Memorandum of Association is a document that regulates a firm’s external activities and must be drawn up on the formation of a registered or incorporated firm. As the firm’s charter it (together with the firm’s articles of association) forms the firm’s constitution. Also called ‘memorandum,’ it gives the firm’s name, names of its members (shareholders) and number of shares held by them, and location of its registered office. It also states the firm’s (1) objectives, (2) amount of authorized share capital, (3) whether liability of its members is limited by shares or by guaranty, and (4) what type of contracts the firm is allowed to enter into. Almost all of its provisions (except those mandated by corporate legislation) can be altered by the firm’s members by following the prescribed procedures. The memorandum is a public document and may be inspected (normally on payment of a fee) by anyone, usually at the public office where it is lodged (such as the registrar of companies office).
It is meant to be a company charter that encloses in itself the essential conditions based on which the company could be conveniently commenced and incorporated. It highlights the major elements that constitute the foundation of the company and adumbrates its scope beyond which the company could not go. As for the purpose of the Memorandum, it is of two dimensions. The first dimension comprises the shareholder where it tells the shareholder the field and scope of the company and with the help of that the shareholder decides the suitability of his investment in the company. The second dimension involves any stakeholder of the company. The Memorandum tells these companies whether the objectives that the respective stakeholder aims to accomplish with the help of the company are within the realm of the company’s objectives or not.
Clauses of memorandum of association:
There are many clauses related to the memorandum of association. Some of them are as follows:
1-Name Clause:
According to this we have to state the name of the company. A company may adopt any name but it should not be identical to the name of an existing company registered with the registrar of the company.
The name of every private company shall contain as its last words, the words “Private Limited” and every public company shall contain in its last word “Limited”. The object is that name of the company should indicate whether it is a private company or a public company barring the cases covered by Section 25.
It is an offence under Sec. 631 to carry on any business or trade using the word “Limited” as a part of the name where the person using the name is not entitled to do so. This kind of illegality does not invalidate contracts made in the ordinary course of business and trade.
2- Situation Clause:
As the name indicates it describes the different situations. This clause a company must have a registered office at which all the communications and notices are to be addressed. The memorandum will only state the name of the province where office is situated and not the address where office is situated.
3-Object Clause:
This is the most important clause in the memorandum. It clearly defines the sphere of the company’s activities. It specifies the activities which a company can carry on and which activities it cannot carry on. The company cannot carry on any activity which is not authorised by its MA. This clause must specify:-
i. Main objects of the company to be pursued by the company on its incorporation
ii. Objects incidental or ancillary to the attainment of the main objects
iii. Other objects of the company not included in (i) and (ii) above.
In case of the companies other than trading corporations whose objects are not confined to one state, the states to whose territories the objects of the company extend must be specified.
Doctrine of the ultra-vires Any transaction which is outside the scope of the powers specified in the objects clause of the MA and are not reasonable incidentally or necessary to the attainment of objects is ultra-vires the company and therefore void. No rights and liabilities on the part of the company arise out of such transactions and it is a nullity even if every member agrees to it.
Consequences of an ultravires transaction:-
1. The company cannot sue any person for enforcement of any of its rights.
2. No person can sue the company for enforcement of its rights.
3. The directors of the company may be held personally liable to outsiders for an ultra vires
However, the doctrine of ultra-vires does not apply in the following cases :-
1. If an act is ultra-vires of powers the directors but intra-vires of company, the company is liable.
2. If an act is ultra-vires the articles of the company but it is intra-vires of the memorandum, the articles can be altered to rectify the error.
3. If an act is within the powers of the company but is irregualarly done, consent of the shareholders will validate it.
4. Where there is ultra-vires borrowing by the company or it obtains deliver of the property under an ultra-vires contract, then the third party has no claim against the company on the basis of the loan but he has right to follow his money or property if it exist as it is and obtain an injunction from the Court restraining the company from parting with it provided that he intervenes before is money spent on or the identity of the property is lost.
5. The lender of the money to a company under the ultra-vires contract has a right to make director personally liable.
4-Liability Clause:
This clause of memorandum contains the declaration that the liability of the shareholders is limited to the extent of the value of shares held by them.
A declaration that the liability of the members is limited in case of the company limited by the shares or guarantee must be given. The MA of a company limited by guarantee must also state that each member undertakes to contribute to the assets of the company such amount not exceeding specified amounts as may be required in the event of the liquidation of the company. A declaration that the liability of the members is unlimited in case of the unlimted companies must be given. The effect of this clause is that in a company limited by shares, no member can be called upon to pay more than the uncalled amount on his shares. If his shares are already fully paid up, he has no liabilty towards the company.
The following are exceptions to the rule of limited liability of members:-
1. If a member agrees in writing to be bound by the alteration of MA / AA requiring him to take more shares or increasing his liability, he shall be liable upto the amount agreed to by him.
2. If every member agrees in writing to re-register the company as an unlimited company and the company is re-registered as such, such members will have unlimited liability.
3. If to the knowledge of a member, the number of shareholders has fallen below the legal minimum, (seven in the case of a public limited company and two in case of a private limited company ) and the company has carried on business for more than 6 months, while the number is so reduced, the members for the time being constituting the company would be personally liable for the debts of the company contracted during that time.
5-Capital Clause:
This clause is required to specify the amount of share capital with which the company proposes to be registered and secondly the divisions of that capital into shares of a fixed amount. The amount of share capital with which the company is to be registered divided into shares must be specified giving details of the number of shares and types of shares. A company cannot issue share capital greater than the maximum amount of share capital mentioned in this clause without altering the memorandum.
6-Subscription Clauses:
This clause contains a statement by the subscribers that they are eager of forming themselves into a company and agree to have a number of shares written against their respective names. A declaration by the persons for subscribing to the Memorandum that they desire to form into a company and agree to take the shares place against their respective name must be given by the promoters.
