Module 3: MoA, AoA,
Doctrines
Ms. Sofia Khatun
Assistant Professor
School of Law
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.
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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.
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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.
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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”.
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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.
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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”.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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 n(10) accounts and audit
(11) directors, their appointment and remuneration
(12) Winding Up.
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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.
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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.
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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.
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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).
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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."
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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.
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Main objects rule of construction—The ultra vires doctrine
confines corporate action within fixed limits. The businessman
has always endeavored 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.
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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.
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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.
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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:
[Link] for the fulfillment of the objects stated in the main
object clause of the memorandum:
[Link] 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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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”.
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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.
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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.
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THANK YOU!
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