COMPANY LAW U2 CH2 MEMORANDUM OF ASSOCIATION

 

UNIVERSITY OF DELHI / SCHOOL OF OPEN LEARNING 

B. Com. (Program) / B. Com. (Hons.)

COMPANY  LAW 

N.O.T.E.S 

UNIT - 2

LESSON 2 : MEMORANDUM OF ASSOCIATION

INTRODUCTION

1. Memorandum of Association (MOA):

- The first step in forming a company, defining its objects and fundamental conditions.

- The main document serves as the company's unalterable charter or constitution.

- According to the Companies Act 2013, governs the relationship of the company with the outside world.

- Shareholders, creditors, and parties dealing with the company can understand its activities, purpose, and risk involved.

- Acts beyond the powers specified in the MOA are considered "ultra vires" and void.

2. Form of Memorandum:

- The form and manner of the Memorandum are given in Tables A, B, C, D, and E of Schedule I of the Companies Act 2013.

- Different tables provide formats for different types of companies (limited by shares, limited by guarantee, unlimited with or without share capital).

- The MOA must be printed, divided into paragraphs, consecutively numbered, and signed by the prescribed number of subscribers.

- At least 7 subscribers for public companies, 2 for private companies, and 1 for Person Companies.

- Each subscriber must sign, mention their address, description, and occupation, and be witnessed by at least one person who attests the signatures and provides their particulars.

CONTENTS OF MEMORANDUM (SEC 4)

 Name Clause:

- A company must have its own distinct legal name.

- Public company names must end with 'Limited,' private company names with 'Private Limited,' and One Person Companies with 'One Person Company.'

- Restrictions on company names:

  i. The name must not be undesirable or similar/identical to an existing company or LLP, as it may cause confusion or deceive customers.

  ii. The name should indicate the company's principal objects and connotate its purpose.

  iii. The name should not suggest a connection or patronage with the government or violate the Emblems and Names (Prevention of Improper Use) Act 1950.

  iv. The company name should not offend any section of society or include words like banking, insurance, cooperative, trust, or investment without justification.

  v. Enemy country names should not be included in the company name.

 Reservation of Name:

- Application to Registrar to reserve the proposed company's name.

- Registrar reserves the name for 60 days.

- False information can lead to cancellation of the reserved name and penalties.

 Publication of Name:

- The company must display its name visibly at the registered office and all business locations.

- Name should be engraved on the company seal.

- Company information (address, CIN, etc.) must be printed on official documents.

- Non-compliance may result in fines.

 Registered Office/ Domicile/ Situation Clause:

- Memorandum of Association must state the state where the registered office will be located.

- Registered office must be established within 15 days of incorporation.

- Verification of the registered office by the Registrar is required (Form INC 22).

- Changes in the registered office must be notified to the Registrar within 15 days.

Object Clause:

- The object clause in the Memorandum of Association defines the company's purpose and powers.

- It protects shareholders, investors, and creditors by ensuring funds are used for authorized activities.

- Objects must be legal, not against public policy, and comply with the Companies Act 2013.

- It prevents the company from engaging in activities beyond its defined scope.

DOCTRINE OF ULTRA VIRES

- A company is bound by its Memorandum of Association and cannot exceed the powers granted.

- Ultra vires transactions are beyond the scope of the company's objects and are void-ab-initio.

- Shareholders' consent cannot legitimize ultra vires acts.

- Consequences include non-binding contracts, injunctions, personal liability of directors, and property rights.

Capital Clause:

- In a company limited by shares, the Memorandum must state the amount and division of share capital.

- Each subscriber must indicate the number of shares they intend to take (minimum of one).

- OPC should mention the member in case of the subscriber's death.

Liability Clause:

- The nature of members' liability is stated in the Memorandum.

- In a company limited by shares, liability is limited to unpaid amounts on their shares.

- In a company limited by guarantee, liability is limited to contributions for debts, expenses, and winding up.

 Association or Subscription Clause:

- The Memorandum must end with this clause, as per the Companies Act 2013.

- Subscribers declare their desire to form a company and agree to take shares.

- At least seven subscribers (for public companies) or two subscribers (for private companies) are required.

- Each subscriber's signature must be attested by a witness who cannot be another subscriber.

IN-TEXT QUESTIONS

1. The memorandum of Association is the Constitution of the company

2. It delimits the scope of the company’s activities.

3. The clauses of the memorandum of association can be altered by the sweet will of the members of the company.

4. The memorandum of a company contains 5 clauses.

5. The name of the company can be changed by passing a _________ resolution in the general meeting.

6. The ____________ shall issue a new certificate of incorporation after incorporating necessary changes in the memorandum.

ANSWERS :

1. True. The Memorandum of Association can be considered the constitution of a company, as it sets out the fundamental principles and rules by which the company operates.

2. True. The Memorandum of Association defines the scope of a company's activities by specifying its objects and powers. It establishes the boundaries within which the company can operate.

3. False. The clauses of the Memorandum of Association cannot be altered at the sweet will of the members. Any alteration requires compliance with the procedures and provisions stated in the Companies Act and usually involves obtaining approval through special resolutions and fulfilling regulatory requirements.

4. False. The memorandum of a company typically contains six clauses: Name Clause, Registered Office Clause, Object Clause, Capital Clause, Liability Clause, and Association or Subscription Clause.

5. Special resolution. The name of a company can be changed by passing a special resolution in the general meeting, subject to compliance with legal requirements and obtaining necessary approvals from regulatory authorities such as the Registrar of Companies.

6. Registrar of Companies. The Registrar of Companies is responsible for incorporating the necessary changes in the memorandum and issuing a new certificate of incorporation reflecting the updated details of the company, including any changes in its name.

ALTERATION OF MEMORANDUM - NAME CLAUSE

1. Change of Name by Special Resolution:

- A company can change its name by passing a special resolution in a general meeting and obtaining written approval from the Central Government.

- No approval is required if the change is simply adding or deleting the word "Private" during the conversion of a public company to a private company or vice versa.

2. Change of Name Not Allowed:

- A company that has defaulted in filing annual returns, financial statements, or other required documents, or in repaying matured deposits, debentures, or interest, cannot change its name.

3. Change of Name by Ordinary Resolution:

a. Company Registered with Identical Name:

- If a company is registered with a name identical or similar to an existing company, it must change its name within three months by passing an ordinary resolution as directed by the Central Government.

b. Company Registered with Name Similar to Registered Trademark:

- If the proprietor of a registered trademark finds that a company's name closely resembles the trademark, they can apply to the Central Government within three years of the company's incorporation.

- If the Central Government agrees, it may direct the company to change its name within six months through an ordinary resolution.

c. Default and Penalties:

- Failure to comply with the Central Government's directions can result in fines for the company and its officers, with the company being fined Rs. 1,000 per day and officers facing fines ranging from Rs. 5,000 to Rs. 1,00,000.

d. Issuance of New Certificate of Incorporation:

- When changing its name, the company must notify the Registrar within 15 days, providing the Central Government's order.

- The company needs to apply to the Registrar using Form No. INC 24, requesting the necessary changes in the certificate of incorporation and the memorandum.

- After making the changes, the Registrar will issue a new certificate of incorporation in Form No. INC 25.

e. Rights and Obligations Remain Unaffected:

- The change of name does not affect the company's rights and obligations or render ongoing legal proceedings invalid.

ALTERATION OF REGISTERED OFFICE/DOMICILE CLAUSE

I. Change of Registered Office within the Same City, Town, or Village:

- A special resolution must be passed, and the Registrar should be notified within 15 days.

II. Change of Registered Office from One Town to Another within the Same State: 

a. Special Resolution:

- A special resolution needs to be passed in a general meeting.

b. Confirmation of Regional Director:

- The company must obtain confirmation from the Regional Director by submitting an application (Form No. INC 23) and paying the required fees.

- Public notice of the change must be published in local newspapers.

- Individual notices must be sent to creditors, debenture holders, and depositors to seek their consent or objections.

- If no objections are received within the specified time, it is assumed that consent has been granted.

- Any ongoing inquiries or lawsuits against the company may hinder the change.

c. Filing Confirmation with Registrar:

- A copy of the confirmation letter from the Regional Director, along with a copy of the amended memorandum, must be filed with the Registrar within 60 days.

- The Registrar will issue a new certificate of incorporation.

d. Notice of Change to Registrar:

- The Registrar must be informed of the new address within 15 days.

III. Change of Registered Office from One State to Another:

a. Special Resolution:

- A special resolution must be passed and filed with the Registrar within 30 days.

b. Confirmation by Central Government:

- The company must submit an application (Form No. INC 23) to the Central Government, along with the necessary documents and fees.

- Public notice of the application must be published in newspapers.

- Individual notices must be sent to creditors, debenture holders, and regulatory bodies.

- Any objections must be filed with the Central Government.

- Pending inquiries or lawsuits against the company may prevent the change.

c. Filing Central Government's Order with Registrars:

- A copy of the Central Government's order approving the change must be filed with the Registrar of each state within 30 days.

- The Registrar of the new state will issue a fresh certificate of incorporation.

ALTERATION OF OBJECT CLAUSE

I. Alteration of Object Clause:

- The object clause of a company can be altered through a special resolution passed at a general meeting.

- The special resolution can be conducted via postal ballot, except for Person Companies and companies with up to 200 members.

- Within one month of passing the resolution, a copy of the resolution and the altered memorandum must be filed with the Registrar.

- The Registrar will register the changes and issue a new certificate of incorporation, serving as conclusive evidence of compliance with Section 13 of the Act.

EXPLAINING IN A SIMPLER WAY : 

Sometimes a company wants to change what it does or the things it focuses on. They can do this by having a special meeting and agreeing together on the changes. Then they tell the Registrar about the changes within one month.

II. Alteration of Object Clause with Unutilized Raised Funds:

- In cases where money has been raised through a prospectus and some funds remain unutilized, specific requirements must be met.

- A special resolution must be passed and filed with the Registrar within 30 days, following the mode of postal ballot.

- A notice containing relevant information, such as total money received, utilized amount, unutilized amount, proposed alterations, justification, financial impact, and other necessary details, must be sent to shareholders.

- The resolution must be published in one English and one vernacular newspaper and displayed on the company's website.

- Dissenting shareholders should be allowed to exit the company if they disagree with the proposed alterations.

- The alterations in the object clause must be registered with the Registrar within 30 days of the special resolution to have legal effect.

 EXPLAINING IN A SIMPLER WAY : 

If a company has raised money through a prospectus (a document that tells people about the company and asks them to invest), but they haven't used all the money yet, there are some extra things they have to do if they want to change what the company does.

They have to have a special meeting and agree on the changes. They also have to send a notice to the shareholders explaining why they want to make the changes and what it means for the company's money. The shareholders who don't like the changes can choose to leave the company if they want.

They also have to publish the notice in newspapers and show it on the company's website so that everyone knows what's happening. The changes have to be registered with the Registrar within 30 days of the special meeting.

Remember, changing what a company does is like changing the activities you do. You have to talk to your family and agree on the changes, and then you let other people know about it.

ALTERATION OF CAPITAL CLAUSE

I. Alteration of Share Capital (Sec 61):

- A company, as authorized by its articles, can alter its capital by passing an ordinary resolution.

- The following changes can be made:

  a. Increase in authorized share capital.

  b. Consolidation of shares into higher denominations.

  c. Sub-division of shares into lower denominations.

  d. Conversion of fully paid-up shares into stock or vice versa.

  e. Cancellation of unissued shares.

  f. Issue of new shares.

- A special resolution is required if the articles do not permit such alterations.

EXPLAINING IN A SIMPLER WAY:

Sometimes a company wants to change how many shares it has or how much each share is worth. They can do this by having a meeting and agreeing together on the changes. They can do things like increasing the total number of shares or making each share worth more or less.

II. Reduction of Share Capital (Sec 66):

- A company may reduce its share capital in the following ways:

  a. Reduce or extinguish the liability of shareholders for unpaid or uncalled capital.

  b. Cancel paid-up share capital that is lost or not supported by available assets.

  c. Pay off excess paid-up share capital.

- The procedure for a reduction involves:

  i. Authorizing reduction in articles or amending them accordingly.

  ii. Passing a special resolution at a general meeting.

  iii. Filing a petition with the National Company Law Tribunal (NCLT), including creditor details and auditor verification.

  iv. Obtaining consent or addressing objections from the Central Government, Registrar, SEBI, and creditors.

  v. Confirming reduction by the NCLT and complying with accounting standards.

  vi. Publishing the NCLT's order, registering it with the Registrar, and updating the company name if required.

  vii. Issuing a certificate by the Registrar and updating share capital details.

  viii. Members are relieved of liability for the reduced nominal value of their shares.

  ix. Members are liable to contribute to unpaid debts if any creditor is unintentionally missed.

  x. Strict penalties for officers involved in fraudulent actions.

EXPLAINING IN A SIMPLER WAY:

Sometimes a company wants to make itself worth less. They can do this by reducing the value of their shares or canceling some of the shares they have. They have to follow a special process that involves getting permission from the National Company Law Tribunal (NCLT) and making sure creditors and other important people agree.

III. Cases Exempt from Tribunal Sanction:

- Certain actions, such as share forfeiture, surrender, diminution of capital, the redemption of preference shares, and buy-back of shares, do not require the sanction of the NCLT.

EXPLAINING IN A SIMPLER WAY: 

There are some changes a company can make to its shares without getting special permission. These include things like taking back shares from shareholders who haven't paid for them, giving up shares voluntarily, or reducing the company's value in specific ways.

Remember, changing how much a company is worth is like changing how much something you own is worth. You have to talk to the right people and follow the rules to make sure everyone agrees on the changes.

DIFFERENCE BETWEEN REDUCTION OF CAPITAL AND DIMINUTION OF CAPITAL

Reduction of Capital:

- Definition: It refers to the extinguishment of paid-up or subscribed capital.

- Resolution: Requires a special resolution.

- Confirmation by Tribunal: Confirmation by the Tribunal is necessary.

- Adding words after name: The Tribunal orders the company to add the words 'and reduced' after its name.

- Procedure: Involves an elaborate procedure before registration and certification by the registrar.

Diminution of Capital:

- Definition: It is the reduction of the unsubscribed portion of the issued capital.

- Resolution: Requires an ordinary resolution.

- Confirmation by Tribunal: No confirmation by the Tribunal is required.

- Adding words after name: No such order is passed by the Tribunal.

- Procedure: The company must notify the registrar within 30 days of diminution.

VARIATION OF RIGHTS OF SHAREHOLDERS (SEC 48)

Procedure for Variation of Rights:

i. Authorization: The memorandum and articles of the company must authorize the variation, and it should not be prohibited by the terms of the issue.

ii. Special Resolution: A special resolution is required in the meeting of shareholders whose rights are varied.

iii. Consent of Shareholders: If the variation affects the rights of another class of shareholders, consent of at least 3/4th of such affected class is required.

iv. Dissenting Shareholders: If some shareholders of the affected class do not consent, at least 10 percent of dissenting shareholders can appeal to the Tribunal within 21 days to obtain a cancellation order.

v. Filing with Registrar: The company must send the Registrar a copy of the resolution and the Tribunal's order within 30 days.

Non-compliance with the provisions may result in a fine and imprisonment for the company and defaulting officers.

ALTERATION OF LIABILITY CLAUSE

 

Liability Clause Alteration:

- General Rule: The liability clause cannot be altered to increase or make the liability of members unlimited without their written consent.

- Exception for Not-for-Profit Associations: In the case of a club or any other not-for-profit association, the memorandum may be altered to increase the subscription of members without their written consent.

- Directors or Manager Liability: If authorized by the articles, a company can alter its memorandum to make the liability of directors or managers unlimited by passing a special resolution. However, the alteration will only take effect if they have given their written consent.