Discuss the importance of Memorandum of Association. Explain

Discuss the importance of Memorandum of Association. Explain in brief its compulsory clauses.

State the different clauses of a memorandum of association of a company. Why is the memorandum called the charter of a company.

What do you understand by Memorandum of Association?

Ans.

MEANING AND DEFINITION OF MEMORANDUM OF ASSOCIATION

The Memorandum of Association is the constitution of the company. It is regarded as its principal document. It is a Charter of the company which explains the boundaries of the affairs of the company. A company cannot go beyond the limits specified in Memorandum of Association.

Following are the ‘definitions’ of Memorandum of Association According to Lord Cairns, “The Memorandum of Association of a company is its charter and ‘defines’ the limitation of the powers of a company.” According to Lord Macmillan, “The purpose of the Memorandum is to enable the shareholders, creditors and those who deal with the company, to know what is its permitted range of enterprise.”

According to Section 2(56) of the Companies Act, 2013, Memorandum means the memorandum of association as originally framed or as altered from time to time in pursuance of any previous companies law or ot this Act.”

The company functions within the limits given by Memorandum of Association. The Memorandum can be altered according to the provisions of the Companies Act, 2013.

IMPORTANCE OF MEMORANDUM OF ASSOCIATION

Or

FUNDAMENTAL DOCUMENTS

A company cannot be formed unless filing memorandum of association. Due to it memorandum of association is prepared by every company and is filed with Registrar of Companies. It is a document of great importance in relation to the proposed company. It is the charter of the company. It is the most significant document of a company. It is called birth giving and life document of a company. It is coma^ory to be filed with the ROC for getting the company registered. It is compulsory for every type of company whether public or private. Memorandum of association is the constitution of the special features makes the Memorandum the Charter or compulsory document of a company:

(1) Original Document – To get the company incorporated, it is compulsory to prepare and file Memorandum of Association. In the absence of it a company cannot be incorporated. That is why it is sometimes called a life giving document or original document.

(2) Clarification of Members’ Risk – The object clause of Memorandum of Association clarifies the risk of its members. If the object clause is in detail the risk of members became less.

(3) Unalterable Charter – It is an unalterable charter of the company. It is not an easy task to alter it. If the company desires to alter it, it has to follow various legal formalities and provisions given in law and in Companies Act, 2013. But in certain circumstances it can be altered to an extent enough it is difficult practically.

(4) Limitation of Working Area – It chart out the limits of object clause. The company is required to follow its provisions strictly.

CONTENTS OR CLAUSES OF MEMORANDUM OF

ASSOCIATION

Following are the contents of Memorandum of Association –

(1) Name Clause of the Company – This is very important clause of the Memorandum of Association. It contains the name of the company. While selecting the name utmost care is necessary. Whatever may be the name of the company but it should end with last words ‘Limited’ or ‘Private Limited’. Though the company is free to choose the name, but Section 4 of the Companies Act, 2013 imposes some restrictions which must be adhered.

(i) The name of the company must not be too identical or similar to the name of another existing company.

(ii) The name chosen must not be undesirable in the opinion of the Central Government. If the company is incorporated with this undesirable name. It may change by passing a general resolution and prior permission of the Central Government.

Hence it is advisable to the promoters of the company to give prior application to the Registrar of the companies with regard to the name of the company to know whether the selected name is available or not.

According to Section 8 of the Companies Act, 2013 if the company is incorporated for charitable purposes and in not for profit making, for these companies, last word Limited is mandatory.

Section 12(3) of the Companies Act, 2013 says that in case of one person company the words ‘One Person Company shall be mentioned in brackets below the name of such company wherever its name is printed.

(2) The Registered Office Clause – It gives the name of state in which registered office of the company will be situated. It determines the domicile and nationality of the company. This clause also known as domicile clause of the company.

Complete address of the registered office is not required in the; memorandum, though it is to be communicated to the registrar within 30 days of the registration of the company.

The registrar office of a company is very important place because it is the place where all communications and notices are to be sent and where all statutory books are kept.

The company shall get its name, address, Corporate Identity Number, telephone number, fax number, e-mail and website address printed in all its business letters, notices etc.

(3) The Objects Clause- It is most important clause of the Memorandum of Association. A company is not legally entitled to do any business other than that specified in its object clause. It protects the interest of shareholder as their money is invested only for the given objectives. It also saves the general public who deals with the company because they can know very well about the boundaries of the companies functions and its contracting capacity. If the company does any work which is not given in its object clause it will be regarded as ultra vires the company and person involved in such art will be responsible in their individual capacity to make good the loss.

Following points should be kept in mind while drafting the objects clause of a company:

(i) Objects must not be illegal.

(ii) It must not be against the provision the Companies Act.

(iii) It must not be against public policy.

(iv) It must be stated clearly and definitely.

(v) It must be sufficiently explained.

The Companies Act, 2013 provides –

(i) Objects for which the company is proposed to be incorporated, and

(ii) Any matter considered necessary in furtherance thereof.

(4) The Liability Clause- This clause states about the liability of members. In case of a company limited by shares, liability of the members is limited to the amount remaining unpaid or uncalled on the shares held by them. If a company is limited by guarantee the liability must be limited to the maximum amount that they have undertaken to pay in case winding up of the company.

(5) The Capital Clause – This clause of the Memorandum must state the amount of share capital with which the company is to be registered and its division into shares of a fixed amount. The capital with which a company is registered is called the “Registered”, “Authorized” or “Nominal”, capital.

(6) The Association or Subscription Clause – Under this clause, signatories to the Memorandum express their desire and agreement to form a company. They also agree to take the number of shares maintained against their respective names. Each subscriber to the Memorandum has to take atleast one share.

There must be atleast seven signatories in case of a public company and atleast two in case of a private company. The subscribers usually deemed as first directors of the company.