Every entrepreneur is excited about the first step of starting a business, which is giving it a legal identity by getting a company registered. Companies are governed through legal documents that pan out the do’s and don’ts for it. Commonly known as company charter, Memorandum of Association (MOA) and Articles of Association (AOA) define company’s scope of work and its internal management. Drafting of these documents is one of the most critical steps in Private Limited Company registration process.
Memorandum and Articles are supreme legal documents forming the company’s constitution. They are indispensable, and the foundation of a company stands on it. Therefore, drafting them requires utmost precision and clarity. Let us look into the meaning and importance of articles of association and memorandum of association.
What is MoA and AoA?
MoA is an abbreviation for Memorandum of Association, and AoA stands for Articles of Association. They safeguard and structure your business, helping in establishing the company’s identity, working methodology, and goal.
Memorandum of Association
As per the Companies Act, 2013, a memorandum covers the following essentials;
A. Name Clause
- Is usually written in the opening paragraph of the article.
- States the name under which the company functions.
- States whether the company is a private limited or a public limited.
Now, there are certain key points to keep in mind while choosing the name of the company. They are;
- Having a unique name and not identical to an existing company.
- Not having any offensive words, connotations, or “sensitive” expressions that may offend any cultural or religious community.
- Not indicating a connection with the government or local authorities unless you have a permission to do so.
B. Situation clause
This clause mentions the State in which a company has its registered office. If the future demands changing of registered office address, then the same must be updated in it.
C. Object Clause
This clause defines the purpose for company formation. This is usually not altered or changed. Hence drafting of this clause is very crucial and should be done with precision and expertise. The company cannot carry on any activity that is not part of object clause of MOA. Such activities are called Ultra Virus (beyond powers) and cannot be ratified even by members.
D. Liability clause
This clause states the liability of members of the company. It can be limited either by shares or guarantee. This clause is omitted in case of an unlimited liability.
E. Capital Clause
This clause specifies the maximum amount of capital a company can raise along with its distribution into shares. The company can only secure a specified capital amount mentioned in this clause. Any special rights or privileges are given to shareholders are mentioned here.
F. Subscription clause
This clause has the names, addresses and the details of its first subscribers. A private limited company needs at least two members. Public limited companies will have a minimum of seven members. It is mandatory for these subscribers to take at least one share.
Articles of association
This is the secondary document playing a vital role in defining the company’s internal workings, their rights, duties and management. It contains the by-laws and other rules & regulations that a company runs by. The contents of AoA remain in sync with the MoA and the Companies Act.
Contents of Articles of Association:
A. Details regarding the shares of a company
- Classes and valuation of shares.
- Transfer, conversion, Lien, and forfeiture of shares.
- Rights attached to the shares and rules about the alteration of capital.
- Rules regarding the minimum subscription and conversion of fully paid shares into stock.
B. Details regarding directors’ rights, duties, and their removal
- Directors appointment, powers, and duties. Borrowing rights of the Board of Directors and the procedure to remove them.
C. Details regarding holding and conducting meetings
- Conducting Meetings, maintaining minutes, and sending out notices. It also states rules regarding voting rights and proxy that includes quorum required with the percentage of votes with directors. It mentions the accounts & audit, and appointment and remuneration of auditors.
D. Process and rules regarding winding up of the company
It is possible to make alterations in the articles if that benefits the company. But that should not be in contradiction with any third-party contracts. This alteration is done by passing a special resolution by filing a copy of it with the Registrar, within 30 days of its passing. Such alteration should not, in any way, increase the liabilities of its existing members.
Difference between MoA and AoA
||Defines the constitution of a company.
||A set of rule and regulations governing the company’s working.
||Defines the objectives, powers and constraints of the organization.
||Describe powers, duties, rights and liabilities of individuals associated with the organization.
||Six clauses are mandatory.
||Its drafting is as per the requirements of the organization.
||It is a mandatory document for all the companies.
||Can opt for Table A instead of AoA in public limited company by shares.
||Filing at the time of company registration.
||Filing at the time of company registration is optional.
||A supreme legal document for company and subordinate to Companies Act.
||A subordinate to the MoA.
||A dominant document that helps drafting AoA.
||Any article in this document that contradicts to the MoA is considered null and void.
||Cannot be amended with retrospective effect.
||Can be amended retrospectively.
||Section 2 (28) of the Companies Act 1956 defines it.
||Section 2 (2) of the Companies Act 1956 defines it.
||It is subordinate to the Companies Act.
||Subordinate to the Companies Act, as well as is memorandum.
||Defines the objectives of a company.
||Defines regulations with which the company will achieve objectives defined in MOA.
Memorandum of Association and Articles of Association are very important documents. They help the owners to run the company with ease and helps in streamlining the business.
Properly defined functions and rules increase efficiency and transparency. Hence, they are indispensable for any private or public limited company.