Memorandum of Associations & Article of Associations: The difference

AMITY LAW SCHOOL (AMITY UNIVERSITY U.P.) LUCKNOW

COMPANY LAW ASSIGNMET On

Memorandum of Association & Articles of Association: The Differences

Submitted to:

Submitted by:

Ms. Annpurna Sinha

Animesh Kumar

Lecturer

B.A.LL.B. (H); VII Sem. Enroll. No. A8108309035

COMPANY LAW ASSIGNMENT

DISCLAIMER This project / assignment have been prepared by the author in capacity of a student of B.A.LL.B. (H) for academic purposes only. The views expressed in the assignment are personal to the author and do not necessarily reflect the view of any other person(s) or authority. This assignment is the intellectual property of the Amity Law School Lucknow and the same or any part thereof may not be used in any manner whatsoever, without express permission of the Amity Law School Lucknow in writing. Every effort has been made to avoid errors and mistakes; however their presence cannot be ruled out.

Animesh Kumar, Amity Law School Lucknow | DIFFERENCE BETWEEN MOA & AOA

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COMPANY LAW ASSIGNMENT ACKNOWLEDGEMENT The assignment work bears the imprint of many people, and I express my gratitude to all those who have helped me and rendered their help in all the possible ways in a completion of my assignment. It is a matter of immense pleasure to express my gratitude to my Hon’ble faculty Ms. Annpurna Sinha (Lecturer) for her guidance and excellent insights which gave direction and focus to this paper. I thank her for lending her precious time in making this assignment an authentic piece of work. She regularly guided me. I also owe sincere gratitude to the staff at library for always helping in the process of finding material and other sources for research. I am very grateful to all the individuals involved in the subgroup for their contributions and assistance in compiling this assignment and the recommendations that go with it: they are the outcome of an open, interactive and creative cooperation. I also thank social networking site for searching the required information in precise and as per needed. How I can forget to give credit and my satisfaction to my friends. My institution and family really supported me throughout in my endeavours to which I am honoured to thank. My sense of gratitude is due to AMITY LAW SCHOOL, LUCKNOW. At last, I express my heartfelt gratitude to the God Almighty, without whose blessing and motivation, the completion of this assignment would have been impossible. Thanks to all.......

Animesh Kumar

Animesh Kumar, Amity Law School Lucknow | DIFFERENCE BETWEEN MOA & AOA

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COMPANY LAW ASSIGNMENT INDEX INTRODUCTION......................................................................................................................1 RELATIONSHIP.......................................................................................................................3 THE LEGAL EFFECTS OF THE MEMORANDUM..............................................................5 LEGAL EFFECT OF THE ARTICLES....................................................................................5 DIFFERENCES.........................................................................................................................7 BIBLIOGRAPHY......................................................................................................................8

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COMPANY LAW ASSIGNMENT INTRODUCTION MOA and AOA stand for Memorandum of Association and Articles of Association respectively and are important source of information for shareholders and other stakeholders in a company that has been duly incorporated. These are documents that are necessary at the time of formation of a company and must be deposited with the registrar of companies who approves the incorporation of the company. Though there are similarities, there are differences between Memorandum of Association and Articles of Association that need to be highlighted for the benefit of all those who are stakeholders in a company or are potential investors as these documents reveal a lot about a company. Every company incorporated by registration with the Registrar of Companies must have these memorandums. Memorandum and Articles are public documents. They are inter-linked and require to be registered for the formation of a company. Where there is any ambiguity or where the memorandum is silent on any point, the articles may serve to explain or supplement the memorandum. The memorandum of association of a company, often simply called the memorandum (and then often capitalised as an abbreviation for the official name, which is a proper noun and usually includes other words), is the document that governs the relationship between the company and the outside. It is one of the documents required to incorporate a company in the United Kingdom, Ireland, India, Bangladesh, Pakistan and Sri Lanka, and is also used in many of the common law jurisdictions of the Commonwealth. The memorandum of association of a company contains fundamental conditions upon which alone company has been incorporated. „Memorandum‟ means “memorandum of association of a company as originally framed or altered from time to time in pursuance of any provision of company laws or of this Act”1. Egyptian Salt and Soda Co. Ltd. v. Port Said Salt Association Lid2 court held that the Memorandum shows the range of the enterprise. The memorandum is the foundation on which the superstructure of the company has been built up. It enables the shareholders, creditors and outsiders to show the permitted activities of the company. The memorandum constitutes the company‟s charter with the outside world and contains a number of statutory clauses. The memorandum of association records the agreement of the first subscribers to form a company under the 2006 Act, to become members and, in the case 1

§ 2(28) Company Act 1956

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(1931) A. C. 677 Animesh Kumar, Amity Law School Lucknow | DIFFERENCE BETWEEN MOA & AOA

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COMPANY LAW ASSIGNMENT of a company that is to have a share capital, to take at least one share each. The memorandum no longer restricts what a company is permitted to do. Since October 2009, if a company's constitution contains any restrictions on the objects at all, those restrictions will form part of the articles of association. Historically, a company's memorandum of association contained an objects clause, which limited its capacity to act. When the first limited companies were incorporated, the objects clause had to be widely drafted so as not to restrict the board of directors in their day to day trading. In the Companies Act 1989 the term "General Commercial Company" was introduced which meant that companies could undertake "any lawful or legal trade or business." The articles of association of a company are its bye-laws or rules and regulations that govern the management of its internal affairs and the conduct of its business. „Articles‟ means “article of association of a company as originally framed or as altered from time to time in pursuance of any previous company laws or of the present Act, i.e., the Act of 1956”3. A company is an incorporated body. So there should be some rules and regulations are to be formed for the management of its internal affairs and conduct of its business as well as the relation between the members and the company. Moreover the rights and duties of its members and the company are to be recorded. There comes the need and origin of Articles of Association. The Articles of Association is a document which contains rules, regulations and bye-laws regarding the internal management of the company. Articles must not violate any provision of the memorandum or any provision of the Companies Act. The rules laid down in the articles must always be read subject to the rules contained in the memorandum. In corporate

governance,

a

company's articles

of

association (called articles

of

incorporation in some jurisdictions) are a document which, along with the memorandum of association (in cases where the memorandum exists) form the company's constitution, defining the responsibilities of the directors, the kind of business to be undertaken, and the means by which the shareholders exert control over the board of directors.

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§ 2(2) Company Act 1956 Animesh Kumar, Amity Law School Lucknow | DIFFERENCE BETWEEN MOA & AOA

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COMPANY LAW ASSIGNMENT RELATIONSHIP Lord Crains in Ashbury Railway Carriage & Iron Co. v. Riche4 described the relationship between memorandum and article in this language: “The memorandum is as were, the area beyond which action of company cannot go; inside the area, the shareholders may make such regulations for their own government as they think fit.” 1. The Articles are subordinate to Memorandum. 2. The Memorandum must be read in conjunction with Articles. 3. The terms of the Memorandum cannot be modified or controlled by the Articles. 4. The memorandum is fundamental and can be altered only under certain circumstances provided by the Act. 5. The Articles are only internal regulations, over which the members of the company have full control and may alter them according to what they think fit. The article regulates the manner in which the company‟s affairs will be managed. The memorandum defines the company‟s object and various powers it possesses; the articles determine how those objects shall be achieved and those powers exercised. In case of Ashubury v. Watson5 court held that care has to be taken to see that regulations provided for in the articles do not exceed the powers of the company as laid down by its memorandum. In Shyam Chand v. Catcutta Stock Exchange6 Articles going beyond the Memorandum are ultra vires. Where the memorandum was silent as to whether the company‟s shares were to be all of one class or might be of different classes, it was held that a power given by articles is to issue shares of different classes resolved the uncertainty and enable the company to do so.7 Where the memorandum of a trading company empowered to do all things incidental to achieving the object, it was held that provision in the articles empowering the company to lend money merely exemplifies the general words of the memorandum, and the company was, therefore, entitled to lend money to its employees. 8 Again, where memorandum empowered the company to borrow on the security of its assets or credit and the articles provided that it might mortgage its uncalled capital, it was held that the articles merely made 4

(1875) LR 7 HL 653

5

[1885] 30 Ch. D 376 CA

6

AIR 1947 Cal. 337

7

Re, South Durham Brewery Company [1885] 31 Ch. D 261

8

Rainford v. James Keith and Blackman Company Ltd. [1905] 2 Ch. 147 Animesh Kumar, Amity Law School Lucknow | DIFFERENCE BETWEEN MOA & AOA

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COMPANY LAW ASSIGNMENT specific the general words of the memorandum so that the company could have power to mortgage its uncalled capital.9 The memorandum and articles van be read together only to remove an ambiguity or uncertainty. If the memorandum is perfectly clear, a doubt as to its meaning cannot be raised by reference to the articles; in such a case the articles are simply inconsistence with the memorandum and are disregarded. Thus, where the memorandum exhaustively defined the rights of preference shareholders, and the articles provided that on a winding up the company‟s surplus assets, after paying all its debts and repaying share capital, should be distributed among all its shareholders, it was held that preference shareholders were not entitled to share any surplus assets; because their rights were to be ascertained from the memorandum alone, and the memorandum did not confer the right to participate on them.10

9

Re Pyle Works (No.2) [1891] 1 Ch. 173

10

Duncan Gilmour & Co. Ltd., Re [1952] All ER 871 Animesh Kumar, Amity Law School Lucknow | DIFFERENCE BETWEEN MOA & AOA

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COMPANY LAW ASSIGNMENT THE LEGAL EFFECTS OF THE MEMORANDUM The Contractual Powers of a Company A Company or a Corporation is an artificial person created by law. It is a legal person capable of suing and of being sued. But the contractual powers of a company are limited in two ways: 1) natural possibility and, 2) legal possibility. I.

Natural Possibility: The fact that a company is an artificial person leads to the result that a company must always enter into contract through agents,

II.

Legal Possibility: A joint stock company cannot enter into any contract the object of which goes beyond the memorandum of association of the company. A statutory corporation cannot enter into any contract which is beyond the scope of its powers as laid down in the statute by which it was created.

LEGAL EFFECT OF THE ARTICLES Section 36 of the Act provides that, “subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent. It‟s if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles.” Binding Contract Thus the articles constitute a binding contract between the company and its members. Beattie v. E & F Beattie Ltd 11, Hanuman Prasad v. Hiralal.12 A company is bound to the members in the same manner as the members are bound to the company. The Articles constitute a contract between members. But the Articles do not constitute any binding contract as between the company and an outsider. The provisions of the articles can be enforced by suit by the company and the members.

11

[1938] Ch 708 (CA) 714

12

[1970] 40 Comp Cas 1058, 1061; AIR 1971 SC 206 Animesh Kumar, Amity Law School Lucknow | DIFFERENCE BETWEEN MOA & AOA

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COMPANY LAW ASSIGNMENT But if the articles are violated by a member, a suit for the enforcement of the articles can be brought only by the Company and not by other-members, unless the person against whom relief is, sought, controls the majority of shares and will not allow a milt to be brought in the name of the company. Burland v. Earle13, The Dhakeswari Cotton Mills Ltd. v. Nilkamal Chakravorty & Ors. 14 The articles come within the definition of public documents. All persons dealing with the company are presumed to know the provisions of the articles. So if anything is done contrary to or beyond the provisions of the articles, the company is not bound. Examples: i.

The articles of a company provided that the company will have a first charge on the shares for debts due to the company from the members. A member, owing money to the company, borrowed money from a bank on the security of the shares. Held, the company‟s claim would have priority because of the provision in the articles, Bradford Banking Company v. Briggs & Co.15

ii.

The articles of a company provided that if a member became insolvent, his shares were to be sold to a nominee of the company at a fixed price. Held the provision was binding and the trustee in bankruptcy cannot claim the share. Borland’s Trustee v. Steel Brothers & Co Ltd.16

iii.

By a special resolution the Company reduced the remuneration of each director, with retrospective effect from the end of the preceding year. Held, the company can vary the terms of the service as to the further but it cannot vary the terms adversely with retrospective effect Sawby v. Port Darwin Gold Mining Co.17

13

[1902] AC 83, 93

14

AIR 1937 Cal 645, 173 Ind Cas 622

15

(1886) 12 AC 293

16

[1901]1 Ch 279

17

[1889] 1 Meg. 385 Animesh Kumar, Amity Law School Lucknow | DIFFERENCE BETWEEN MOA & AOA

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COMPANY LAW ASSIGNMENT DIFFERENCES Memorandum and articles are public documents. They are inter-linked and require to be registered for the formation of a company. Where there is any ambiguity or where the memorandum is silent on any point, the articles may serve to explain or supplement the memorandum. Beyond this, the two documents have nothing in common and differ from one another in the following respects: The memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated. It defines and limits the objects of the company beyond which the action of the company cannot go. The articles are the internal regulations of the company and are subsidiary to the memorandum. The memorandum is subordinate to the Act only, while the articles are not only subordinate to the Act but also to the memorandum. The memorandum must compulsorily be filed with the Registrar by all types of companies at the time of incorporation while a public company limited by shares need not file a separate set of articles at the time of incorporation as it may choose to adopt 'Table A'—the model set of articles. The memorandum defines the relation between the company and the outsiders e.g., creditors, buyers, sellers, debtors and members etc. Articles govern internal relationship between the company and the members and generally have nothing to do with the outsiders. The memorandum cannot be easily altered while articles are easily alterable by passing a special resolution only, Acts done by a company ultra vires the memorandum are void and cannot be ratified by the shareholders. But acts done by a company ultra vires articles but inter vires the memorandum are simply irregular and not void and can be ratified subsequently by the shareholders. Outsiders have no remedy against the company for contracts entered into ultra vires the memorandum, while they can enforce the contract against the company even if it is ultra vires the articles i.e., where some formality relating to internal regulation like passing of the required resolution, might have not been performed, provided they act carefully and had no notice of the irregularity.

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COMPANY LAW ASSIGNMENT BIBLIOGRAPHY BOOKS REFERRED:  Davies, P. L. (Paul Lyndon), 1944-. - Introduction to company law / Paul L. Davies.Oxford: Oxford University Press, 2002. - (Clarendon law series).  Dine, Janet. - Company law. - 4th ed. - Basingstoke: Palgrave, 2001. - (Palgrave law masters)  Ferran, Eil´‡s. - Company law and corporate finance / Eil‡s Ferran. - Oxford : Oxford University Press, 1999.  Griffin, Stephen. - Company law: fundamental principles / Stephen Griffin. - 3rd ed. Harlow: Longman, 2000.  Hicks, Andrew. - Cases and materials on company law / Andrew Hicks & S.H. Goo. 4th ed. - London: Blackstone, 2001.  Majumdar A.K. & Kapoor G.K., Companty Law, Taxman, 15 Edn.  Mayson, Stephen W. - Mayson, French & Ryan on company law / Stephen W. Mayson, Derek French and C. - 2002-2003. - 19th ed. - Oxford: Oxford University Press, 2002.  Pettet, B. G. - Company law / Ben Pettet. - Harlow: Longman, 2001. - (Longman law series).  Proctor, Giles. - Corporate governance / Giles Proctor, Lilian Miles. - London: Cavendish, 2002.  Singh Avtar: Indian Company Law, Eastern Book Co. WEBSITES REFERRED:  www.dsiidc.org  www.lawyersnjurists.com  www.manupatra.com  www.nsdcindia.org  www.publishyourarticles.net  www.scconline.co.in  www.scribd.com  www.ssrn.com  www.sweetandmaxwell.co.uk

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