Distinction between Memorandum of Association and Articles of Association

Memorandum of Association (MoA) is a pivotal legal document that lays the foundation for the existence and functioning of a company. It defines the company’s relationship with the external world, setting out its objectives, operational scope, and boundaries. Every company in India is required to have an MoA, which must be submitted at the time of incorporation under the Companies Act, 2013.

MoA serves as a constitution for the company and provides clarity to shareholders, creditors, and third parties regarding the nature and purpose of the business. It outlines what the company can and cannot do, ensuring that its operations remain within defined legal limits. If a company acts beyond the powers outlined in the MoA, such actions are considered ultra vires (beyond the powers) and can be deemed invalid.

Features of Memorandum of Association

1. Defines Scope of Company’s Activities

The most crucial feature of the MoA is that it sets the boundaries within which the company can operate. The company must adhere to its stated objectives, and any activity outside these objectives is considered ultra vires. The MoA ensures that shareholders and external parties know the company’s exact scope of business.

2. Public Document

MoA is a public document once registered with the Registrar of Companies (RoC). This means that anyone, including shareholders, creditors, and the public, can inspect it to understand the company’s objectives and its operational limits. The transparency provided by the MoA allows stakeholders to assess whether the company is operating within its legal framework.

3. Binding on the Company and its Members

MoA serves as a contract between the company and its members (shareholders), as well as between the company and third parties. Once registered, both the company and its members are bound to the clauses of the MoA. Neither the company nor its members can act beyond the provisions of the MoA, ensuring compliance with legal requirements.

4. Contains Key Clauses

MoA consists of several important clauses, each serving a specific function. These are:

• Name Clause: Specifies the name of the company.
• Registered Office Clause: States the location of the company’s registered office.
• Object Clause: Defines the company’s main objectives and any incidental activities.
• Liability Clause: Limits the liability of shareholders.
• Capital Clause: Outlines the company’s authorized share capital.
• Subscription Clause: Lists the initial shareholders and the shares they agree to take up.

Each of these clauses is essential to the company’s structure and operation, and together they provide a complete picture of the company’s legal identity.

5. Rigid Document

MoA is a relatively rigid document that cannot be easily altered. Any changes to the MoA require approval by a special resolution of the shareholders, and in some cases, permission from external authorities, such as the National Company Law Tribunal (NCLT). This rigidity ensures that the company’s core objectives and legal framework remain stable.

6. Governs Company’s External Relationships

The MoA plays a critical role in defining the company’s relationship with the external world. It clarifies the company’s legal existence, ensuring that third parties dealing with the company understand its objectives and limitations. This protects both the company and external parties from engaging in activities that could be outside the company’s legal powers.

Articles of Association

Articles of Association (AoA) is a fundamental legal document that governs the internal management of a company. While the Memorandum of Association (MoA) defines a company’s objectives and scope in relation to the external world, the AoA establishes the rules for how the company will conduct its internal affairs. It is a key document that defines the roles and responsibilities of directors, the decision-making process, and the rights and obligations of shareholders.

AoA serves as the company’s internal constitution, laying down the procedures for managing day-to-day operations, including how board meetings are conducted, how directors are appointed or removed, and how shares are issued or transferred. It is a flexible document, which means it can be altered to reflect the changing needs of the company, subject to legal approval.

Features of Articles of Association:

1. Regulates Internal Management

The primary function of the AoA is to regulate the internal management of the company. It outlines the governance framework, detailing the rights, responsibilities, and duties of the company’s directors, shareholders, and officers. This ensures that the company operates efficiently and in accordance with the agreed-upon rules.

For example, AoA may specify how meetings of the board or shareholders are to be convened, the quorum required for those meetings, and how decisions are to be made (simple majority, special resolution, etc.).

2. Defines Rights and Duties of Shareholders

AoA also clearly defines the rights and duties of shareholders, including how they can participate in company decisions. It lays down the voting rights of shareholders, dividend entitlements, and procedures for transferring shares. In the case of private limited companies, the AoA often places restrictions on share transfers to maintain control within a small group of shareholders.

This ensures transparency and provides shareholders with a clear understanding of their rights and the company’s procedures for major decisions.

3. Contractual Nature

AoA acts as a contract between the company and its members (shareholders), as well as among the members themselves. Once it is adopted, all members are legally bound by its provisions. It ensures that shareholders and the company are aligned in terms of governance rules and expectations.

For instance, a shareholder cannot claim ignorance of the rules or procedures set out in the AoA, as it forms a binding contract once the person becomes a shareholder.

4. Flexibility

AoA is more flexible. It can be altered as the company’s needs change over time. Changes to the AoA can be made by passing a special resolution at a general meeting of shareholders, where at least 75% of the members approve the changes.

This flexibility ensures that the company can adapt to changes in the business environment, its ownership structure, or its internal management needs.

5. Conforms to the Companies Act

AoA must be drafted in accordance with the Companies Act, 2013 in India. While companies are free to create their own internal rules, those rules cannot conflict with the provisions of the Companies Act or with the company’s Memorandum of Association.

For instance, a company cannot include provisions in the AoA that allow it to conduct business activities outside its object clause, as defined in the MoA.

6. Facilitates Corporate Governance

AoA plays a critical role in ensuring effective corporate governance. It lays down the framework for appointing directors, conducting board meetings, managing financial affairs, and ensuring compliance with the law. By establishing clear procedures and accountability mechanisms, the AoA ensures that the company operates smoothly and is less prone to conflicts or governance issues.

For example, the AoA may specify the procedure for appointing auditors, approving financial statements, or managing conflicts of interest within the board of directors.

Key differences between Memorandum of Association and Articles of Association