Memorandum of association was judicially defined by Lord Cairns in “Ashbury Railway Carriage Co. Ltd vs. Riche” as the “charter” which defines the limitations of the powers of a company to be established under the Act”.
It is a document which sets out the constitution of the company and is really the foundation on which the structure of the company is based. It contains the fundamental conditions upon which alone the company is allowed to be incorporated.
A company pursues only such objects and exercises only such powers as are conferred expressly in the memorandum. A company cannot depart from the provisions contained in its memorandum, however great the necessity may be. If it does, it would be ultra vires the company and therefore wholly void.
The purpose of the memorandum is to enable the shareholders, creditors and those who deal with the company to know what the permitted range of the enterprise is. It defines as well as confines the powers of the company.
Lord Cairns in Ashbury Railway Carriage Co. Ltd vs. Riche pointed out that, the memorandum as it were the area beyond which the action of the company cannot go; inside that area the shareholders may make such regulations for their own government as they may think fit.
Case Law: Ashbury Railway Carriage Co Ltd vs. Riche
A company was registered under Companies Act 1862 and the objects clause was defined as follows:
The objects for which the company is established are to make and sell, or lend on hire, railway carriages and wagons, and all kinds of rail plant, fittings, machinery and rolling stock; to carry on the business of mechanical engineering and general contractors; to purchase and sell, as merchants, timber, coal, metals and other materials and to buy and sell any such materials on commission or as agents.
The directors agreed to purchase a concession for making railway in Belgium; and form a company in Belgium called Societe Anonyme to work the concession and it was further agreed that Mr. Riche commence the work. Later difficulties arose and the shareholders of Ashbury Co. disapproved of what had been done in the matter of the railway, and required the directors to take over the company’s interest therein and to indemnify the shareholders. The directors, however on behalf of the shareholders repudiated the contract for the construction of the railway, as being ultra vires the company and Mr. Riche sued the company for damages for breach of contract.
It was held that the contract was ultra vires (beyond the powers of) the company and that accordingly the company was not liable to Mr. Riche. Lord Cairns said that the contract was entirely beyond the objects in the memorandum and was thereby placed beyond the powers of the company to make the contract. If so, it is not a question whether the contract ever was ratified or was not ratified. If it was a contract void at its beginning, it was void because the company could not make the contract.
If every shareholder of the company had been in the room and every shareholder of the company had said that this contract which we desire to make, which we authorize the directors to make, to which we sanction the placing of the seal of the company, the case would not have stood in any different position from that in which it stands now. The shareholders would thereby by unanimous consent have been attempting to do the very thing which, by the Act of parliament they were prohibited from doing.
Contents of Memorandum
Section 5 of the Act states the following six clauses of the memorandum of association:-
(a) Name clause
(b) Registered office clause
(c) Objects clause
(d) Liability clause
(e) Capital clause
(f) Association clause
(a) The Name clause
The promoters of a proposed company have freedom to choose its name, but the freedom is limited by section 19(2) of the Act which provides that “no name shall be reserved and no company shall be registered by a name which consists of abbreviations, initials or which, in the opinion of the registrar is “undesirable” e.g. Malaya.
The registrar of companies has not issued any circular explaining the criteria likely to be used in deciding whether a proposed name is undesirable under the section. However, corresponding to English Companies Act 1948 to which Kenya’s companies Act was formed, regards a proposed name as undesirable if;-
(i) It is like the name of an existing company.
(ii) It is misleading for example, if the name of a company likely to have small resources suggests that it is going to trade on a greet scale over a wide field.
(iii) It suggests some connection with the crown or members of the royal family, for example, Queens and Princes.
(i) It includes words which might be trademarks, unless a trade mark clearance has been obtained.
No company shall be registered by a name which is identical or which resembles the name of an existing company. Where a company is registered by a name so similar to that of another company that the public are likely to be deceived, the court will grant an injunction restraining it from using that name.
Case Law: Ewing vs. Buttercup Margarine Co. Ltd
The plaintiff, who carried on business under the trade name of the Buttercup Dairy Company, was held entitled to restrain a newly registered company from carrying on business under the name of the Buttercup Margarine Company Ltd on the ground that the public might reasonable think that the registered company was connected with his business.
However, if the company’s business is different from that of the complaining party, confusion is not likely to arise and an injunction will not be granted.
To avoid the risk of choosing a name that ultimately turns out to be desirable, the promoters should enquire from the registrar whether the name they intend to give the company is “too like” that of a company already in the register of companies. After obtaining confirmation that the name is a registerable one they should immediately make a written application for its reservation under section 19(1) of the Act. Any such reservation shall remain in force for a period of 30 days or such longer period, not exceeding 60 days as the Registrar, for special reasons may allow.
Every public company must write the word “limited” after its name and every private limited must write the word “private limited” after its name. Companies whose liabilities are not limited are prohibited from using the word “limited”.
(b) The Registered office clause
Section 5(1) (b) provides that the memorandum of association shall state that, “The registered office for the company is to be situated in Kenya”
The registered office clause is important for two reasons:-
(i) It ascertains the domicile and nationality of a company.
(ii) It is the place where various registers relating to the company must be kept and to which all communications and notices must be sent. A company need not carry on its business at its registered office.
The primary function of the registered office is to act as the company’s official address. It provides a convenient place where legal documents, notices, and other communications can be signed.
The following registers and documents are kept at the company’s registered office;-
(i) The register of members.
(ii) The register of directors and secretaries.
(iii) The company’s register of charges.
(iv) The register of debenture holders.
(v) The register of directors interests in shares.
(vi) The minute books of general meeting.
The above registers and documents are subject to inspection by the following:-
(a) The company’s members can access and inspect them free of charge during business hours for at least two hours each day.
(b) Debenture holders of the company can inspect free of charge during business hours.
(c) Any member of the public can inspect on payment of prescribed fee not exceeding Sh. 2 for each inspection.
(c) The Object clause:
Section 5(1) (c) requires the memorandum of association to state the objects of the company.
The object clause defines the sphere of the company’s activities, the aims that its formation seeks to achieve and the kind of activities. If anything is undertaken outside the objects stated in the memorandum then such shall be considered ultra vires and hence not binding the company.
The objects clause is intended to serve the following purposes:-
(a) To protect subscribers who learn from it the purpose to which their money can be applied
(b) To protect persons who deal with the company and who can infer from it the extent of the company’s powers.
In choosing the company’s objects, the following should be noted;
(i) The objects should not be illegal or against the general law of the country, for example, gambling is prohibited and therefore the objects should exclude such.
(ii) The object should not include anything in contravention of the Act.
(iii) They should not include anything against public policy e.g. trading with alien enemies.
The statement Lord Cairns in 1875 in Ashbury Railway Co. Ltd vs. Riche to the effect that a contract beyond the objects of the company in the memorandum of associations, is beyond the powers of the company give the impression that a company has no legal power to do anything which is not written in the memorandum. That would be a starting proposition because, in practice, companies have to do so many things in the course of their business that if all those things were to be written down in the memorandum, the memorandum would be such a gigantic document that nobody would read it. The judges will not regard a transaction undertaken by a company as ‘ultra vires’ merely because it is not written in the company’s memorandum of association as one of the company’s objects.
They would infact regard the transaction as ultra vires by implication if:-
(a) It was reasonably incidental to any of the objects which have been written in the company’s memorandum.
(b) It was undertaken for the sole purpose of effectuating, or achieving the written objects.
Doctrine of Constructive Notice
This rule regards that a person transacting business with a company is taken to be aware of the contents of the company’s public documents such as memorandum, articles, annual return and special resolutions.
Because the company’s registry is a “public office” the documents kept therein are generally referred to as “public documents” since members of the public are free to inspect them on payment of a prescribed fee.
A person transacting business with a company will be taken to have read the objects clause in the company’s memorandum. Consequently if he concludes a contract with the company and it turns out that the contract was for a purpose which is neither expressly nor impliedly within the company’s objects and hence ultra vires, he is regarded as having entered into an ultra vires contract knowingly even though he was not actually aware of its being ultra vires. He cannot successfully sue the company for breach of the contract.
The legal justification for this rule is that since the company’s public documents in its file at the company’s Registry are available there for inspection by any interested member of the public he should have gone to the registry asked for the company’s file, inspected the contents and having found the memorandum of association read the objects clause inorder to ascertain whether the proposed contract is consistent with the company’s objects. If he fails to do so, he will be regarded as having been aware that the contract was ultra vires. He cannot therefore be allowed to enforce it.
The criticism that could be made against the constructive rule is its assumption that a potential contracting party who read a company’s objects will be able to make the correct legal conclusion regarding the vires of the proposed transaction. The fact that a perusal of the company’s object clause does not guarantee its correct interpretation is amply demonstrated when senior judges differ over the vires of a particular transaction. Why should an ordinary businessman be expected to decide the matter correctly? Reading the objects does not guarantee correct interpretation.
Remedies of the ultra vires lender
No action or suit lies at law to recover money lent to a company which has borrowed for an ultra vires purpose. This means that the ultra vires lender cannot sue, as lender, to recover the money he lent to the company. However, he might avail himself of one or any of the following remedies:-
(a) If the result of the transaction is that the indebtedness of the company is not increased because the new loan was applied in discharging an old debt, the invalid lender can be treated as standing in place of those whose debts have been paid off.
In Sinclair vs. Brougham, it was stated that the ultra vires lender would be entitled to rank as creditor only to the extent to which his money was applied in discharging the intra vires debt.
(b) If the lender can identify his money or the investment of his money in the hands of the borrowing company, he can call for its return.
(c) If the lender cannot bring himself within any of the above prepositions he would have no remedy except to participate in the division of the company’s surplus assets if any which would be divisible among ultra vires creditors during company’s liquidation after all members have received back their capital in full.
(d) The Liability Clause
This clause states that the liability of the members of the company is limited.
Section 5(2) provides that memorandum of a company limited by shares or guarantee shall state that the liability of members is limited.
Companies may either be:-
(i) Limited by shares
(ii) Limited by guarantee
Companies limited by shares
Section 4(2) (a) defines such a company as a company having the liability of its members limited by memorandum to the amount, if any, unpaid on the shares held by them.
Companies limited by guarantee
Section 4(2)(b) defines such a company as a company having the liability of its members limited by the memorandum to such an amount as the members may undertake to contribute to the assets of the company in the event of its being wound up.
The members can only be called upon to pay the amount guaranteed if the company is in liquidation.
Section 4(2) (c) defines it as a company not having any limit on the liability of its members.
Although the company is a separate legal entity, the members’ liability resembles that of partners.
(e) The Capital Clause
Section 5(4) (a) provides that a company having a share capital, the memorandum shall state “the amount of share capital with which the company proposes to be registered and the division thereof into shares of a fixed amount”.
(f) The Association Clause
This clause though not provided in Section 5 of the Act, provides that those who have agreed to subscribe to the memorandum must signify their willingness to associate and form a company. Seven persons are required to sign the memorandum in case of public company whereas two for private companies.
Alteration of the Memorandum
The memorandum of association of a company being its charter, the right of the company to alter its contents is rigidly limited by the provisions of the Act. Section 7 of the Act provides that a company shall not alter the conditions contained in its memorandum except in cases, in the mode and to the extent for which express provisions is made in this Act.
(1) Change of Name
A company’s name may be changed voluntarily or compulsorily.
(a) Voluntary change of name
A company’s name may be changed voluntarily if:-
(i) A Special resolution is passed by the company for that purpose after obtaining a written approval of the registrar (Section 20(1).
(ii) The company was inadvertently registered by a name which, in the opinion of the registrar, is too like the name by which a company in existence is previously registered.
Although the section does not make it mandatory for the company to change its name it is advisable for the company to take immediate steps to effect the change as soon as it becomes aware of the situation. Any delay entails the risk of passing-off action being instituted against it.
(iii) The minister, by license, authorizes a company to make a change in its name.
(b) Compulsory change-
Section 20 (2) of the Act provides that within 6 months of registration with a particular name, the registrar may direct a change in name if in his opinion the name is “too like” that of pre-existing company. A change of name under this section may be made by ordinary resolution.
Failure to comply with the registrar’s directive is an offence punishable by a fine not exceeding Sh. 100 for every day during which the default continues.
After a company changes its name, it shall give to the registrar notice thereof within fourteen days. Upon receipt of the notice, the registrar shall:-
(i) Enter the name on the register in place of the former.
(ii) Issue to the company a certificate of change of name.
(iii) Publish the change of name in the Kenya Gazette
(2) Change of Registered Office
A company may change the address of its registered office on giving proper notice to the registrar. The new address takes effect on the entry of the address on the register but the company has 14 days after giving due notice in which to use the new address and to transfer the registers etc, required to be kept there before it commits any offences for using the wrong address.
The registrar must publish in the Gazette notice of the receipt by him of notice of change in the company’s registered office.
(3) Change of the Object Clause
Section 8 of the Act provides that a company may, by special resolution, alter the provisions of its memorandum with respect to its objects if the alteration would enable the company: -
(a) To carry on its business more economically or more effectively.
(b) To attain its main purpose by new or improved means.
(c) To enlarge or change the local area of its operations.
(d) To carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company.
(e) To restrict or abandon any of the objects specified in the memorandum.
(f) To sell or dispose of the undertaking of the company.
(g) To amalgamate with any other company or body of persons.
In order to effect the proposed alterations the company’s directors would have to convene an extraordinary general meeting of the company in order to consider and if approved, pass a resolution that the company’s objects be altered as proposed.
The resolution would be effective immediately it is passed if it was voted for by the holders of at least 86% in nominal value of the company’s issued share capital or any class thereof.
When the objects are altered, a printed copy of the special resolution must be delivered to the registrar within 14 days.
(4) Change of Capital Clause
Section 63 (1) provides that a company limited by shares or a company limited by guarantee and having a share capital, if so authorized by its articles, may alter the conditions of its memorandum as follows: -
(a) It may increase its share capital by new shares of such amount as it thinks expedient.
(b) It may consolidate and divide its capital into shares of larger amount than the existing shares.
(c) It may convert all or any of its paid up shares into stock and reconvert stock into paid up shares.
(d) It may subdivide its shares into shares of smaller amount.
(e) It may cancel shares, which at the date of passing of the resolution have not been taken or agreed to be taken by any person and diminish the amount of its share capital by the amount of shares so cancelled.
Section 63 (2) provides that this shall be exercised by the company in a general meeting.