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Key takeaways

  • The object clause, is a part of company’s MOA, it describes the company's projected goals, for which the company was founded and the direction in which it will work.
  • A relevant doctrine to the object clause, the Doctrine of ultra vires forbids directors from deviating from the purpose for which the company was established.
  • The MOA is a crucial document for the company, just as the constitution is important for a nation. Therefore, the Memorandum of Association (MOA) and the clauses inside it should be drafted with the utmost care.

Along with the articles of Association, the memorandum of association is one of the most crucial documents for a company. It is a legal document outlining the company's connection with its members which is created at the moment of incorporation. It mentions the details, how and why the company was founded. The company's authorization and the conditions under which it operates are established. It is a guidebook that contains all the rules and legislation that apply to how a company interacts with the outside world.

Every company needs a memorandum of association outlining the scope of its operations. Until the document has been created, the organisation cannot operate outside of its bounds. The activity would be ruled ultra vires and void if the company exceeds its legal authority.

It serves as the firm foundation on which the company is founded. The company's whole structure is outlined in the Memorandum of Association. The media may access the document. In order to enter into contracts with the company, all that is required of a person is for them to obtain the Memorandum of Association and pay the necessary fees to the Registrar of Companies. The Memorandum of Association contains all the information one needs to know about the company.

Additionally, the MOA is open to the public at large. Everyone who conducts business with the firm is required to be familiar with its memorandum. The founder members of the company must sign this document, which serves as the firm's charter, at the time of incorporation. The memorandum of association contains six clauses overall, each of which contains a particular aspect of the company. The Main six clauses of MOA are as follows-

  1. Name Clause
  2. Residency clause
  3. Object Clause
  4. Liability Clause
  5. Capital clause
  6. Subscription clause

Object clause

One of the MOA's most important clauses, the object clause, describes the company's projected goals. This clause specifies the goal for which the company was founded and the direction in which it will work. This sentence is split into two pieces. A sub clause follows one of the major clauses. The main clause of the MOA will provide a concise description of the business activities that will be carried out by the firm, which may include manufacturing, trading, or rendering any type of services. The sub clause also included a description of the actions related to the main clause.

Additionally, it can include business-related operations that are planned with future diversification demands and changes in mind. This is so that a company cannot deviate from its MOA and is not allowed by law to engage in any activity not covered by the MOA.

Why the object clause is important

The company describes its founding and operating objectives in detail in the appropriate object clause. Every subscriber and shareholder has access to the MOA, and with the object clause, they may determine how the company plans to utilise their money. Additionally, it offers protection to those doing business with the company because they are aware of its range of activities. Additionally, the board of directors restricts their ability to utilise business funds for improper reasons and only permits them to do so in accordance with the MOA.

Sample Object clauses; some examples of how Object clauses are drawn for various type of businesses;

Amusement park: To carry on the business of building and maintaining amusement parks, to promote, organise and manage all kinds of entertainments, sports, recreation and amusements, whether indoor or outdoor including funfairs, exhibitions, ride-shows and games, competitions, tournaments, concerts, cinematograph and television performances, stage and variety shows, aquatic and equestrian events, pyrotechnic, aerial and spectacular displays, dancing, skating, circuses and other forms and types of similar enterprises. In connection with any such business or businesses, to purchase, lease, hire, contract/provide, operate, equip and maintain land, buildings, theatres, cinemas, studios, concert hails, studio, tracks, arenas, golf and putting courses, tennis courts, skating rinks, swimming baths, boating and paddling pools, marinas, piers, jetties, coach and car parks, tents, vehicles, boats, chairs, machines and all other structures, apparatus, equipment and articles which may be necessary or convenient in the opinion of the company for the carrying on of such activities.

Electrical Appliances: To carry on the business of electrical engineers, electricians, engineers, contractors, manufacturers, suppliers, of and dealers in electrical and other appliances cables, wire lines, dry cells, accumulators and distribute, supply electricity for the purpose of light, heat, motive power and for all other purposes to which electrical energy can be employed. To carry on business activities for manufacturing, distribution, generation, transmission, supervisions and control of all types of power either mechanical, hydraulic, gas, wind farms, solar etc. and/or to design, plan, manufacture, assemble, supply, erect, commission, test, maintain, trouble shooting, repair, service etc., of electrical and/or electronics goods, items, instruments, parts, spares, D.G. sets, electrical control, switchgear panels, switches, cables, plugs, powers projects in industrial, commercial, residential, establishments etc., in part individual and/or composite key basis and to provide Consultancy, expert services, advises, designs, drawings in relation to supervision and control of power in India and abroad.

Relevant doctrine; Doctrine of Ultra Vires

The term “Ultra Vires” originated from a Latin phrase meaning “beyond the power.” Ultra vires could be used to describe actions that go beyond the company charter's purview or, more correctly, beyond the predetermined power. Acts that are ultra vires must always go beyond the scope of the power that has been approved or determined. It might also include illegal activities covered under company law. Every business organization has policies, articles, and memoranda that define how it will act in order to operate effectively.

Purpose of the doctrine

The Doctrine of Ultra Vires is established to protect the company's creditors and investors. The company is not allowed to use any investors' funds outside those listed in the memorandum's object clause according to the doctrine of ultra vires. As a result, both the investors and the company need to be certain that their investment won't be utilised for things or activities they didn't specify when they invested money in the business. This guarantees that the company won't use the investors' money for unapproved purposes. A company's insolvency, or a situation where its creditors are not being paid, may be brought about by the improper use of its assets.

The company's doctrine guards against the improper use of its resources, and defending the creditors. In addition, the idea of ultra vires forbids directors from deviating from the purpose for which the company was established, hence it is necessary to regularly monitor the directors' activity. Knowing which business categories they can act in is beneficial to the directors.

The Ashbury Railway Carriage and Iron Co. Ltd. v. Riche's historic judgment gave rise to the ultra vires doctrine. The dispute began when the company's directors signed a contract with railway contractor Riche to secure funding for the construction of a railway line in Belgium. The contract was eventually revoked by the directors on the grounds that it violated the agreement of association. Riche accused the business of contract breach and filed a lawsuit. The contract was declared void ab initio and invalid by the House of Lords at the moment it was made. Consequently, the contract could not be ratified later since it is ultra vires.

Conclusion 

The name of the company, the actual address of the registered office, the names of the shareholders, and the allocation of shares are all included in the object clause of a company's Memorandum of Association (MOA). The MOA is crucial for the company, just as the constitution is important for a nation. Therefore, the Memorandum of Association (MOA) should be drafted with the utmost care.
 


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