In the corporate world, the term Company represents a body/association formed by individual or a group of individuals for the purpose of giving a legal form to an idea that will result into profit in the commercial sector, that has the status of being a legal entity and not a natural person. For the incorporation of any company, whether public, private, or OPC, it is an essential prerequisite to register the company with the help of approved legal documents. Memorandum of Association and Articles of Association are two of the most important legal documents for such incorporation. It is generally said that if the memorandum is the skeleton, then articles of association are the flesh and blood of the company. Section 7(1) (a) of the Companies Act, 2013 has clearly mentioned that a company can be registered only when these two mandatory legal documents have been duly drafted and signed by the required subscribers. Let’s understand these terms and there key differences with the help of this article.

Memorandum of Association (MoA):

Memorandum is also known as the charter or soul of the company , which is prepared prior to registration of a company.  Section 2(56) of the Companies Act, 2013 defines memorandum as:

• Memorandum of association as originally formed and

• Memorandum as altered time to time.

A legal framework that defines a company’s authority, power, limits, objects, name, and other necessary details like place of registered office, etc., beyond which a company cannot take any other action, perform any action, or gain profit. Violation of this rule results in an ultra vires act, which has no effect in the eyes of the law in simple terms, anything done under the doctrine of ultra vires will be rendered void, and it brings disrepute to the goodwill of the company in the competitive market.

Legal provision for issuing MoA is, it must be subscribed by at least 7 members in case of a public company, and at least two members should subscribe for incorporation of a private company; one member is required only in the case where the company being incorporated is an OPC(one person company) in nature as per section 3 of the Act.

Purpose:

A memorandum is a public document; any person having an interest in the company can access these documents after paying the required fees to the registrar of companies (ROC), it is provided under Article 399 of the Companies Act, 2013, that an interested person may inspect any document filed with the registrar. The memorandum contains the information regarding the foundation values of a company that helps to shareholders, creditors, and members interested in investing wisely, keeping in view their rights and liabilities, and power.

Structure:

• Name Clause: Specifies the company’s legal name, indicating whether it is a public or private entity. The name enables a company to represent a separate identity that shall not be similar or same to any other existing company’s name.

• Registered Office Clause: Identifies the state in which the registered office is situated and determines jurisdiction for legal and administrative matters. Section 12 of the Act provides for registered office of the company.

• Object Clause: A company runs it’s business smoothly only upon the clarity of it’s object clause. Section 4(c ) provides for object clause which includes both, the main object and the matters which are necessary for achieving the main object.

• Liability Claus: This clause provides for the members liability in a company that can be limited by shares or guarantee, and the liability clause may be omitted in case of unlimited liability.

• Capital Clause: The valuation of maximum amount that can be raised by a company is provided under it’s capital clause, this clause restricts a company from securing more capital than that which is already mentioned in this clause.

• Association of subscription clause: This clause shows reflection of relationship between subscribers and the company. The importance of this clause is wide as it gives effect on incorporation of company that only if subscribers to the MOA have executed through this clause and have agreed to pay for interested shares.

Alteration of Memorandum:

When the draft originally prepared and registered with time Or anytime demand changes in its actual wordings and information, the process of Alteration of memorandum is adopted to introduce new changes like change in the company name, location of registered office, objective clause of company, nature of liability of company members, the maximum limit of authorised capital of the company or the devil of authorised capital.

The process for Alteration of memorandum includes holding a board meeting to approve the alteration in memorandum, holding a general meeting to receive approval from shareholders for the alteration, once reaching resolution is reached, a special resolution to alter the MoA should be filed with the ROC within 30 days. The ROC, after scrutinizing the special resolution, allows alteration of the memorandum.

Article of Association (AoA):

Articles contain rules and regulations that govern the company, and upon which shareholders and directors agreed. Section 2(5) of the Companies Act 2013 defines an article of association as a document that contains all the necessary rules and regulations governing company affairs and to day method of internal management. Such a document does not prohibit any corporation from making further rules and introducing any alteration to such documents. Broadly, articles of association detail the framework of the company‘s structure, the roles and responsibilities of its shareholders and directors, and management. It must not cross the objective value provided under MoM; that act would be considered ultra vires.

Purpose:

The draft enables the shareholders or any person interested in affairs of such incorporated company to get insights on internal operational management of company in terms of financial management, flexibility and adaptability, legal compliance, shareholders protection, dispute resolution and fairness in passing any special resolution.

Structure of AoA:

• Company name and registered office: this clause is used for the purpose of identifying the company being referred to without having any conflict with any other company of similar nature to avoid similarities in name so the targets.

• Share Capital and Shareholders’ Right: it provides rules and related regulations for providing a summary to the financial structure by outlining the number of shares in which it’s capital is divided into and the maximum amount of the capital the company can raise through allotted shares.

• Board of Director, Duties and Powers: it provides the role of director in management of corporate affairs with authoritative powers to make decisions and decide strategy for the company. It may include the limitations on powers of directors, and alternative dispute resolution methods as well.

• Shareholders’ Meetings and Voting Procedures: All the necessary decisions are made via general meetings with shareholders. This clause of the AoA details the operational procedure for various kinds of meetings for example annual general meetings and extraordinary general meetings, Board meetings. This clause contains all the methods to conduct such meetings like, the minimum, notice period for convening a meeting, the quorum of members needed to hold a meeting, voting rights, alterations and passing of resolutions.

• Liquidation Process: this clause explains the rules to be followed by company to be dissolved, it contains provisions for the distribution of company’s remaining assets among shareholders once the all debts and liabilities have been paid. It includes the process of appointment of liquidator, method of valuation of company’s assets. It ensures fairness  and due process to avoid later conflict of interests.

Alterations of Articles of Association:

It follows the same procedure as followed in alterations of Memorandum of association with voting values considered while passing any special resolution.

In a landmark judgment of Ashbury Railway Carriage Iron co. Ltd. Vs Riche (1875) LR 7 HL 653, the court provided key difference between Memorandum and Articles of Association as the Memorandum sets legal boundaries for the function of a company beyond which a company can not act or make rules, any such rule will be rendered ultra vires.

Key difference:

Purpose: MoA provides for objective, external scope of involved parties, target capital value etc.  whereas the AoA lays down the internal rules and regulations for the management of company that can not be in excess to boundaries provided under memorandum.

Status: MoA is considered charter of company a supreme document which is above all other documents drafted in respect of incorporating a company while AoA is subordinate to MoA.

Effect of Actions: MoA provides a limit under which actions will be carried on anything done beyond that limit would be ultra vires while in case of AoA if certain actions are beyond the scope of AoA but within the scope of MoA, such actions can be ratified by the special resolutions of the shareholders.

Alterations: MoA can not be easily altered sometimes it requires permission from government or tribunals even after passing special resolution whereas the AoA can be simply ratified by passing special resolution.

The aim of this article is to explain two most popular terms, Memorandum and Article of Association, which together form the Constitution of a company, it enables the readers to understand in brief the importance and difference, so they can draft better with a keen understanding of these two documents. Memorandum and Articles play a vital role in the corporate sector, it secure investors, shareholders, creditors, Md other authorised members to get benefits from the work and help in the smooth flow of the economy.

Disclaimer: This article is intended solely for educational and informational purposes. It does not constitute legal advice and should not be relied upon as such. While every effort has been made to ensure the accuracy, reliability, and completeness of the information provided, ClearLaw.online, the author, and the publisher disclaim any liability for errors, omissions, or inadvertent inaccuracies. Readers are strongly advised to consult a qualified legal professional for guidance on any specific legal issue or matter.