the Companies Act. 

5. It defines the rights, power and duties of the directors and other authorities. 

6. For Private companies, there is no formal model of AOA mention in companies act. It has a discretion to formulate its own AOA.

Doctrine of Constructive Notice

Upon registration, the articles and memorandum become accessible documents that every person can view by payment of nominal fee. As a result, every individual considering entering into an agreement with a company has the ability to obtain these documents and is therefore assumed to be aware of the exact powers of the company, and the extent to which this power be assigned to the directors, and any restrictions imposed on the use of this power.[6] In other words, every person contracting with the company is deemed to have a “constructive notice” of the contents of its memorandum and articles. In fact, he is considered not only as having read those documents but also as having understood them according to their exact meaning.[7] Consequently, if a person enters into a contract which is beyond the powers of the company, as defined in the memorandum of association, or outside the limits set on the powers of the directors, he cannot, as a general rule, acquire any rights under the contract against the company.[8]

Doctrine of Indoor Management

The idea of indoor management works to shield outsiders from the corporation, whereas the theory of “constructive notice” aims to shield the company from outsiders. While those entering into a contract with a company are assumed to be aware of the terms of the memorandum and articles, they also have the right to believe that the company’s officers have complied with the articles’ conditions. An outsider has no obligation to ensure that the company follows its own internal rules.

• This doctrine was laid down in Royal British Bank v. Turquand[9],

In this case the directors of a banking company were authorised by its articles to borrow such sums of money as required from time to time, by passing resolution in general meeting. The directors gave a bond to Turquand without the passing of any such resolution. It was held that Turquand could sue the company, as he was entitled to assume that the necessary resolution had been passed.

Lord Hatherly observed: “Outsiders to the company are bound to know the external position, but are not bound to know its indoor management”.

Doctrine of Alter Ego

The courts use it to disregard the position of a company’s shareholders, officials, and directors in terms of their culpability in their individual capacities, so that they can be held personally accountable for their acts when they act unlawfully or unfairly.

In Lennards Carying Co. Ltd. v. Asiatic Petroleum Co. Ltd[10], Viscount Haldane propounded the “alter ego” theory and distinguished doctrine of Alter ego from vicarious liability. The House of Lords stated that the default of the managing director who is the “directing mind and will” of the company, would be attributed to him and he’ll be held for the wrong doing of the company.[11]

But there are certain exceptions to all these doctrines.

RELATIONSHIP b/w MOA & AOA

It is generally considered that the memorandum takes supremacy over the articles. As a result, if they are both in conflict, the articles must give way. Lord Cairns in Ashbury’s case[12] described the relationship between the memorandum and the articles as follows:

 “The memorandum of association is as it were, the area beyond which the actions of the company cannot go; inside the area the shareholders may make such rules for their own governance as they think fit.”

However, the articles must be read in connection with the memorandum. This will be carried out to either supplement or eliminate any ambiguities in the memorandum. The memorandum and articles, when registered with registrar binds a company and the members thereof to the same extent as if they had been signed by the company and each member.[13] The effect is that, it’s considered as a contract between each member and the company.[14]

But neither the articles nor the memorandum can authorise the company to do anything so as to contravene any of the provisions of the companies Act.[15]

DEVELOPMENTS IN MOA & AOA

Until the year 1890, MoA was regarded as an unalterable charter of the company. This led to a number of difficulties in the working of companies. Consequently, the companies Act was amended to provide for the alteration of the various clauses of the memorandum.

And the Companies Act 2013, recognizes an interesting concept of entrenchment which was not present in the earlier act. Essentially, the entrenchment provisions allow for certain clauses in the articles to be amended upon satisfaction of certain conditions or restrictions greater than those prescribed under the Act (ex: obtaining 100% consent from the shareholders). This provision acts as a safeguard to the minority shareholders and is of specific interest to the general public, who invest in the capital of the company. This shall entitle the enforcement of any pre-determined rights and provide greater certainty to investors. The provisions for entrenchment are referred to in section 5(3) of companies act,2013 shall be made either;

 (a) on formation of a company, or

 (b) by an amendment in the articles, agreed by all the members in case of a private company and by a special resolution in the case of a public company.

CONCLUSION

It is unimaginable for any business to function without borrowing. Nonetheless, safeguarding the interests of creditors and investors is imperative concurrently. Any irregular or negligent action could lead to the company’s insolvency or winding up. Which will result in great loss for the creditors and investors. Thus, certain provisions are incorporated in the company’s memorandum and articles of association, which specify the purposes and rules of the company respectively, to safeguard the interests of creditors and investors.

REFERENCES

1. DR. G.K. KAPOOR & DR. SANJAY DHAMIJA, COMPANY LAW AND PRACTICE: A COMPREHENSIVE TEXTBOOK ON COMPANIES ACT, 2013, 136-138 (24^th ed. 2019)
2. Gursharan Singh, Introduction to the new avatar of ‘memorandum of association’ and analysis of the ‘doctrine of ultra-vires, SSRN, Oct. 3, 2014, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2504364
3. Raghvendra Singh Raghuvanshi & Nidhi Vaidya, Applicability of Doctrine of Ultra Vires on Companies, SSRN, (Feb. 27, 2010), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1558971
4. ICSI, https://www.icsi.edu/media/webmodules/publications/FinalCLStudy.pdf (last visited Nov. 4, 2023).
5. Sankalp Jain, Principal Documents of a Company: Memorandum and Articles, SSRN, Sep. 8, 2021, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3902356
6. https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf (last visited Nov. 4, 2023).
7. https://www.hilarispublisher.com/open-access/the-abrogation-of-ultra-vires-doctrine-of-company-law-by-the-english-courts-90307.html (last visited Nov. 4, 2023).
8. Ashbury Railway Carriage & Iron Co. Ltd. v. Riche [1875] L.R. 7 H.L. 653
9. Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. AIR 1971 SC 422.
10. Griffith v. Paget, (1877) Ch. D. 517
11. Mohony v. East Holyfrod Mining Co., (1875) L.R. 7 H.L. 869
12. Royal British Bank v. Turquand (1856) 119 E.R. 886
13. Lennards Carying Co. Ltd. v. Asiatic Petroleum Co. Ltd [1915] AC 705
14. Re Peveril Gold Mines, (1989) 1 Ch 122 (CA)

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[1] Gursharan Singh, Introduction to the new avatar of ‘memorandum of association’ and analysis of the ‘doctrine of ultra-vires, SSRN, Oct. 3, 2014, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2504364

[2] Raghvendra Singh Raghuvanshi & Nidhi Vaidya, Applicability of Doctrine of Ultra Vires on Companies, SSRN, (Feb. 27, 2010), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1558971

[3] [1875] L.R. 7 H.L. 653

[4] Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. AIR 1971 SC 422.

[5] LEGAL WINDOW, https://www.legalwindow.in/article-of-association-and-alteration-in-aoa/ (last visited Nov. 13, 2023)

[6] ICSI, https://www.icsi.edu/media/webmodules/publications/FinalCLStudy.pdf (last visited Nov. 4, 2023).

[7] Griffith v. Paget, (1877) Ch. D. 517

[8] Mohony v. East Holyfrod Mining Co., (1875) L.R. 7 H.L. 869

[9] (1856) 119 E.R. 886

[10] [1915] AC 705

[11] Supra note 06 at 05

[12] Supra note 04 at 4

[13] Companies act, 2013, § 10, No. 18, Acts of Parliament, 1949 (India).

[14] Sankalp Jain, Principal Documents of a Company: Memorandum and Articles, SSRN, Sep. 8, 2021, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3902356

[15] Re Peveril Gold Mines, (1989) 1 Ch 122 (CA)