Meaning and importance of memorandum and articles of association.

One of the first steps, in the formation of a company is to prepare a document called the “memorandum and articles of association. The memorandum of association of a company contains the fundamental conditions upon which alone the company has been incorporated. According to section 2(28) of the Companies Act, 1956 “Memoramdum” means memorandum of association of a company as originally framed or altered from time to time in pursuance of any previous companies law or of this Act”. This definition, however, does not state the nature of this document nor is indicative of its importance. According to Palmer, the memorandum of association is a document of great importance in relation to the proposed company. It contains the objects for which the company is formed and therefore identifies the possible scope of its operations beyond which its actions cannot go. It defines as well as confines the powers of the company. If anything is done beyond these powers, that will be ultra vires (beyond powers of) the company and so void. 

 

In the celebrated case of Ashbury Railway Carriage &Iron Co. Ltd v. Riche[1875] LR. 7 H.L. 653, Lord Cairns observed : “the memorandum of association of a company defines the limitation on the powers of the company. . . it contains in it both that which is affirmative and that which is negative. It states affirmatively the ambit and extent of vitality and power which by law are given to the corporation and it states, if it is necessary to state, negatively, that nothing shall be done beyond that ambit. . ” Thus, it serves two purposes. It enables shareholders, creditors and all those who deal with the company to know what its powers are and what is the range of its activities. An intending shareholder can find out the purposes for which his money is going to be used by the company and what risk he is taking in making the investment. Likewise, anyone dealing with the company, say, the supplier of goods or money, will know whether the transaction he intends to make with the company is within the objects of the company and not ultra vires its objects. 

 

Introduction to Article of asociation 

“memorandum and articles of association”, both are made at a same time

 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. 

 

According to section 2(2) of the Companies Act, 1956 ‘articles’ means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous companies laws or of the present Act, ia, the Act of 1956’ 

 

The articles regulate the internal management of the company. They define the powers of its officers. They also establish a contract between the company and the members and between the members inter se. This contract governs the ordinary rights and obligations incidental to membership in the company. [Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. AIR 1971 SC 422]. 

 

Articles are like the partnership deed in a partnership. They set out provisions for the manner in which the company is to be administered. In particular, they provide for matters like the making of calls; forfeiture of shares; directors’ qualifications, appo’ ment, powers and duties of auditors‘; procedure for transfer and transmis’ sio f shares and debentures. 

 

Memorandum and article of association Relationship

 

The articles regulate the manner in which the company’s affairs will be managed, The memorandum defines the company’s objects and various powers it possesses; the articles determine how those objects shall be achieved and those powers exercised. But the Companies Act, 1956, does not require the articles to provide for certain specified matters in the same way as it requires the memorandum to do. Consequently, the contents of the articles of different companies may vary substantially, and the utmost flexibility is allowed to the persons who R7111 the company to organise its management as they wish. 

 

The articles of a company are subordinate and controlled by the memorandum of association which is the dominant instrument and contains the general constitution of the company. The memorandum is fundamental and can be altered only under certain circumstances provided by the Act. But the articles are only internal regulations, over which the members of the company have full control and may alter them accordin g to what they think fit. 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 ~ Ashbury v. Watson [1885] 30 Ch. D 376 CA Articles going beyond the Memorandum are ultra vires Shyam Cha ndv. Calcutta Stock Exchange AIR 1947 Cal. 

 

Subject to the rule that the memorandum prevails in the event of a conflict, the memorandum and articles of association are contemporaneous documents, must be read together, and ambiguity or uncertainty in the one may be removed by reference to the other. Thus, 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 the articles to issue shares of different classes resolved the uncertain‘ ty and enabled the company to do so. [He South Durham Brewery Company [1885] 31 Ch. D 26l]. 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. [Rainford v. James Keith and Blackman Company Ltd. [1905] 2 Ch. 147]. Again. where the 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 specific the general words of the memorandum so that the company could have power to mortgage its uncalled capital. [Re Pyle Works (No. 2) [1891] 1 Ch. 173].’ 

 

The “memorandum and article of association” can 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 inconsistent 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 [Duncan Gilmour & Co. Ltd, Re[l952] All. ER 871]. 

 REFERENCE:-

  1. TAX MAN BOOK ON COMPANY LAW

 MORE TOPICS:-

  1. ARTICLE 370 OF INDIAN CONSTITUTION
  2. SECTION 125 OF CRPC
  3. CODIFICATION OF LAW