This article is written by Mrinal Mukul, a law student at O.P Jindal Global University, Haryana. This article seeks to explain the meaning, purpose, alteration, and restrictions related to a company’s object clause of the Memorandum of Association.  

It has been published by Rachit Garg.

Introduction 

The Memorandum of Association is defined in Section 2(56) of the Companies Act 2013, which designates the term ‘Memorandum’ as a Memorandum of Association of the company. It is the charter document of the company and contains the terms of association with the company, as well as the name, object, and scope of the company.

Section 4 of the Companies Act 2013 requires a company’s Memorandum of Association to state the purpose for which the company was incorporated and any matters deemed necessary to facilitate the incorporation of the company. These objects are specified in the object clause of the company’s Memorandum of Association. This clause is probably the most important and consistently longest in a company memorandum and enumerates the possible business activities of the company. Any transaction that falls within the scope of the underlying terms is intra vires, but any transaction that does not fall within the scope of the underlying terms is ultra vires. Companies can be prosecuted and fined for ultra vires activities. The object clause sets out the scope and extent of the company’s power.

This statement aims to inform creditors and others associated with the company about the company’s power and scope of authority and to protect subscribers who know what their money is being used for. Likewise, the provision ensures that the company does not expand into areas not listed in its memorandum and beyond the activities for which it was established. The subject matter of the company must not violate the provisions of the Companies Act or any other law; for example, it is illegal to operate a casino in India. These few things should always be taken into consideration while instituting a memorandum of association.

What is a Memorandum of Association 

The Memorandum of Association is the most important document of the company. It states the objective for which the company came into existence. It contains the rights, privileges, and powers of the company. Hence, it is called ‘the charter of the company.’ It is considered the constitution of a company. It determines the company’s relationship with the outside world. The company’s whole business is organized in accordance with the Memorandum of Association. One must take into consideration that the company may not engage in any business or activity not specified in the memorandum. It can only exercise the powers expressly set out in the memorandum. 

Lord Cairns defines: “The Memorandum of Association of a company is the charter which sets out the limitations of the company established under the Act.” 

Therefore, a Memorandum of Association is a document that sets out the constitution of the company according to the law. It also determines the scope of its activities. The Memorandum of Association allows shareholders, creditors, and anyone associated with the company in any way to know the range of activities. 

What is the Object Clause 

This clause sets out the purpose for which the company was formed. It is difficult to change the object clause later. Therefore, it is necessary for the company to formulate this clause carefully. This clause lists all types of business that a company may carry out in the future. The object clause must contain the company’s important goals as well as other goals not listed above. 

This clause must specify the following:  

  • The company’s main objectives are to be pursued by the company upon its  incorporation; 
  • Auxiliary or ancillary purposes for achieving the main objectives; and
  • Other objectives of the company that are not covered by (i) and (ii) above. 

For corporations other than commercial corporations whose purpose is not limited to one state, it is necessary to specify the state in which the purpose of the corporation extends to its territory.

To that end, object clauses are often lengthy and unwieldy, as companies try to include as much as possible to avoid classifying deals as ‘overreaching’ in later years. It usually includes a broad ‘catch-all’ clause that allows the ability to do something incidental or ancillary to the other objects.

Purpose behind the object clause 

The object clause is the most important clause in the memorandum, as it not only sets out the objectives of the company’s formation but also defines the scope and powers that the company can exercise in achieving those objectives. Indicating the company’s purpose in the company’s Memorandum of Association is not only a legal technicality but also has great practical significance. This is due to the following reasons: 

  1. It provides protection for shareholders and investors because they know where their money is being used for. Also, it ensures that their investment is not being used for any other business. 
  2. It protects creditors by ensuring that company funds are not used for unauthorized activities.
  3. It serves the public interest because it restricts the activity of a company within the specified boundaries as stated in the object clause. This prevents diversification into areas of business that are not closely related to the purpose for which the company was founded. 

A company can choose any object provided:

  • It does not break the law,
  • The object is moral, and it should not be contrary to public policy, 
  • It must not contain any content that contravenes the provisions of the Companies Act 2013, 
  • It must not contain any ambiguous statements,
  • It must contain the main object and all other materials needed to promote the main objects.

In the case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1875), the company and M/s. Riche entered into a contract in which the company agreed to finance the rail line’s construction. The directors later rejected the contract because it was ultra-vires of the company’s memorandum. Riche filed a lawsuit seeking damages from the company. According to Riche, the term ‘general contract’ in the object clause of the company’s meant terms referring to any type of contract. Therefore, according to Riche, the company has all the power and authority to enter into and enforce such contracts. Later, a majority of the company’s shareholders approved the deal. However, the company’s directors still refused to perform the contract, arguing that it was ultra vires. The House of Lords ruled that the contract was ultra vires the memorandum of the company and was therefore invalid.

They also said that even if every shareholder of the company approved the law, it would be invalid because it was ultra-vires the memorandum of the company. A memorandum cannot be amended retrospectively, nor can it authorize an ultra vires act.

Constituents of the Object Clause 

Under the Companies Act 2013, the subject matter related to the registration of a company must be divided into three sub-clauses, namely:-

  • Main object 
  • Incidental or Ancillary objects 
  • Other objects

Main object

Under the main object, the company must state the primary purpose pursued by the company at the time of its formation in accordance with the Memorandum of Association. I will cover details regarding the business activities which the company will carry out in future. 

An ancillary or incidental object is nothing but a part of the main object, and it must be clearly defined to avoid any kind of ambiguity. A company that has a main object with diverse subsidiary objects cannot continue to pursue the subsidiary objects after the main object ceases to exist.

Incidental or Ancillary Objects 

Objects under this category are not independent objects. In reasonable interpretation, these objects can be considered incidental or conducive to the main object, but nothing further. These cannot be construed as expanding the scope of the objects clause but will only be taken into consideration as necessarily carrying out the main object. In other words, incidental acts have imminent connections with the main objects.

In Evans v. Brunner Mond & Company (1921), a company was established to carry out a chemical manufacturing business. The object clause in the company’s memorandum permitted the company to engage in “all business and matters as may be incidental or conducive to the attainment of the above objectives.” Pursuant to the resolution, the directors were authorized to allocate a certain amount from the surplus reserve account to such universities in the UK for scientific research and training. The decision was challenged because it was ultra vires according to the company’s power. The court held that the expenditure authorized by the resolution was necessary for the company’s growth as a chemical manufacturer. Therefore, the resolution was incidental or conducive to the attainment of the company’s main object; consequently, it was not ultra vires. 

Other Objects 

The third part enumerates those that are neither the main objects nor ancillary or incidental but nevertheless necessary to enable the company to engage in all types of business activities that an enterprise expects to be able to engage in. The company should clearly state its objective and purpose in unambiguous terms for which its funds will be used. 

In Wamanlal Chhotalal Parekh v. The Scindia Steam Navigation Co. (1943), the court observed that a statement of object protects shareholders by ensuring that funds raised for one undertaking do not pose a risk to another.

Alteration of object clause of Memorandum of Association (MOA)

Section 13 of the Companies Act 2013, read with Rule 29 of the Companies (Incorporation) Rules 2014, sets out the procedure for alteration of the company’s object clause under the Companies Act 2013. MOA is an important legal document of the company and, in particular, specifies the scope of business activities of the company. The MOA also stipulates the relationship between the company and its shareholders’ rights and interests. It also establishes the relationship between the company and its shareholders.

Therefore, MOA also has object clauses that define the company’s purpose and range of activities. After the company’s registration is complete, it may want to change the object clause. This requires changing the company’s MOA. Section 13 of the Companies Act, 2013, deals with amendments to the MOA. 

The company’s object clause is usually the third clause of the company’s Memorandum of Association. It states an objective related to the business purpose for which the company was established and any other matters deemed necessary to facilitate this. Setting up the object clause is one of the most important terms for registering a company.

Steps to alter the object clause of MOA

  1. Approve the target alteration of the object clause of the Memorandum of Association at the Board Meeting.
  1. Pass a special resolution at the Extraordinary General Meeting (EGM) to amend the object clause of the MOA. Specific clauses in passing a special resolution if the company raises funds from the public through the issuance of a prospectus and some unutilized funds out of those have to be disclosed when the special resolution is passed.

The special resolution of the members will be obtained by postal ballot. A notification will be sent to members with details, such as –

  • Total funds received (from the public through the offering prospectus). 
  • Total money utilized for the objects stated in the prospectus. 
  • Unutilized funds out of total funds received by issuing a prospectus. 
  • Details of proposed changes to the object. 
  • Reason for changing the object. 
  • Amount proposed to be utilized for the new object.
  • The estimated financial impact of the proposed changes on the company’s earnings and cash flows.
  • Other important information.
  • The special resolution will be published in newspapers (one in English and one in the local language) at the company’s registered office.
  • SRs are also placed on the company’s website. 
  • Dissenting shareholders (voting against decisions on dissenting terms) are offered the opportunity by the promoters and other shareholders to exit.

If the company has not received any funds from the public or the funds received have been fully utilized, then the company is not obliged to disclose; only the special resolution would be enough.

  1. Filing of Form MGT-14: The authorized director or company secretary must also ensure that they file the Form MGT-14 within 30 days of the passing of the special resolution. They must submit this form to the Registrar of Companies.
  1. Receipt of new Certificate of Incorporation: Once the Registrar of Companies receives the MGT-14 form, they will conduct a compliance check. When the Registrar is satisfied, he registers the changes and issues a new certificate of incorporation. Also, an amendment to the object clause of the Memorandum of Association is not complete unless a new incorporation certificate is obtained.
  1. Incorporate the change: Once the company receives the new certificate of incorporation, it must incorporate the amendments into all copies of the Memorandum of Association.

Restrictions regarding the alteration in the object clause 

According to Section 13(8) of the Companies Act, 2013, read in conjunction with Rule 32 of the Companies (Incorporation) Rules 2014, a company raising funds by way of a public prospectus shall not make any amendments to its memorandum unless the company has passed a special resolution, and: 

  • Details of any such resolution must also be published in an English-language newspaper and one in a vernacular language where the company’s registered office is located and shall also be published on the company’s website, stating the reasons for the amendments in the MOA; 
  • If the company receives objections from any member of the company, they will have the opportunity to be heard to exit by the promoters and shareholders having control as per the rules established by the Securities and Exchange Board of India (SEBI).

In the above circumstances, if a special resolution is required, it will be taken by postal ballot as per Rule 32 of the Companies (Incorporation) Rules 2014. 

While drafting the Notice for the Extraordinary General Meeting to alter the object clause, the following information must be included: 

  • The total amount received; 
  • Funds used for the objectives mentioned in the prospectus; 
  • Specify the remaining amount not used from the stated prospectus;
  • Changes in the object clause; 
  • The reason for the change; 
  • The amount used for the new object; 
  • The impact of the expected changes on the company’s earnings and cash flow; 
  • A place from which interested parties can obtain a copy of the special resolution notice; and,
  • Any other relevant information. 

Conclusion 

The Memorandum of Association is an important document required by any organization. Regulations made shall not exceed the powers of the company specified in the Memorandum- of Association. It needs to be maintained by the company as it advises the company in every aspect. It also helps to manage the company’s management. It is a necessary part of company formation. If a change is made, the company must follow the legal process mentioned in the Companies Act 2013. In addition, the Memorandum of Association must contain the purpose of the company it was established for and all matters deemed necessary for its development. These objects are specified in the company’s object clause of the Memorandum of Association.

Frequently Asked Questions (FAQ) 

Is the company’s Memorandum of Association (MoA) and Articles of Association (AoA) the same? 

No. The Memorandum of Association (MoA) and Articles of Association (AoA) are different. The MoA is the basis of the company’s constitution, while the AoA contains the company’s internal rules and regulations. AoA is subordinate to MoA. 

Do I need an MoA to register a company? 

Yes. The company owner must prepare the company’s MoA before applying for company registration. This is a mandatory document to be submitted to the Registrar of Companies when applying for company registration. The MoA must be signed by all directors and members of the proposed company.

Do all companies need an MoA? 

Yes, every company must have an MoA as it defines the scope of its operations. The entire structure of the company is detailed in the MoA. It must be filed with the Registrar of Companies. It is a public document, and anyone can view a company’s MoA by paying the required fee to the Ministry of Corporate Affairs.

References


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