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Importance of Memorandum of Association

Created on 20 Aug 2018

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Updated on 23 Apr 2024

Importance of Memorandum of Association

The Memorandum of Association (MOA) is the company's Constitution, prepared at the time of registration and periodically updated to incorporate changes. It is a legal document that defines the very foundation of the company. Therefore, utmost precision and clarity need to be taken at the time of drafting the MOA.

It contains all the fundamental details about the establishment and its location, the defined scope of business activities and objectives, the extent of authority, the legal rights of the company, and all other information needed to register the company. It is also referred to as the Charter, which needs to be filed as a part of the Registration Compliance.

As per Section 399 of the Companies Act, an MOA is a public document. Hence, any individual or entity entering into a contract with the company is expected to know its MOA.

This document also defines the boundary for the registered company, so any activity overriding the provisions of the MOA will be considered ultra vires by the company and void.

Clauses in an MOA: Specified Sections for Regulations

The MOA comprises of 6 clauses:

  1. Name Clause -The company is a legal entity that must have an established identity. The first clause in the MOA is the Name clause, which states the company's registered name.

  2. Situation Clause - This clause gives the full address of the registered office of the company.

  3. Object Clause -  The MOA has to specify the objectives for which the company has been incorporated. It covers the primary and ancillary objectives of the company.

  4. Capital Clause -  It states the amount of capital with which the company has been registered. This clause provides the shareholding pattern with details of the shareholders and the number of shares held by them.

  5. Liability Clause - It mentions the limited or unlimited liability of each of its members. This clause will state the amount each member will have to pay in the event of liquidation of the company.

  6. Association and Subscription Clause - The memorandum needs to be subscribed by at least 7 members in the case of a Public limited company and at least 2 in the case of a private company.

The Importance of the Memorandum of Association

MOA is not just a piece of paper; it's the foundation and cornerstone upon which a company is built. It lays out the fundamental framework, defining its very existence and guiding its journey. Here's why the MoA is absolutely crucial:

Establishment and Identity:    

The MOA is a  fundamental and vital document required for the registration of a company. It is the official birth certificate of a company. MOA declares its existence to the world, registering its name, location, and type of business. This establishes the company as a separate legal entity from its founders and shareholders, granting it distinct rights and liabilities.

Scope and Limitations:

The MoA defines the boundaries within which your company can operate. It outlines the company's objectives, specifying its main activities and any limitations on its power. The company cannot perform activities outside this document’s limits unless necessary amendments have been made.
This provides clarity and transparency for stakeholders, preventing unauthorised ventures and protecting shareholders' interests.   

Capital Structure and Liability:

The MoA specifies the company's authorised share capital, defining the maximum amount it can raise by issuing shares. It also clarifies the liability of the members, whether limited by shares or guarantees, protecting their personal assets from unlimited liability.    
It brings about transparency and is the medium via which all the stakeholders get full information regarding the company.

Internal Governance:

The MoA serves as a guiding document for the company's internal governance. It outlines the procedures for appointing directors, holding meetings, and distributing profits. This ensures clarity and structure in decision-making processes.
It is also a means of attracting investors as they get a clear idea of the gamut of activity and objectives of the company.

To learn more about internal governance and its importance, read the article: ESG Excellence in India.

Public Document and Trust:

The MoA is a public document accessible to anyone. This transparency builds trust with stakeholders, investors, and potential partners, as everyone can understand the company's core purpose and limitations.

Protection and Stability:

The MoA creates a safeguard against unauthorised actions by management or external parties. Any attempt to deviate from the MoA's provisions can be challenged legally, providing stability and protecting the company's core values.

Future Growth and Adaptability:

While the MoA defines the starting point, it also allows for adaptability. The document can be amended with the necessary approvals, allowing the company to evolve and expand its scope as circumstances and opportunities change.

The Bottom Line

To sum up, we’d like to say that the Memorandum Of Association is a very vital document for a company to be incorporated. This Charter’s properly defined functions and rules increase efficiency and transparency. Therefore, they are indispensable for any organisation.

Understanding and valuing its importance is critical for any entrepreneur or leader aiming to build a successful and sustainable business.

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Ausaf Ahmed

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Ausaf is a 2nd-semester student who is pursuing Accountancy Honours. He has a joyful character and is a very curious boy who always tents to learn new things especially in travel and finance background. 

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