Company Law

Memorandum Of Association – Meaning, Importance And Contents

Memorandum of Association : This is a very important document. No company can be incorporated without having a Memorandum of Association. A company s memorandum of association is its charter and, under the provisions of the Act, defines its rights and obligations . The memorandum defines the basic objectives for which the company is allowed to be incorporated .

For a public company, a minimum of seven, and for a private company, a minimum of two persons need to be signatories , i.e. , subscribers to the memorandum of association. Each signatory must give his address, description and occupation etc. and number of shares subscribed by him. The subscribers must sign these documents in the presence of atleast one witness who shall attest the signature. The documents should also bear the date .

Features of Memorandum of Association

  • The memorandum of association is the basic charter on which the company is based and is mandatory for a company.
  • The memorandum of association is the constitution of the company because it defines its limitations and the sphere of its activities.
  • The memorandum cannot be altered by the company, except by fulfilling the conditions laid down in the Companies Act and for specific activities and situations.
  • It defines the scope of the company’s activity, and all acts beyond the scope are deemed to be ultra vires.
  • It is a public document, and is open to inspection by those who deal with the company.
  • It defines the company’s relations with outside individuals and its activities in relation to them.

Importance Of Memorandum of Association

(1) It is a fundamental document: It is the basic and mandatory charter without which the company cannot be incorporated. Every company-public or private is required by law to have its memorandum of association.

(2) It is an unalterable document: Till 1890, in England, the memorandum of association of a company could not be altered; but considering the changed circumstances and conditions prevailing in today’s business scenario, it is possible-within specified limits and under the strict provisions of the Companies Act that define the method of alteration- to alter the memorandum of association.

(3) It defines the limitation of the company’s operations: The memorandum of association defines the nature of the company’s business and the scope within which the company is to function in its business activity. The company cannot go beyond the limitation defined in the memorandum. Any transaction which is not within the ambit of the powers of a company shall be ultravires and void and cannot be validated on any ground.

(4) It forms the basis of relationship between the company and outsiders: The memorandum of association is an indicator or a guideline of the company’s activities to outsiders. It is a public document that tells others of the company’s financial capacity, its capacity to make contracts, its aims, objectives and field of activity. Those who deal with the company are expected to know what the company’s memorandum of association contains. The memorandum is open to all who deal with – or plan to deal with – the company. Any contract made with the company that goes beyond the scope of the memorandum is not binding on the company. In other words, the memorandum is a guardian of the interest of the company and those who deal with it.

(5) It contains clauses that give important information about the company: The relevant information includes the name of the company, the address of its registered office, the company’s share capital and whether it is limited by shares or by guarantee, the objects of the company, its sphere of activities and its limitations. In short, it gives the viewer a picture of the company.

Contents of Memorandum of Association

The memorandum of association must contain the following fundamental clauses which have often been described as the conditions of its incorporation i.e., registration:

(1) Name Clause: This clause contains the name by which the company is registered. The   company’s corporate name not only is the identification of the company, it also reveals its individual status. There is no restriction on a company on the selection of its name-it can choose any name- but the following legal formalities must be kept in mind while naming a company:

(2) Situation or Registered Office Clause: This clause describes the address, city and state in which the company’s registered office will be located. On the basis of this information only it is possible to establish the domicile of the company and determine its ‘nationality’ and the local laws that will govern its operations. It also establishes whether the company is an Indian or a foreign company.

(3) Object Clause: This is probably the most important clause in the memorandum of association of the company, and defines the objects or aims for which the company is to be set up. A company is not legally entitled to do any business other than what is specified in the objects clause. This clause is meant to protect the interest of the members of the company (who become aware of the purpose for which their investment is to be employed) and the public at large who deal with the company to come to know the limitations or powers of the company. If a company crosses the limits of its objects and does some act which is beyond the scope of its activity, such act would be deemed to be ultra vires. Such an act of the company cannot be held valid even if it is done with the consent of its members.

 (4) Liability Clause: In case of a company whose of members is by shares or guarantee, the memorandum must contain a clause stating that The liability of the members is limited’. Even a company which is exempted from using the word ‘Limited’ as a part of its name under Section 8 of the Companies Act, 2013 is also required to state in its memorandum  that the liability of members liability limited  is limited. The effect of this clause is that the liability of the shareholders is limited to the nominal value of shares held by him, i.e, no shareholders (member) can be called upon to pay more than the unpaid value of the shares held by him. In case his shares are fully paid, he shall not be required to pay any more even if tho company owes huge debts to his creditors.

(5) Capital Clause: The capital clause in memorandum states the amount of the nominal or authorised capital with which the company proposes to be registered and the value of the shares into which it is divided. The Capital of the company may be divided into two different categories namely,

  • equity share capital
  • preference share capital

The company, during its existence cannot issue any shares exceeding the value of its authorised or registered (or  nominal) capital unless and until it completes the requisite legal formalities.

(6) Association Clause: This clause is also known as ‘subscription clause’ of the memorandum. The association clause must state that the persons who are subscribing their signatures to the memorandum and are desirous of forming themselves into an association in pursuance of the memorandum. Each subscriber must sign the memorandum in the presence of at least one witness who shall at least the signature. Each one of them agrees to take the number of shares stated against their respective names.

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