Meaning and Legal Effect

The Memorandum of Association (MOA) is the most fundamental and paramount document in the constitution of a company. It is often described as the company's charter or constitution because it defines the company's very existence, its powers, and the scope of its operations. The MOA governs the company's relationship with the outside world, informing shareholders, creditors, and any other person dealing with the company about its permitted range of activities.

Any action taken by the company that goes beyond the powers specified in its MOA is considered ultra vires (beyond the powers) and is legally void and unenforceable.

The Charter of the Company

The MOA is rightly called the charter because it lays down the foundational conditions upon which the company is granted incorporation. It establishes the "lakshman rekha" or boundary line that the company cannot cross. Its primary purposes are:

• To allow the shareholders, creditors, and all those who deal with the company to know what its permitted range of enterprise is.
• To enable these stakeholders to understand the purpose for which their money is going to be used and the risks they are taking by investing in the company.
• To define the limits of the company's powers, thereby protecting the members and investors.

Defines the Scope of the Company's Powers

The legal effect of the MOA is that it binds the company and its members. Since the MOA is registered with the Registrar of Companies (RoC), it becomes a public document. Under the Doctrine of Constructive Notice, every person who deals with the company is deemed to have read the MOA and understood its contents. This means no one can claim ignorance of the company's powers and objectives as a defense in a legal dispute.

If a company enters into a contract that is beyond the scope of its Objects Clause in the MOA, that contract is void, and neither the company nor the other party can enforce it in a court of law.

Contents of MOA (Section 4)

As per Section 4 of the Companies Act, 2013, the Memorandum of Association of every company must state the following six essential clauses. The specific format of the MOA for different types of companies is provided in Tables A, B, C, D, and E in Schedule I of the Act.

1. Name Clause

This clause specifies the name of the company. The name is the company's unique identity. The choice of name is subject to certain restrictions:

• It must end with the word "Limited" for a public limited company and "Private Limited" for a private limited company.
• The name should not be identical to or closely resemble the name of an existing registered company.
• It must not be considered undesirable by the Central Government or violate the provisions of the Emblems and Names (Prevention of Improper Use) Act, 1950.

2. Registered Office Clause

This clause specifies the name of the State in which the registered office of the company is to be situated. It does not contain the full address of the office. The full address must be communicated to the RoC separately within 30 days of incorporation. The purpose of this clause is to establish the company's domicile and the jurisdiction of the RoC and the courts.

3. Objects Clause

This is the most critical clause of the MOA. It defines the purpose for which the company has been formed and the scope of its activities. The Objects Clause is divided into two parts:

1. The objects for which the company is proposed to be incorporated. This lists the main business activities the company will undertake.
2. Any matter considered necessary in furtherance thereof. This includes ancillary or incidental objects that help in achieving the main objects.

The company cannot legally undertake any business that is not mentioned or implied in this clause. This protects investors' funds from being used for purposes other than those for which they were raised.

4. Liability Clause

This clause states the nature of the liability of the members of the company. It specifies whether the members' liability is limited or unlimited.

• For a company limited by shares: The clause states that the liability of its members is limited to the amount, if any, unpaid on the shares respectively held by them.
• For a company limited by guarantee: The clause states the amount that each member undertakes to contribute to the assets of the company in the event of its being wound up.
• For an unlimited company: The clause states that the liability of its members is unlimited.

5. Capital Clause

This clause is required only for companies having a share capital. It must state:

• The amount of authorised share capital (also known as nominal or registered capital). This is the maximum amount of capital the company is authorised to raise through the issue of shares.
• The division of this capital into shares of a fixed amount (e.g., ₹10,00,000 divided into 1,00,000 shares of ₹10 each).

6. Association and Subscription Clause

This is the final clause of the MOA. It is a declaration by the subscribers (the first members of the company) stating their intention to form a company and their agreement to take the number of shares indicated against their names. Each subscriber must sign the MOA in the presence of at least one witness, who must also sign and provide their details. The minimum number of subscribers is:

• Seven or more for a public company.
• Two or more for a private company.
• One for a One Person Company (OPC).

Alteration of MOA

Although the MOA is a fundamental document, it can be altered to accommodate the changing needs of the business. However, the procedure for alteration is strict to ensure that the interests of members and creditors are protected. The procedure is governed by Section 13 of the Companies Act, 2013.

Procedure for Alteration

The general procedure for altering any clause of the MOA involves the following steps:

1. Board Resolution: The Board of Directors must first pass a resolution at a board meeting to approve the proposed alteration and to call for a General Meeting of the shareholders.
2. Special Resolution: The alteration must be approved by the members of the company by passing a Special Resolution at a General Meeting. A special resolution requires the votes cast in favour of the resolution to be at least three times the votes cast against it.
3. Approval of Authorities (if required): Depending on the nature of the alteration, approval from authorities like the Central Government (power often delegated to the Regional Director) or the Registrar of Companies may be required. For example:
   • Change of Name: Requires approval from the Central Government (RoC) in addition to a special resolution.
   • Change of Registered Office from one State to another: Requires a special resolution and confirmation from the Regional Director.
4. Filing with RoC: A copy of the special resolution and the altered MOA must be filed with the RoC within the prescribed time. The alteration takes effect only after it is registered by the RoC.

Doctrine of Ultra Vires

The term "Ultra Vires" is a Latin phrase meaning "beyond the powers". The Doctrine of Ultra Vires is a fundamental rule of company law which states that any act done or contract made by the company which is beyond the powers mentioned in the Objects Clause of its MOA is legally null and void.

The primary purpose of this doctrine is to protect the investors and creditors of the company. It ensures that the funds of the company are used only for the specific objects for which the company was formed and not for any other purpose.

Acts Beyond the Objects Clause are Void

The legal effects of an ultra vires transaction are severe:

• Void ab initio: An ultra vires act is void from the very beginning. It is a nullity in the eyes of the law and cannot create any legal rights or obligations between the parties.
• Cannot be Ratified: An act that is ultra vires the company cannot be made valid even if every single member of the company agrees to it. It cannot be ratified by a resolution of the shareholders.
• Injunction: Any member of the company can obtain an injunction from the court to restrain the company from undertaking an ultra vires act.
• Personal Liability of Directors: Directors can be held personally liable for any loss caused to the company by using its funds for an ultra vires purpose.

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Meaning and Legal Effect

The Articles of Association (AOA) is a secondary but critically important constitutional document of a company. It contains the rules, regulations, and by-laws that govern the internal management and day-to-day administration of the company. While the Memorandum of Association (MOA) defines the company's external relationship with the world, the AOA defines the internal relationship between the members, directors, and the company itself.

The AOA is subordinate to both the Companies Act, 2013, and the MOA. If there is any conflict between the AOA and the MOA, the MOA will prevail. Similarly, any clause in the AOA that contradicts the Companies Act is void.

By-laws of the Company

The AOA functions as the company's internal rulebook or by-laws. It lays down the procedures and regulations for carrying out the objectives stated in the MOA. It details the manner in which the company's affairs will be managed and defines the rights, duties, and powers of its directors, officers, and members.

Think of the MOA as the country's Constitution, which sets the broad principles and boundaries. The AOA, in contrast, is like the Code of Civil Procedure or Code of Criminal Procedure, which lays down the detailed processes to be followed within that constitutional framework.

Governs Internal Management

The primary purpose of the Articles is to regulate the internal governance of the company. It establishes a framework for how the company will operate, covering aspects like:

• The appointment, powers, and duties of directors.
• The procedure for conducting board and shareholder meetings.
• The rights attached to different classes of shares.
• The process for transferring shares.
• The declaration of dividends and creation of reserves.
• The maintenance of accounts and their audit.

Every company is required to have its own AOA. In the case of a company limited by shares, if it does not register its own articles, the model articles contained in Table F of Schedule I of the Companies Act, 2013, automatically apply.

Contents of AOA

The Articles of Association can contain any rules for the internal management of the company, provided they are not contrary to the Companies Act or the MOA. The specific contents can vary widely from one company to another, but they typically cover the following areas:

Share Capital

This section details the rules related to the company's share capital, including:

• The division of capital into different classes of shares (e.g., equity, preference) and the rights attached to each class.
• Procedure for making calls on shares and the consequences of non-payment.
• The process for forfeiture of shares when calls are not paid.
• Procedure for issuing share certificates.
• Rules regarding lien on shares (the company's right to retain shares for a debt owed by the shareholder).

Transfer and Transmission of Shares

The AOA outlines the procedures for the change of ownership of shares:

• Transfer of Shares: The procedure for the voluntary transfer of shares by a member to another person. A private company's articles must restrict the right to transfer shares.
• Transmission of Shares: The process by which shares are passed on to a legal heir or representative upon the death, insolvency, or insanity of a member. This is a transfer by operation of law.

Directors' Powers and Duties

This is a significant part of the AOA, defining the entire governance structure related to the directors:

• The number of directors, their appointment, and their qualifications.
• The powers and duties of the Board of Directors.
• The procedure for the appointment of the Managing Director, Whole-time Director, and Manager.
• Rules regarding the remuneration of directors.
• The proceedings of the Board and its committees.

Meetings and Proceedings

The AOA lays down the rules for conducting various company meetings:

• Procedure for calling and conducting General Meetings (Annual General Meeting and Extraordinary General Meeting).
• The length of notice required for meetings.
• The quorum required for a valid meeting.
• Rules regarding the use of proxies.
• The process for passing ordinary and special resolutions.

Voting Rights

This section specifies the voting rights of members, including:

• The number of votes each member is entitled to.
• The method of voting (e.g., show of hands, poll, electronic voting).
• Restrictions on voting rights, if any (e.g., a member cannot vote if they have not paid calls on their shares).

Alteration of AOA

A company has a statutory right to alter its Articles of Association at any time to adapt to changing circumstances. However, this power is subject to certain conditions and limitations to protect the interests of all stakeholders, especially minority shareholders.

Procedure for Alteration

The procedure for altering the AOA is laid down in Section 14 of the Companies Act, 2013. The steps are as follows:

1. Board Resolution: The Board of Directors must first convene a meeting and pass a resolution to approve the proposed alteration(s) to the AOA.
2. General Meeting: A General Meeting of the shareholders must be called to seek their approval.
3. Special Resolution: The alteration must be approved by the members by passing a Special Resolution. This requires that the votes cast in favour are at least three times the votes cast against the resolution.
4. Filing with RoC: A certified copy of the special resolution along with the altered AOA must be filed with the Registrar of Companies (RoC) within 15 days of passing the resolution. The alteration becomes effective only upon this filing.

Limitations on Alteration:

• The alteration must not be in conflict with the provisions of the Companies Act, 2013.
• The alteration must not be contrary to the company's Memorandum of Association.
• The alteration must not be illegal or against public policy.
• The alteration must be bonafide for the benefit of the company as a whole and must not constitute a fraud on the minority shareholders.
• An alteration to convert a public company into a private company requires the approval of the National Company Law Tribunal (NCLT) in addition to the special resolution.

Binding Nature of MOA and AOA

According to Section 10 of the Companies Act, 2013, once the MOA and AOA are registered, they bind the company and its members to the same extent as if they had been signed by the company and by each member. This creates a contractual relationship between the company and its members, and among the members themselves. However, it does not create a contract between the company and an outsider. This binding nature gives rise to two important legal doctrines.

Doctrine of Constructive Notice

The MOA and AOA are registered with the RoC and are available for public inspection. Therefore, they are considered public documents. The Doctrine of Constructive Notice is a legal presumption that every person dealing with the company has read these documents and understood their contents. This means if a person enters into a contract that is contrary to the provisions of the MOA or AOA, they cannot later claim that they were unaware of those provisions.

This doctrine primarily protects the company against outsiders. For example, if the AOA states that a bill of exchange must be signed by two directors, and an outsider accepts a bill signed by only one director, the company will not be liable on that bill. The outsider is presumed to have known the requirement.

Doctrine of Indoor Management (Rule in Turquand's Case)

The Doctrine of Indoor Management is an important exception to the Doctrine of Constructive Notice. While outsiders are presumed to know the company's public documents (MOA and AOA), they are not required to inquire into the internal procedural regularities of the company. They are entitled to assume that the internal proceedings ("indoor management") have been carried out in accordance with the AOA.

This doctrine protects the outsider against the company. It ensures that the company cannot escape liability by citing a failure to comply with an internal procedure.

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