Liability Clause of MOA (Memorandum of Association)

Introduction

According to the Companies Act of 2013, every Memorandum of Association (MOA) must include mandatory clauses. The goal of this article is to go over the various clauses that must be provided in the MOA during company registration and to know about one of the important clauses in MOA (Memorandum of Association) is the Liability Clause, which declares the liability of the company members to be either limited or unlimited. Here in this article, we will learn in-depth about “What is the Liability Clause of MOA (Memorandum of Association)?”

MOA (Memorandum of Association)

A Memorandum of Association (MoA) is the company’s charter. It is a legal document prepared during the formation and registration process of a company to define its relationship with shareholders and to specify the company’s objectives. The company can only engage in the activities specified in the Memorandum of Association. As such, the MOA establishes the limit beyond which the company’s actions are not permitted. The Memorandum of Association informs shareholders, creditors, and anyone else dealing with the company about the company’s basic rights and powers. Furthermore, the contents of the MoA assist prospective shareholders in making the right decision when considering investing in the company. A Memorandum of Association must be signed by at least two subscribers in the case of a Private Limited Company and seven members in the case of a public limited company.

List of Clauses of MOA (Memorandum of Association)

Certain clauses are required to be included in every MOA:

• Subscription Clause
• Object Clause
• Situation Clause
• Name Clause
• Liability Clause
• Capital Clause

What is the Liability Clause of MOA (Memorandum of Association)?

The liability clause, which is a mandatory clause in every MOA, serves an essential purpose. It depicts the types of liabilities one may face if one joins a company. The following are some of the most important functions of the Liability clause:

• Liability Limited by Shares: The first type of liability is Liability Limited by Shares. In the case of a company whose liability is limited by shares, the members’ liability is limited by the number of shares purchased by shareholders. This type of company is ideal for profit-making/commercial businesses because it allows one to run a business alone or with others while maintaining profit and reducing liability.

• Liability Limited by Guarantee: The second type of liability is Liability Limited by Guarantee. In this case, each member guarantees that they will pay a certain amount if the company fails. This type of company is typically a non-profit organisation, such as an NGO, that does not retain any profits. People cannot be granted share capital in the case of these companies. As a result, people willingly become guarantors for the company; typically, the owners become guarantors who willingly accept a certain amount of liability for the company.

• Unlimited Liability: Unlimited Liability is the third and final type of liability. In the case of an unlimited company, every member is obligated to pay an unlimited amount if the company suffers losses and must be wound up. Their liability can be for any amount and also extends to members’ personal property.

Final Thoughts

The type of liability that your company should choose is entirely dependent on the structure of your company. For example, If you are starting a commercial business, then limited by shares is the way to go; if you are starting a charity, then limited by guarantee is the way to go. A company’s liability clause can be changed, but only if it is a Private Limited Company. If a Public Company wants to change its liability clause, it must first convert to a Private Limited Company.