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All About the Memorandum of Association: And How You Can Frame Yours (Indian Business Perspective)

Just like the Constitution is the fundamental document that governs the relations between a State and its people, a Memorandum of Association is the Constitution of a Company that governs the fundamental relations that exists between the company and the people including its shareholders, creditors, debenture-holders or others associated with the company.

A Memorandum is a public document, which is why people who do business with the company are advised to go through it.

The parts of a memorandum of association are very important for the formation of a company. Here is how you can create a memorandum yourself at ease.

Considering that a memorandum is the most important piece of text when it comes to incorporating a company, it is advisable you take the advice of a lawyer or a Corporate Secretary when you want to frame your business.

That said, in this article, I will show you the main contents that has to be put in the Memorandum as well as how you can do it yourself and get it registered.

Keep in mind that this article is mainly framed towards the Indian businesses and is a part of the Investing in India series wherein I put content that shows how you invest or set up a business in India.

  1. Here's what you need to know before you invest or start a business in India.
  2. Localize Your Business for the Indian Market

So, let's get started.

Before You Begin: There are some forms of memorandum. Download it here as everything in this article relates around the forms. You can also create your own memorandum once you check out the forms given in Table A - E in the PDF. It will only take you 5 seconds.

Now, a Memorandum is very poorly defined in Companies Act, 2013. Section 2(56) of the Companies Act, 2013 defines it as "the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or the present Act."

The contents of a memorandum can be deciphered from Section 4 of the Companies Act. It has 5 chief components or clauses-
  1. The Name clause
  2. The Registered Office clause
  3. The Objects clause
  4. The Liability clause
  5. The Capital Clause

What's in a Name?

Since a company acquires a corporate personality and becomes a distinct person, having a name is of extreme importance.

Name of a company is very important. The name that has been mentioned in the memorandum has to be shown at the registered office of the company. Also the name mentioned in the memorandum has to be used in every official communication by the company

Justice Johnson, in the case of Osborn v. United States (you can find it in Volume 6 of Lawyer's Edition, page 204) has said that the name of a corporation is the symbol of its personal existence.

A company can choose whatever name it wants to but there are a few steps to look out for first.

1. Section 4(2) of the Companies Act, 2013 provides that no company should have a name that's undesirable. Whether a name is undesirable or not, depends on the discretion of the Central Government. But there are a few simple rules- 

Firstly, the name that you choose should not be identical with or too nearly resemble the name of another company. The name should not also imply connection with or patronage under the Government.

Nor, should it be such that its use will be an offence under any law or infringe upon a trademark. You can easily check it by using this webpage. Also, rule 8 of the Companies (Incorporation) Rules, 2014 provides some details into how to judge whether your proposed name is undesirable or not.

2. In case of a public company that has limited liability, the last word of the name must be "limited" and in case of a private company that has its members’ liability limited, the last two words must be "private limited".

Omitting to put the word limited liability for a company that has its liability limited constitutes an offence for the directors and they can be punished with fine. However, the omission if shown to be accidental will not constitute an offence.

For example, in Dermatine Co Ltd vs Ashworth, a bill of exchange drawn upon a limited company and accepted by two of its directors did not have the word “limited” on it. The reason behind this was found to be that the rubber stamp by which the words of acceptance were marked on the bill was longer than the paper of the bill which caused this error.

Therefore the directors were held not liable in this case.

However, avoid these mistakes as they can sabotage your business.

Change Your Company's Name by This Method

Section 13 basically regulates the procedure for amending any provision in the memorandum.

Section 13(2) and 13(3) shows how you can change your company's name.

To change your business' name in the memorandum, you need to pass a special resolution to that effect and then get the approval of the Central Government in writing.

The best way of going about the procedure of changing the name of a company is given as follows-
  1. Convene a board meeting. Pass a resolution authorising the director or company secretary to check with the Ministry of Corporate Affairs (MCA) whether the suggested name is available or not. Also, you need to pass a resolution to convene an extraordinary general meeting.
  2. Now you can pass a name application to the MCA for checking whether the proposed name is available or not.
  3. After the approval of the name, you need to conduct an extraordinary general meeting on behalf of your company and pass a special resolution for changing the company's name and for that alteration in the Memorandum and Articles of Association as well.
  4. Now you need to seek approval for change in the company's name to the Registrar of Companies in Form 1B along with the necessary fees.
  5. After this the Registrar will issue you a new certificate of incorporation which marks the successful change in name and the end of the process.
  6. This name should be entered in all future documents of memorandum and articles of association. You must not use the old name on any of your company's official documents.

Registered Office - What's That?

For a company to do business in India, it must have a registered office in the country. It can be situate in any state but the location has to be mentioned in the memorandum.

Companies in India must have a registered office
Companies in India must have a registered office
A registered office is important for the reason that all the official communications and notices to the company will be sent to that office. It is kind of like a head-office.

However you need not rush into creating a registered office if you are just incorporating your company. 

Section 12 provides that you need to create a registered office within 15 days of your company getting incorporated and you have to send proof of the address of the office to the Registrar for verification within 30 days of incorporation or before starting business, whichever comes first.

Related Reads: 

How to Send Company Address for Verification

According to the notification issued by Ministry of Corporate Affairs under the Companies (Incorporation) Amendment Rules, 2019 ("Amendment Rules") that the registered office of a company has to be verified by filing E-form INC – 22 A.

This e-form called as ACTIVE (Active Company Tagging Identities and Verification) requires that you put in details of your registered office such as the phone, water and electricity connection bills, photographs of the interior and exterior of your office building as well as information regarding the Key Managerial Personnel.

Here are all the forms that you need to check out as per the MCA website and this contains information on how you need to file them.

Not filing this e-form will get your company marked as Active Non-Compliant in the MCA records and this will prevent you from changing your company's name and registered office as well as change in Directors except for their resignation.

How You Can Change Your Registered Office

This process is very much similar to the process of changing your company's name. Sections 13(4-6) provides that you need-

  • to give notice to every debenture holder or person(s) whose interests are likely to be affected due to changing the registered office. Usually a notice given in a newspaper suffices as sufficient notice. However, it is best if you give notice in 3 newspapers - one in English, one in Hindi and one in the regional language of the place where your business is located and also email the debenture holders and creditors to the company.
  • You also need a special resolution that approves changing the registered office and,
  • the Central Government's permission for changing the location of the registered office.
You also need to fill some forms which are-
  1. For change in address within a city, you need to file Form INC-22. Here's an instruction kit related to the form.
  2. For changing the address outside the local limits of a city or district, you need to first file eForm MGT-14 and then eForm INC-22.
  3. And, finally for shifting your registered office outside a State, you need to file the forms - MGT-14, INC-23, INC 28 and INC 22.

Shoot For the Stars But First Write it Down in the Objects Clause

This clause basically signifies the reason why a company has been established. It operates as a contract between a company and its members.

In UK, the Companies Act, 2006 has done away with the objects clause. 

However, I find the objects clause to be important in the perspective of an investor because, say you invested in a sports shoe company and you find one day that the company has routed its capital to work on the smartphone sector - wouldn't you be pissed?

You as an investor have invested your money into a business with the idea that it is going to invest its capital into the sector that it advertises to be in. Of course, a company can branch out to other sectors and pursue other objects but that would require it to obtain the consent of shareholders of the company and amend its memorandum.

But still, looking at the new English law, it is not without reason that they have stopped the practice of writing down the objects. According to them, the objects clause has had been a stop-gag on the power of the companies to act.

Here's an Explanation of the Objects Clause as per the English Law

And, to escape them companies have had put down huge, catch-all objects on their memorandum so as to be able to shift from one-object to another.

However, in India the law being to put down the objects, a company can assume the English practice of creating catch-all objects too if they want to broaden their potential business base.

However, do note that you can't frame an objects clause that has anything illegal to Indian laws. Otherwise your company shall be wound up.

For example, in the case of Universal Mutual Aid and Poor Houses Association vs A.D. Thappa Naidu, the appellant company was framed with the illegal purpose of conducting a lottery. 

Although its memorandum stated that the objects of the company was to get donation money which it would apply to charities, in the Articles of Association of the company, they stated that the company had one of its objects to raise money by conducting lotteries.

Now in India, conducting lotteries is illegal if you don't have the Government's permission and as a result the company was subsequently wound up.

Going Ultra-Vires The Objects Can Bring You Trouble

Since the objects exist to keep the company in track of following its stated goals, if you go and so something that's not related to the goals, you can be restricted by the courts.

This restriction stems from a principle called the principle of ultra-vires (actually it's called the doctrine of ultra-vires).

Ultra means beyond and vires means powers. Therefore this principle exists to prevent a company from acting beyond its powers.

However, Indian and English laws have several similarities and this principle has in fact originated from the English case of Ashbury Railway Carriage and Iron Company Ltd vs Riche in 1875.

The application of this principle however under-went a significant change in 1880 due to the judgement given by the House of Lords in the case of Attorney General vs Great Eastern Railway Company

It was held that the doctrine of ultra-vires has to be applied reasonable and therefore if a company pursued any objects that were necessary for, or incidental to achieving its objects, then it would not be made void by the Court.

Plus, the company could pursue anything that had been authorised by the statute.

This application of this doctrine in India has been reaffirmed by a 1963 Supreme Court judgement in the case A. Lakshmanaswami Mudaliar vs LIC.

In this case, the shareholders authorised the directors of the respondent company to donate money to charity. However the Supreme Court held that the donation was ultra-vires the objects of the business as only those donations could be made which would further the company's own objectives.

A third party can not sue your company if one enters into it in a contract that's ultra-vires its objects.

However, if you go ultra-vires your company's objects, you incur some personal liabilities.

Since it is the directors' job to ensure that the capital of the company is used for stuff that are mentioned in its objects clause, if the company uses its resources to pursue something that is nowhere related to its objects, the directors will have to replace the capital used.

This is a very old rule and has been in existence since 1882.

If you are a director of the company, you can also become liable for ultra-vires contracts made with a creditor. For example, in the case of Weeks vs Propert, an 1873 judgement - a railway company gave out a loan of £500 pounds to the plaintiff when in fact the company's powers to issue debentures had crossed its limit. It was therefore held that the company was not liable for the contract and instead the directors were therefore personally to the creditor.

And, that's not all. A member of your company can bring an injunction against you to restrict you from pursuing an ultra-vires venture.

You can't change your objects if-

Usually changing the objects' clause of a company's memorandum is left to the company to decide. But, in order to protect shareholders, some procedures has been laid out.

You can find them in Rule 32 of the Companies (Incorporation) Rules, 2014. I'll briefly go over them here.

If you have raised money from the public by issuing a prospectus, you need to-
  1. Pass a special resolution via postal ballot.
  2. You need to advertise the  resolution, especially the prescribed details in an English newspaper and also a local vernacular newspaper. The vernacular newspaper has to be of the official language of the place where your company's registered office is located.
  3. You also need to put up the prescribed details in the official website of your company. It is best, if you also share the justification behind the resolution being passed.
  4. The promoter (which I'm guessing is you) should give the shareholders who do not agree with the change in the objects' clause an opportunity to exit the company.
As soon as the Registrar goes through the E-forms and documents, he will publish the change in the memorandum of association.

How You Can Change the Objects' Clause in the Memorandum

You can change the objects' clause by the following method-
  • You need to call a board meeting by issuing a notice in accordance with Section 173(3) of the Companies Act, 2013 by giving not less than seven days' of notice to every director.
In the meeting you need to get an in-principle approval of all the directors for a change in the objects' clause. 

You also need to confirm the date and time for the Extra-ordinary General Meeting with the shareholders for changing the objects clause and as per Section 102(1) of the Companies Act, 2013 and approve of the notice of EGM along with Agenda and Explanatory Statement has to be affixed in the notice of the General meeting which shall be sent to the shareholders.

Then you need to authorise the Director or Company Secretary to issue the notice as per Section 101 of the Act.

In the Extra-ordinary General meeting, you need to pass the Special Resolution, as mentioned in Section 13(1) to get approval for changing the objects' clause in the memorandum.

After that's done, you need to file form MGT-14 to the registrar where your company's located along with the following documents-
  1. Altered Memorandum of Association,
  2. Notice of the Extra-Ordinary General Meeting
  3. A Certified true copy of the Special Resolution that has been passed in the meeting.

Now, Let's Limit Your Liability

Limit your liability if your company fails

The reason behind starting a company is because the founders want to limit their liability. Having a business with unlimited liability can cause a lot of problems for the founders as their own personal property becomes liable in case of meeting debts and obligations if the business gets wound up.

Therefore creating a company helps you limit your liability by shares or guarantee. You may even create a company with unlimited liability, but that's just crazy!

Finally, You Need to Mention The Company's Total Share Capital

Shares of your company has to be mentioned in the memorandum of association

Mentioned in Section 4(1)(e) of the statute, this refers to the total nominal capital of the company and the shares into which this capital is divided. Capital can be held in different currencies.

What's Next?

The last part of the memorandum contains the subscriber's declaration. Table A of Schedule 1 of the Memorandum of Association gives an example of the memorandum of a company limited by shares from which this declaration has been used-
We the several persons whose names and addresses are subscribed, are desirous of being formed into a company, in pursuance of this memorandum of association, and we respectively agree to take the number of shares in the capital of the company set opposite our respective names.
In case of a private company, you need at least 2 persons to subscribe to the Memorandum while in case of a public company, you need only 7 persons.

One Person Companies just need one person to subscribe to the memorandum.

How to File Your Own Memorandum

A memorandum has different forms and depending on the type of company you plan on forming, you need to fill out different forms.

The process is extremely simple and it's just that different types of companies have different forms that you need to fill and submit to the Registrar.

Schedule 1 of the Companies Act, 2013 provides a list of tables. Of them, Table A, B, C, D and E provide forms for the memorandum of association.
  • Table A is for a company having a share capital which is limited by shares. 
  • Table B is for a company limited by guarantee and not having a share capital. 
  • Table C relates to a company limited by guarantee and having a share capital. 
  • Table D is for an unlimited company, and
  • Table E is for an unlimited company having a share capital.
After this, the tables give the format of the articles of association relating to different types of companies.

Now you can do this all alone, or you can appoint a lawyer, to do these for you. All you need to do, is execute a document called a power of attorney.

Read Next: What's BootStrapping and Can You Do It With Your Business

Related read: Professional Tax in India: How to Not Get Penalized!

That's all. If you liked this post, feel free to share and if there's anything else that you feel I have missed out, do comment and let me know!
Disclaimer: This article is meant for a general idea relating to the memorandum of a company and is not meant to give professional advice. You are recommended to consult a lawyer when framing your memorandum.


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