WHAT IS A MEMORANDUM

OF ASSOCIATION?
 WHAT IS A MEMORANDUM OF
ASSOCIATION?
• Definition:

“THE MEMORANDUM OF ASSOCIATION OF A COMPANY IS ITS CHARTER AND

DEFINES THE LIMITATION OF THE POWERS OF A COMPANY”
 WHAT IS A MEMORANDUM OF
ASSOCIATION?
• Fundamental document of prime importance.
• Depicts:
• Objectives
• Extent of authority
• Competency
• Liabilities and legal rights of the company.
• Acts as a legal code and regulates the relationship between the company
and its shareholders, investors and beneficiaries.
 WHY IS IT NECESSARY FOR A
COMPANY?

• To know the purpose for which the company has been formed.
• The range of activities that the company is permitted to be involved in.
• To learn the company’s objectives.
• It also curbs the company’s flexibility by preventing it from getting
involved in any other kind of activities other than the ones mentioned in
the memorandum.
 CONTENTS OF A MEMORANDUM
OF ASSOCIATION
• Under Section 4 of the Companies Act 2013, a Memorandum of
Association should comprise of the following clauses:
1. Name Clause
2. Situation Clause
3. Object Clause
4. Liability Clause
5. Capital Clause
6. Association or Subscription Clause.
 NAME CLAUSE
• Mandatory to mention the name of the company while drafting.
• Should not be identical to an existing company.
• Should be exactly the same as the one approved by the Registrar of
Companies.
• Should restrain from using words like “King, Queen, Emperor, U.N.O.,
W.H.O., Etc in order not to mislead the public.
• This is prohibited under the Emblems and Names (Prevention of Improper
Use) Act of 1950.
 SITUATION CLAUSE
• Must contain
• the name of the state where the company operates.
• Jurisdiction of the Registrar of Company.
• It is mandatory for the company to have the registered office
within 15 working days.
• Verification of the registered office must be completed in 30
days.
• In the case of location change of the registered office, the
memorandum needs to be altered.
 OBJECT CLAUSE

• The objective for which the company is formed must be

mentioned.
• It should carefully mention all the types of businesses that the
company may possibly engage in the future.
• The objects must be stated articulately.
• Must not be ambiguous and illegal in nature.
• Must not be against the Prohibition of the Act or the public policy.
 OBJECT CLAUSE

• The objects are classified as

1. Main Objects
2. Ancillary Objects
3. Other Objects
 LIABILITY CLAUSE

• The liabilities of the members of the company must be clearly stated.

• They may be limited by shares or by guarantee.
• In case of unlimited liability company, the entire clause can be
eliminated.
 CAPITAL CLAUSE
• The maximum amount of authorized capital that can be generated
by the members of the company is ought to be mentioned.
• Stamp duty is applicable on this amount.
• There is no legal limit to the maximum amount of capital that can be
raised by a company.
• It can not increase the authorized share capital, once it has been
incorporated.
• It is not mandatory for an unlimited company having an authorized share
capital to mention it in the memorandum.
 ASSOCIATION OR SUBSCRIPTION
CLAUSE
• The amount of authorized capital and the number of shares
owned by each member of the company should be mentioned in the
memorandum.
• The subscribers to the memorandum must own a minimum of each one
share.
• The subscribers must sign the memorandum in the presence of at
least one witness who is required to attest the signature.
ARTICLES OF
ASSOCIATION
 WHAT IS ARTICLES OF
ASSOCIATION?

• The Articles of Association are the rules, regulations and bye-laws governing the
internal affairs of the company.
• They lay down the mode and manner in which the business of the company is to be
conducted.
• Section 5 of companies act, 2013, deals with articles of association.
 CONTENTS OF ARTICLES

• Section 5(1) and section 5(2) of Companies Act, 2013 provide the contents:

1. Share capital including sub-division, rights of share holders, payment of commission,

share certificates
2. Call on shares
3. Transfer of shares
4. Forfeiture of shares
5. Surrender of shares
6. Conversion of shares in stock
 (CONTD…)

7. Share warrant
8. Alteration of capital
9. General meetings and proceedings
10. Voting rights of members
11. Dividends and reserves
12. Winding up
 ALTERATION OF ARTICLES
• As per section 14, the following are the provisions regarding modes of alteration of
articles:

1. Conversion of private company to public company or vice-versa, is permitted.

2. Such conversions shall comply with provisions of the Act and conditions in its
memorandum.
3. Special resolution shall be passed for such conversion
 (CONTD…)

4. The Act requires certain restrictions and limitations to be included in the articles of a
private company.
5. Approval shall be obtained from the tribunal for converting public company to private
company.
6. Every alterations shall be filed with the registrar, together with a printed copy of altered
articles, within a period of 15 days.
 LIMITATIONS REGARDING
ALTERATION OF ARTICLES

• Alterations should not be inconsistent with the provisions of the Companies Act,
2013 or other status
• Alterations should not be inconsistent with the conditions contained in the
memorandum (section 14)
• Alterations must be bonafide for the benefit of the company
• Alterations should not be oppressive to the minority
 (CONTD..)

• Alterations must not increase the liability of existing members

• Alterations must not allow anything which is illegal or unlawful or opposed to public
policy
• Alterations must not deprive any person of his rights under a contract
DOCTRINE OF INDOOR
MANAGEMENT
 INTRODUCTION
• Rule in Royal British Bank v. Turquand or Turquand rule
• Limitation to the doctrine of constructive notice
• The outsiders dealing with the company are entitled to assume that as far
as the internal proceedings of the company are concerned, everything
has been regularly done.
• It seeks to protect outsiders against the company (whereas doctrine of
constructive notice protects company against outsiders)
 BASIS
1) What happens internal to a company is not a matter of public
knowledge.
2) Without this doctrine, the company can escape creditors by denying the
authority of officials to act on its behalf
 ROYAL BRITISH BANK V.
TURQUAND
• The directors of the company had issued a bond to T. They had the power
under the Articles to issue such bond provided they were authorised by a
resolution passed by the shareholders at a GM of the company. But no
such required resolution was passed by the company. Held, T could
recover the amount of the bond from the company on the ground that he
was entitled to assume that the resolution had been passed.
• Persons dealing with companies are not bound to look into the regularity
of the internal proceedings and will not be affected by irregularities of
which they had no notice.
 EXCEPTIONS
1) Knowledge of irregularity - The rule will not apply if the person
dealing with the company had slight knowledge of the internal
irregularities
Case – Howard v. Patent Ivory Co. (1888) – Directors can borrow 1000
pounds without approval – beyond this they must obtain shareholders’
approval in GM. Directors borrowed 3500 pounds from another director who
took debentures – Since plaintiff is a director who had knowledge about the
internal irregularity the debentures are worth only 1000 pounds.
 EXCEPTIONS
2) Negligence – Person dealing with the company could have discovered
the irregularity if he had made proper inquiries
- The circumstances surrounding the contract are so suspicious as to invite
inquiry and the person does not make a proper inquiry
Case – Anand Bihari Lal v. Dinshaw & Co. (1942) – plaintiff accepted
transfer of company’s property from its accountant. Held, transfer was void
as accountant did not have the power. Plaintiff should have checked the
power of attorney executed in favour of the accountant by the company.
 EXCEPTIONS
3) Forgery – The rule does not apply if the document is forged since
nothing can validate forgery
- A company can never be held accountable for forgeries committed by its
officers
Case – Ruben v. Great Fingall Consolidated Co. (1906) – Secretary of
a company issued a share certificate under the company’s seal with his
own signature and the signature of a director forged by him. Held, the
share certificate was not binding on the company.
 EXCEPTIONS
4) Acts outside the scope of apparent authority – If an officer of a
company enters into a contract with a third party and if the act of the
officer is beyond the scope of his authority, the company is not bound.
Case – Kreditbank Cassel v. Schenkers Ltd. (1927) – A branch
manager of a company drew and endorsed bills of exchange on behalf of
the company – for personal indebtment – had no such authority – Held,
company was not bound.
DOCTRINE OF CONSTRUCTIVE
NOTICE
PRESENTED BY,
UMA.N
• Every person dealing with the company is presumed to have notice of
the contents of the Memorandum of Association and Articles of
Association.
• These documents are registered or filed with the Registrar of
Companies.
• The office of Registrar of Companies are regarded as public offices and
the documents MOA and AOA are open, accessible and available to all.
• All the outsiders dealing with the company are presumed not only to
have read the documents, but also to have understood it.
• This doctrine restricts any outsider from saying that, “he
did not read the Articles of Association and Memorandum
of Association and other related documents.”

• This includes understanding the powers of the company, its

directors, officers and the extent of these powers.

• The courts see it as the responsibility of the party entering

into the contract to inspect the legal documents before
agreeing to the contract terms.

• The rule used in Oakbank Oil Co. v. Crum (1882 8

 KOTLA VENKATSWAMY VS
CHINNA RAMAMURTHY
• The AOA of the company stated that all the deeds have to be signed by
the Managing Director, Company Secretary and Working Diirector.
• Mortgage deed was signed by the Working Director and Company
Secretary in favour of the plaintiff.
• Company opted for voluntary liquidation and sold the mortgage
property to the defendant.
• The plaintiff then approached the court, the court ruled against the
plaintiff stating that, the plaintiff did not act prudently and dodged its
duty to read the documents.
• The mortgage deed was considered as an illegal document.
 RAMA CORPORATION VS PROVED TIN
& GENERAL INVESTMENT CO. (1952)
• The director of the plaintiff company formed an agreement with the
director defendant company to subscribe funds which they can use to
finance the sale of goods produced by a third company.
• The director of the plaintiff company gave a cheque to the defendant
company.
• But as per the AOA, of the defendant company only a director to whom
the power of the board has been delegated, can collect a cheque on the
behalf of the company.
• The plaintiff hadn’t read the defendant’s articles and was unaware of this
clause. In the decision of the court and the defendant company was held
not bound by the agreement.
THANK YOU!!!