The Constitutional Documents of a Company
- Sanjeev Ramakrishnan and Siddharth Rana
- Apr 6, 2021
- 6 min read
Updated: Apr 16, 2021
The constitutional documents of a company are those which define the aim and objectives of your organisation and provide for the internal workings of your corporation. Throughout the course of this blog post, we will discuss these documents, namely the Memorandum of Association and the Articles of Association, both of which are essential for the existence and continued functioning of your company.
Memorandum of Association ("MOA")
The Memorandum of Association is one of the most important documents of a company, whose contents are binding on both, the organization and its members. The purpose of the MOA is to "delimit and identify the objects in such plain and unambiguous manner as that the reader can identify the field of industry within which the corporate activities are to be confined."[i] The MOA of a company in other words, is a contract that defines the relationship of the organisation with the outside world i.e., the third parties. A company cannot seek its registration without an MOA that is valid in the eyes of law.
The meaning of MOA is defined under Section 2(56) of the Companies Act, 2013 (“the Act”) and its format is detailed in Table A, Schedule 1 of the Act. It is a rigid document as opposed to the Articles of Association and alterations (if any) are to be made in compliance with Section 13 of the Act.
Contents of MOA
Any MOA must contain the below-mentioned clauses and are to be addressed by all companies in their respective MOA’s:
Name Clause – For a company to have a distinct legal identity, it requires its own unique name. The name is bound by a few restrictions, namely, that it should either end with “limited” or “private limited” depending on the type of the company,[ii] that it must not resemble the name of an existing company, that it must not insinuate the involvement of a government nor violate the provisions of the Emblems and Name Act, 1950. The law also stipulates that the name must be displayed at every place where the company conducts its business activities and that the name must be placed in all modes of communication the company uses, including its seals.
Registered Office Clause – Every company must have a registered office from where it makes communications, and the address of the office is to be registered within thirty days of its incorporation. However, there is no compulsion that the company is to carry out its business activities from the registered office.[iii] The registered office can also be in a different state than the state(s) where the firm conducts its business. The purpose for this clause in terms of the MOA is that it clarifies the state in which the company’s registered office is situated and thus, laying out its domicile for matters pertaining to jurisdiction.[iv]
Objects Clause – This is the most important clause of the MOA, as it states the reason as to why the company was created in the first place, the object of the company and any other matter that is required by the company for the furtherance of its object. This clause elaborates on the scope within which a company can operate. Therefore, to reduce disagreements and to increase the scope of operations, companies now draft extensive objective clauses to avoid the problem of “going beyond the scope of its object”. However, the objects clause cannot be written ambiguously nor can it be interpreted in an open-ended and inclusive fashion.[v] A company can perform a particular act only if such act is directly or at least proximately related to the company’s objects as detailed in the objects clause. A particular act will be deemed as ultra-vires in situations where a company performs a task that is outside the scope of the objects clause. In addition, the objects of the company must not be- a) illegal, b) immoral, c) against public policy or the laws in force at time, or d) ambiguous/vague in nature.
Liability Clause – In the case of a limited liability company, it is important to specify the liabilities of the members involved, and whether such liability is affixed to shares or by guarantees. In such a case, the MOA must state the amount of fixed assets each member will contribute in a situation where the company does go out of operation. In case of a one-person company, the MOA must state the name of the person who will be the member in the case the original subscriber dies.
Share Capital Clause – In the case of a company with share capital, the amount of share capital as well as the number of shares that each subscriber holds must be stated in the MOA and every subscriber in a company must hold at least one share. This clause is an extension and explanation of the rules of the liability clause. A company may be subject to a penalty when it publishes any material that mentions the authorized capital of the company while it fails to mention the amount of capital subscribed and paid up for in a prominent position.
Association/Subscription Clause – It is a declaration that is made in the MOA by the subscribers of the company to show a desire to form an association with each other as well as to agree to and abide by all the terms in the MOA. For a public company, at least seven persons should be signatories, while the minimum limit is set at two persons for private companies. In both cases, at least one independent witness is required who is not a signatory to the MOA.
Articles of Association ("AOA")
The AOA is a document which provides for the day to day internal working mechanisms of any corporation. AOA has been defined under Section 2(5) and provided under Section 5 of the Act. Unlike an MOA, there are 91 clauses in the AOA of a company limited by shares. Depending on the nature of the company, i.e., whether limited by shares, guarantee or unlimited, Tables F to J of Schedule 1 provide for different clauses of AOA. These deal with the appointment of directors, alteration of the share capital, general meetings, buy-back of shares, voting rights, dividends and reserves etc. It is important to note that clauses of the AOA cannot be in violation of the Act and the MOA.
Any agreement entered by the company with shareholders and investors has to be in compliance with the AOA as the AOA is binding on the company. Consequently, anything contained in such agreements which is contrary to the AOA will not hold the company liable for the same. Therefore, it is extremely essential that either the agreement is kept in compliance with the AOA, or that if anything is to the contrary, then it is included in the AOA through amendment to ensure enforceability against the company.
Amendment of Constitutional Documents
MOA and AOA can be amended under Sections 13 and 14 of the Act respectively by passing a special resolution before the board. However, the same needs to be notified to the Registrar of Companies only after which the amendments become effective. While the changes in the MOA are either approved by the Central Government or the Registrar, certain changes in the AOA such as the conversion of a public company into a private company are only approved by the Tribunal. All such amendments require the convening of Board meetings after which the Board resolutions are to be approved by the shareholders and finally registered with the Registrar.
Conclusion
Through the course of this article, we see the key clauses that form a part of a company’s constitutional documents. The MOA is one of the most vital documents of a company that defines its purpose, scope, liabilities and to a large extent, its existence with respect to the outside world. Companies usually avoid amending their MOA as it is a rigid document by nature, and its alteration requires a special resolution. Even if a special resolution is passed in favor of the alteration, continual modification of the MOA may lead to the loss of reliability on the MOA, which consequently reflects poorly on the company.
The AOA on the other hand, is vital for the smooth internal functioning of the company and helps regulate the most basic day to day decisions involved in the company. Therefore, it is important for a particular company to draft these constitutional documents in a detailed and comprehensible manner to create flexibility, to help reduce disputes within the organisation and with external parties, and thereby assist with the effective functioning of the organisation.
This post is written by Siddharth Rana and Sanjeev Ramakrishnan, students at Jindal Global Law School and Members, Legal Entrepeneurship Cell.
very well written :)