Effect of Memorandum and Articles of Associations - An anlysis

[CS A Rengarajan]

EFFECT OF MEMORANDUM AND ARTICLES- An analysis.

 

As per sub section (1) of Section 36 of the Companies Act, 1956 provides that  when Memorandum and Articles of Association once registered  shall bind the company and its shareholders.  Whatever terms and conditions are in the Memorandum and Articles of Association shall bind the company and its members.    The Supreme Court's ruling in V. B. Rangaraj vs V. B. Gopalakrishnan (1991 6 CLA 211) is the authority for the proposition that a clause in a shareholders' agreement that is not repugnant to the Companies Act or to the company's Memorandum would stand legal scrutiny only when it is incorporated in the company's Articles of Association. The agreement between shareholders not binding the company unless it is incorporated in the Articles of Associations.

 

As per Sub section (2) of Section 36 of the Companies Act provides that all money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company.

 

Sub section (1) of Section 41 provides that the subscribers of the memorandum of a company shall be deemed to have agreed to become members of a company, and on its registration, shall be entered as members in its register of members.

 

Sub section (2) of Section 41 provides that every other person who ¹[agrees in writing] to become a member of a company and whose name is entered in its register of members, shall be a member of the company.

 

Normally when subscribers to memorandum agree to pay the money and the same will be due from them only on incorporation of the company is registered with Roc. At present there is no time limit to pay the same.  Normally the subscriber to memorandum will pay immediately on incorporation.  Preferably we should pay before first year closing of accounts of the company.   At the time of winding up also, when there is any due from shareholders, the same may be paid by them to the company.

The terms and conditions between shareholders and company is treated as contract. Both memorandum and articles of association contains terms and conditions to be adopted i.e  how much share to be issued to subscribers to the memorandum, how to issue further shares, transferability of shares, how shareholders exercises their rights in their meeting, how directors to be elected etc.

We need to understand what is contract?

According to Section 2 (h) of Indian Contract Act, “An agreement enforceable by law is a contract.

 

The essentials of valid contract is are as follows:

 

1)  An agreement between two parties. Always offer by one party and acceptance by the other party

2) The person competent to enter into agreement ( minor not to enter into an agreement)

3)  There should be lawful consideration and lawful object for that agreement

4) They should be consent  of the parties , when they re enter into the agreement

5) The agreement  must not be one, which has been  expressly declared to be void.

 

A contract is an agreement between two or more parties to do, not do, or promise something. Contracts can come in many forms they can be oral or written, implied or express, and legally enforceable or not. The strongest contract, in terms of enforceability, has an offer, acceptance, consideration for the exchange, clearly sets out the terms of the agreement without ambiguity, and is signed by the involved parties with proper capacity to enter into the contract.

 

Weaker contracts include verbal agreements or contracts drawn up by parties in direct violation of state or federal laws. There are numerous aspects related to valid contracts; in fact, an entire course in law school is often devoted to contract law

 

Conclusion: The agreement between Shareholders and the company are treated as a contract and it should contain all  essentials of valid contract as mentioned above.

 

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csarengarajan
Company Secretary, Chennai
email csaren...@gmail.com
mobile 093810 11200
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