What is a Memorandum of Association?

The memorandum of association acts as the foundation of every company. It explains all the
rules and bubbles powers of the owner in your systematic formal representation. Memorandum
of association of the company deals with all aspects of that particular organization such as the
operations delegation of duties and policies, principles, etc. The memorandum of association of
any company is formed or designed by considering the objective of a particular firm. In the year
2013, section 399 of the companies act, designed to form an MOA, which is the public document
and needs to get aware of this moa to all employees of an organization.

Definition of Memorandum of Association (MOA)

The memorandum of association definition explains that all the powers and the rights should be
mentioned in this public document and no one should depart from the contract as well as not to
Violet the rules and regulations specified in the moa. If anyone violates, they can be termed as
ultra vires of the company and immediately can void them. This is the simple and straight away
definition of the memorandum of association of any company. It is completely under legal
survival. All the papers are strictly verified and are tested by the moa in company law.

Objectives of Memorandum of Association

A company can undertake only those activities that are mentioned in the MOA. In other words,
the Memorandum of Association lays down the boundary beyond which the actions of the
company cannot exceed.
MOA helps the creditors, shareholders and any other person that are interacting and
dealing with the company, to know the company’s powers and objectives. In addition to this,
MOA contents help the prospective shareholders in taking the right decision while investing in
the company.

Importance of MOA
Memorandum is the fundamental document of a company which contains conditions upon which
the company is incorporated.

1
 This document is important for following reasons:
 The memorandum defines the limitations on the powers of the company established under the
Act.
 The whole structure of the company is built upon memorandum.
 It explains the scope of activities of the company. The investment knows where their money will
be spent, and outsiders also know the nature of activities the company is authorized to take up.
 It is a basic document of the company about its constitution.
 It is a charter of the company which sets out its written goals.

Clauses of Memorandum of Association

Memorandum of Association (MOA) includes six different clauses as mentioned below:
1. Name Clause
2. Domicile Clause
3. Objects Clause
4. Liability Clause
5. Capital Clause
6. Subscription Clause

1. Name Clause
The name of the company is its first unique identity. Thus the name clause of the memorandum
consists of the authentic, legal and approved name of the company. Company names should not
bear any similarities to a company registered with a similar name because many times these
companies protect the name of their companies via a Trademark Registration procedure.

2. Domicile Clause
The domicile clause comprises all possible details of the registered office of the company. It has
the name of the State or Union Territory of the registered office and may and may not have the
exact address of the office. It also has the names of the registrars enrolled.

2
 3. Objects Clause
Objects Clause constitutes the main body of the memorandum. It provides a list of all the
operations of the company. Every motive and operation the company indulges in must be
mentioned in the object clause. Also, any such operation which is not mentioned in the object
clause is considered to be beyond the reach of the company. The objects of a company fall into
two categories as prescribed below:

1. The proposed objects of the company for which it is being incorporated

2. Matters considered necessary in furtherance thereof

Apart from just starting out the objectives of the company the statement of objects in the
company’s MoA empowers the people associated with the company with the following benefits:

 It gives protection to the subscribers as they have complete knowledge of where their
valuable money is being invested.
 Protects the individuals and/ or companies that deal with the concerned company as they
have knowledge of the extent of the company’s powers.
 The board of directors of the company is restricted from using the funds of the company
only to the objects specified in the Memorandum.

3
Doctrine of Ultra Vires
If the company operates beyond the scope of the powers stated in the object clause, then the
action of the company will be ultra vires and thus void.
Consequences of Ultra Vires:
1.Liability of Directors: The directors of the company have a duty to ensure that company’s
capital is used for the right purpose only. If the capital is diverted for another purpose not stated
in the memorandum, then the directors will be held personally liable.
2.Ultra Vires Borrowing by the Company: If a bank lends to the company for the purpose not
stated in the object clause, then the borrowing would be Ultra Vires and the bank will not be able
to recover the amount.
3.Ultra Vires Lending by the Company: If the company lends money for an ultra vires
purpose, then the lending would be ultra vires.
 Void ab initio – Ultra Vires acts of the company are considered void from the beginning.
 Injunction – Any member of the company can use the remedy of injunction to prevent the
company from doing ultra vires acts.

4. Liability Clause
Liability Clause mentions the liability of every member of the Company. It simply states that
every member of the company has limited liability. The clause also specifies the amount of
contribution of agreed upon for each individual participant in case the company is closing or
winding up. Irrespective of the financial state of the company, no member can be told to pay
more than the amount that remains unpaid on his/her shares.

5. Capital Clause
This clause mentions the share capital with which the company is registered. In addition to this,
the capital clause should also mention the types of shares, the number of each type of share, and
the face value of each share. Private companies and public companies not intended to be listed in
the stock exchange may assume any face value depending on a number of factors however,
public companies to be listed will have a prescribed face value of the shares.

6. Subscription Clause
The last and final clause of the Memorandum of Association is called the subscription clause.
The subscription clause basically lists down the motives of the shareholders behind the

4
incorporation of the company and also states that the subscribers are agreeing to take up shares in
the company. It also specifies the number of shares taken up by each subscriber. It is all
according to the details specified in the MoA Subscriber Sheet.

QUESTION 4.

Meaning of Company Sickness:

The strength of the industrial sector, by and large, determines the soundness of the economy. A
developing economy like India cannot afford the growing sickness in industries as it results in a
colossal wastage of physical, financial and human resources. In the presence of the resource
crunch, the industrial sickness becomes all the more an alarming problem. Industrial sickness
usually refers to a situation when an industrial firm performs poorly, incurs losses for several
years and often defaults in its debt repayment obligations.
Definition
The Reserve Bank of India has defined a sick unit as one “which has incurred a cash loss for one
year and is likely to continue incurring losses for the current year as well as in the following year
and the unit has an imbalance in its financial structure, such as, current ratio is less than 1: 1 and
there is worsening trend in debt-equity ratio.”
The State Bank of India has defined a sick unit as one “which fails to generate an internal
surplus on a continuous basis and depends for its survival upon frequent infusion of funds.”

Signals of Company Sickness

The sign of sickness may be discernable at quite an early stage. This warning sign is termed as
“Signal”. In fact, the timely identification of various signals makes the detection of sickness
easier. Therefore, the various signals as listed below need to be identified and monitored at an
early stage.
The important signals of Company sickness are:
1. Decline in capacity utilization
2. Irregularity in maintaining bank account
3. Non-submission of the data to bank financial institutions

5
4. Inventories in excessive quantities
5. Frequent break down in plant/equipment’s
6. Decline in technical deficiency
7. Decline in the quality of the products/services
8. Shortage of liquid funds for short-term financial obligations
9. Default in the payment of statutory dues
10. Frequent turnover of personnel in the industries.

Symptoms of Company Sickness

The persistence of many signals for a long period of time is termed as symptoms of sickness, the
various symptoms ultimately reflect on the plant performance (capacity utilization, financial
capital ratio, share market value practices in the diverse areas of finance, production, marketing
and labor relation in the industry).
Some of the important symptoms are:
1. Deteriorating financial ratio
2. Delay in the audit of annual account
3. Persisting shortage of cash flow
4. Continuous tumble in the price of the shares
5. Delay in the payment of statutory dues
6. Widespread use of creative accounting
7. Frequent request for loans
8. Morale degration of the employees
9. Desperation amongst the top and middle managerial level.

However, the financial ratios, in each case cannot be considered as true symptoms of industrial
sickness. It is over to two main factors:
1. The sickness prone unit – To present a better and sound image, one must do lot of window
dressing.
2. Financial data – It may be available after a gap of one year.
However, an early identification of symptoms makes the task of detecting easier and fast.

6
 Steps taken to Winding up of Company according to Sec 425(1)
According to Section 425(1) of the Companies Act, 2013, there are 2 kinds of Winding Up.
1. Compulsory Winding Up under the order of the Court
2. Voluntary Winding Up, which itself is of two kinds:
Members’ Voluntary Winding Up
Creditor’s Voluntary Winding Up

1.Compulsory winding up
The winding up of a company by the order of court is called compulsory winding up. Section
433 of the Act, 1956 envisaged the following circumstances under which the affairs of a
company wound up by the Tribunal.
1. If the company, of its own, passes a Special Resolution that it should be wound up by the
court, and presents a petition to the court for same.
2. If the company makes any default in filing the statutory report with the registrar of companies
or in holding the statutory meeting within the prescribed time
3. If the company does not commence business within one year from the date of its
incorporation or suspends its business for a whole year
4. If the number of members falls below seven in the case of a public company, and below two
in the case of a private company.
5. If the company is unable to pay its debts
6. If the court is of the opinion that it is just and equitable that the company be wound up.
7. If the company has made default in filing its Balance sheet and Profit and Loss account or
annual return for any five consecutive financial year.
8. If the company has acted against the sovereignty or integrity of India, the security of the state
or friendly relation with foreign state etc
9. If the tribunal is of the opinion that the Company should be wound up under circumstances
mentioned under Section 424G (sick company).

2.Voluntary winding up

Winding up the affairs of a company either by its members or by its creditors, without any
interference of court it is called voluntary winding up of a company. Section 484 of the Act,

7
 1956 lays down the following circumstances under which a Company may wound up
voluntarily:
1. By passing Ordinary Resolution: When the period fixed for the duration of the Company by its
Article has expired or the event, if any, on the occurrence of which the Article provides that the
Company is to be dissolve, the Company may wound up voluntarily by passing a Ordinary
resolution in the General Meeting.
2. By passing Special Resolution: The members of the company may, at any time by passing a
Special Resolution, wound up the affairs of the Company voluntarily. No reasons need to be
given when majority of the members decided to wind up the Company.
3.Appointment of liquidator: Liquidator is an officer appointed by the creditors of the company
(in case of Creditor’s Voluntary Winding up) or by the members of the Company (in case of
Members’ Voluntary Winding up), when the company goes into winding up or liquidation
voluntarily. Functionally the Official Liquidator is under the supervision and control of the High
Court but administratively is under the control of the Central Government through the Regional
Director.
4. Types of Voluntary winding up A company may wind up its affairs voluntarily in any of the
following two manners:
 Members’ voluntary winding up: Winding up the affairs of the company voluntarily under the
supervision of members whereby declaration of solvency is made by the Board and the same has
been filed with the Registrar.
 Creditors’ voluntary winding up: Winding up the affairs of the Company when declaration of is
not made by the directors and the Creditors of the Company control and supervise the entire
process.

Order of Payment When a Company is Liquidated

.
An official ‘hierarchy’ laid down by the Insolvency Act, 1986, determines which group of
creditors is paid first during an insolvent liquidation. When a company enters liquidation, each
class of creditors must be paid in full before funds are allocated to the next in the following
order:
1. Shareholders Secured creditors with a fixed charge

8
2. Administrator/Liquidator fees
3. Preferential creditors
4. Secondary preferential creditors (expanded to include HMRC for certain taxes)
5. Secured creditors with a floating charge
6. Unsecured creditors (including all other HMRC debt)

(1) Secured Creditors with a Fixed Charge

Secured creditors, who hold a fixed or floating charge over a business asset are the first to be
paid in insolvency. These creditors have a legal right or charge over company property, which
can include anything from buildings and equipment to vehicles, machinery and intellectual
property.
(2) Preferential Creditors
Employees are classed as preferential creditors for unpaid wages and holiday pay claims, so they
are next in line to receive their cut. The Finance Act 2020 makes HMRC a secondary preferential
creditor.
(3) Secured Creditors With a Floating Charge
Floating charges are generally offered over non-constant assets such as work in progress or raw
materials. Holders of floating charges are registered in Companies House by the lender and, at
the point of any insolvency event, the floating charge ‘crystallizes’ to become fixed. A
proportion of those assets set aside for floating charge holders are given to unsecured creditors in
what is called ‘the prescribed part.
(4) Unsecured Creditors
This group will include suppliers, trade creditors, business rates and claims other than pay arrears
and holiday pay by employees. It also includes ‘associate creditors’ which are directors or
employee who’ve lent the company money on an unsecured basis, or salaries and wages for
company owners and directors are unpaid.
(5) Shareholders
Right at the very bottom of the pile are the shareholders of the insolvenct company. These are the
people who have invested money in the business on a risk basis, and as such, they are not entitled
to remuneration or repayments in a company liquidation or administration until the claims of all
of the above groups are satisfied.