effect of memorandum of Association and articles of association

Every registered company in India is required by law to have a Memorandum of Association and an Agreement of Association. However, while business registration is not required by law, it does come with a number of advantages. The Memorandum of Agreement (MoA) and the Articles of Association (AoA) are legal agreements that contain a company’s details, fundamental capital structure, and operating procedures.Every company has its own way of doing things. They are jolted down in a company in the shape of MoA and AoA. It functions as a constitution and lays forth the business’s core parameters, such as what the firm does and who the major authority agents are, such as directors and promoters. The clause that governs a company’s external management is found in the Memorandum of Agreement. The AoA contains the rules and regulations that manage the internal management of the company.

The Memorandum of Association (MOA) is the most important and mandatory document for a company’s formation. At the time of incorporation, it must be registered with the ROC (Registrar of Companies). It specifies the firm’s objectives, scope, powers, and operating area, all of which the corporation is prohibited from violating. As a result, it establishes the company’s boundaries.  It must be carefully prepared because the corporation will not be able to go back on it afterwards. Furthermore, it can only be altered with the knowledge of the Central Government through a laborious procedure in the Annual General Meeting. It cannot be changed after the fact.

The Articles of Association (AOA) is a secondary document that is created only after the Memorandum of Association (MOA). It establishes the company’s administration and management norms and regulations. The articles define the members’ rights, obligations, powers, and duties, as well as information about the company’s accounts and audit.

Although it is generally recommended that each firm have its own article, a company limited by shares can use Table A for the same purpose. Its purpose is to steer the company’s operations and governance.

WHAT ARE MEMORENDUM OF ASSOCIATION & ARTICLES OF ASSOCIATION?

Memorandum of Association is abbreviated as MoA, and Articles of Association is abbreviated as AoA. They protect and organise your firm by assisting in the formation of the organization’s identity, working approach, and objective.

Memorandum of Association

As per the Companies Act, 2013, a memorandum covers the following essentials;

  1.  Name Clause

Is normally written in the article’s first paragraph. This is the name under which the business operates. Indicates whether the company is a private or public limited company.

Now, there are certain key points to keep in mind while choosing the name of the company. They are;

• Having a distinct name that is not the same as an existing business.

• There are no derogatory terms, implications, or “sensitive” expressions that could offend any cultural or religious group.

• If you do not have permission, don’t mention any ties to the government or local authorities.

  •  Situation Clause

This clause specifies the state in which a company’s registered office is located. If the registered office address needs to be changed in the future, it must be updated.

  •  Object Clause

This clause establishes the reason for the company’s formation. This isn’t generally changed or altered. As a result, the design of this section is quite important and should be done with care and knowledge. The corporation is prohibited from engaging in any activity that is not covered by the MOA’s object clause. Such acts are referred to be Ultra Virus (beyond abilities) and are not ratified by members.

  •  Liability Clause

This section establishes the company’s members’ liability. Shares or a guarantee can be used to limit it. In the situation of limitless responsibility, this provision is omitted.

  •  Capital Clause

This clause establishes the maximum amount of capital that a corporation can raise, as well as the allocation of that cash into shares. Only the capital amount provided in this section can be secured by the corporation. Shareholders are given particular rights and advantages, which are detailed here.

  •  Subscription Clause

This clause contains the initial subscribers’ names, addresses, and contact information. At least two people are required to form a private limited business. A public limited company must have at least seven members. These subscribers are required to take at least one share.

ARTICLES OF ASSOCIATION

This is a supplementary document that defines the internal workings of the organisation, as well as their rights, responsibilities, and management. It contains a company’s bylaws as well as other rules and regulations. The AoA’s content is consistent with the MoA and the Companies Act.

Contents of Articles of Association:

  1.  Details Regarding The Shares Of A Company

• Share classes and valuation.

• Share transfer, conversion, lien, and forfeiture.

• The rights associated to the shares, as well as the laws governing capital changes.

• Minimum subscription requirements and rules for converting fully paid shares into equity.

  • Details Regarding Directors’ Rights, Duties, And Their Removal

Directors’ appointment, powers, and duties. Borrowing rights of the Board of Directors and the procedure to remove them.

  •  Details Regarding Holding And Conducting Meetings

Meetings are held, minutes are kept, and announcements are sent out. It also specifies voting rights and proxy regulations, such as the quorum requirement and the percentage of votes with directors. It discusses accounting and auditing, as well as the appointment and remuneration of auditors.

  •  Process And Rules Regarding Winding Up Of The Company

If it is in the best interests of the company, changes to the articles can be made. However, this should not conflict with any third-party agreements. This is done by passing a special resolution and filing a copy with the Registrar within 30 days of the resolution’s passage. Such a change should not enhance the existing members’ liabilities in any manner.

DIFFERENCE BETWEEN MoA & AoA

MoA

  1. Defines the constitution of a company.
  2. Defines the objectives, powers and constraints of the organization.
  3. Six clauses are mandatory.
  4. It is a mandatory document for all the companies.
  5. Filing at the time of company registration.
  6. A supreme legal document for company and subordinate to Companies Act.
  7. A dominant document that helps drafting AoA.
  8. Cannot be amended with retrospective effect.
  9. Section 2 (28) of the Companies Act 1956 defines it.
  10. It is subordinate to the Companies Act.
  11. Defines the objectives of a company.

AoA

  1. A set of rule and regulations governing the company’s working.
  2. Describe powers, duties, rights and liabilities of individuals associated with the organization.
  3. Its drafting is as per the requirements of the organization.
  4. Can opt for Table A instead of AoA in public limited company by shares.
  5. Filing at the time of company registration is optional.
  6. A subordinate to the MoA.
  7. Any article in this document that contradicts to the MoA is considered null and void.
  8. Can be amended retrospectively.
  9. Section 2 (2) of the Companies Act 1956 defines it.
  10. Subordinate to the Companies Act, as well as is memorandum.
  11. Defines regulations with which the company will achieve objectives defined in MOA.

BINDING EFFECT OF MOA AND AOA

Section 10 declares

“Subject to the provisions of this Act, the Memorandum and Articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the Memorandum and of the Articles.”

The articles of a company do not have the force of a statute.[1]

The Sections’ aim is to make the memorandum and articles have contractual force. Only the precise bounds of that influence, as well as the people it is supposed to protect, are unknown. The following propositions can be used to describe the law:

1. Binding the company to its members:

The members owe it to the corporation to observe and follow the articles. In the event that the corporation violates the articles, members can seek an injunction against the company to prevent it from doing so.

Members can sue to prevent a corporation from engaging in ultra-vires or illegal conduct, as well as acting on a resolution acquired through deception or in violation of the Articles.

The case of Wood v Odessa Waterworks Co.[2] provides an illustration of binding of articles on the company to its members. The articles of the Waterworks Co. provided that ‘the directors may, with the sanction of the company at general meeting, declare a dividend to be paid to the members’. Instead of paying the dividend in cash to the shareholders a resolution was passed to give them debenture bonds.

In an action by a member to restrain the directors from acting on the resolution, the Court held: “The question is whether that which is proposed to be done in the present case is in accordance with the articles of association of the company.

Those articles provide that the directors may, with the sanction of a general meeting, declare a dividend to be paid to shareholders. Prima facie that means to be paid in cash. The debenture bonds proposed to be issued are not a payment in cash.” Accordingly the directors were restrained from acting on the resolution.


[1] Hill Properties Ltd v. Union Bank Of India (2014) 1 SSC 635; (2014) 1 SCC (Civ) 513

[2] Wood v Odessa Waterworks Co (1889) 42 Ch D 636.

2. Binding on members in their relations to the company:

An article of Association is a statutory covenant that binds the members to the company. It is a “compact of the most sacred character” between the firm and each member.

Any money payable to the company under the Memorandum or Articles shall be considered a debt owed to the company by that member. Articles are taken to be signed and agreed upon by each member to be followed. Members are bound by the articles just as if every one of them had contracted to conform to them. A company can sue its members for the enforcement of its Articles as well as for restraining their breach. A case in point is:

Borland’s Trustees v. Steel Bros. & Co. Ltd. (1901)[1]:

The company’s articles of association stated that in the event of a member’s insolvency, his shares would be auctioned at a price determined by the directors. Borland was forced to declare bankruptcy. His bankruptcy trustee, who intended to sell the shares for their full value, said he wasn’t bound by the articles. He was found to be obligated to follow the company’s articles of incorporation.

3. Binding between members:

The articles’ contractual force is restricted to concerns deriving from the members’ relationship as members of the corporation and does not extend beyond that relationship. The articles serve as a contract between the company and each of its members. The provisions do not govern their rights in and of themselves.

Such rights can only be enforced by or against a member through the company. However, this is not without exception. Courts have extended the articles to constitute a contract between individual members qua members without joining the company as a party to the action. The case of Rayfield v Hands[2]  is a pointer to the issue. Rayfield was a shareholder in a company. He was required to inform the directors in the event of his intention to transfer the shares. The directors were required to take the shares at a fair value. Rayfield informed the directors in accordance with the articles. The directors contended that they were not bound to take and pay for Rayfield’s shares and the articles could impose no such obligation on them. The court set aside this argument by treating the directors as members and compelled them to take Rayfield’s shares at a fair value. The court also held that it was not necessary for Rayfield to join the company for bringing a suit against the directors.


[1]Borland’s Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279

[2] Rayfield v Hands [1960] Ch 1

4. No binding in relation to the outsiders:

The company’s memorandum and articles do not establish a contract with a third party. The firm, as well as its members, are not obligated to outsiders to carry out the terms of the memorandum and articles. Consider the following scenario:

In Browne v La Trinidad[1], the articles of the company contained a clause to the effect that Browne should be a director and should not be removable. He was, however, removed and had brought an action to restrain the company from excluding him.

Browne and the corporation did not have a contract, according to the court. Even if the articles purport to provide him specific rights, no outsider can enforce them against the firm.

As a result, an outsider cannot use the Articles to bring a claim against the firm. Even if a member has certain rights in a capacity other than that of a member, those rights cannot be enforced against the company. The member would be an outsider for those ‘outside rights’. The leading case is that of Eley v Positive Government Security Life Assurance Co.[2]

The articles of a company contained a clause that Eley would be the solicitor of the company and would not be removed except for misconduct. He became member in the company also. He acted as solicitor of the company but the company removed him. He brought an action against the company for breach of the articles.

His suit was dismissed. The Court held, “An outsider to whom rights purport to be given by the Articles in his capacity as such outsider, whether he is or subsequently becomes as member, cannot sue on those articles to enforce those rights”.


[1] Browne v La Trinidad (1887) 37 Ch D 1

[2] Eley v Positive Government Security Life Assurance Co Ltd 1 Ex D 88(1875)

BIBLIOGRAPHY

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