MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION OF A COMPANY

       MEMORANDUM OF ASSOCIATION

INTRODUCTION:

While forming a company first we need to prepare a Memorandum of Association of the company. It is the charter of the company defining its object. Before applying to the Company Registrar for the incorporation of the company Memorandum of Association needs to be prepared. A company that wants to get registered as a private/public limited has to prepare the memorandum of association.

DEFINITION:

 Sec. 2 (28) of the Companies Act, 1956, states that a Memorandum of Association of a company is as it is originally made or changed from time to time in pursuance of any earlier made Companies law or of this act.

In Ashbury Railway Carriage Co. V. Riche Lord Cairns stated that the Memorandum of Association of a company is the charter of the company explaining the limitation of the powers of a company. It consists of elementary conditions upon which the company is allowed to be incorporated

According to Lord Macmillan, the main aim of the Memorandum is to authorize the shareholders, creditors, and outsiders engaging with the company to know the area of operation of the company.

CLAUSES OF MEMORANDUM OF ASSOCIATION:

  • Name Clause:

The first clause of the Memorandum of Association must mention the name of the company. The Companies Act directs that the name of a limited company must end with the word “limited” and the name of a private company must end with the word “private limited”. A company is allowed to alter its name after approval from its shareholders and the Central Government. This enables the outsiders to deal with the company to know the fact that the liability of the members of the company is limited. Moreover, the name of the company must not be similar to the name of a previously registered company.

  • Registered Office Clause:

 The second clause of the Memorandum must provide the name of the State in which the registered office of the company will be situated. A company is allowed to alter its registered office within a State after taking approval from its shareholders. The approval of the shareholders of the company and the Company Law Board is required for shifting the registered office of the company from one State to another. A company has to either from the 30th day after the date of its incorporation or from that day on which it commences its business or whichever is earlier have a registered office to which all communication and notices may be addressed.

  • Object Clause:

The object clause of the memorandum of association can be split-up into three parts.

  1. Main objects– It not only provides the fundamental object of incorporation of the company but also the scope of operation of the company. It helps the shareholders, creditors, and those engaging with the company to know the allowed scope of activities of the company beyond which the company cannot go.
  2. Other objects– The Memorandum may also show other objects which shall be clearly and unambiguously mentioned.
  3. Ancillary objects– Ancillary objects means the objects incidental to obtaining the main objects. They are related to the main objects.
  • Liability Clause:

 The fourth clause must mention the type of liability to be incurred by the members of the company will incur. Thus, it states whether the members of the company have limited liability or not and if the liability is limited then whether it is limited by contribution towards share capital or guarantee. In a company limited by shares, the members can only be called upon to pay the company the amount not paid on the shares held by them. In companies limited by guarantee, the members can only be called upon to pay up the sum of money which they have guaranteed in case of the dissolution of the company. Thus, the liability of the members should be given and it cannot be later altered into an unlimited liability.

  • Capital Clause:

 This clause provides the amount of titular capital of the company and the number and value of the shares into which the capital is split-up. Thus, the capital clause of the company, having a share capital, shall mention the amount of the share capital with which the company is to be registered and its division into shares of a fixed amount.

The capital with which a company is registered is commonly known as “registered’, “authorized” or “nominal” capital. A company is not permitted to issue more shares than are authorized by the Memorandum. A company can issue only equity shares or preference shares, not having disproportionate rights. But, a private company that is not a subsidiary of a public company is allowed to issue shares of any kind and with disproportionate rights.

  • Association Clause:

 The last clause in the Memorandum provides the declaration of association signed by the subscribers. It provides that the several persons whose names and addresses are subscribed, intend to form into a company in pursuance of this Memorandum of Association and also consent to take the number of shares in the capital of the company written opposite to the respective names. After this declaration, the names, addresses, and descriptions of the subscribers and the number of shares taken by them are given. Each subscriber is expected to take at least one share.

In the case of a public company the Memorandum needs to be signed by at least seven subscribers and in the case of a private company by at least two subscribers. The signature of each subscriber has to be attested by at least one witness who cannot be any of the other subscribers.

 ALTERATION IN MEMORANDUM OF ASSOCIATION:

The Memorandum of Association can be altered by following the procedure given under the Companies Act.

  1. Change of Name-

By special resolution– The name of the company can be changed by passing a special resolution that is subject to the approval of the Central Government and Company Law Board, in writing to the effect.

By ordinary resolution– If according to the Central Government, the registered name of the company is identical to the name of an existing company, the company may either alter its name, by ordinary resolution after taking approval of the Central Government or shall alter its name if the Central Government directs it to do so within 12 months of its registration. Usually, when such an order of the Central Government is received by the company it shall change its name within 3 months from the date of such order.

In such a case, the Registrar has to issue a new certificate of incorporation to the company and enter the new name on the register in place of the earlier name.

2. Change of registered office

For changing the registered office of the company it has to pass some resolutions such as the special resolution and the board resolution.

Special Resolution– If the company wishes to change its registered office to a place outside the local lists of the city, town, or village wherein the office is presently located, it has to pass a special resolution in a general meeting of the company.

Board Resolution- To allow enable the authorization of the director to sign and submit form INC- 22 a board resolution needs to be passed.

3. Change of Registered Office with a Different Registrar of Companies but Same State-

When a company wishes to change its registered office from the jurisdiction of one Registrar of Companies to the other, an application has to be made for the approval of the Regional Director. As the Regional Director validates this change, it has to file the same confirmation with the Registrar within 60 days. The Registrar of Companies has to confirm the change of the address within 30 days of the filing.

4. Change of Registered Office to another State-

The Memorandum of Association of the company needs to be amended to change the registered office of the company from one State to another. A company also needs to pass a special resolution for the alteration of the Memorandum of Association. This resolution has to be filed with the Registrar within 30 days of the resolution being passed. The company also needs to take the approval of the Central Government to change the registered office from one state to another.

The Central Government shall transfer this application outside the State within 60 days of the application. However, before passing the application the Central Government may confirm that the change is with the consent of the creditors, debenture holders, etc. Further, the approval given by the Central Government shall be filed with the Registrars of both the States in which the old and the new registered office is located. The certified copy of the order of the Central Government that approves the Alteration of Memorandum of Association for transfer of registered office from one State to other shall be filed with the stipulated fee as with the Registrar of the State within 30 days from the date of receipt of a certified copy of the other.

The Registrar of the State in which the new office will be situated shall register the same and issue a new certificate of incorporation

5. Change of objects

A company may by passing a special resolution, change its Memorandum to alter the objects of the company so that it can-

(a) to continue its business more economically or in a more efficient manner;

(b) to obtain its main objects by new or improved means or ways;

(c) to expand or alter its local area of operations;

(d) to continue the certain business that may conveniently or advantageously be combined with the business of the company;

(e) to limit or desert any of the objects specified in the memorandum;

(f) to sell or dispose of either the full, or any part, of the undertaking, or of any of the undertakings, of the company; or

(g) to enter into amalgamation with any other company.

The alteration of the object clause involves:

Special Resolution: Firstly, the company has to call a general meeting for passing a special resolution and also has to file a certified copy of the resolution with the Central Government.

Ratification by the Central Government: After that, the application for the proposed alteration needs to be filed with the Central Government. Such an application shall be scrutinized by the Government before confirming the alteration.

6. Change in liability clause

A company either limited by shares or guarantee cannot alter its Memorandum to burden its members with additional liability or force them to buy additional shares of the company unless and until all the members agree voluntarily to such a change in writing. Therefore, the liability of the members cannot be increased without taking their approval.

7. Change in Capital clause-

If allowed by the Articles of Association, a company may change its Capital clause without the consent of the Court in the following situations-

  1. For increasing its share capital by issuing new shares.
  2. For canceling shares not taken up by any person or diminishing the amount of its share capital by the number of shares canceled.
  3. For consolidating and dividing the share capital into shares of a larger amount.
  4. For subdividing its shares into shares of a smaller amount.

For making such an alteration, a special resolution needs to be passed in the general meeting of the company. The company has to give notice of such alterations to the Registrar.

A Company limited by shares may reduce its share capital in any of the following ways:

  1. By extinguishing or reducing the liability of the members for uncalled capital.
  2. By paying off any paid-up capital that is more than the needs of the company.

For the reduction of capital, a company has to pass a special resolution and apply to the Court for an order continuing the reduction. Further, the company has to give notice of the above alteration to the Registrar.

                                                           

 ARTICLES OF ASSOCIATION

The Articles of Association consists of the rules, regulations, and the bye-laws of the company governing the internal management and administration of the company. The articles are framed by the objects of the company given in the Memorandum of Association. A company may either make its Articles or adopt any of the model forms of the Articles contained in Schedule I.

The Articles consist of provisions, like issue and transfer of shares, change of capital, borrowing powers, accounts, and powers of directors. All provisions regulating the relationship between the company and its members and between members interse may be included in the Articles of the company. The Articles of Association has to be signed by the subscriber of the Memorandum of Association and must be registered in the case of a private company. It is not mandatory for a company limited by shares to have its articles. A company limited by shares may either partly or fully adopt table A of the Schedule of the Companies Act, 1956.

In the case of conflict between the provisions of the Articles and the Companies Act, the provisions of the Act shall prevail as per Section 9 of the Companies Act, 1956. Section 36 of the Act states that when the Articles are registered they bind a company and its members as if they had been signed by the company and each member. Section 31 provides that the Articles of the company may be amended only after taking approval of the shareholders of the company.

CONTENTS OF ARTICLES OF ASSOCIATION:

Articles of Association contain the following provisions:

  • Classes of shares, their values, and the rights attached to each of them;
  • Call on shares;
  • Lien on shares;
  • Transfer of shares;
  • Share capital, right of shareholders, payment or underwriting commission;
  • General meeting and proceedings at the meeting;
  • Borrowing powers of Board of Directors and managers etc;
  • Issue of preference share;
  • Forfeiture of the share;
  • Transmission of shares;
  • Shares held jointly;
  • Share warrants;
  • Conversion of shares into stock;
  • Appointment of and remuneration to Auditors
  • Alteration of capital;
  • Voting rights of members and its procedure;
  • Appointment of Directors, their remuneration, qualifications, powers, duties, and proceedings of the Board of Directors;
  • Dividend and reserves;
  • Buy-Back of Shares;
  • Chief Executing Officer, Manager, Company Secretary or Chief Financial Officer;
  • Accounts and audit;
  • Winding up and capitalization of profit;
  • Common seal;
  • Secrecy;
  • Indemnity;
  • Execution clause.

ALTERATION OF ARTICLES OF ASSOCIATION:

For altering its Articles a company needs to pass a special resolution. Such alteration shall not come in conflict with the provisions of the Memorandum of Association of the Companies Act. A copy of every special resolution that changes the Articles of a company must be filed with the Registrar within 30 days of its passing.

The alteration of Articles of Association shall be done taking into account the following factors-

1. The proposed alteration shall not contradict the provisions of the Companies Act or the provisions of the Memorandum of Association.

2. The alteration should not propose anything that is not legal

4. The alteration should be made for the company’s benefit.

5. The proposed alteration should not increase the liability of existing members.

6. Alteration of Articles can be done only by a special resolution.

7. Alteration can be done with retrospective effect.

8. The Court has no power to order alteration of the Articles of Association.

DIFFERENCE BETWEEN MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION:

 MEMORANDUM OF ASSOCIATIONARTICLES OF ASSOCIATION
1)The Memorandum of Association is the most important document of a company consisting of the conditions upon which the company is allowed to be incorporated.The Articles of Association contains all the rules, regulations, and bye-laws for controlling the internal management of the company.
2)It defines the company’s objects and scope and area of operation of the company.It provides the rules and regulations mandatory for carrying out the objects of the company.
3)It is subordinate to the Companies Act.It is subordinate to the Memorandum.
4)Every company must have its own Memorandum of Association.It is not mandatory in the case of a company limited by shares.
5)The memorandum of association of the company is not allowed to be amended retrospectively.The articles of association are allowed to be amended retrospectively.
6)Memorandum can be altered after passing Special Resolution in Annual General Meeting and previous approval of the Central Government or Company Law Board is required.  Articles can be amended by passing Special Resolution at Annual General Meeting.
7)It controls the relationship between the company and the outsider.It controls the relationship between the company and its members and also between the member’s interse.
8)Any action of the company ultra-vires the Memorandum is void. Such an act cannot be ratified subsequently even by all the shareholders.Any action of the company ultra-vires the Articles but intra-vires to the Memorandum can be ratified by all the shareholders.
9)Every company must register the Memorandum of Association.Every company doesn’t need to register the Articles of Association.
10)A memorandum must contain six clauses.The articles can be drafted as per the choice of the company.
11) Memorandum is the charter of the company stating and restricting the powers and constraints of the Company.Articles provide the obligation, rights, and powers of an individual required to govern the company.
12)It is a supreme document.It is subordinate to the memorandum.

CONCLUSION:

From the above discussion, we can conclude that the Memorandum of Association of any company states the scope of its activities required for the Incorporation of the company. Whereas, Articles of Association consists of the rules and regulations governing the relation between the company and its members and between members interse. There should be no contradiction between both these documents and in case of any such contradiction, the provisions of the Memorandum of Association shall prevail.

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