Memorandum of Association in Company Law

What is actually memorandum?

A memorandum is a type of message or document used for communication within an organization. It is like a reminder or formal memorandum sent to colleagues or employees. Often used to share important information or updates.

What is memorandum of association?

• Memorandum of association of a company is a legal document that sets out the objective about a company. ( This includes details like company's name, objectives, registered office address, and the type of business it will conduct).

• It is an important document when starting a company and must be filed with the Registrar in order to secure the company's registration.

• According to Lord Macmillian, " The purpose of the memorandum is to enable, shareholders, creditors and those who deal with the company to know what is its permitted range of enterprise."

Importance of memorandum of association within an organization !

The memorandum of association is very important within an organization because it defines the policies and procedures for how the business is run. It is an essential document that makes sure everyone is in agreement and keeps things moving along smoothly.

Here are some important points of the memorandum of association within an organization.

1) Legal Foundation : The memorandum of association is a legal document that establishes the company's existence and provides strong foundation for its operations.

2) Establish company's identity : It helps to establish the identity and purpose of the company by providing information about its name, registered office address, and the kind of activity it will do.

3) Objectives and Powers : The memorandum of association sets the company's powers, objectives and limitations, guidelines its activities and decision making process.

4) Protection to shareholders : The memorandum of association provides protection to shareholders by outlining shareholders' rights, obligations, and liabilities within the business.

5) Build trust on investor : The memorandum of association build investor trust by offering clarity and transparency regarding the company's structure, objectives, and operations.

Purposes of memorandum of association !

A memorandum of association serves two important purposes :

• It gives the shareholders information how their money will be spent and the risk involved in purchasing that company's shares.

• Similarly. the supplier of goods or funds will be aware of whether the transaction he plans to carry out with the firm is within the company's authority

Clauses of memorandum of association !

The memorandum of association typically includes clauses that the company's name, registered office, goals, and capital structure. It also includes information regarding each member's liability.

The following are some essential details regarding a memorandum of association's clauses :

1) Name clause : The official or formal name of the business is stated in this clause. It is necessary because it provides the business with a legal identity and sets it apart from other businesses.

In addition to not being sounding too similar to already-existing business, the name must abide by all applicable rules and regulations.

2) Registered office or Domicile Clause : The address of the company's registered office is given in this clause. The registered office is the official address where legal documents, notices, and communications are sent to the company. 

It has to be physical address within the jurisdiction where the company is registered.

The registered office clause is important for two reason :

i) Firstly, it determines the company's domicile. Which gives the state's High court jurisdiction over the registered office.

ii) Secondly, it is at the registered office where the company's statutory books are normally kept, and to which notices and other communication can be sent.

3) Object Clause : The primary goals and ambitions of the business are described in the object clause. It outlines the company's goals and the scope of its activities.

The object clause is essential as it helps define the limits of the business's activities and ensuring that it conforms to its stated goals.

It also helps in understanding of the nature of the company and its objectives by prospective partners. investors, and stakeholders.

4) Capital Clause : The capital clause in a memorandum of association describes the company's authorized capital as well as the share division. It basically describes the company's financial structure.

The maximum amount of capital that a business is allowed to raise is known as authorized capital. It sets a limit on the total amount of shares the company can issue. Potential shareholders and investors may find this to be an important factor.

The capital clause improves to the transparency and clarity of the company's ownership structure. when making an investment or joining the company, It promotes new shareholders and investors in understanding the financial side of business.

5) Liability Clause : The nature of a company member's liability is stated in this clause.

A shareholder's liability in a company having share limits is restricted at the outstanding balance on their shares.

A business that is limited by a guarantee limits its member's liability to the amount that they are willing to pay in the event of the company's winding up.

6) Association Clause : In the Association clause stated the purpose of the subscribers to establish a company and become members.

 

It is a statement made by the initial shareholders, also known as promoters, expressing their will to work together and establish the business according to the guidelines stated in the memorandum of association.

These Clauses together constitute the memorandum of association, an essential document in a company's formation process. It enables the formation of the company's and its member's legal responsibility, rights, and framework.

What is the role of memorandum of association in company formation?

The memorandum of association is essential in the formation of company. It acts as an essential document providing the company's rules and important details. Defining legal frameworks, rights, and duties for both the company and its members is beneficial.

When organizing a company, the memorandum of association plays a number of important roles.

1) Legal Requirement : In many jurisdictions, the memorandum of association is a legal requirement for a company's formation. During the registration process, it needs to be submitted to the proper government agency.

2) Company's Constitution : The company's scope, goals, and functions are explained in the memorandum of association, which serves as its constitution. It makes the nature and goal clear of the business operation.

3) Limited Liability : The memorandum of association outlines the members' liability in case that the company is limited by shares or by guarantee. It states clearly the limits of their liability when the business experience financial difficulties.

4) Share Capital : Information regarding the authorized share capital and share distribution is contained in the memorandum of association. It gives information to new shareholders and investors as well as outlining the ownership structure of the business.

5) Binding Document : Between the company and its members, the memorandum of association is a legal instrument. It sets out the responsibilities and rights of the members as well as the guidelines for how they work with the company.

Overall, a company's memorandum of association plays a crucial role in establishing its operational and legal foundations. It offers the business and its members clarity, transparency, and legal protection.

Some Related Questions -

1) Why is the object clause the most important in memorandum of association of a company?

• The object clause in memorandum of association plays an essential role because it describes the goals and operations of the business. It guarantees that the business stays within the law and helps in defining the range of its operations.

2) How important is the memorandum of association for Indian companies?

• For Indian companies, the memorandum of association has great significance, It is one the essential documents needed for the formation procedure. The company's goals, its scope of operations, and the rights and responsibilities of its members are explained in the memorandum of association.

• It helps define the company's legal identity and acts as its constitution. Important information is also given to stakeholders, including creditors, investors, and regulatory authorities, in the memorandum of association.

• It helps protect the interests of all parties involved and ensures transparency in the business's operations. Therefore, it is safe to say that the memorandum of association is very important to Indian Companies.

3) How do we write a memorandum of association?

To write a memorandum of association, The following important details should be included in your memorandum of association.

• Company Name : Start by defining your company's name properly.

• Registered Office Address : Provide the registered office address for your company.

• Objectives : Describe the primary objectives and operations of your business.

• Share Capital : Explain how shares will be divided among shareholders and how much funds will be invested.

• Liability : Describe the shareholders' or members' responsibilities for the company.