Memorandum and Article of Association

“The Memorandum of Association and Article of Association of a company defines the constitution and the scope of powers of the company. In simple words, these are the foundation on which the company is built.”

Introduction:

As a corporate firm holder, proprietors likely see the term Memorandum of Association and Articles of Association in a few discrete places, but what are these and why do the businesses need them?

The Articles of Association is a Considerable document that figures out the constitution and management of the firm. Memorandum of Association states the relation of the firm with the entitlement of the partners of the firm and also sets up the connection or relation of the organisation with its members. Memorandum holds the powers, rights, and interest of the organisation. Thus, it is known as an agreement of the organization. It is to be treated as the constitution of an organisation. The firm can only hold the activities conveyed in the memorandum.

What is Memorandum of Association under Companies Act, 2013?

According to Section 2(56) of the Companies Act, 2013, “Memorandum” means:

• Memorandum of association of a company as originally framed
• As altered from time to time in pursuance of any previous company law or of this Act.[1]

According to Section 399 of the Companies Act, 2013, any individual can examine any deed filed with the Registrar in the execution of the statute of the Act. Hence, any individual who wants to transact with the firm can have the information about the firm through the Memorandum of Association.

Purpose of Registering an MOU

The objective of registering a MOU is:

• The MOA of a firm holds the purpose for which the organization is established. It recognizes the extent of its functioning and decides the confinement which it cannot hold.
• MOA is a public deed according to Section 399 of the Companies Act, 2013. Hence, any individual who enters into an agreement with the firm is anticipated to have knowledge of the MOA.
• It includes the authority and entitlement of the firm.

Contents of Memorandum of Association

According to Section 13 of the Companies Act, 2013 the Memorandum of the Association of an organisation must include the following:

1. Name Clause

It states that for a public limited company, it must have the word ‘Limited’ and for a private organisation, the name of the firm must have the words ‘Private Limited’ as the last words.

This is not exercisable to companies formed under, Section 8 of the Companies Act 2013 who must include one of the following words:

• Federation
• Foundation
• Association
• Forum
• Council
• Confederation

The enterprise must follow all name changing statutes prescribed in the Act.

2. Object Clause

It must identify the purpose for which the firm is legally being corporated or came into existence. Further, if an organization changes its undertakings which are not reflected in its name, then it can change its name in six months of changing its undertakings.

Doctrine of Ultra Vires

If a firm functions in addition to the range of the authority mentioned in the above clause, then the action of the firm will be ultra vires and thus invalid.

Consequences of Ultra Vires

• Directors of an organization have an obligation to make sure that the firm’s financial assets are used for the right motive only but if financial assets are used for another motive that is not provided in the memorandum, then the directors of the firm’s will be held liable personally. 
• If a financial institution advance to an organization for the motive not provided in the object clause, then the loan would be beyond the authority and the institution will not be able to revive the sum.
• Beyond the authority actions of an organization are taken as invalid from the starting.
• Any partner of the firm can use the cure of injunction to stop an organization from doing beyond the power actions. 

3. Liability Clause

It identifies the sum undertaken by each member to the contribution to an organization like the assets during the windup and cost, charges and expenses of wind up.

• For an enterprise restricted by share: [Section 2(22) of the Companies Act, 2013]

It identifies if the obligation or liability of its members is restricted to any unpaid amount on the shares that they hold.

• For an enterprise restricted by guarantee: [Section 2(21) of the Companies Act, 2013]

It specifies the obligation of the members of an enterprise, if limited or unlimited.

4. Capital Clause

This clause identifies the measure of offer capital by which an enterprise suggests to be registered and separate into a portion of a fixed sum.

Illustration: The capital from the issue of shares of a firm is Rs.80,00,000, which is divided into 3000 shares of Rs. 4000 each.

5. Area of Operation Clause

This clause states or specifies to whose place the objects of the organization reach.

6. Situation Clause

The name of the State where the Office is registered of an enterprise is arranged. To decide the ambit of the court and the Registrar of this organization, it is important.

7. Association Clause

The memorandum must precisely identify the want of the subscriber to form an organization. This is the last clause.

Printing and the Signing of MOA

The Memorandum of Association must be printed and signed by each partner as in seven in the case of the public firm and two in case of Private Firm. It should be signed in front of at least one witness who will certify the signature of subscribers of the memorandum.

In the case of One Person firm, the name of the potential successor must be prescribed in the memorandum of association. And in case of the occasion of death and not certain event, the potential successor will become the partner.

Article of Association

According to the Section 2(5) of the Companies Act, 201, ‘Articles’ means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous companies laws or of the present Act, i.e. the Act of 1956.[1]

An article of Association is a subordinate deed that is made only after the Memorandum. It prescribes the rules and regulations for the management and direction of an organization. It is mostly recommended for every firm to have its own article but a firm restricted by shares can embrace for the form in regard to the memorandum of association of an organization.

The articles lay down the right, responsibilities, powers, duties, etc of the members along with information regarding the accounts and audit of the company.[2]

Can the Articles be changed after Legal Corporation of a Company?

The Article goes along with the Memorandum and cannot go against it. It is very simple to make changes in Article of Association without any limitations but not MOA. It can be changed in the Annual General Meeting as per the wish of the firm.

Section 5 of the Companies Act, 2013 states Article of Association.

The articles of a firm shall contain the rules for the functioning of a firm. The articles shall also consist of subjects, as may be mentioned. It shall not stop a firm from involving such additional subjects in its articles as may be taken necessary for its operation.

The articles of association contains following points prescribed below:

• Time of meetings.
• Entitlement of Shareholders and members.
• Duties, Obligations and the authorities of the directors.
• Process for changes in the share capital of the firm. 
• Process for the closing of the firm.
• Powers in regard to borrowings.
• Process of transmission of shares.

What are the differences between the Articles of Association and Memorandum of Association?

Memorandum of Association is different from the article of Association in the following ways:

• Memorandum is the highest and supreme deed without which the firm cannot operate. All other deeds are subordinate to it and follow it, including Article of association.
• MOA states down the authorities, motives and area of functioning of the firm, while Article states down the regulations for the functioning and direction of the same.
• MOA states the relation between the firm and the outside forces, while Article states the relation within an organization.
• MOA is stated in Section 2 (28) of Companies Act, 2013, while AOA is provided under Section 2 (2) of the Companies Act 1956.     
• Actions which are beyond the authority or limit of the MOA are invalid, while the actions beyond the Article are simply not regular but not invalid.

CONCLUSION

Memorandum of Association and Article of Association are two processes of the documentation. Memorandum is basically the constitution of the company and the article prescribes the rules of the firm. The firm can add further clauses into the memorandum, like entitlements attached to a different group of shares, if needed. Every individual subscribing should have knowledge of the memorandum.

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References:

[1]  Diva Rai, Memorandum of Association : Know everything about it, IPLEADERS, (October 18, 2019), https://blog.ipleaders.in/memorandum-of-association-2/

[2] Kaushik dhar, Articles of Association And Alteration of Articles, LEGAL SERVICE INDIA, http://www.legalservicesindia.com/article/1050/Articles-of-Association-&-Alteration-of-Articles.html

[3] Memorandum of Association & Articles of Association, LAWYERED, (Aug 22,2016), https://www.lawyered.in/legal-disrupt/articles/memorandum-association-articles-association/