Memorandum of Association of a Company

Memorandum of Association:

The Memorandum of Association is the constitution of the company and provides the foundation on which its structure is built. It is the principal document of the company and no company can be registered without the memorandum of association. It defines the scope of the company’s activities as well as its relation with the outside world.

According to Lord Macmillan, “The purpose of the memorandum is to enable the shareholder, creditors and those who deal with the company to know what is permitted range of enterprise.”

In the words of Charles Worth, “the memorandum of association is the company’s charter and defines the limitations of its powers. Its purpose is to enable shareholders; creditors and those who deal with the company, to know what its permitted range of enterprise is. It is the document which informs all persons dealing with the company, what the company is formed to do. How capital will it raise it’s its nationality is? It regulates the company’s external affairs, while the articles of association regulate its internal affairs.” This is an exhaustive definition which explains the nature and scope of memorandum.

Section 2 (28) of the Companies Act defines a memorandum as “the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous Company Law or of this Act.” The contents of the memorandum are explained in Section B of the Act.

Purpose

The main purpose of the memorandum is to explain the scope of activities of the company. The prospective shareholders know the areas where company will invest their money and the risk they are taking in investing the money. The outsiders will understand the limits of the working of the company and their dealings with it should remain within the prescribed scope.

Importance of Memorandum

Memorandum is the fundamental document of a company which contain conditions upon which the company is incorporated. This document is important for the following reasons.

  • Memorandum defines the limitations on the powers of the company established under the Act.
  • The whole structure of the company is built upon memorandum.
  • It explains the scope of activities of the company. The investment knows where their money will be spent and outsiders also know the nature of activities the company is authorized to take up.
  • It is a basic document of the company with regard to its constitution
  • It is a charter of the company which sets out its written goals.

Clauses of Memorandum

The memorandum of association contains the following clauses:

The Name Clause:

A company being a separate legal entity must have a name. A company may select any name which does not resemble the name of any other company and it should not contain the words like king, queen, emperor, government bodies and the names of world bodies like UNO, WHO, World Bank etc. The name should not be objectionable in the opinion of the government. The word ‘limited’ must be used at the end of the name of a Public and ‘Private Limited’ is used by a Private Company. These words are used to ensure that all persons dealing with the company should know that the liability of its members is limited. The name of the company must be painted outside every place where business of the company is carried on.

If the company has a name which is undesirable or resembles the name of any other existing company, this name can be changed by passing an ordinary resolution.

Registered Office Clause:

Every company should have a registered office, the address of which should be communicated to the Registrar of Companies. This helps the Registrar to have correspondence with the company. The place of registered office can be intimated to the Registrar within 30 days of incorporation or commencement of business, whichever is earlier.

A company can shift its registered office from one play to another n the same town with intimation to the Register. But if the company wants to shift its registered office from one town to another town in the same state, a special resolution is required to be passed. If the office is to be shifted from one state to another state it involves alteration in the memorandum.

Object Clause:

This is one of the important clauses of the Memorandum of Association. It determines the rights and powers of the company and also defines its sphere of activities. The object clause should decide carefully because it is difficult to alter this clause later on. No activity can be taken up by the company which is not mentioned in the object clause Moreover, the investors i.e., shareholders will not mentioned in the object clause. Moreover, the investors i.e., shareholders will know the sphere of activities which the company can undertake. The choice of the object clause lies with the subscribers to the memorandum. They are free to add anything to it provided it is not contrary to the provisions of the Companies Act and other laws of the land.

The Companies (Amendment) Act 1965 requires that in cause of companies formed after this amendment, the memorandum must state separately (a) main objects, and (b) other objects. Main objects will include objects to be pursued by the company on incorporation and objects incidental or ancillary to the attainment of the main objects. Other objects will include all other objects which are not included in the main objects.

The object clause offers protection to the shareholders by ensuring that the funds raised for the undertaking are not going to be risked in any other undertaking. The creditors also feel protected by this clause. By confining the activities within a specified field, it serves the public interest also.

The object clause can be changed to enable a company to carry on its activities more economically, or by improved means to carry on some business which under existing circumstances may conveniently by combined with the object clause.

Liability Clause:

This clause states that the liability of the members is limited to the value of shares held by them. It means that the memes will be liable to pay only the unpaid balance of their shares. The liability of the members may be limited by guarantee. It also states the amount which every member will undertake to contribute to the assets of the company in the event of its winding up.

Capital Clause:

The clause states the total capital of the proposed company. The division of capital into equity share capital and preference share capital should also be mentioned. The number of shares in each category and their value should be given. If some special rights and privileges are conferred on any type of shareholders, mention may also be made in the clause to enable the public to know the exact nature of capital structure of the company.

Association Clause:

This clause contains the names of signatories to the memorandum of association. The memorandum must be singed by at least seven persons in the cause of public limited company and by at least two persons in the case of private limited company. Each subscriber must take at least one share in the company. The subscribers declare that they agree to incorporate the company and agree to take the shares stated against their names. The signatures of subscriber are attested by at least one witness each. The full addresses and occupations of subscribers and the witnesses are also given.

Alteration of a Memorandum of Association

Memorandum of Association is a basic document of the company. Any change in various clauses of memorandum may have an adverse effect on any of the parties connected with the company. Company Law has prescribed a particular procedure for making a change in the memorandum. The procedure provided for different clauses varies. The following procedure is followed for carrying out a change in the memorandum:

Name clause (Section 25):

A company may change its name by passing a special resolution and with the prior approval of the Central government. If the company is registered with an undesirable name then it can change it with an ordinary resolution with the approval of the Central Government. The Central Government can also direct the comapny within 12 months of its registration to change its name and this will have to be done within three months. The change in name will be effective when it is resisted with the Registrar.

Registered Office (Section 17):

The change in registered office place from one state to another requires a change in memorandum. This change affects the interests of shareholders, investors, creditors, employees etc. This change can be affected only with the approval of Company Law Board. Earlier this power was vested with the court but the Company Law (Amended) Act, 1974 has transferred it to Company Law Board.

Object Clause (Section 17):

The object clause is the most important clause in the memorandum; its change may affect the activities of the company. This clause is a limitation on the company beyond which it cannot carry its activities. The object clause can be changed by passing a special resolution and by getting the permission of the Company Law Board. A copy of the resolution should be field with the Registrar within 30 days of passing the resolution. A petition is also made to the Company Law Board for issuing a confirmation. When this change is allowed by the Board, then printed copy of the Memorandum as altered must be field with the Registrar within three months of the order.

The change in situation and objects clause is allowed only under certain situations. It will be allowed when it necessary for any of the following reasons:

  • The change is necessary to allow the company to carry on its business more economically or efficiently.
  • The company will be able to attain its objectives by new and improved means.
  • The company may enlarge the local area of its operations.
  • The company is enabled by change to carry on some new business with convenience and advantage.
  • To restrict or abandon any of the objects specified in the memorandum.
  • To sell whole of part of the company’s property.
  • To amalgamate with any other company or body of persons.

Liability clause:

If articles so permit, the liability of the Directors Managing Directors or Manager can be made unlimited by passing a special resolution. The officer concerned should also accord his consent for making the liability unlimited.

Capital Clause:

A change in capital clause involving an increase in the authorized capital can affected by passing an ordinary resolution in the general Meeting.