KNOW YOUR LAW #4 - THE CONSTITUTIONAL DOCUMENT FOR COMPANIES

PROVISION COVERED	Section 4
CONCEPT COVERED	The Memorandum of Association, its significance and contents

THE CHARTER DOCUMENT:

The Memorandum of Association (“MOA”) can rightfully be termed as the constitutional document of every company. While the Companies Act attribute to the overall regulation and governance of all the companies domiciled in India on a collective level, the MOA finds prominence as the fundamental document with respect to every company at an individual level that regulates the conduct of companies.

IDENTITY OF THE COMPANY:

The MOA outlines the identity of a company and creates a well-defined boundary within which a company would operate. The MOA defines the very purpose of formation and existence of a company. The charter document also outlines the structure of a company in terms of the liability of its owners. The Supreme Court of India in the case of “Federal Bank Ltd v. Sagar Thomas & Ors. (2003)” stated that “A company registered under the Companies Act for the purposes of carrying on any trade or business is a private enterprise to earn livelihood and to make profits out of such activities.” The Companies Act outlines the economic structure known as a company for earning wealth but whereas the MOA expounds the activities which shall be undertaken through such medium known as company to earn wealth.

AFFIRMATIVE AND NEGATIVITY:

Bare character of the MOA could be termed as both affirmative and restrictive in nature. The MOA sets out the limitation of the powers of the company by which it is bound to act. It states affirmatively the powers bestowed to the company by the virtue of law and on the other hand it also negatively contemplates that the company shall do nothing beyond the ambit of power contained in itself.  

IMPORTANCE:

Section 2(56) of the Companies Act, 2013 defines MOA as “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.” This definition however does not outline the nature of such document. The MOA serves two purposes namely for making the investors as to how their funds are channelized and to assure the investors that their contractual obligation with the company falls within the objects mentioned in the MOA. MOA contemplate the relationship between a company and the stakeholders and decision of investors and stakeholders are primarily based on the MOA.

STRUCTURE OF MEMORANDUM:

Section 4(6) of the Companies Act, 2013 read with Schedule I to the Companies Act, 2013 outlines the prescribed five forms of the MOA which shall be applicable to different classes of companies which are summarised as below:

FORM	APPLICABILITY
Table A	Applicable in case of companies limited by shares
Table B	Applicable to companies limited by guarantee and not having share capital
Table C	Applicable to companies limited by guarantee and having share capital
Table D	Applicable to unlimited companies not having share capital
Table E	Applicable to unlimited companies having share capital

The law empowers companies to add, subtract or vary the contents of the charter document so long as the modifications or amendments as the case may be do not disturb the general structure of the MOA.

CONTENTS OF THE MEMORANDUM:

Section 4 of the Companies Act, 2013 outlines certain clauses that are to be mentioned in the MOA which are listed as below:

NAME CLAUSE:

A company incorporated under the provisions under company law being a legal person ought to have a name of its own through which it would contract. The MOA shall state the name of the company through which it operates and is known to the business environment. The name of company shall end with the last word as “Limited” in case of public limited company or “Private Limited” in case of private limited company.

REGISTERED OFFICE CLAUSE:

The MOA shall state the State in which the registered office of the company is domiciled in or is to be situated in. However, the company is not mandated to furnish the complete address of the registered office.

OBJECT CLAUSE:

The MOA shall establish the purpose for which a company is in existence. In other words, the MOA vide its object clause contemplates the areas of business which a company shall operate within. The Calcutta High Court in case of “Bhutoria Brothers Private Limited (1957)” stated that “One indispensable condition is that the Memorandum shall state the objects of the Company. Stating the objects of the Company in the Memorandum is not a mere legal technicality but is a necessity of great practical import. It is essential that the public who are called upon to subscribe to the capital of the company by purchase of its share should know clearly what are the objects for which they are paying and which they want to encourage.” From time to time, as business operations diverge and new lines of business are explored, the companies are at the liberty to alter their object clause to include such new line of business that the company shall function upon. The MOA does not state the exact activity that a company would undertake but rather object clause expounds the scope and nature of business activities within which a company shall operate. The Apex Court in “Lakshminarayan Ram Gopaland Son Limited v. The Government of Hyderabad (1954)” postulated that “The objects of an incorporated company as laid down in the Memorandum of Association are certainly not conclusive of the question whether the activities of the company amount to carrying on of business. But they are relevant for the purpose of determining the nature and scope of such activities.”

The objects subsumed under the MOA shall have a definitive and such objects mentioned shall not be vague. Care must be ensured by companies to avoid usage of general words in MOA as such words are often subject to various interpretations and shall often mislead the stakeholders. Manufacturing general words in MOA frustrates the very purpose of law that stakeholders dealing with the company through MOA are presumed to be aware of the business of company. Generic words discourage the investors and other stakeholders from understanding the exact nature of business that a company undertakes or wishes to undertake. The object clause of the MOA shall be sub-classified under the following categories:

·         The main objects for which a company is proposed to be established / established.

·         The other objects that supplement the attainment of main objects.

PURPOSE OF OBJECT CLAUSE:

Investors and other stakeholders cannot repose their interest measured in monetary / non-monetary terms in something which is uncertain and not visible presently. The MOA vide its object clause provides assurance to the investors as to where their funds would be deployed in and also provides assurance to the creditors who lend money to the company from time to time as to where their lending would be utilized in.

LIABILITY CLAUSE:

The MOA shall outline the liability of the members of a company. In case of company limited by shares, the MOA shall outline the character of the company in terms of liability of members. The constitutional document shall in case of company limited by shares state that the liability of the members shall stand accounted and limited to the extent of shares held by the members and in case of company limited by guarantee, the MOA shall state that the member shall undertake to contribute by the virtue of his / her guarantee to contribute towards the assets, debts, charges and such expenses in event of winding up of the company.

CAPITAL CLAUSE:

The capital clause of MOA postulates the capital structure of the company. The MOA of a company shall outline the maximum capital of a company which it shall issue and get registered with i.e. authorised capital of the company with clear division of each class of securities that shall be issued thereunder with fixed amount against each class of securities.

SUBSCRIPTION CLAUSE:

The MOA shall state the number of shares which the subscribers have agreed to subscribe. The MOA shall vide its subscription clause elucidate the details of the subscribers who have agreed to contribute towards the capital of the company and the number of shares agreed to subscribe against their particulars.

SUBSCRIPTION – NON INVOLMENT OF TRANSFER AND ALLOTMENT:

It is imperative to note that subscription is the agreement to contribute towards the capital of the company prior to the incorporation of the company and does not involve membership in the company by the virtue of transfer or allotment of securities. The Calcutta High Court in “Smt. Nupur Mitra & Anr. v. Basubani Pvt. Ltd. & Ors. (1999)” held that “each subscriber to the memorandum of association irrevocably agrees to take from the company the number of shares placed opposite to his signature, and he becomes a member ipso facto whether his name is entered in the register or not and that in the case of subscribers to the memorandum of association neither allotment nor entry on the register is necessary.” Interpretation can be also made out from the case of “Sri Gopal Jalan & Company v. Calcutta Stock Exchange Association Limited (1963)” wherein the Supreme Court opined that “Subscribers become shareholders without either the mode of transfer or by the mode of allotment. What in fact the law does in their case is that their subscription to the Memorandum takes the place of an application for shares and the registration of the Memorandum operates as the acceptance of the application by the Company.” The subscription to MOA signifies the creation of a securities rather than allotment or transfer wherein the securities are already in existence.

CHANGE IN STANCE OF LAW?

The intention behind existence of any law or provision thereunder can be attributed to the intention of the legislator. Though the Companies Act has underwent several reforms, recast several times, repealed and amended from time to time, the very structure of the MOA as outlined above has been undisturbed since time of inception. The very intent of the legislator has been to craft the MOA in such a way so as to disclose the complete character of a company including its very identity to all concerned stakeholders completely. The structure of the MOA found its roots under Section 6, 7 and 8 of the Indian Companies Act, 1913 respectively. An extract of Section 6 of the 1913 Act is reproduced below for immediate reference:

6. In the case of a company limited by shares-

(1) the memorandum shall state-

(i) the name of the company, with 'Limited' as the last word in its name:

(ii) the province in which the registered office of the company is to be situate;

(iii) the object of the company;

(iv) that the liability of the members is limited;

(v) the amount of share capital with which the company proposes to be registered, and the division thereof into shares of a fixed amount;

(NOTE: The concept dealt in Section 4 with respect to inter alia name reservation and its process along with Doctrine of Ultra vires shall be posted under post #5 of Know Your Law blog series)

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