Why MOA and AOA Matter During Company Incorporation?

Incorporating a company in India means you will have to face two terms which, at first sight, seem difficult to understand but are not less than essentials to the legal basis of your business: Memorandum of Association (MOA) and Articles of Association (AOA). They are not just paper formalities; they are the basic documents of your company that determine its full range of activities and governing law inside. Knowing the reason for their importance can be a good preventive measure against regulatory fines, legal disagreements, and limitations of activities in the future.

What Are MOA and AOA? The Basics Explained

Let’s start with the fundamentals. Think of your company as a living entity governed by a constitution. That constitution has two parts: the MOA and AOA.

The Memorandum of Association (MOA) is the primary document of your company, indicating the activities that are permissible in your business. It includes company name, registered office address, business objectives, capital structure, and the liability of its members as the main legal facts of your company. The Companies Act 2013 has stipulated that every MOA must have six mandatory clauses in it: Name Clause, Registered Office Clause, Objects Clause, Liability Clause, Capital Clause, and Subscription Clause.

On the other hand, the Articles of Association (AOA) is the manual for your internal governance. It lays down the rules for internal operation of the company, directors’ appointment, timing and conduct of meetings, shareholders’ rights and duties, dividends’ allocation, and dispute settlement. While the MOA determines the limits of the company, the AOA determines the manner of the company’s operations.

These two documents are in a hierarchical relationship. The MOA is more powerful than the AOA and both are below the Companies Act 2013. In cases where the AOA provisions contradict those of the MOA, the latter prevails. Any provision that is in contradiction with the Companies Act is considered non-existent.

The Six Mandatory Clauses of MOA: Your Company’s Legal Boundaries

Inherent in a Memorandum of Association (MOA) clause is its comprehensive meaning and its function as a boundary for the company. Hence, let us dive into the details:

1. The name clause: This specifically points out the official company name that has been registered with the authorities. The name must have “Limited” or “Private Limited” in it and must be unique as per the rules laid down by the Registrar of Companies (ROC).

2. The registered office clause: This indicates the particular state of company registration and the place of its main office. Based on this clause, it is determined as to which Registrar of Companies the company’s documents will be filed and it will also determine the regulatory filings.

3. The objects clause: This is arguably the most crucial of all the clauses. It enumerates all the company’s business roles, both principal and ancillary that are legally allowed to be carried out. This clause marks the legal limit that the company cannot cross without changing the MOA.

4. The liability clause: This indicates whether the company’s shareholders enjoy limited or unlimited liability. In a private limited company, for instance, the members are usually “limited by shares,” signifying that their liability equals the amount they have invested.

5. Capital Clause: This indicates the authorized share capital of your company, the maximum amount of capital that can be issued by your company as shares. It also describes the way this capital is split up into shares.

6. Subscription Clause: This contains the names of the first subscribers to the Memorandum of Association (the company’s founders), along with their shareholdings and the signatures of the witnesses.

Why MOA and AOA Are Mandatory During Incorporation

There’s no doubt about it, one of the major requirements for registering a company with the Registrar of Companies (ROC) is submitting both MOA and AOA. This step is indispensable as the incorporation process demanding the submission of SPICE+ form (SPICe) along with e-MOA (in Form INC-33) and e-AOA (in Form INC-34) or their hard copies. These documents are the very backbone of law on which the ROC bestows your Certificate of Incorporation.

If MOA and AOA are not drafted properly, then:

• The application for registration of the company will be rejected.
• The Certificate of Incorporation cannot be issued to the company.
• The company will not be recognized as a legal entity.
• The company will not be able to open bank accounts in its name.
• The company will not be able to enter into contracts that are legally binding on the company.

This is not a matter of bureaucratic delays; it is a fundamental layer of the regulatory framework that secures your business, investors, workers, and creditors.

The Ultra Vires Doctrine: Why the Objects Clause Matters Most

One of the main concepts that are related to MOA is the ultra vires doctrine, a Latin term that translates as “beyond the powers.” According to this doctrine, if a company acts outside the allowed scope of the objects stated in the MOA, then such an act is considered null and void and cannot be enforced even if all the shareholders give their unanimous consent.

Let’s say, for instance, that your company is set up with a core activity of “providing IT consulting services” and this is explicitly stated in the MOA under the Objects Clause. Later, if your directors without making any changes to the MOA decide to go into the business of manufacturing textiles, then any contracts signed to carry on the textile business will be treated as ultra vires and hence void. Thus, it follows that:

• The company cannot be sued by third parties for the purpose of enforcing such contracts
• The company is powerless to bring these contracts into effect against third parties
• Funds utilized for such activities may be reclaimed from the directors as a personal liability
• Directors can incur personal liabilities for losses

This legal principle is in place to safeguard investors and lenders from misappropriation of the company’s assets by the management. Nevertheless, actions that were done outside the AOA can be approved by the shareholders through a special resolution, which is not the situation with ultra vires acts under MOA.

How MOA and AOA Protect All Stakeholders

For Shareholders: Not only do these documents outline your rights if you are a shareholder but also your voting power, dividend payout rights, rights during liquidation, and the ways of being at a meeting. They keep management from doing anything that might negatively affect your investment.

For Creditors: The Liability Clause in the Memorandum of Association gives creditors the assurance regarding the liability structure. In the case of a limited company, creditors are confident that only the company’s assets can be attached and not the personal assets of the members. This creates a lending relationship with more confidence.

For Investors: Investors analyze both MOA and AOA when they think about investing in a company to see the company’s business limits, growth potential, governance, and their rights as shareholders. A clear and well-drafted MOA is a sign of a company’s attractiveness to investors; an outdated or unclear one raises concerns.

For Regulators: The documents also assist the regulators in making sure that the firms operate within the law and meet the standards of corporate governance. 

For the Public: MOA, which is a public document that can be accessed on the MCA portal, assures that customers, suppliers, and other stakeholders can check before entering into business relations what the company is legally allowed to do.

The Filing Requirement: Why Timely and Accurate Submission Is Critical

When a new company is formed, the Memorandum of Association (MOA) and Articles of Association (AOA) must be presented to the Registrar of Companies (ROC). The filing of MOA is compulsory, while AOA is not but needs to be practically implemented as governance procedures are needed immediately after the incorporation of a company. 

The process of filing consists of: 

1. Digital signatures for every subscriber: Each person who is a part of the company must provide a digital signature on the MOA and AOA using their Digital Signature Certificate (DSC). 
2. The documents must be in the proper format: The documents need to be in the format mentioned in Schedule I of the Companies (Incorporation) Rules 2014, which has tables (Table A to J) with standardized provisions. 
3. Payment of the prescribed fees: The fees for ROC filing are charged according to the company’s authorized capital. 
4. Documents for support: Proof of identity and address of all subscribers, proof of registered office and other documents as per the requirements.

Errors or missing information might hold up your incorporation or even result in rejection. The ROC has defined periods for granting approval or asking questions about your application, usually in the range of 5-10 working days.

Understanding the Amendment Process

Your business will not be static. You might have to revise your MOA and AOA due to changes in the size of your company, the market conditions, or the introduction of new laws. The process of changing the MOA is far harsher than the process of changing the AOA, though.

Changing the AOA is a simple process. You need to:

1. Take a Board Meeting to talk about the changes that are proposed
2. Set a General Meeting (Extraordinary General Meeting or AGM) with at least 21 days’ notice to shareholders
3. Get a special resolution certified by the approval of 75% of the shareholders
4. Send Form MGT-14 to the ROC within 15 days
5. Deliver the revised AOA and other documents

Changing the MOA involves similar steps, but it is also more complicated:

6. The same board and general meeting procedures will be followed
7. The same requirement of 75% shareholder approval will apply
8. File Form MGT-14 with the ROC within 30 days
9. Depending on which clause you’re amending, regulatory approval might be necessary (certain amendments to Name Clause, Objects Clause, or Liability Clause need approval from Regional Director or NCLT)
10. Amendment is valid only after ROC registration

Hence, if you intend to widen the scope of your business from “IT consulting” to “IT consulting and software development,” it is requisite that the Objects Clause be modified. This would not only necessitate the shareholders’ endorsement but may also the approval of the Ministry of Corporate Affairs’ Regional Director.

MOA, AOA, and Regulatory Compliance: An Ongoing Responsibility

The amalgamation of the MOA and the AOA during the incorporation process is by no means the end of your journey as a compliant entity. Your adherence to the MOA provisions is as follows throughout the lifetime of your company:

1. The directors who authorize ultra vires activities may be penalized, and the company’s assets may be at risk.
2. The shareholders and creditors can take legal actions if the AOA is violated.
3. You have to submit your amendments on time: Every time you amend your MOA or AOA, you must submit the amended documents to the ROC. Delays or failure to file amendments may result in penalties.
4. You are required to maintain documents that can be easily accessed: The AOA must be stored at the registered office for member and creditor inspection. The MOA is available to the public on the MCA portal.
5. You are obliged to maintain alignment: In the event of regulatory changes (for example, amendments to the Companies Act), it is your responsibility to ensure that your MOA and AOA are still in compliance.

Conclusion

MOA and AOA are the main pillars of your company, and not just the legal requirements for setting up. The Memorandum of Association specifies the company’s legal identity, its goals, and the limits of its operations. The Articles of Association regulate the internal workings of the company and distribute the rights and responsibilities of the shareholders and other stakeholders. In essence, they codify the rules of your company’s constitution, the primary document which will govern all future operations, decisions, and relations with shareholders.

When you are stage of incorporation, don’t overlook the necessity of having a broad enough MOA that can encourage business to grow. Precise wording so that the stakeholders are clear what the company’s limits are, and all the six standard clauses properly written. At the same time, make sure that your AOA is made according to your company’s requirements. With transparent governance procedures that will not lead to conflicts and will enable quick decision-making.