MEMORANDUM OF ASSOCIATION AND ARTICLE OF ASSOCIATION By: PARAM GWALANI - 12 RONIL JAIN - 17 GOVINDA NARSALE - 34 RISHABH RANKA - 39 SHEHAAB

ROSHAN - 40

MEMORANDUM OF ASSOCIATION
MEANING:
Memorandum of association is the most important document of the company. It is the basis on which the super-structure of the company is based. It is also known as the constitution / charter of the company. This document is a sort of contract between the company and its shareholders. It refers to that document which defines the principal conditions on which the company is incorporated. It defines the objects and determines the scope of the activities of the company. It sets out the limits outside which the company cannot go. If the company works on a line, which is not given in the memorandum, then it will be considered as illegal. The memorandum should be printed and divided into different paragraphs. It is regarded as unalterable charter of the company as generally it is very difficult to change any clause of this document. This document must be signed by at least seven persons in case of public limited company and two persons in case of private limited company. The memorandum must be prepared very carefully, printed and divided into different paragraphs, each paragraph must be numbered. It should stamp according to the provisions of the

companies ordinance and signed by the subscriber in the presence of witness. No company can be registered without a memorandum of association since it defines the rights and objectives of the company.

DEFINITION:
According to LORD CAIRNS, the memorandum contains the fundamental conditions upon which the company is allowed to be incorporated. According to section 2(28) of the companies Act, Memorandum means the Memorandum of association of the company as originally framed or as altered from time to time in pursuance of any previous companies law or of this act.

FEATURES
1. It is mandatory for a company. 2. It is the constitution of the company. 3. It cannot be altered by the company. 4. It defines the scope of the companies activity. 5. It is a public document. 6. It defines the company relation with outside individual.

IMPORTANCE OR PURPOSE:
Lord Macmillan said that: The purpose of Memorandum of Association is to enable the share holders, creditors and those who deal with the company to know what its permitted range of enterprise is. The following are the importance of Memorandum of Association: 1. Basis of Incorporation: A company cannot get itself registered without filing this document. Hence it is the basis of incorporation of a company. 2. Helps others to get information about the company: The Memorandum of Association of a company helps others or outsiders to get information about the company regarding its name, address, object, capital, and liability etc. 3. It lays down the extent of working of the company: Memorandum of Association lays down the objects and scope of activities of the company. It also states the limits up to which a company can move. Any activity done by the company beyond the scope of the memorandum will be considered as ultra vires and void.

4. Unalterable document: The provisions of this document cannot be changed without passing a special resolution (passed by 75% of the majority). In certain cases, the changes can be made by seeking permission from the Company Law Board or Central Board. 5. Determining the relationship between the company and others: It helps others or outsiders to know whether the company is authorized to enter into a particular transaction or not.

CONTENTS/CLAUSES OF THE MEMORANDUM OF ASSOCIATION:

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. The name should not be identical with the name of any existing company. The name should not create an impression that the company is carrying on the business of some other existing company. The name should not be misleading (i.e. creating confusion regarding its nature of business).

THE REGISTERED OFFICE CLAUSE:

In this clause the name of the State in which the registered office of the company is to be situated is mentioned. This clause determines the jurisdiction of the Registrar of Companies and the court. This clause also speaks about the nationality of the company. The full address of the registered office must 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.

THE 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. 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
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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. Two main reasons why a company needs to state its objects in the memorandum of association: 1. To inform its members how it will use the investors capital in its business. 2. To inform its creditors & members of the public dealing with the company about the rights of the company.

THE LIABILITY CLAUSE:

The liability clause states the nature of liability of the members/owners of the company (i.e. whether limited by shares or limited by guarantee or unlimited). 1. Limited by shares: It states that the liability of the members is limited to the value of shares held by them. It means that the members will be liable to pay only the unpaid balance of their shares. 2. Limited by guarantee: In this case, the
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liability clause must state the extent of liability of each individual member in the event of its being dissolved. 3. Unlimited liability: In this case, the liability clause does not appear in the memorandum of association.

THE CAPITAL CLAUSE:

The capital with which a company is registered is known as authorized or nominal capital. This clause states the total and maximum authorized capital of the proposed company. A company cannot raise funds more than the authorized capital. The minimum requirement of capital for public company is Rs 5 lakhs whereas for private company is Rs 1 lakh. It also states 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.

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THE ASSOCIATION CLAUSE:

This clause contains the names of signatories to the memorandum of association. The address, signatures and descriptions of the members to the proposed company are also given in this clause. The memorandum must be singed by at least seven persons in the case of public limited company and by at least two persons in the case of private limited 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.

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ALTERATION OF MEMORANDUM OF ASSOCIATION:

CHANGE IN NAME CLAUSE:
BY SPECIAL RESOLUTION: A Company Can Change Its Name. It Must First Pass A Special Resolution And Then Obtain Approval Of The Central Government In Writing. No Approval Is Necessary For Merely including Or Deleting The Word Private Consequent On The Conversion Of The Public Company Into Private Company And Vice Versa. BY ORDINARY RESOLUTION: (a) If A Company Is Registered By A Name and The Name is of an Existing Company, It Can Change Its Name By Passing An Ordinary Resolution And With The Previous Approval Of The Central Government Signified In Writing. (b)The Central Government may also, within 12 months of registration, direct the company to change its name. Within 3 months of such direction the company must change its name by passing an ordinary resolution and by the previous approval of Central government signified in writing. Default in complying with the direction is punishable with fine upto RS.1000 for everyday during which the default continues.

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NEW CERTIFICATE OF INCORPORATION: THE REGISTRAR SHALL ENTER THE NAME ON THE REGISTER IN PLACE OF FORMER NAME AND SHALL ISSUE A FRESH CERTIFICATE OF INCORPORATION.THE CHANGE IS EFFECTIVE ONLY ON THE ISSUE OF A CERTIFICATE. THE REGITRAR SHALL ALSO MAKE THE NECESSARY ALTERATION IN THE MEMORANDUM OF ASSOCIATION OF THE COMPANY. EFFECT OF CHANGE IN NAME: The change of name shall not effect any rights or obligations of the company or render defective any legal proceedings by or against it. Any legal proceedings, which might have been continued or commenced by or against the company by its former name, may be continued by or against the company in its new name. The alteration effected is only in the name and not in the identity of the company. The change of name does not affect the entity of the company or its continuity as the same entity with the same rights, privileges and liabilities as before. A change of name does not bring into existence a new company. Nothing authorizes the company to commence a legal proceeding in its former name at a time when it had acquired its new name.

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CHANGE IN REGISTERED OFFICE CLAUSE:

THE CHANGE OF REGISTERED OFFICE MAY INVOLVE ANY OF THE FOLLOWING: CHANGE WITHIN THE CITY: If a Company wants to change its office from one place to another within the same city then the board of directors have to pass a resolution in the general meeting and the registrar is to be informed of this within 30 days from the pass of the resolution. CHANGE WITHIN THE STATE: When the registered office is to be changed from one ROC to another ROC within a state the company have to take permission from regional director by giving an application. CHANGE FROM ONE STATE TO ANOTHER: Sec 17 deals with change of registered office from one state to another. For this the company have to first pass a special resolution the take the confirmation from the company law board and inform the necessary parties affected and have to file the copy of the special resolution within 30 days from date of the resolution.

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CHANGE OUTSIDE INDIA: A Company cannot change its registered office from India to another country and the Central Government have no right to sanction such alteration of Memorandum. CHANGE IN OBJECT CLAUSE: It is extremely difficult to alter the object clause because the law has laid down strict limitations on such alteration. Section 17 of the companies act defines these limitations, and any alteration must necessarily be within these. (A) UNDER SEC 17(1), THE OBJECT CLAUSE CAN BE ALTERED ONLY IF THE ALTERATION IS REQUIRED TO UNABLE THE COMPANY: 1. To carry on its business more efficiently. 2. To attain its main purpose by improved means. 3. To enlarge or change the local area of operations. 4. To carry on some business which can be advantageously combined with the business of the company

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5. To restrict or abandon any of the objects specified in memorandum. 6. To amalgamate the company with any other company. 7. To sell or dispose of the whole or any part of the undertaking of the company.

(B) Procedure of Alteration:

1. SPECIAL RESOLUTION: A special resolution have to be passed at the general meeting for the alteration of the object clause. 2. FILING OF SPECIAL RESOLUTION: The copy of the resolution have to be filed with the Registrar within 30 days from date of the pass of the resolution. 3. CERTIFICATION OF REGISTRATION: Further the Registrar will register the special resolution and then certify the registration.

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CHANGE IN LIABILITY CLAUSE:

Normally a company cannot alter its liability clause so as to make the liability of the members unlimited. The company cannot alter the liability clause if it causes an enhancement in the liability of the shareholder. The company can do so only if the members agree in writing to such change.

CHANGE IN CAPITAL CLAUSE:

The company can alter its capital clause by passing a special resolution in the general meeting and the confirmation of the court is not required if the change is made for following purpose: 1. To increase its shares. 2. To consolidate and divide its share into shares of lager amount. 3. To convert its fully paid shares into stocks and reconvert its stock into fully paid shares. 4. To sub divide its shares into shares of smaller amount. 5. To cancel its shares which are not issued.

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CASE STUDY:
A company which was formally forbidden by its Articles of Association from paying remuneration to its managers wanted to alter its objects clause so as to acquire power to pay this remuneration to carry on its business more economically or efficiently. Was this alteration allowed???

FACTS:
In this case a company was incorporated for the purpose of introducing scientific methods in feeding, housing and breeding poultry. Memorandum of the company prohibited payment of any remuneration to the directors. The company's business increased and the governing body found that they were not able to give the necessary time to the management of its affairs unless they were paid for their services. Alterations in the objects of the company were proposed to remove the prohibition against payment of remuneration to them. The judge initially refused to sanction alterations as it involved a fundamental change in the constitution of the company.

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VERDICT OF THE CASE:

Legal Answer : Yes , the alteration of objects clause of the Memorandum of Association is allowed. Legal Justification : The power of alteration of objects is subject to two limits , namely (1) Substantive or physical limit (2) Procedural limit Substantive limit : By Section 17(1) , the objects of a company may be altered by a special resolution so as to enable the company (a) To carry on its business more economically or more efficiently : The alteration must , however , leave the business of the company substantially what it was before the alteration. This clause contemplates only those changes in the mode of conducting business as will enable it to be carried on more economically or more efficiently.

REFERENCE CASE: SCIENTIFIC POULTRY BREEDER ASSOCIATION.

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ARTICLE OF ASSOCIATION:
MEANING AND DEFINITION:
Section 2(2) of companies act defines articles as Articles means Articles of Association of a company as originally framed or as altered from time to time in pursuance of any previous Companies law or of this Act, including so far as they apply to the company, the regulations contained, as the case may be. Articles are supplementary document to the memorandum. Articles proceed to define the duties rights and powers of the governing body as between themselves and the company at large. [Lord Cairns] Articles are the internal laws of a company. Articles devise ways for the internal management of the company. [Lord Brobene] The Articles are next in importance to the memorandum of association which contains the fundamental conditions upon which alone a company is allowed to be incorporated.

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CONTENT OF ARTICLE OF ASSOCIATION:

Some of the important contents of Articles of Association are as follows: (1)Matters relating to shareholders: (i) Types , number and denominations of shares; (ii) The respective rights of different types of shares; (iii)Methods of making an issue of share capital; (iv)Procedure for making calls and allotment of shares; (v) Procedure for issue of share certificate and share warrants; (vi)Conversion of shares into stock, lien of shares etc.; (vii)Alteration of share capital; (viii)Voting powers of the shareholders; (ix)Procedure for forfeiture, reissue and surrender of shares; (x)The amount of minimum subscription; (xi)Procedure regarding company meetings; (xii)Procedure for transfer and transmission of shares.
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(2) Matters relating to Directors: (i)Rules regarding appointment, reappointment, remuneration, reward, etc., of the Directors; (ii) Rules regarding qualification and disqualification of directors; (iii)Procedure for retirement and removal of Directors; (iv)Rules regarding borrowing power of Directors; (v) Rules regarding conducting meetings of Directors; (vi)Rights and liabilities of Directors; (vii)Rules for fixation of maximum and minimum Directors, etc. (3)Other matters: (i)Procedure for audit of company accounts; (ii) Procedure of winding up of the company; (iii)Rules regarding keeping of books of accounts; (iv) Borrowing of funds from the public and the rate of interest thereon; (v) Commission and brokerage for selling shares to underwriters; (vi)Rules regarding declaration of dividends and capitalization of reserves; (vii)Interest rates on calls-in-advance and calls-in-arrear.

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ALTERATION OF ARTICLE OF ASSOCIATION:

Articles of Association is related to the internal management of the company. These matters are not permanent in nature and it gets altered from time to time depending upon the changing situation of the company. The company may alter its Articles by passing a special resolution: (i)The alteration must be made for the benefit of the company; (ii) The alteration can only be made by a special resolution; (iii)The alteration must not sanction anything illegal; (iv)The alteration must not in any way increase the liability of the existing members; (v) The alteration must not constitute a fraud on the minority; (vi)The alteration must not be detrimental to the provisions of the Companies Act; (vii)The alteration must not cause any breach of contract with an outsider; (viii)The alteration must not contravene any clause of the memorandum.

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