Is it time to abolish the memorandum of association?

[The
following guest post is contributed by Suprotik Das, a 4th year law student at the Jindal Global Law
School, Sonepat, Haryana.]
With the advent of the recent Start-up
India Action Plan, the focus for start-ups seems to be on simplification of
convoluted legal procedures, efficiency and speed of incorporation. In this
regard, the Government has proposed that incorporation and registration
formalities be shifted to a mobile application platform with seamless
integration with the MCA and Registrar of Companies.
There is perhaps one simple change that
I wish to discuss which will ease the speed of incorporation and registration
in India. This proposal, which has been adopted successfully in other countries
within the Commonwealth such as the United Kingdom, Hong Kong and Singapore,
involves abolishing the need for drafting a memorandum of association
altogether.
The trend now tends to gravitate toward
having an ‘all-inclusive’ constitutional document that facilitates
incorporation-related matters and contains within it an amalgamation of
important elements from the Articles of Association and the Memorandum of
Association (“articles’ and “memorandum” for short). This would benefit
start-ups (that meet the requirements delineated in the Action Plan) and
potentially for new companies that do not qualify as start-ups.



For the purposes of this post, I have
used the term ‘start-up’ in the context of those companies that qualify as
start-ups under the Action-Plan and the term ‘company’ has been applied in the
context of those companies which are not start-ups under the action plan and which
would be incorporated in the future.
Let us now look at the approaches in
India, Hong Kong and Singapore.
India
The Companies Act, 2013 requires both
the articles and the memorandum. The memorandum, apart from other important
share-capital and name-related matters contains the objects clause[1] of the company and the
articles contain details of internal management of the company. Both can be
amended pursuant to special resolutions under sections 13 and 14 of the Companies
Act.
Hong Kong
As per the new Companies Ordinance
(Cap. 622), which was notified on March 3, 2014, the requirement of drafting a
separate Memorandum of Association was done away with. This is due to the
removal of the doctrine of ultra vires and
revival of the doctrine of post facto ratification.
Further, the objects clause has been effortlessly included in the Articles. The
result is a quick, seamless and simple procedure to incorporate a company in
Hong Kong.[2]
Singapore
The Singapore Companies Act (Cap. 50)
as recently amended has also done away with the bifurcation between Articles
and Memorandum of Association and has combined them into a single document
known as the ‘constitution’, which includes the objects clause (which is only
optional).[3]
At this juncture, it now becomes pertinent
to discuss what is meant by the doctrine of ultra-vires.
The Doctrine of
Ultra Vires
This doctrine was recognized in the
seminal case of Ashbury Rly Carriage and
Iron Co v. Riche
.[4] It states that if an act were done outside the company’s objects clause,
it would be void ab initio.
The obvious practical effect of such an
arrangement means that if the company carries out an act that is not
contemplated by its memorandum, the following scenarios may arise:
1.         The shareholders can reject such an act
as ultra vires in relation to the
memorandum.
2.         The shareholders can ratify such an act
ex post facto.
3.         If the act in question is part of a
business strategy such as diversification or the existence of synergies, the
memorandum could be altered through a special resolution of the members.
The doctrine of post facto ratification
The doctrine of ultra vires is fettered by the application of the doctrine of post facto ratification by shareholders.
Suppose a director takes an action that is outside the ambit of the objects
clause, shareholders in general meeting can ratify such an action if it is in
the best interests of the company.
The practical effect of such a doctrine
is this: companies and start-ups may have widely worded objects clauses and shareholders
may ratify an ultra vires act without
having to go through the herculean task of amending the memorandum through a
special resolution.
The way forward
The Companies
Law Committee Report
has recommended that section 4(1)(c) be amended such
that it allows companies to have a general objects clause. The proposed clause
reads as follows – “to engage in any
lawful act or activity or business as per the law for the time being in force”.
However, the fetter to this general objects clause would be the
prescription of sectoral restrictions by the concerned regulators. The
conclusion that I draw from this is that the Committee has recognised the
practical effect of post facto ratification.
Interestingly, the Report makes a
reference to the English Companies Act, 2006 wherein it describes the statutory
requirement of having the objects clause included within the articles of the
company. As per section 31 of the English Companies Act, the objects are
unfettered unless restricted by the articles, which leads us to conclude that even
the United Kingdom has this practice of having in place an over-arching
constitutional document for a company. Strangely, the Committee has not
considered this practice, even after reviewing the English position.
If the objects clause in the memorandum
is, in a manner of speaking ‘organic’, i.e., amenable to change, why not
abolish the need for a separate document? The name and type of company, objects
clause and other important share capital-related matters ought to be integrated
into one holistic ‘constitutional’ document much like the approach of England, Hong
Kong and Singapore.
From a global perspective, with the Government’s
recent efforts to ensure the ease of doing business in India as well as the
‘Make in India’ campaign, this is something Parliament should consider so as to
bring India on par with global standards of the ease of doing business. At a
domestic level, this will greatly benefit companies and start-ups that seek to
focus on a wide spectrum of services and products.
– Suprotik Das



[1] Section 4(1)(c) of the Companies Act, 2013.
[2] FAQ section – New Companies Ordinance, Companies Registry,
Government of the Hong Kong SAR, http://www.cr.gov.hk/en/companies_ordinance/faq_abolition-ma.htm#02.
[3] Section 23(1A) of the Singapore Companies Act (Cap. 50).
[4] (1875) LR 7 HL 653

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • Offhand

    The referred expert committee’ recommendation on amendment of sec 4 (1)(c) of the Act , instantly takes one to the practical wisdom or otherwise underlying the age-old maxim – Generalia Specialibus Non Derogant. According to a school of thought, vide Syntactical Presumptions – Denman Chambers, – the right or wrong of which is inevitably prone to a never ending debate,- that “has caused a great deal of litigation and seems frequently to have thwarted the maxim”. May be recommended to explore further, mostly for academic interest ; but unlikely to save from the cfommonly dreaded ‘brain drain’- agree ?

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