Learn all about Memorandum of Association – The 5 Clauses

A company being a creation of law requires a registered document known as the Memorandum of Association (MoA). it is one of the two main documents that one needs to prepare and submit for company registration. Without a memorandum of association, a company may not be incorporated.

The memorandum of association of a company acts as the constitution of a company. It can be defined as the “Bible” of a company. When a person or several persons agree to join hands to form a company, each subscriber will have to sign the memorandum of association to signify his intent to form a company.

The memorandum of association when registered becomes the law for the company, governing its conduct and relationship with the shareholders in general in contrast with the articles of association.

The memorandum of association deals with the objectives of the company, its structure, type, powers, limitations, capital structure, and nature and extent of liability. It draws a line between what a company can or cannot do.

As a legal entity, a company can only undertake such business activities that are allowed under the memorandum of association. Any unauthorized business will be ultra vires and the company, shareholders, and management may be liable to penal action.

In Pakistan, the law governing the formation and operations of the companies is the Companies Act 2017. It defines the “memorandum” as

“the memorandum of association of a company as originally framed or as altered from time to time in pursuance of company law or of this Act”

This definition does not give a literal meaning or tell about the contents. However, other relevant provisions when read with the definition give a clear indication of what a “memorandum of association” is.

Since a company is formed under the law as a separate legal entity, the memorandum of association has a very important status and role for a company. The memorandum is the document that governs the overall conduct of that legal person. It also, subject to law, empowers the company, its management, and shareholders to undertake business activities and define the scope of the activities.

For example, if a company wants to become a large organization with public funds, its MoA must contain such provisions that allow it to invite public investment. Similarly, if the company is not for a specific purpose (special purpose vehicle or SPV) and a specific time, the memorandum must be drafted accordingly. It also determines the size of the company and the distribution of shares among the subscribers.

When you intend to form a company in Pakistan, the memorandum is filed with the company registrar of the Securities & Exchange Commission of Pakistan (SECP) under the Companies Act 2017.

When you file your application for company registration, you must file a memorandum of association with the SECP (company registrar) along with other documents.

Under the law, SECP has provided specific requirements and formats for the memorandum of different companies which are discussed below.

The MoA filed with the SECP is a public document and can be accessed by anyone who wishes to understand the company’s structure and other details and activities.

As discussed, a memorandum of association is a constitutional document and mentions the identity, location, objective, capital, and liability of the subscribers. Articles of association on the other hand is the document that governs the internal working, rights, and responsibilities of the shareholders, officers, and management of the company.

Unlike a memorandum, the articles of association contain detailed provisions and cover several aspects of the working of the company. It is used as a reference document for all the internal working of the company and everything must be done according to the articles on each step. However, in case of any contradiction between the memorandum and the articles, the memorandum prevails and both are subject to law.

Under the Companies Act 2017, a memorandum must contain some specific clauses. Most of the clauses are similar in all types of companies. However, based on the type and nature of the company, some clauses are different and must be drafted accordingly. In general, the memorandum of all the companies must contain clauses about Name, registered office, object, capital, and liability. Lastly, the memorandum is signed by the subscribers to signify their intent to form the company and their undertaking to subscribe to the shares mentioned in the memorandum.

The name clause in the memorandum is the first clause and contains the official name of the company upon registration. The name of the company will appear on all the places of business of the company and on all the documents of the company to identify its legal personality. However, a company may change its name after completing the legal formalities.

In the case of a company limited by shares, the name must, along with the name include at the end the words:

(Private) Limited for a private limited company

(SMC-Private) for a single-member company

Limited for a public limited company

Unlimited for a company with unlimited liability

In the case of a company limited by guarantee, the words (Guarantee) Limited must be included at the end.

In case of failure to include these words respectively, legal action may be taken against the company for misstatement.

The second clause of the memorandum is the registered office clause. A company may mention a particular city in this clause. However, to avoid legal complications for the change of office from one city in a province to another city in the same province, the name of the province should be mentioned.

However, if a company wants to change relocate its registered office from one province to any other province or capital territory, this clause would need amendment, after meeting the legal requirements.

The third and most important clause of the memorandum of a company is the object clause. The clause determines what business a company intends to do. The object clause also mentions the businesses a company can do and what businesses are prohibited for the company.

Generally, a company can do any lawful business. However, the Companies Act 2017 requires all companies to mention their principal line of business at the beginning of the object clause. The principal line of business is the business activity in which the company will have substantial assets or the company’s substantial revenue is earned. The principal line of business must be commensurate with the name of the company, though it may be changed by following the prescribed procedure.

The object clause must also mention certain legal businesses that are prohibited for the company unless it has a license to do such business. These may include:

• Banking
• Non-banking finance
• Microfinancing and Microcredit
• Real Estate Investment Trust
• Insurance
• Modaraba Management
• Stock Brokerage
• Forex
• Security Services
• Any other business prohibited under any law

Apart from the above, the object clause must contain that the company shall not engage in the business of:

• multi-level marketing
• Pyramid and Ponzi Schemes
• lottery business

Any unlawful business.

The fourth clause of the memorandum is the liability clause. In the case of a company with limited liability, it must mention that the liability of the members is limited. In case the company is an unlimited liability company this clause must mention that the liability of members is unlimited.

If the company is limited by guarantee, the liability clause must mention that the liability of members is limited. However, in a guarantee limited company, the liability will be as per the undertaking to contribute in case of winding up.

The fifth and last clause mentions the capital structure of the company. In the case of a company limited by shares or a guarantee limited company having a share capital, this clause will mention authorized capital and its division into shares of a fixed amount. The authorized capital may be divided into shares of any denomination like 10, 20, 100, or 1000 as the promoters think fit.

After this, the subscribers signify their intention to form a company to their agreement to take shares mentioned against their names.

The memorandum of association of a company is the foundation document required for the formation of a company and is filed with the registrar of companies along with other documents. It contains clauses related to the company’s name, registered office, object, liability, and capital structure. Memorandum must be drafted carefully as it will determine the scope of business, size and type of the company.