Importance of a memorandum of association and doctrine of ultra vires

MEANING OF MEMORANDUM OF ASSOCIATION

Is one of the most important documents and must be drafted with care. It has to be filed with the registrar of companies during the process of incorporation of a company. It contains the fundamental conditions upon which the company is allowed to operate. It is the document that governs the relationship between the company and the outside. It is one of the document required to incorporate a company in the United kingdom, Ireland, Canada, Nigeria, India, Nepal, Bangladesh, Pakistan, and Sri-Lanka, Tanzania and is also used in many of the common law jurisdiction of the common wealth.

Also, a memorandum of association (M.O.A) is a legal document prepared in the formation and registration process of a limited liability company to define its relationship with shareholders. The MOA is accessible to the public and describes the company’s name, physical address of registered office, names of shareholders, and the distribution of shares. The Memorandum of association and the Article of association serve as the constitution of the company. The Memorandum of association is not applied in the U.S but it is a legal requirement for limited liability companies in European countries, as well as some common wealth nations.

The memorandum of association always tend to explain the name of the company, physical address of the company, location  of the company, its permitted range of activities and objectives, criteria governing the relationship of the company with its shareholders and the outside world, and the provisions for the distribution of its shares among the specified shareholders.

“Share holder”, is any person, company or other institution that owns at least one of a company’s Stock. Because shareholders are a company’s owners, they reap the benefit of the company’s success in the form of increased stock valuation. If the company does poorly however, share holders can lose money if the price of its stock declines. Since a share holder is considered to be a owner of company, he/she can claim all the benefits from the company in accordance with his or her shares, also as a shareholder, a person must be ready to accept all the circumstances of the loss or damage which may happen during running a business or company, the loss must be accepted by the share holder depending on amount of money invested by a shareholder

IMPORTANCE OF A MEMORANDUM OF ASSOCIATION

• It shows memorandum clauses, clauses include;

Name clause which tell a company name, a company selects any name but it should not resemble the name of any other company,

Situation clause which show the name of the province in which the company office is located, object clause which tell the nature of the company,

Liability clause which contains a declaration that the liability of the members of the company is limited to the extent of the value of the share purchase by them,

Capital clause (a company having a share capital shall state the total maximum amount of share capital with which it is registered,

•  Association and subscription clauses (this contains a declaration by the subscription that are decisions of forming a company and agree to have number of the shares written against their respective names).
• Memorandum of association sets out the limits outside which the company cannot go, the limits that a company must not go beyond it, the limits of a company provide what a company suppose to do and what a company must not do, when a company breach that contract, the registrar of the companies is powered to remove the license of that company or other measures may take place.

• Memorandum of association enable share holders, creditors and all those who deal with the company to know what its permitted range of enterprise, also the memorandum of association of many companies provides for the minimum and maximum range of capital that a shareholder can invest in the company, this help to direct the companies and its shareholders to know the contribution of each of them in forming a company. The existence of a memorandum of association, also give good ground for how the shareholders will benefit from investment.

• Business objective of the company, every company must have an objective to reach somewhere in success, this objectives or goals of a company must always put on the memorandum of association so as to enable the shareholders to understand the where their company is going, also the existence of company’s goals on memorandum of association, it help the outsiders who want to invest in such company to know how they will benefit from the company and if the objective of the company relate to what they want in such companies.

• It define the scope of the company’s activities as well as its relation with the outside world, the memorandum of association provide on various activities that a company will deals with, sometime one company can have many different activities of different nature but only those registered to be conducted by this company. A company can be registered as food’s company but inside the company there may be other activities like transporting services and communication.

• The whole structure of the company is built upon memorandum, the structure of the company includes the branches or divisions of the company, leadership of the company, and other necessary information which help to control company

• Memorandum of association always work together with Article of association (A.O.A), since article of association help to provide for the responsibilities of the directors of the company, the kind of business to be undertaken, and the means by which shareholders exert control over the board of directors.

MEANING OF THE DOCTRINE OF ULTRA -VIRES

Doctrine of ultra-vires describe acts attempted by a corporation that are beyond the scope of powers granted by the corporation’s objects clause, articles of incorporation or in a clause in it’s by laws, in the laws authorizing a corporations formation, or similar founding documents. Acts attempted by a corporation that are beyond the scope of it’s are void or voidable.

The objective clause of the memorandum of the company contains the objects for which the company is formed. An act of the company must not be beyond the objects clause otherwise it will be ultra vires and therefore, void and cannot be ratified even if all the member wish to ratify. This is called the doctrine of ultra vires. The expression “ultra vires” consists of two words, “ultra” and “vires”, ulra means beyond and vires means powers. Here the expression that ultra vires is used to indicate an act of the company, which is beyond the powers. Conferred on the company by the objects clause of its memorandum, an ultra vires act is void and cannot be ratified even if all the directors wish to ratify it. Sometime the expression ultra vires is used to describe the situation when the directors of a company have exceeded the powers delegated to them. Where a company exceeds its powers as conferred on it by the objects clause of its memorandum, its not bound by it because it lacks legal capacity to incur responsibility for the action, but when the directors of a company have exceeded the powers delegated to them. This use must be avoided for it is apt to cause confusion between two entity distinct legal principles consequently, here are restricting the meaning of ultra vires objects clause of the company’s memorandum

PROTECTION OF CREDITORS AND INVESTORS

Doctrine of ultra vires has been developed to protect the investors and creditors of the company. This doctrine prevents a company to employ money of the investors for a purpose other than those stated in the objects clause of its memorandum. Thus, the investors and the company may be assured by this rule that their investment will not be employed for the time of investing their money is so to be employed. This doctrine protects the creditors of the company by ensuring them that the funds of the company to which they must look for the payment are not dissipated in un-authorized activities. The wrongful application of the company’s assets may result in the insolvency of the company and there by protects creditors from departing the object for which the company has been formed and thus, puts a check over the activities of the directions. It enables the directors to know within what lines of business they are authorized to act.

In Ashbury Railway Carriage and Iron Company Ltd V. Riche[1], The object of the company as stated in the objects clause of it’s memorandum, were to make and sell, or lend on hire railway carriages and wagons, and all kinds of railway plaint, fittings, machinery and rolling stock to carry on the business of mechanical engineers and general contractors to purchase and sell as merchants timber, coal, metal or other materials and to buy and sell any materials on commissions or as agents, the directors of the company entered into a contract with Riches for financing a construction of a railway line in Belgium. All the members of the company ratified the contract, but later on the company repudiated it. Riche sued the company for breach of contract.

The issue in this case was whether the contract was valid and if not, whether it could be ratified by the members of the company.

The court held that, the contract was beyond the objects as defined in the objects clause of its memorandum and therefore it was void. The company had no capacity to ratify contract,

According to the doctrine of ultra vires, the doctrine protect the share holders to ratify things beyond the company’s object, and even if they are forced, the contract will be null and void. If the share holders are permitted to ratify ultra vires act or contract, it will be nothing but permitting them to do the everything which by the Act of parliament, they are prohibited from doing.

Doctrine of ultra vires is not illusory protection to the shareholders and not pitfall to outsiders dealing with the company because, the existence of a doctrine, prevent the shareholders to ratify the contracts beyond the objects which can be harmful to a company if ratified. Also it prevent the outsiders to enter into contact with unlawful company which act beyond their company objects. It help to prevent loss to both shareholders of the company and outsiders dealing with the company

[1] 
(1875) L.R 7 H.L 653