This article is written by Lakshay Kumar, a second-year B.A.LLB student of Delhi Metropolitan Education, Indraprastha University. In this article, he talks about memorandum of association, clauses, after this he talks about the doctrine of ultra vires, its importance, and its applicability.
As per Section 2(56) of Companies Act, 2013 memorandum means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of this Act. Memorandum of Association is a legal document that contains specific information regarding the working of the company, it also defines the scope of activities of the company. Memorandum of Association is also called the charter of the company which contains the rights and duties of the members and their relation with the company.
Every individual who wants to start his or her business wants to have a legal identity for its company, a memorandum of association contains all the necessary documents that are required to give legal identity to the company.
Features of Memorandum of Association
- A memorandum of association states the nature of business activities to be conducted by the company.
- It is prepared by the promoters of the company.
- A memorandum of association is signed by at least 7 people in case of a public company and 2 people in case of a private company.
- It is submitted to the registrar of companies for registration that is for getting a certificate of incorporation.
- It is an unalterable charter as changes are made with great difficulty.
- It is a public document and can be inspected by any individual as and when necessary
- Any act done beyond the powers of the memorandum of association ultra vires the act.
Importance of Memorandum of Association
- A memorandum of association is an essential document without which no company could be registered.
- A memorandum of association also works as a guide for all the members of the company including the directors, it includes the objectives of the company, it also contains the limitation which restricts the power of the company.
- All the investors are protected by the memorandum of association as there is always a risk involved when a person invests money in a company.
- It makes outsiders know whether a particular company is eligible to make transactions or accept it.
Contents of Memorandum of Association
Section 4 of the Companies Act, 2013 mentions the following major contents which are required for a memorandum of association namely:
According to the first clause, every memorandum must contain the name of the company, however, there are certain restrictions attached to it such as:
- The name of the company must not be similar to an existing company.
- The name of the company must be agreeable to the government, which means it should be desirable in the opinion of the government.
- Names that are prohibited under the Emblem and Names (Prevention of Improper Use Act), 1950, can not be used for incorporating a company.
- Similarly, a company must not use any name which is connected with the government or state patronage without prior approval of the government.
- A private company with limited shares should end its name with private limited.
2) Office Clause
According to this clause every company must mention in the memorandum the state in which the office is registered. Within 15 days of its incorporation a company must have a registered office and within 30 days verification should be done of the registered office. Registration is done to fix the domicile of the company, sometimes people get confused between domicile and residence. One major difference between the two is that domicile may or may not be the residence of the company, residence of a company is the place from where the management of the company and business is carried out.
3) Objects Clause
The purpose of the company for which it has been set up is determined by the objects clause, therefore, it is one of the most essential clauses included in the memorandum of association. If certain activities of the companies are not included in the object clause then the company is not legally bound to conduct those activities. There are mainly 3 objects that the company wants to fulfill the first object is the main object i.e for which the company is incorporated, a second object is an ancillary object and the third is other objects, both the second and third objects are used to persuade the main object. There are certain points which are needed to be kept in mind such as:
- The object of the company should be stated clearly without any ambiguities.
- Objects must not be illegal.
- The objects should not be against the provisions of the Companies Act.
- The objects must not be against public policy.
4) Liability Clause
The liability clause of memorandum of association mentions the liability of each member, whether the liability of its members is limited by shares or limited by guarantee or it is unlimited.
- In case the company is limited by shares then the members cannot be called upon to pay more than the unpaid amount.
- In case the company is limited by guarantee then the clause must mention the amount each member has to pay in case of liquidation.
- If the company is unlimited then the members’ liability is unlimited and the personal assets of the member can be used to discharge the liability.
5) Subscription Clause
According to this clause, the Memorandum must mention the amount of capital and the shares that have been taken by each member or subscriber. Various statutory provisions regarding this clause are:
- The memorandum must be signed by the subscriber in the presence of at least one witness.
- Each subscriber must take at least one share.
- Quantity of shares that the member has taken must be mentioned.
5) Succession Clause
According to this Section, the memorandum must mention the name of the person who would become the member as a subscriber in case of the death of the previous subscriber.
Alterations in Memorandum of Association
Section 13 of the Companies Act, 2013 contains the provisions as to how can a memorandum of association be changed.
- According to Section 13(2) if the name of the company is to be changed then first it must conform to subSection2 and 3 of Section 4 of the Act and secondly, the name must be approved by the government in writing.
- Under Section13(3) when the new name of the company is made then the registrar should enter the new name in place of old name in the registrar of companies and issue a new certificate of incorporation. The new name would be effective from the date of issue of the certificate.
- Alteration as to the registered place would not be effective if it is not approved by the central government, on an application filed by the company as it is prescribed in the Act.
- The Central government has 60 days to dispose of the application, before doing this it has to satisfy that the consent of alteration has been taken from all the creditors, debenture holders and all the other members concerned with the company. Apart from this, the central government has to satisfy itself that the company has made all the provisions to discharge itself from all the debts and obligations.
- According to Section 13(7), if a company has raised money from public through prospectus and still has that money is not utilized, then that company is not allowed to change the object of the company unless a particular resolution has been passed for that effect.
- According to Section 13(11), in case a company limited by guarantee or not having a share capital purposes any person not as a member to participate in the divisible profits of the company then alteration made in the memorandum would be void.
- According to Section 13(6), the company which wants to alter its memorandum has to file with the registrar.
- The special resolution passed by the company.
- Approval of the central government if the alteration involves a change in the name of the company.
When an alteration is allowed
- To enable a company to carry on its business more economically or more efficiently.
- To enable the company to attain its objects by new and improved means.
- To enlarge the company’s operation. Companies can add or remove words from their name if that name confines itself to the territorial boundaries of India.
- To enable the company to restrict or abandon any objects specified in the memorandum. To merge with any other company or body of persons.
The Doctrine of Ultra Vires
Every memorandum of a company has a certain object clause which mentions the reason why the company has been incorporated. It is expected that the company will act according to the object clause and will not act outside the object clause, if the company does any act which is not a part of the object clause then that act of the company would be declared ultra vires. The literal meaning of this doctrine is acts done beyond power. An ultra vires act is void and can not be ratified by the directors even if they want to ratify it.
Need for Ultra Vires
The doctrine of Ultra Vires was particularly introduced to protect the interests of creditors and shareholders, the object clause is considered the preamble of the company, and therefore anything was done which is not inconsistent with the preamble will definitely be termed as void. It also helps the creditors to see whether their money is invested in an appropriate way and place. It also helps the company to avoid the situation of insolvency as it ensures that the assets of the company are put in the prescribed manner because if they are not put in a prescribed manner then there is a risk that the company might lose its assets and become insolvent. this doctrine is also essential to curb the unlimited powers of the directors, it ensures and guides the directors to act in an authorized way.
Case law on ultra vires
Ashbury Railway Carriage and Iron Company Ltd v. Riche (1875)
In this case, the object clause in the memorandum of the company was to sell, lend, hire or make the railway carriages and wagons of all kinds. The directors of the company entered into an agreement with Riches for financing a railway line, later the company did not perform the contract and the plaintiff sued the defendants for breach of contract. one thing to be noted here is that the members of the company ratified the contract before its nonperformance.
The issue before the court was whether the contract was valid and could the members of the company ratify the same contract.
It was held that the acts of the company was outside its object clause and therefore not within the memorandum and therefore declared the contract void.
House of Lords was of the view that the company incorporated within the company’s act is bound to do the acts as per the object clause in the memorandum and therefore in the above case financing of the railway line was outside the object clause of the company and therefore it was ultra vires.
Acts which are not ultra vires
There are 3 situations under which an act will not be termed as ultra vires, all these situations can also be termed as exceptions:
- If the act was done is within the object clause.
- If some special powers have been conferred by a statute so that the main task can be made effectual, then also the act done will not be ultra vires.
- Sometimes certain acts done are neither within the object clause nor some special power had been conferred, but still, the act done would not be ultra vires if it is found in the inquiry that the act done was incidental and consequential to the act and was done to fulfill the main task.
Evans v. Brunner Mond and Company (1921)
In this case, a company was incorporated for carrying on a business for manufacturing chemicals. The object clause in the memorandum authorized the company to make any such decision that may be incidental for the fulfillment of the above-stated business. Through a special resolution, the company was also authorized to distribute a certain amount of money from the surplus to any university in the U.K as the company wishes to do for promoting scientific development and research.
This clause was challenged in the court on the ground that the above power to grant money was against the objective clause in the memorandum and thus ultra vires.
However, the directors of the company were able to prove that the above practice was somehow connected to their business as it was difficult to get trained men and the money was given to encourage scientific development and research so that more trained personnel could be produced and the company could easily recruit them.
The Court held that the expenditure authorized by the company was necessary for the company’s continued progress and therefore the act was not ultra vires.
Today in such a highly industrialized society it is necessary to define the roles and functions of a company, as a company not only incorporates the interests of its members but also serves the interest of its investors, shareholders, and creditors, therefore it is essential for a company to move towards its objective in a more professional and ethical way. It is also important to protect the interests of every person who is directly or indirectly related to the company and therefore the doctrine of ultra vires is of prime importance in order to deal with any kind of mismanagement and prevent the abuse of power.
- Ministry Of Corporate Affairs – Government of India
- Business laws by Avtar Singh
- Companies Act, 2013