Contents of Memorandum of Association

CONTENTS OF MEMORANDUM OF ASSOCIATION

INTRODUCTION

Memorandum has been defined under Section 2(56) of the Companies Act, 2013. Memorandum means a memorandum of association of a corporation that is initially framed or revised from time to time pursuant to this Act. In theory, the Memorandum of Association lays out the constitution of the organisation. It’s the character of the business. It determines the scope of its operations and the relationship it maintains with the outside world. The Memorandum of Association shall contain the purpose for which the organisation is founded and shall define the future scope of its activity beyond that its actions cannot go. If anything is done beyond these powers that will be ultra vires the company and void.

ALSO READ: Articles of Association – Companies Act, 2013: An Overview

IMPORTANCE AND PURPOSES OF MEMORANDUM

Memorandum of association is the most important document of a company and it basically sets out the constitution and charter of the company. It defines the powers of the company. The following are the purposes of the memorandum.

1. Knowledge of field of activity of company: Memorandum of association enables the intending shareholders to know the field of activity in which their money is going to be used by the company. For example, an oil exploration company will use the money for oil exploration purposes, an e-commerce company for sale of goods online etc.
2. Knowledge of intra vires transaction: Memorandum contains the objects for which the company is formed. It enables the suppliers of goods or money to know whether the transaction which he intends to make with the company is within the objects of the company or not. If the transaction is beyond the objects clause of memorandum, it will be void.
3. Memorandum of association is a very vital and important document for the registration of a company.
4. Memorandum of association defines the functions and span of operations of the company. This paper has complete control of the operation of the organisation.

CONTENTS OF MEMORANDUM

As per Section 4(1), the memorandum of a limited company contains the following clauses:

1. NAME CLAUSE

Being a legal person and in order to establish identity of such a legal person, a company must have a name. Therefore, as per section 4(1), the memorandum of a limited company must state the name of the company with limited as its last word in the case of a private company. The following points should be kept in mind while deciding about the name of company.

1. Identical name: The name stated in the memorandum shall not be identical with or resemble too nearly to the name of an existing company [section 4(2)]. Resemblance between two names should not be such which is likely to deceive the customers.
2. Offence under any law: The name shall not be such that its use by the company will constitute an offence under any law for the time being in force [Section 4(2)].
3. Undesirable name: The name shall not be undesirable in the opinion of the Central Government [Section 4(2)].

Prescribed Rules: Rule 8 of the companies (Incorporation) Rules, 2014 lays down rules for determining ‘undesirable names’. The name shall be considered as undesirable if-

1. It includes the name of a registered trade mark, unless the consent of the owner of trade mark has been obtained and produced by the promoters
2. It includes any words which are offensive of any section of the people
3. The proposed name is identical with or resembles the name of a limited liability partnership.
4. It is not in harmony with the principal objects of the company laid down in the memorandum.

Case- Ewing v. Buttercup Margarine Company Ltd.

The plaintiff was carrying on business as Buttercup Dairy Company. A new company, Buttercup Margarine Co. Ltd., was incorporated. The plaintiff filed a suit against the company for restraining it from carrying on the business under the aforesaid name on the ground that the name of the newly incorporated company was similar to Buttercup Dairy Company and therefore, customers might think that the two enterprises were connected. The court upheld the contention of the plaintiff and restrained the newly formed company to use the said name.

2. REGISTERED OFFICE CLAUSE

The second clause of the memorandum must specify the state in which the registered office of the company is to be situated [section 4(1)] because:

1. A) For fixing the domicile of the company: Registered office is necessary for fixing the domicile of the company. High court of that state has jurisdiction in which the registered office of the company is situated. Domicile is the place of registration and residence is the place of its management and control.
2. B) For deciding the place where books of account and other relevant books and papers are to be kept: Section 126 provides that each company shall prepare and keep at its registered office, financial statements, account books and other related books and records for each financial institution If the Board wishes to keep books and other documents at any other place in India, a notice to that effect shall be issued to the Registrar. Books can be held in electronic format.

A company must have within a period of 30 days of its incorporation and all times thereafter a registered office to which all communications and notices may be addressed. [Section 12(1)]. The company has to file Form No. INC-22 with the Registrar to comply with the provisions of this sub-section. The Form should be accompanied with the prescribed fee and the documents. Section 12(9) inserted by the Companies (Amendment) Act, 2019 provides that if any default is made in complying with this provision, the Registrar may initiate actions. Pursuant to Article 12(2), the company shall, in the manner prescribed, provide a verification of its registered office within 30 days of its incorporation. Pursuant to section 12(9), where the Registrar has fair grounds to believe that the company is not engaged in any business, the Registrar may give rise to a physical verification of the company’s registered office in a company, which may have its registered office in one State and conduct business in another State.

3. OBJECT CLAUSE

The third clause which a memorandum contains is the objects clause. Section 4(1) states that the memorandum of a corporation shall set forth the key objects for which the company is proposed to be incorporated and any matter considered necessary in support of the memorandum. Under the Companies Act, 1956, it was necessary to state the main objects and other objects. The Companies Act, 2013 has done away with ‘other objects’. The objects must not be illegal, it should not be forbidden by law, immoral or opposed to public policy. It should not be against the provisions of the Companies Act, 2013. The objects must be clearly stated that is the object must not contain any ambiguous statement.

The purpose of object clause in the memorandum of association is:

1. Protection of investors: It protects the investors in the company so that they may know the objects in which their money is to be employed. It ensures them that the money invested by them in the company is not going to be risked in another adventure.
2. Protection of creditors: It protects creditors by ensuring that the company’s funds to which they must look for payment, are not dissipated in unauthorised activities.
3. Serving public interest: It serves interest by preventing diversification of a company’s activities in directions, not closely connected with the business for which the company may have been initially established.

4. LIABILITY CLAUSE

Section 4(1) states that the memorandum of a company shall state that the liability of the members of a company, whether limited or unlimited. It shall also state, in case of a company limited by shares, that liability of its members is limited to the amount unpaid, on the shares held by them. If the shares of a member is fully paid up, his liability would be nil. In the case of a company limited by guarantee, the memorandum shall state the amount up-to which each member undertakes to Contribute to the properties of the company in the event of its liquidation, whether as a member or within 12 months after it ceases to be a member, for the price of the money owed and the liabilities of the company and for the costs, expenditures and prices of the liquidation and for the adjustment of the rights of the contributors to each other.

5. CAPITAL CLAUSE

As per section 4 (1) of the act, in case of a company limited by share capital, the memorandum of a company shall state the amount of share capital with which the company is to be registered and the division into shares of the fixed sum and the number of shares that the memorandum subscribers agree to subscribe, which would no longer be any less than one percentage, and the quantity of stocks that each of the memoranda subscribers plans to take, indicated the opposite.

6. NOMINATION CLAUSE

According to section 4(1), the memorandum of an enterprise shall express that with inside the case of 1 Person Company, the call of individual who, with inside the occasion of loss of life of the subscriber, shall emerge as the member of the enterprise.

7. SUBSCRIPTION OR ASSOCIATION CLAUSE

The memorandum includes a declaration that the individuals signing the memorandum intend to create an association in compliance with the memorandum. Then each of the subscriber must sign memorandum. In case of company having a share capital each subscriber must take at least one share and must write opposite his name the number of shares he intend to take.

ASHBURY RAILWAY CARRIAGE AND IRONCO. LTD. V. RICHE

Facts:

the sued company has provided that it is designed to manufacture, and sell, or lease to rented railway carriages, and all types of railway plants, fittings, machinery and rolling stock, and to do business for mechanical engineers and general contractors. The company has entered into an agreement with Riche to finance the construction of a railway in Belgium. Later on the company repudiated the contract as ultra vires. Riche brought an action for damages arising from a breach of contract.

Issues:

1. Whether the financing of construction of railway comes within the expression ‘General Contractors’ or not?
2. Whether subsequent unanimous ratification by the members of the company could make an ultra vires contact intra vires?

Decision:

The House of Lords held that the word of the general contractors had to be used to signify, in general, the conclusion of contracts relating to the company of mechanical engineers. The term does not authorise the making of contracts of any and every description. Thus, the financing of construction of railway was held not to come within the expression ‘General Contractors’. The House of Lords observed that the statement of objects has two fold operation. The financing of the construction of railway being outside the object clause of the company, the contract for same was ultra vires the company.

A contract which is ultra vires the company is void ab initio, and is of no legal effect. What is forbidden by the statute cannot be rendered intra vires even by the unanimous consent of all members. In the present case, subsequent ratification of the contract could not make it intra vires. The plaintiff was held not entitled to damages for the breach of contract on the part of the defendant company.

Author: Ishita Agrawal,
3rd year B.A.LL.B(Hons), Himachal Pradesh National Law University, Shimla