EFFECT OF MEMORANDUM AND ARTICLES OF ASSOCIATION

Memorandum of Association and Articles of Association are the two fundamental documents essential in the process of incorporation of Company. The very First step for starting a business is giving it a legal identity by registering a company. Companies are governed by legal documents that contents internal rules and regulations for conducting affairs of the entity while doing the business. The Memorandum of Association and Articles of Association, also known as the company charter documents, these documents define the very objectives for which a Company is registered and the means and plan of action for achieving and regulating those objectives. describes the scope of work and powers of internal management of the company.

These preliminary documents must be submitted while incorporating a company Along with prescribed forms, the MOA and AOA should be filed with the Registrar of Companies. The Memorandum and Articles of Association are of paramount importance which states the company’s constitution. They are indispensable, and the foundation of a business is constructed on them.

As we all know that Company is incorporated with certain minimum number of persons who come together with a common aim and with primary understanding about liability of each of them, capital contribution by each of the members, and an undertaking about subscription to number of shares as might have been agreed inter se. A Memorandum of Association of a Company precisely describes all details constituting a Company.

Memorandum as it is often called as a Charter of Company. A Charter in its correct sense means: Grant of authority or rights, stating that the granter formally acknowledges the prerogative of the recipient to exercise the rights specified. It is implied that the granter retains superiority, and that the recipient admits a restricted status within the relationship, and it is within that sense that charters were historically granted, and that sense is kept back in modern usage of the term.

If the aforementioned definition is seen in the context of Memorandum of Association, it is such a document which comprises of all the objectives, rights, liabilities, mentioned therein, in relation to incorporate proposed entity and which got registered itself with due process of law, acceptable and binding on all those subscribing to such Charter and all those who deal with the Company formed.

A Memorandum of Association broadly has following clauses:

  1. Name Clause: This clause states name of the Company with which it is incorporated with Ministry of Corporate affairs through Registrar of Companies.
  2. Domicile Clause: This clause describes the jurisdiction of Regulatory authorities, under which the Company’s registered office falls.
  3. Objects Clause: This clause gives information about the objects for which Company is incorporated.
  4. Liability Clause: This clause indicates us about limit on monetary liability of each member towards Company.
  5. Capital Clause: This clause defines the maximum capital which Company can raise at given point of time.
  6. Subscription Clause: This clause indicates and have the Declaration and Undertaking given by all the subscribers to Memorandum of Association to the effect they have agreed to incorporate and take up shares agreed to subscribe and to pay for the same.

ARTICLES OF ASSOCIATION (AOA) OF A COMPANY

The companies’ rules, bye-laws, and regulations that regulates conduct of the company and its internal affairs. AOA is drafted in a manner compliant with memorandum which governs it. Articles are perquisite for every business since it is essential to establishing its internal rights, operations, management, and responsibilities. The AOA should be in accordance with the MOA and the 2013 Companies Act. Articles of association can have the stricter provisions than the Act itself provided it shall not contravene the Act. In case of contradiction Companies Act will prevail.

Contents of AOA

  • Adoption of preliminary contracts.
  • Share capital its terms and rights of the shareholder.
  • Voting rights of the member of the company.
  • The allocation of shares.
  • Calls on securities.
  • Lien on the shares.
  • Share transfers and transmissions.
  • Terms of Share forfeiture.
  • Changing the capital.
  • Buy back of shares its guidelines and resources for the same.
  • Timelines to issue Certificates of shares.
  • The exchange of shares for stock as per the prescribed conditions of issue.
  • Terms for appointing proxy and there voting rights.

 BINDING EFFECT OF ARTICLES OF ASSOCIATION AND MEMORANDUM OF ASSOCIATION

The Memorandum and Articles, when gets registered, “shall, subject to the specified provisions in the Act, shall bind the Company and the Members thereof. It covenants on both parts to observe all the provisions of the Memorandum and of the Articles. It demonstrates a contractual relationship between the Company and its Members, likewise between Members and the Company. Articles give out a binding agreement between a firm and its members regarding their obligations and rights as members. To execute and to restrict any violation of the articles, either a member or the company may file a lawsuit.

1. Binding the company to its members:

The corporation has a duty to uphold and abide by the articles in front of the members, they may ask for an injunction against the firm if it violates the articles and to prevent the company from continuing its violation. Members may also take the organization to court to have their proclaimed personal rights provided under the Articles, such as the right to receive split, enforced. Though, the provisions of the Articles may only be enforced by a shareholder or a member of the company, in that capacity alone and not in any other capacity.

The Wood v. Odessa Waterworks Co. case serves as a precedent of how the articles are binding on the company’s members. An ordinary general meeting was conducted to declare dividends which then put forth to substitute dividend with debenture bonds (a means which it was claimed was not allowed by the Company’s articles of association). The applicants, a shareholder opposed to this resolution, applied for an injunction to prevent the dividends being paid out as proposed by the resolution. It describes that “The articles of association create a contract not only between shareholders and the company, but between each individual shareholder and every other” and injunction granted in this case also given protection to the minority shareholders.

2. Articles and Memorandum binding on members in their relations to the company:

Every member of the company is compelled to other under a statutory covenant by the “compact of the most holy character” known as the article of Association. Any money payable by the member to the company in accordance with the memorandum or the articles is considered a debt owed by him to the firm. Every member is presumed to have signed the articles and committed to abide by them. The articles bind the members just as if each member had agreed to act in accordance with the provisions laid down by them. A firm has the right to bring legal action against its members in order to enforce its articles and prevent violations.

Borland’s Trustees v. Steel Bros. & Co. Ltd. (1901) is a case in point. The company’s articles of association have outlined that in the event of a member’s bankruptcy, the shares would be sold at a price as may be decided by the directors. Borland went out of business. His bankruptcy trustee argued that he was not constrained by the articles since he wished to sell these shares for their full worth. It was resolved that he had to follow the terms of the company’s articles.

3. Binding between members:

The contractual effect of the articles prevents the disputes arising between the members’ members of the company can’t go beyond the provisions mentioned therein. A contract between each member and the company is based on the articles. The rights mentioned in the articles to be enforced through company it may be by or against a member. This is not always the case. However, the court have observed in various cases that individual members can be party to the suit without adding the company as a third party. The Rayfield v. Hands case from 1960 precedent on this subject.

Rayfield owned shares in a business. If he proposed to transfer those shares, he was required to intimate the directors. The shares were to be purchased by the directors at fair market value. As per the prescribed provisions of the articles, Rayfield noticed the directors. The directors argued that the articles could not impose such a responsibility on them and that they were not bound to take and pay for Rayfield’s shares. After hearing both the sides, the court dismissed the director’s argument as members and ordering them to accept Rayfield’s shares at fair market value. The court held that Rayfield did not have to be a part of the corporation in order to sue the directors.

4. Not binding with respect to the outsiders:

There is no contract between the company and the outsider as a result of the memorandum and articles. The provisions of the memorandum and the articles are not subject to external obligations on the part of the firm or its members. In Browne v. La Trinidad, a clause in the company’s articles prescribes that Browne should be a director and should not be subject to removal from his office. He was fired from the position and has filed a lawsuit to prevent further exclusion by the business. It was held that Browne and the business did not have a contract. Articles cannot be enforced by a third party even if they appear to grant the outsider particular rights.

DOCTRINE OF INDOOR MANAGEMENT

The doctrine of ‘constructive notice” makes an effort to safeguard the company against the third party, the rule of indoor management serves to protect the outsiders against the company.

As described in this doctrine, and stated in Royal British Bank v. Turquand, (1856) 119 E.R. 886, people dealing with a company having satisfied themselves that the transaction put forward is not in its nature inconsistent with the memorandum and articles, are not bound to inquire the regularity of any internal proceedings. That is, while persons contracting with a company are presumed to be aware of the contents of the memorandum and articles, they are entitled to assume that the provisions mentioned in the articles have been observed by the authorities of the company. It is not a part of the duty of an outsider to see that the company carries out its own internal management.

EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT

  1. Where the outsider had knowledge of irregularity in the affairs of the company.
  2. No knowledge of memorandum and articles
  3. Forgery
  4. Negligence
  5. This doctrine will not apply where the question is in concern to the very existence of an agency. In Varkey Souriar v. Keraleeya Banking Co. Ltd. (1957) 27 Com Cases 591 (Ker.), the Hon’ble Kerala High Court observed that the ‘doctrine of indoor management’ can’t apply where the question is not one as to scope of the authorities power exercised by an apparent agent of a company but is with regard to the very existence of the agency.
  6. Indoor Management is not applicable in a case where a pre-condition is required to be fulfilled before company itself can exercise a particular power. In simple terms, the act done is not merely ultra vires the directors/ officers but ultra vires the company itself – Pacific Coast Coal Mines v. Arbuthnot (1917) AC 607.

CONCLUSION

The articles of association and the memorandum of association are most important legal documents. They facilitate the management of the business and aid in its simplification for conducting the affairs of the company. The provisions made there under clearly improve effectiveness and transparency in the Functioning. As a result, they plays vital role in the operations of any private or public limited corporation.

[i] REFERENCES


[i] https://thefactfactor.com/tag/rayfield-v-hands/

Companies act 2013 Bare Act Rules and regulations made thereunder

Aishwarya Says:

Law students often face problems, which they cannot share with their friends and families. We have started a column on our website Student’s Corner. In this column we are talking to several law students about the challenges that they face. Students who are interested in participating in the same, can fill this Google Form.

IF YOU ARE INTERESTED IN PARTICIPATING IN THE SAME, DO LET ME KNOW.

We do conduct several Courses, Quizs and Webinars, Click here to registerDo follow me on FacebookTwitter  Youtube and Instagram.The copyright of this Article belongs exclusively to Ms. Aishwarya Sandeep. Reproduction of the same, without permission will amount to Copyright Infringement. Appropriate Legal Action under the Indian Laws will be taken.If you would also like to contribute to my website, then do share your articles or poems at secondinnings.hr@gmail.comIn the year 2021, we wrote about 1000 Inspirational Women In India, in the year 2022, we would be featuring 5000 Start Up Stories

Join our Whatsapp group for Legal Job Openings

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Create a website or blog at WordPress.com

Up ↑

%d bloggers like this: