The Memorandum of Association and Articles of Association are the two most important documents that lay the foundation for the formation of a company and its functioning. Memorandum of Association includes the name, place of registered office, capital, objects, and liability clauses. The articles of a company are its bye-laws, i.e., rules and regulations which govern the internal affairs, management, and conduct of its business. Both of these documents are to be registered with the Registrar of Companies at the time of a company’s incorporation.
In this blog, we talk about the concept of Memorandum of Association and Articles of Association, their purpose, contents, distinction, and also the legal effect of these documents.
Meaning and purpose of Memorandum of Association (MOA)
The first and foremost step in the incorporation of a company is to prepare a document called the memorandum of association. In fact, this is one of the pre-requisites for forming any type of company under the Companies Act, 2013. The memorandum is the fundamental document on which the constitution and structure of a company are built. It defines the objectives that the proposed company will pursue, the scope of its activities beyond which it cannot go, and its relationship with the outside world.
In the prominent case of Ashbury Railway Carriage & Iron Co. Ltd. vs. Riche (1875), it was observed that the memorandum is the charter document of a company that defines the limitations of its powers. It states the ambit of powers which are given to the company by law as well as signifies that nothing shall be done beyond that ambit.
If a company engages in an act that is not stated in the Memorandum as the objects or powers, it is prohibited by the doctrine of ultra vires. Thus, such an act is void and does not bind the company even though all members assent to it.
Meaning and purpose of Articles of Association (AOA)
A company’s articles of association are its bye-laws, which are the rules & regulations that regulate the administration of its internal affairs and the conduct of its operations. Articles play a critical role in the affairs of a company.
While the memorandum establishes the scope and powers of the business, the articles of association define how the company’s objectives are to be carried out and can be framed and modified by the members. They must, however, remain within the parameters established by the memorandum and the Companies Act.
A company’s articles are subordinate to and subject to its memorandum of association, and any provision in the articles that goes beyond the memorandum is considered ultra vires. However, the articles are just internal corporate regulations, which the members of the corporation have complete authority over and may alter as they see fit. Thus, only care must be taken to ensure that the rules set out in the articles do not exceed the company’s powers as defined by its memorandum [Ashbury v. Watson, (1885)].
Major points of Difference between Memorandum of Association and Articles of Association
The following are the key differences between the memorandum and articles of association:
The memorandum of association is the company’s charter and establishes the essential criteria and purposes for which the company is given an incorporation certificate. The articles of association are the rules and regulations that govern the company’s internal management.
The memorandum of association cannot be easily amended. The clauses of the memorandum can only be altered in the manner authorized by the Act. In some situations, alterations need the approval of the Central Government or a Court. On the other hand, members have the right to alter the articles of association by a special resolution. In general, there is no need to seek authorization from the Court or the Central Government to change the articles.
Furthermore, as per Section 15(1), every alteration made to a company’s memorandum or articles must be documented in every copy of the memorandum or articles, as the case may be. If a company fails to comply with the terms of Section 15(1), the company and any official who fails to comply shall be subject to a penalty of one thousand rupees for each copy of the memorandum or articles issued without such alteration [Section 15(2)].
3. Overriding effect:
Any clause in the memorandum of association that is contradictory to the provisions of the Companies Act is prohibited. It should be noted that in case the memorandum of a company contains anything contrary to the provisions of the Companies Act, the Act shall override the clauses of the memorandum (Section 6).
The articles of association are subordinate to both the Companies Act and the memorandum of association. In other words, the articles must not contain anything unlawful or in violation of the memorandum, nor should they be inconsistent with the provisions of the Companies Act, 2013.
4. Relationship between members:
The memorandum outlines the relationship between the entity and outsiders, whereas the articles govern the relationship between the entity and its members, as well as among the members themselves.
5. Ratification of acts done beyond the scope:
As discussed previously, acts performed by an entity outside of the scope of the memorandum are null and invalid, and cannot be ratified even by a unanimous vote of all shareholders. The shareholders, on the other hand, can ratify the actions of directors that are not addressed by the articles, i.e., that go beyond the scope of the articles (as long as they are not ultra vires the memorandum).
Section 4(6) of the Companies Act specifies the format that a Memorandum of Association should have. A company can adopt any of the formats specified in Tables A, B, C, D, or E of Schedule I to the Act, as may be applicable to the type of such company.
- Form in Table A applies to companies limited by shares.
- Form in Table B applies to companies limited by guarantee not having a share capital.
- Form in Table C applies to companies limited by guarantee having a share capital.
- Form in Table D applies to unlimited companies not having a share capital.
- Form in Table E applies to unlimited companies having a share capital.
For articles, a company can either fully or partially adopt the model Articles of Association laid down in the Act such as Table F (for a Company limited by shares), Table G (for a company limited by guarantee), Table H (for a company limited by guarantee and not having a share capital), Table I (for an unlimited company and having a share capital) and Table J (for an unlimited company not having a share capital) (as the case may be) of Schedule I to the Companies Act, 2013 or it can frame its own Articles which are not inconsistent with the sections of the Act or rules made thereunder.
7. Contents of these documents:
The contents of a memorandum are as follows:
- Name clause specifying the name of the company (Whether it is public or private)
- Situation clause specifying the state in which the registered office is situated
- Objects clause specifying the objects for which the company is being formed
- Liability clause stating that the liability of members is limited or unlimited
- The capital clause stating the amount of the capital with which the company is registered
- Subscription clause showing that the subscribers agree to subscribe to the prescribed number of shares against their name in the memorandum
The articles outline the rules and regulations that a corporation has established for its own operations. In general, the articles should include the following information:
- Adoption of preliminary contracts
- Number and value of shares
- Issue of preference shares
- Alteration of capital
- Conversion of shares into stock
- Meetings and rules regarding committees
- Voting rights and proxies
- Directors, their appointment, and delegations of powers
- General meetings and Directors’ meetings
- Borrowing powers
- Remuneration of directors
- Managing director, Whole-time Director, Manager, Secretary
- Audit committee
- Dividends and reserves
- Accounts and audit
8. Key information:
The memorandum of a company comprises information about its powers, the scope of activities, and objectives. On the other hand, the articles of association mainly comprise information about the rules and regulations of the company.
Comparison table on Memorandum of Association vs Articles of Association
|Basis of difference||MOA||AOA|
|Meaning||Fundamental document on which the constitution and structure of a company are built||Bye-laws, i.e., rules and regulations which govern the internal affairs, management, and conduct of a company|
|Key information||A company’s powers and objectives||A company’s rules and regulations|
|Alteration||Cannot be easily amended||Members have the right to alter the articles of association by a special resolution|
|Overriding effect||Subordinate to the Companies Act; Act shall prevail if there is a contradiction||Subordinate to both the Companies Act and the memorandum of association|
|Relationship between members||Relationship between the entity and outsiders||Relationship between the entity and its members, and among the members themselves|
|Ratification of acts done beyond the scope||Null and invalid, and cannot be ratified even by a unanimous vote of all shareholders||Can be ratified by shareholders as long as they are not ultra vires the memorandum|
|Contents||6 clauses (name, place of registered office, capital, objects, subscription, and liability clauses)||Rules and regulations that a corporation has established (for example, in relation to General meetings and Directors’ meetings, Voting rights and proxies, etc.)|
|Format||Tables A, B, C, D, or E of Schedule I||Tables F, G, H, I, J of Schedule I or frame own articles|
The legal effect of these documents
The clauses of the Memorandum of Association are compulsory and are designated as “conditions prescribed by law” based on which a company is incorporated. When the memorandum and articles are registered, they bind the company and its members to follow all of the requirements of the memorandum and articles.
It is always advisable to read the memorandum and articles of a company before dealing with it so as to obtain a fair idea about the company’s scope of operations, powers of the Board, relationship with stakeholders, and similar aspects.
List of references:
- Ashbury Railway Carriage & Iron Co. Ltd. vs. Riche, (1875) L.R. 7 H.L. 653
- Ashbury v. Watson, (1885) 30 Ch. D 376 (CA)
- Companies Act, 2013: Section 6
- Companies Act, 2013: Section 15(1) and (2)
- Companies Act, 2013: Section 4(6)
- Schedule I to the Companies Act, 2013
- Memorandum of Association Format – Download MOA Sample Template. (2022). Retrieved 24 March 2022, from https://cleartax.in/s/memorandum-of-association-moa
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