Memorandum of Association and Article of Association

Memorandum of Association and Article of Association
13 March 2020

Memorandum of Association and Article of Association

The history of India Company Law began with the Joint Stock Companies Act 1850. Since then a cumulative process of amendment and consolidation brought us to the most comprehensive and complicated piece of legislation, The Companies Act, 1956. The Companies Act, 2013 has replaced the Companies Act, 156. The Act has 470 sections and 7 schedules. The Companies Bill 2012 was passed by the Lok Sabha on 18th December 2012 and by the Rajya Sabha 8th August 2013. On receiving the assent of Hon'ble President of India on 29th August 2013, it was notified on 30th August 2013 as the Companies Act 2013.

The word Company has been derived from the Latin word "com" which means "with or together" and "panis" which means "bread". It is called a body corporate because the persons composing it are made into one body by incorporating it according to law and clothing it with a legal personality.  A company can be defined as an "artificial person", invisible, intangible, created under the law, with a discrete legal entity, perpetual succession, and a common seal.

A company is a form of business organization. The definition of the term varies by country. In general, a company is the same as a corporation. Which is a union of natural persons that has its own legal status that is independent of the persons involved. It is a "creature" of the statute; i.e., it is like a person created by law. Because it is recognized by governments as such (as a separate creature) it must file tax returns and pay taxes and conform to state and federal law. This separation of persons and corporation gives it special powers. Its status and capacity are determined by the law of the place of incorporation. A corporation is defined as a legal entity or structure created under the authority of a state's laws, consisting of a person or group of persons who become shareholders. The entity's existence is considered separate and distinct from that of its members. Like a real person, a corporation can enter into contracts, can sue and can be sued, can pay taxes separately from its owners and do the other things necessary to conduct business.

As per Section 2 (20) of the Companies Act, 2013, the term “Company" has been defined as "a company incorporated under this Act or under any previous company law.” It means that 'the persons who form the company and contribute money or money’s worth for the business of the company are called ‘Members’. They get ‘shares’ in the company in the proportion of their contribution to the company. The contribution made by members of the company is the ‘Capital’ of the company'. The company is a legal person created by a process of law other than natural birth. For this reason, a company is also called an artificial legal person. As a natural person, a company also enjoys many rights and incurred many liabilities of a natural person.

Every entrepreneur is excited about the first step of starting a business, which is giving it a legal identity by getting a company registered. Companies are governed through legal documents that pan out the do’s and don’ts for it. Commonly known as company charter, Memorandum of Association (MOA) and Articles of Association (AOA) define the company’s scope of work and its internal management. Drafting of these documents is one of the most critical steps in the Private Limited Company registration process.

Memorandum and Articles are supreme legal documents forming the company’s constitution. They are indispensable, and the foundation of a company stands on it. Therefore, drafting them requires the utmost precision and clarity. Let us look into the meaning and importance of articles of association and memorandum of association.

Memorandum of Association

Memorandum of association defines the relation of the company with the rights of the members of the company interest and also establishes the relationship of the company with the members. As per Section 2(56) of the Companies Act,2013 “memorandum” means 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. Section 4 of the Companies Act,2013 deals with MOA. The Memorandum of a company shall contain the following;

  1. Name Clause
    1. Is usually written in the opening paragraph of the article.
    2. States the name under which the company functions.
    3. States whether the company is a private limited or a public limited.
    4. Now, there are certain key points to keep in mind while choosing the name of the company. They are:
      1. Having a unique name and not identical to an existing company.
      2. Not having any offensive words, connotations, or “sensitive” expressions that may offend any cultural or religious community.
      3. Not indicating a connection with the government or local authorities unless you have permission to do so.
  2. Situation clause
    1. This clause mentions the State in which a company has its registered office. If the future demands changing of registered office address, then the same must be updated in it.
  3. Object Clause
    1. This clause defines the purpose of company formation. This is usually not altered or changed. Hence drafting of this clause is very crucial and should be done with precision and expertise. The company cannot carry on any activity that is not part of the object clause of MOA. Such activities are called Ultra Virus (beyond powers) and cannot be ratified even by members.
  4. Liability clause
    1. This clause states the liability of members of the company. It can be limited either by shares or guarantee. This clause is omitted in case of unlimited liability.
  5. Capital Clause
    1. This clause specifies the maximum amount of capital a company can raise along with its distribution into shares. The company can only secure a specified capital amount mentioned in this clause. Any special rights or privileges are given to shareholders are mentioned here.
  6. Subscription clause
    1. This clause has the names, addresses and the details of its first subscribers. A private limited company needs at least two members. Public limited companies will have a minimum of seven members. It is mandatory for these subscribers to take at least one share.
Type of MOA

The memorandums are of the following type depending on their form.

  1. Table A: If shares limit a company
  2. Table B: If a company limited by guarantee
  3. Table C: If a company limited by guarantee and share capital
  4. Table D: If it is an unlimited company
  5. Table E: If it is an unlimited company having a share capital
Articles of association

This is the secondary document playing a vital role in defining the company’s internal workings, their rights, duties and management. As per Section 2(5) of the Companies Act,2013  an “article” refers to the original article of association of a company or a version that has been altered so as to comply to the laws stipulated in the Act. Section 5 of the Companies Act,2013 defines the article of association as the document that contains the rules and regulations regarding the management of the company. It contains the by-laws and other rules & regulations that a company runs by. The contents of AoA remain in sync with the MoA and the Companies Act. Contents of Articles of Association:

  1. Details regarding the shares of a company
    1. Classes and valuation of shares.
    2. Transfer, conversion, Lien, and forfeiture of shares.
    3. Rights attached to the shares and rules about the alteration of capital.
    4. Rules regarding the minimum subscription and conversion of fully paid shares into stock.
  2. Details regarding directors’ rights, duties, and their removal
    1. Directors appointment, powers, and duties. Borrowing rights of the Board of Directors and the procedure to remove them.
  3. Details regarding holding and conducting meetings
    1. Conducting Meetings, maintaining minutes, and sending out notices. It also states rules regarding voting rights and proxy that includes quorum required with the percentage of votes with directors. It mentions the accounts & audit, and appointment and remuneration of auditors.
  4. Process and rules regarding winding up of the company
    1. It is possible to make alterations in the articles if that benefits the company. But that should not be in contradiction with any third-party contracts. This alteration is done by passing a special resolution by filing a copy of it with the Registrar, within 30 days of its passing. Such alteration should not, in any way, increase the liabilities of its existing members.
Types of Articles
  1. Table F: If shares limit a company
  2. Table G: If a company is limited by guarantee
  3. Table H: If the guarantee and shares limit a company
  4. Table I: If it is an unlimited company having a share capital
  5. Table J: If it is an unlimited company not having share capital