MOA, AOA and
DOCTRINES
Dr. HINA KAUSAR
MEMORANDUM OF ASSOCIATION
Memorandum of association for a company is the document which
contains the rules regarding constitution and activities of the company. It is a
fundamental charter of the company.
It defines the extent of powers of the company, beyond that it cannot go. It is a
document filed at the time of incorporation.
It is a public document i.e. any interested public can get a copy on payment of
prescribed fees.
The memorandum of association is a document of great importance in relation to
the proposed company. It lays down the area of operation of the company. It also
regulates the external affairs of the company in relation to outsiders. Its purpose
is to enable the shareholders and those who deal with the company to know what
is permitted range. It not only shows the object of the formation of a company,
but also the utmost possible scope of it.
Importance of Memorandum of Association
Memorandum of the Association is the most essential document for a company
due to the following reasons:
i. Unalterable Charter: The provisions of Memorandum of Association
cannot be changed without adopting a special resolution passed by seventy
five percent majority.
ii. Basis of incorporation: Memorandum of Association is the basis of
incorporation and a company cannot be registered without filling this
document. It is basis of incorporation of a company.
iii. To determine the working limits of the company: It determines the limits
of a company’s activities. Any activity outside the scope of the memorandum
will be ultra-vires and void. Even the whole body of members cannot make it
valid and binding for the company. This is known as the doctrine of ultra-
vires.
iv. To determine the relations between company and others: It enables
outsiders to know whether the company is authorised to enter into a particular
transaction.
v. Informs the name, address, objects and capital: In its external
appearance, every outsider can easily know some important and common
points of information about the company through the Memorandum of
Association.
Definition of MOA
Section 2(28) of the Companies (Amendment) Act, 2013 defines
“Memorandum” but the definition does not throw any light on the scope, use
and importance of the Memorandum of Association in a company.
Lord Cairns, in the leading case of Ashbury Railway Carriage co. V. Riche
observed that, “The Memorandum of Association of a company is its charter
and defines the limitation of the powers of a company”.
Purpose of Memorandum of Association
The purpose of memorandum is two-fold:
1. The prospective share holders shall know the field in which, or
the purpose for, which their money is going to be used by the
company and what risk they are undertaking in making that
investment.
2. The outsiders dealing with the company shall know with
certainty as to what the objects of the company are and as to
whether the contractual relation into which they contemplate to
enter with the company is within the objects of the company.
Contents of Memorandum of Association
According to the Companies Act, the Memorandum of Association of a company must
contain the following clauses:
Name Clause – The name of the company should be stated in this clause. A company is
free to select any name it likes. But the name should not be identical or similar to that of
a company already registered. It should not also use words like King, Queen, Emperor,
Government Bodies and names of World bodies like U.N.O, W.H.O, World Bank etc. if
it is a public limited company, the name of the company should end with the word
“Limited” and if it is a private Limited Company, the name should end with the words
“Private Limited”.
Registered Office Clause: In this clause, the name of the State where the company’s
registered office is located should be mentioned. Registered office means a place
where common seal, statutory books etc. of the company are kept. The company
should intimate the location of registered office to the Registrar within thirty days from
the date of incorporation or commencement of business.
Objects Clause-The most important clause of memorandum of association is
the object clause because it sets out the purpose for which the company is
formed and the kind of activities or business it intends to carry on. The
importance of objects clause lies in the fact that it determines the purpose and
the capacity of the company, besides its spheres of activities. The company
should confine its activities within its stated objects and not beyond the object
clause.
Liability Clause-This clause states the liability of members of the company.
The liability may be limited by shares or by guarantee.
Capital Clause -This clause mentions the maximum amount of capital that
can be raised by the company. The division of capital into shares is also
mentioned in this clause. The company cannot secure more capital than
mentioned in this clause.
ALTERATION OF MEMORANDUM
The alteration of the memorandum is possible only by strictly
following the procedure laid down in the Act :-
Alteration of a name clause
The name of a company can be changed by passing a special
resolution and with approval of central govt.
Alteration of registered office clause
If the shift of office is within local limits, i.e. from one place to
another place in the same city , town or village that can be done by
giving a notice of change to registrar.
If the shift is outside local limits, a special resolution has to be
passed.
If the shift is from the jurisdiction of one registrar to another’s the
special resolution should be confirmed by the regional director of the
state. (New Sec 17 A Amendment Act 2000)
The alteration shall not take effect unless the resolution is confirmed
by the Central Government.
Alteration of object clause
The alteration of object clause is subject to so many restrictions. A company may change its
objects for the following purposes;
To carry business more economically or more efficiently.
To attain its main purposes by new or improved means.
To enlarge or change local area of operation
To restrict or abandon any of its objects specified in the memorandum.
To amalgamate the company with any other company.
to sell or dispose of the whole or any part of the undertaking of the company.
The Company may alter its objects and it shall be effective only after it is approved by
special resolution of the members in general meeting.
Alteration of liability clause
Liability clause cannot be altered so as to make the liability of
members unlimited.
Alteration of capital clause
The procedure for the alteration of share capital and the power to
make such alteration are generally provided in the Articles of
Association.
Doctrine of Ultra Vires
The phrase Ultra vires is a combination of Latin words which refers to
“beyond the powers”. The doctrine of ultra vires implies that the company
should confine its activities within its stated objects. Thus it is meant to restrict
the powers of the company to its object clause.
An act, which is ultra vires, is void and does not bind the company. It therefore
follows that neither the company nor the other contracting party can sue each
other for ultra vires acts.
An act otherwise ultra vires cannot be made valid even if all the members of
the company assent to it. The doctrine of ultra vires is well illustrated by the
House of Lords in Ashbury Railway Carriage & Iron Co. v. Riche ((1875) LR
7 HL 653).
The objects of the company in this case as defined in the memorandum stated that the company
was established to sell, or lend on hire, railway carriages and wagons and all kinds of railway
plants etc. and to carry on business of mechanical engineers and general contractors.
The company entered into a contract with Riche, a firm of railway contractors, to finance the
construction of a railway line in Belgium. The company however repudiated the contract on the
ground that it was ultra vires the company.
Consequently, Riche brought a suit for damages and breach of contract against the company. His
contention was that the said contract was well within the term "general contractors" used in the
memorandum and was, therefore, within the powers of the company. That apart, the said contract
had been ratified by a majority of shareholders.
The House of Lords, however, ruled that the contract was ultra vires and therefore, null and void.
Lord Cairns LC observed: "The subscribers are to state the objects for which the proposed company is to
be established and then the company comes into existence for those objects only. Such a statement has a
two-fold operation. It states affirmatively the ambit and extent of powers of company and it states
negatively that nothing shall be done beyond that ambit, and that no attempt shall be made to use the
corporate life for any other purpose than that which is so specified.
The term "general contractors" must be taken to indicate the making generally of such contracts as are
connected with the business of mechanical engineers. If the term "general contractors" is not so
interpreted, it would authorize the making of contracts of any and every description...and would virtually
point to the carrying out of business of any kind whatsoever and would, therefore, be altogether
unmeaning.
Hence the contract was entirely beyond the objects in the memorandum of association.
In the next leading case of Attorney-General v Great Eastern Railway Co
((1880) LR 5 AC 473 (HL), the House of Lords observed that the doctrine of
ultra vires, as it was explained in the Ashbury case, should be maintained. But
it ought to be reasonably and not unreasonably understood and applied and
that whatever may be fairly regarded as incidental to the objects authorized
ought not to be held as ultra vires, unless it is expressly prohibited.
Thus, a company may do an act which is
(a) necessary for, or
(b) incidental to, the attainment of its objects, or
(c) which is otherwise authorized by the Act.
Though the Companies Act now requires that the companies
should state incidental objects also in their memorandum, but if
they are not so stated, they would be taken into consideration
while deciding the ambit of the company's activities or business.
In Forrest v. Manchester Railway Co.(1861), it was held that a
railway company having authority to keep steam vessels for the
purpose of ferry could use them for excursion trips on sea when
they were idle.
In Evans v. Brunner Mond & Co. Ltd (1921), a company
manufacturing chemicals by a resolution authorized its directors
to distribute $ 1,00,000 to universities and scientific institutions
for the furtherance of scientific research and education.
One of the members challenged this act of the company on the
ground that it was ultra vires. The court held that the distribution
of money for scientific research was conducive to the process of
the company as chemical manufacturers and therefore incidental
to the company's main object, hence intra vires and valid.
The doctrine of ultra vires was applied for the first time in India
in Jahangir R. Modi v. Shamji Ladha (1866), wherein the
Bombay High Court held that purchase of shares in other joint
stock company by directors was ultra vires the memorandum of
company as the company had not authorized them to enter into
such deals.
The Supreme Court of India upheld the doctrine of ultra vires in its
decision in A. Lakshamanaswami Mudaliar V. Life Insurance Company
(AIR 1963 SC1185).
In this case the directors of the company were authorized to make payment
towards the charitable or any benevolent object, or for any general public,
or useful objects."
In accordance with shareholder's resolution, the directors paid rupees two
lakh to a trust formed for the purpose of promoting technical and business
knowledge. The company's business having been taken over by Life
Insurance Corporation, it had no business left of its own to promote.
Supreme Court applying the doctrine of ultra vires, in this case held that
"the directors could not spend company's money on any charitable or
general object which they might choose. They could spend money for
promotion of only such charitable objects as would be useful for the
attainment of company's own objects.“
Mr. Justice Shah (afterwards C.J.) held, 'there must be proximate
connection between the gift and the company's business interest."
Similarly, in Parke v. Daily News Ltd (1962), where the directors of a
company proposed to distribute the money received on the sale of its
assets as compensation to the employees who had lost their jobs, the
court restrained the scheme.
Their motives may be laudable from the point of view of industrial
relations, but the law does not recognize them as a sufficient justification
to enable the majority to spend the money of the company.
Main objects rule of construction—The ultra vires doctrine confines corporate action within
fixed limits. The businessman has always endeavoured to evade the limitations imposed by
the doctrine on their freedom of action.
One of the methods of bypassing ultra vires is the practice of registering memorandum
containing a profusion of objects and powers.“
For example, in Cotman v Brougham (1918), the House of Lords had to consider a
memorandum which contained an objects clause with 30 sub-clauses enabling the company to
carry on almost every conceivable kind of business which a company could adopt.
Such an objects clause naturally defeats the very purpose for which it is there.
In a bid to control this tendency the courts adopted the "main objects
rule" of construction. The rule owes its origin to the decision in the
Ashbury case where it was held that the words "general contractors" must
be read in connection with the company's main business.
German Date Coffee Co, re, is another illustration of its application.
In Re German Date Coffee Co, (1882) 20 Ch. D. 169, the memorandum of a company
in its object clause stated that it was formed for working a German patent which
would be granted for manufacturing coffee from dates, for improvements and
extension of the said invention and to acquire and purchase any other invention for
similar purposes.
The intended German patent not having been granted, the Company purchased a
Swedish patent and established working on it in Hamburg.
Two shareholders of the company filed a petition for winding up of the company on
the ground that the main object for which the company was formed had become
impossible and, therefore, the court should order winding up of the company.
Accepting the contention of the petitioners, the court ruled that since the company's
real object to manufacture a substitute for coffee in Germany under a patent had
become impossible it was just and equitable that company should be wound up.
A brief analysis of the doctrine of ultra vires with regard to its consequences
would reveal that only those activities of the company shall be valid i.e., intra
vires, which are:
i. Essential for the fulfillment of the objects stated in the main object clause of
the memorandum:
ii. Incidental and consequential are reasonably within its permissible limits of
business, and
iii. Which the company is authorized to do by the Companies Act in the course
of its business.
All other activities of the company excepting the above shall be ultra vires and
therefore invalid.
Consequences of Ultra Vires
Transactions
The consequences, which may follow as a result of ultra vires transactions undertaken by the company,
are as under:
1. Injunction: The members can get an injunction to restrain the company from going ahead with a
transaction, which is ultra vires, the company
2. Directors may be held personally liable: The funds of a company can only be utilized for carrying
out its authorized objects. Accordingly, if a director of a company makes an ultra vires payment, he
can be held personally liable and compelled to refund the money.
3. Breach of warranty of authority: The directors being the agents of the company can do nothing
which the company itself cannot do under its memorandum of association, and, therefore, any contract
which is ultra vires the company will be void and without any effect whatsoever. As such, directors
must act within the limits of the company's powers. If they do not, they would be held personally liable
for breach of warranty.
4. Property acquired through ultra vires dealings: Where company's money
has been utilized in ultra vires dealings in order to acquire certain property, the
company's right over such property shall remain secure.
5. Ultra vires contracts: The ultra vires contracts are void ab initio and,
therefore, cannot become valid by ratification or by estoppels.
Articles of Association
Articles of Association are the bye-Laws or rules and regulations that govern the
management of Company’s internal affairs and the conduct of its business.
The Articles play very important role in the affairs of the Company. The Articles regulate
the internal management of the affairs of the company by way of defining the powers of its
officers and establishing a contract between the company and the members and the
members inter se.
They lay down the mode and the manner in which the business of the company is to be
conducted.
In framing Articles of Association care must be taken to see that regulations framed do not
go beyond the powers of the company itself as contemplated by the Memorandum of
Association nor should they be such as would violate any of the requirements of the
Companies Act, itself. All clauses in the Articles ultra vires the Memorandum or the Act
shall be null and void.
Relationship between Memorandum of Association & Articles of
Association
Articles of Association and Memorandum of Association are
closely related, as Articles of Association is supplementary to the
Memorandum of Association. Memorandum of Association lay
down companies’ objects and various powers it possesses; while
Articles of Association determine how those objects shall be
achieved and those powers exercised.
The memorandum and the articles can be read together in order to
remove an ambiguity or uncertainty.
Contents of Articles of Association
Articles generally contain provision relating to the following matters:
(1). share capital, different classes of shares of shareholders and variations of their rights
(2). allotment of shares
(3). calls on shares
(4). issue of share certificates and share warrants
(5). transfer and transmission of shares
(6). alteration of share capital
(7). borrowing power of the company
(8). rules regarding meetings
(9). voting rights of members
(10) . accounts and audit
(11). directors, their appointment and remuneration
(12). Winding Up.
Alteration of Articles of Association
Company has inherent right to amend its Articles of Association. The right to
alter or add to the Articles is expressly conferred by Section 31 of Companies
Act, 1956, which states that a company may alter its Articles, as often as
required, by passing a special resolution only.
A copy of special resolution authorising the alteration together with a printed
copy of the altered Articles must be filed with the Registrar within 30 days of
passing the said resolution.
LEGAL EFFECT OF MEMORANDUM AND ARTICLES
Memorandum and Articles, when registered bind the company and its members to the
same extent as if they have been signed by the company and by each member to
observe and be bound by all the provisions of the memorandum and of the articles.
1. Members bound to the company
Each member must observe the provisions of articles and memorandum. The articles
are the regulations of the company binding on the company and on its shareholders.
Shareholders, therefore, cannot among themselves enter into an agreement which is
contrary to or is inconsistence with the articles of the company.
2. Company bound to members
A company is bound to its members by whatever is contained in its articles and
memorandum. The company is bound not only to the “members as a body” but also to
the individual members as to their individual rights.
3. Members bound to members
The articles bind the members inter se, i.e. one to another as far as rights and
duties arising out of the articles are concerned. After the articles are registered,
they not only constitute a contract between the association or company on the
one hand and its members on the other, but also they constitute a contract
between the members inter se.
Doctrine of Constructive
Notice
The MOA and AOA of every company are registered with the Registrar of
Companies. The office of the registrar is a public office and consequently
the MOA and AOA become public documents. They are open and
accessible to all.
So, every person dealing or proposing to enter into a contract with the
company is deemed to have constructive notice of the contents of its
Memorandum of Association and Articles of Association means whether
he actually reads them or not, it is presumed that he has read these
documents and has ascertained the exact powers of the company to enter
into contract, the extent to which these powers have been delegated to the
directors and the limitations to such powers.
He is presumed not only to have read them, but to have
understood them properly. He is presumed to know the
contents of these documents. This kind of presumed notice is
called constructive notice.
Consequently, if a person enters into a contract which is ultra
vires the Memorandum, or beyond the authority of the
directors conferred by the Articles, then the contract becomes
invalid and he cannot enforce it.
Persons dealing with the company would be deemed to have
constructive notice as to who are the directors of the company.
The doctrine of constructive notice protects the company
against outsiders. They cannot take the plea that the company
did not informed them about the powers of the company.
In the case of Kotla Venkataswamy V. Chinta Ramamurthy, the
AOA required that all deeds should be signed by the managing
director, the secretary and a working director on behalf of the
company. The plaintiff accepted a deed of mortgage executed by
the secretary and a working director only. It was held that the
plaintiff could not claim under the deed.
Doctrine of Indoor
Management
The doctrine of indoor management follows from the doctrine of ‘constructive
notice’ laid down in various judicial decisions. The hardships caused to
outsiders dealing with a company by the rule of ‘constructive notice’ have
been sought to be softened under the principle of ‘indoor management’. It
affords some protection to the outsiders against the company.
According to this doctrine, after satisfying themselves that the proposed
transaction is intra vires the memorandum and articles, persons dealing with the
company are not bound to enquire whether the internal proceedings were
correctly followed. They are entitled to assume that the internal proceedings
relating to the contract are regular as per the memorandum and articles.
When an outsider enters into a contract with the company, he is presumed to
have knowledge of the provisions of memorandum and articles as per the
doctrine of constructive notice. But he is not required to go beyond that and to
enquire whether the internal proceedings required by these documents have been
regularly followed by the company. They need not enquire whether the necessary
meeting was convened and held properly or whether necessary resolution was
passed properly. They are entitled to take it for granted that the company had
gone through all these proceedings in a regular manner. This is known as the
Doctrine of Indoor Management.
The doctrine of indoor management is opposed to that of the
rule of constructive notice. The latter seeks to protect the
company against the outsider, the former operates to protect
outsiders against the company.
The rule of constructive notice is confined to the external
position of the company and therefore, it follows that there is
no notice as to how the company’s internal machinery is
handled by its officers. If the contract is consistent with the
public documents, the person contracting will not be
prejudiced by the irregularities that may beset the indoor
working of the company.
According to this doctrine, persons dealing with the company need not inquire
whether internal proceedings relating to the contract are followed correctly, once they
are satisfied that the transaction is in accordance with the memorandum and articles
of association.
The rule had its genesis in Royal British Bank V. Tarquand. The directors of a
company borrowed a sum of money from the plaintiff. The company’s articles
provided that the directors might borrow on bonds such sums as may from time to time
be authorized by a resolution passed at a general meeting of the company. The
shareholders claimed that there had been no such resolution authorizing the loan and
therefore, it was taken without their authority. The company was, however, held bound
by the loan. Once it was found that the directors could borrow subject to a resolution,
the plaintiff had the right to infer that the necessary resolution must have been passed.
The rule is based upon obvious reasons of convenience in
business relations. Firstly, the memorandum and articles of
association are public documents, open to public inspection.
But the details of internal procedure are not thus open to public
inspection. Hence, an outsider “is presumed to know the
constitution of a company; but not what may or may not have
taken place within the doors that are closed to him”.
Exceptions to Doctrine of Indoor
Management
1. Knowledge of irregularity:-In this case if the ‘outsider’ has
actual knowledge of irregularity within the company, this rule
will have no application. Knowledge of an irregularity may
arise from the fact that the person contracting was himself a
party to the insider procedure. Thus, the principle is clear that
a person who is himself a part of the internal machinery
cannot take the advantage of irregularities.
2. Suspicion of irregularity:- the protection of this rule will also
not be available where the circumstances surrounding the
contract are suspicious and therefore, invite inquiry. E.g. an
officer is purporting to act in a manner which is apparently
outside the scope of his authority.
3. Forgery:-The rule does not apply where a person relies
upon a document that turns out to be forged since nothing
can validate forgery.
4. Acts outside apparent authority- if the act of an officer of a
company in one which would ordinarily be beyond the
powers of such an officer, the plaintiff cannot claim the
protection of this doctrine. A clear illustration is Anand
Behari Lal V. Dinshaw Co., the plaintiff accepted a transfer
of a company’s property from its accountant. Since such a
transaction is apparently beyond the scope of an
accountant’s authority, it was held as void.
