Articles of Association under Company Law

Article of Association – a crucial document that defines the internal management framework of a company. The Articles of Association outline the rules and regulations that govern the conduct of a company’s affairs, including the powers and duties of its directors, the rights of its members, and the procedures for decision-making and corporate actions. 

It plays a vital role in ensuring effective corporate governance and transparency in business operations. 

Meaning of Articles of Association

Under Indian Company Law, the Articles of Association is a legal document that outlines the rules and regulations governing the management and operations of a company. It is a key document that defines the internal rules and procedures for the company’s shareholders, directors, and officers, as well as the company’s relationship with its stakeholders.

The Articles of Association must be drafted and filed during the incorporation process of the company. It includes various provisions, such as the company’s name, its registered office address, the objectives of the company, the rights and obligations of its members, the number of directors and their powers and duties, the rules for conducting meetings, and the procedure for issuing and transferring shares.

In addition, the Articles of Association also specify the procedures for resolving disputes between the company and its shareholders or between the shareholders themselves. They may also include provisions relating to the appointment and removal of directors, the distribution of profits and losses, and the winding up of the company.

It is important to note that the Articles of Association are legally binding on the company and its members and must be adhered to at all times. Any changes to the Articles of Association must be approved by the shareholders through a special resolution and filed with the Registrar of Companies.

Definition of Articles of Association under the Companies Act, 2013

The Companies Act, 2013 provides a detailed definition and provisions related to the Articles of Association in Section 2(5) and Section 5 respectively.

According to Section 2(5) of the Companies Act, 2013, the Articles of Association refers to the document containing the rules and regulations that govern the management of the company’s affairs.

Section 5 of the Companies Act, 2013 specifies that the Articles of Association must be in accordance with the provisions of the Act and must be signed by each subscriber to the memorandum of association in the presence of at least one witness who attests the signature. The articles must also be printed and divided into paragraphs and numbered consecutively.

Furthermore, the Act specifies that the articles may contain provisions for the management of the company’s business, the regulation of its affairs, the conduct of its shareholders and directors, and other matters incidental to the company’s operations. 

The articles may also provide for the transfer and transmission of shares, the appointment and removal of directors, the payment of dividends, and the winding up of the company.

Purpose of the AoA

The Articles of Association serve several purposes under the Indian Company Law, some of which are:

Governing document: The Articles of Association is a governing document that defines the rules and regulations for the management and operation of the company. It sets out the rights, duties, and obligations of the company’s directors, shareholders, and officers.

Legal requirements: The Companies Act, 2013, mandates every company to have its Articles of Association, which must be filed with the Registrar of Companies at the time of incorporation.

Clarity: The Articles of Association help to provide clarity to the company’s shareholders, directors, and officers on the procedures and rules they must follow when conducting business activities.

Protection: The Articles of Association help to protect the interests of the shareholders by defining their rights and providing procedures to address disputes or conflicts.

Flexibility: The Articles of Association can be amended from time to time to suit the changing needs and circumstances of the company, provided that such amendments comply with the provisions of the Companies Act, 2013.

Overall, the Articles of Association play a critical role in the governance of a company and help to ensure that the company’s affairs are conducted in a lawful and transparent manner while protecting the interests of its stakeholders.

Scope of AoA

The Articles of Association and Memorandum of Association (MoA) are two important documents that a company must have as per the provisions of the Companies Act, 2013. The MoA defines the fundamental objectives and scope of the company, while the AoA contains the rules and regulations for the company’s management and operation.

The scope of the AoA is limited by the MoA, as the rules and regulations contained in the AoA must be consistent with the objectives outlined in the MoA. The AoA must not exceed the scope of the MoA and should not contain any provision that is ultra vires (beyond the powers) of the company as specified in the MoA.

In the landmark judgment of Shyam Chand v. Calcutta Stock Exchange, the Supreme Court of India held that the AoA of a company must not contain any provision that is beyond the scope of the MoA. In this case, the Calcutta Stock Exchange had inserted a provision in its AoA that allowed it to expel a member for conduct detrimental to the interest of the exchange, even though this provision was not included in the MoA.

The Supreme Court held that the provision in the AoA was ultra vires the MoA and was therefore void. The court emphasized that the scope of the AoA must be consistent with the MoA and that any provision in the AoA that goes beyond the MoA is invalid.

This judgment highlights the importance of ensuring that the AoA is in line with the MoA, and that any provision in the AoA must not exceed the scope of the MoA. Companies must take care to ensure that their AoA is not ultra vires the MoA to avoid any legal disputes or challenges to the validity of their AoA.

Nature and Content of Articles of Association

The Articles of Association  is a legal document that governs the internal rules and regulations of a company. The nature and content of the AoA may vary from company to company depending on their specific requirements and business objectives. However, certain essential elements must be included in the AoA as per the Companies Act, 2013. The following are some of the essential aspects of the nature and content of the AoA:

Nature: The AoA is a binding document that sets out the rules and regulations for the management and operation of the company. It outlines the rights, duties, and obligations of the company’s directors, shareholders, and officers.

Content: The AoA typically contains the following elements:

a. Name and registered office of the company

b. Objects and purpose of the company

c. Share capital and shareholding pattern

d. Articles relating to the issue and transfer of shares

e. Powers and duties of the directors

f. Rules for holding meetings, quorum, voting, and resolutions

g. Provisions for appointment and removal of directors

h. Provisions for appointment of auditors and their remuneration

i. Procedure for winding up of the company

Flexibility: The AoA can be amended from time to time to suit the changing needs and circumstances of the company. However, any amendments to the AoA must comply with the provisions of the Companies Act, 2013.

Legal implications: The AoA is a legally binding document and is enforceable in a court of law. It provides clarity to the company’s shareholders, directors, and officers on the procedures and rules they must follow when conducting business activities.

Components of Articles of Association

The Articles of Association is a document that sets out the internal regulations and management framework for a company. The components of the Articles of Association include:

Name clause – This clause defines the name of the company and specifies the legal form of the business, whether it is a private or public company.

Registered office clause – This clause specifies the address of the registered office of the company, which is the official address for all communication and legal proceedings.

Object clause – This clause defines the main objects and purposes of the company and specifies the activities that the company is authorized to undertake.

Liability clause – This clause outlines the liability of the members of the company, whether it is limited or unlimited.

Share capital clause – This clause defines the authorized share capital of the company, the types of shares that can be issued, and the rights and privileges attached to each class of shares.

Management clause – This clause defines the powers, duties, and responsibilities of the directors and the procedures for their appointment, removal, and remuneration.

General meetings clause – This clause outlines the procedures for convening and conducting general meetings of the company, including the notice period, quorum, voting rights, and resolution-making process.

Dividend clause – This clause specifies the rules and procedures for the distribution of dividends to the shareholders.

Winding-up clause – This clause outlines the procedures for the winding up of the company in case of bankruptcy, liquidation, or dissolution.

These components are essential for effective corporate governance and must be drafted in compliance with the legal requirements of the Companies Act, 2013.

Conditions for the provisions of entrenchment in the AOA

Entrenchment provisions are a type of provision that can be included in the Articles of Association of a company, which requires a specified procedure to be followed before they can be amended or repealed. These provisions can be used to protect important rights or provisions that the company wants to ensure remain intact despite any changes to the AoA.

The conditions for the provisions of entrenchment in the AoA are as follows:

1. The AoA must have been amended to include the entrenchment provision at the time of its incorporation, or it must be approved by a special resolution of the shareholders.
2. The entrenchment provision must be included in the AoA at the time of its incorporation or must be approved by a special resolution of the shareholders.
3. The entrenchment provision can only apply to the provisions of the AoA that are of a fundamental nature, such as the rights of the shareholders or the board’s powers.
4. The entrenchment provision must be registered with the Registrar of Companies.
5. The entrenchment provision must specify the procedure to be followed for amending or repealing the provision.

It is important to note that the entrenchment provisions cannot be used to prevent the company from complying with the requirements of the Companies Act, 2013, or any other applicable laws. Additionally, any amendment or repeal of an entrenched provision must be in accordance with the procedure specified in the entrenchment provision itself.

In summary, entrenchment provisions can be included in the AoA to protect fundamental rights or provisions, but they must be approved by shareholders through a special resolution, cannot be used to prevent compliance with the law, and must be registered with the Registrar of Companies.

Alteration of Articles of Association

The Articles of Association of a company can be altered in various ways, subject to the provisions of the Companies Act, 2013. Alteration of Articles of Association is a common requirement for a public company to become a private company, or for a private company to become a public company. The following are the provisions for the alteration of AoA in each case:

Alteration of AoA for a Public Company to Become a Private Company

• To convert a public company into a private company, the AoA needs to be altered by removing the provisions that make it a public company. The following provisions of the AoA need to be altered:
• Remove the provisions related to the minimum number of members, which is seven for a public company and two for a private company.
• Remove the provisions related to the right to transfer shares, which is unrestricted for a public company and restricted for a private company.
• Remove the provisions related to the invitation to the public to subscribe for shares or debentures, which is allowed for a public company and prohibited for a private company.
• The alteration of AoA must be approved by a special resolution of the shareholders, and the approval of the National Company Law Tribunal (NCLT) is required.

Alteration of AoA for a Private Company to Become a Public Company

• To convert a private company into a public company, the AoA needs to be altered by adding provisions that make it a public company. The following provisions of the AoA need to be altered:
• Add the provisions related to the minimum number of members, which is seven for a public company and two for a private company.
• Add the provisions related to the right to transfer shares, which is unrestricted for a public company and restricted for a private company.
• Add the provisions related to the invitation to the public to subscribe for shares or debentures, which is allowed for a public company and prohibited for a private company.
• The alteration of AoA must be approved by a special resolution of the shareholders, and the approval of the NCLT is required.

It is important to note that any alteration of the AoA must be made in accordance with the provisions of the Companies Act, 2013, and any other applicable laws. Additionally, the altered AoA must be filed with the Registrar of Companies within 30 days of the alteration.

Procedure for Alteration of Articles of Association

The Articles of Association (AoA) of a company can be altered or amended as per the provisions of the Companies Act, 2013. The following are some of the ways in which the AoA can be altered:

By a Special Resolution: The AoA can be altered by passing a special resolution in a general meeting of the shareholders. A special resolution requires the approval of at least 75% of the votes cast by the shareholders who are present or represented at the meeting.

By the Board of Directors: The AoA can be altered by the board of directors if the power to do so is specifically given to them in the AoA. However, any such alteration must be ratified by the shareholders at the next general meeting.

By an Order of the Tribunal: The AoA can be altered by an order of the National Company Law Tribunal (NCLT) if it is satisfied that the alteration is necessary for the proper functioning of the company or to protect the interests of the shareholders.

In accordance with the provisions of the AoA: The AoA may contain provisions for its own alteration or amendment, in which case the alteration must be made in accordance with those provisions.

It is important to note that any alteration of the AoA must be made in accordance with the provisions of the Companies Act, 2013, and any other applicable laws. Additionally, the altered AoA must be filed with the Registrar of Companies within 30 days of the alteration.

In conclusion, the AoA of a company can be altered by a special resolution of the shareholders, by the board of directors with the ratification of the shareholders, by an order of the NCLT, or in accordance with the provisions of the AoA itself. Any alteration must be made in accordance with the provisions of the law and must be filed with the Registrar of Companies.

Limitations on power to alter articles

The power to alter the Articles of Association (AoA) of a company is not absolute and is subject to certain limitations. The following are some of the limitations on the power to alter the AoA:

Consistency with the Companies Act: Any alteration to the AoA must be consistent with the provisions of the Companies Act, 2013, and any other applicable laws.

Contravention of Memorandum of Association: Any alteration to the AoA must not be in contravention of the Memorandum of Association (MoA) of the company.

Binding Effect of Contracts: Any alteration to the AoA must not affect the binding effect of contracts entered into by the company prior to the alteration.

Minority Shareholder Protection: Any alteration to the AoA that affects the rights of minority shareholders must be made with their consent or with the approval of the National Company Law Tribunal (NCLT).

Alteration of Fundamental Provisions: The AoA can be altered only to the extent that it does not affect the fundamental provisions of the company, such as its name, registered office, objects, and capital.

Mandatory Provisions: Certain provisions of the AoA, such as those related to the appointment and remuneration of directors, appointment and removal of auditors, and declaration and payment of dividends, cannot be altered without the approval of the shareholders by way of a special resolution.

It is important to note that any alteration of the AoA that contravenes the provisions of the Companies Act, 2013, or any other applicable law, or that affects the rights of minority shareholders, may be challenged before the NCLT.

Binding effect of Memorandum and Articles of Association 

The Memorandum and Articles of Association (MoA and AoA) are the two most important documents that govern the constitution and operation of a company. The following are the binding effects of the MoA and AoA:

Binding Effect of Memorandum and Articles of Association on the Company and its Members

The MoA and AoA are binding on the company and its members. This means that the company and its members are legally obligated to comply with the provisions of these documents. In Wood v. Odessa Waterworks Co, it was held that the articles of a company constitute a contract between the company and its members, and the company is bound to carry out its provisions.

Members Bound to the Company

The members of a company are bound by the provisions of the MoA and AoA. This means that they cannot do anything that is in contravention of the provisions of these documents. In Borland’s Trustees v. Steel Bros. & Co. Ltd., it was held that a member of a company cannot rely on the articles of association to justify an action that is in breach of a contract.

Binding Between Members

The MoA and AoA are also binding between the members of a company. This means that the members are legally obligated to comply with the provisions of these documents in their dealings with each other. In Rayfield v Hands, it was held that the articles of association are binding on the members in their capacity as members of the company.

No Binding in Relation to Outsiders

The MoA and AoA are not binding on outsiders, such as customers, suppliers, and creditors of the company. This means that these parties cannot rely on the provisions of these documents in their dealings with the company. In Browne v La Trinidad, it was held that the articles of association are not binding on a person who is not a member of the company.

In summary, the MoA and AoA are binding on the company and its members, but not on outsiders. They are also binding between the members of the company. The provisions of these documents must be followed by the company and its members in all their dealings with each other. Any breach of these provisions may lead to legal consequences.

What is the doctrine of Constructive Notice?

Doctrine of Constructive Notice is a legal concept that applies to the registration of companies and states that all persons dealing with a registered company are deemed to have knowledge of its Memorandum of Association and Articles of Association, as these documents are available for public inspection. This means that any person who enters into a transaction with the company is deemed to have constructive notice of the provisions of these documents, even if they have not actually read them.

The doctrine of constructive notice is based on Section 399 of the Companies Act, 2013, which provides that any person dealing with a registered company shall be deemed to have notice of the company’s MoA and AoA.

The doctrine of constructive notice plays an important role in ensuring that persons dealing with a registered company are aware of its MoA and AoA, and that they comply with the provisions of these documents. However, it is also subject to certain limitations, particularly in cases where there are irregularities in the internal management of the company.

Example:

Suppose that Company A is a registered company with an MoA and AoA that are available for public inspection. Company A’s AoA contains a provision that limits the authority of its directors to enter into contracts above a certain amount without the approval of the company’s shareholders. 

If a person, let’s call him Mr. X, enters into a contract with Company A for an amount above the limit specified in the AoA, Mr. X is deemed to have constructive notice of the provision and is therefore bound by it, even if he did not actually read the AoA. The doctrine of constructive notice ensures that Mr. X cannot claim ignorance of the provision as a defence if Company A seeks to enforce it against him.

What is the doctrine of Indoor management?

Doctrine of Indoor Management, also known as the Rule of Turquand, is a legal concept that provides protection to third parties who enter into transactions with a company based on the assumption that the internal procedures of the company have been complied with, even if they have not been followed. The doctrine is based on the principle that outsiders dealing with a company should not be expected to know the internal affairs of the company.

The doctrine of indoor management is recognized in Section 128 of the Indian Companies Act, 2013. According to this section, any act of the board of directors or any officer of a company that is in contravention of the company’s MoA or AoA shall be valid, provided it is done in good faith and is not ultra vires the company’s powers.

The landmark case related to the doctrine of indoor management is:

Royal British Bank v. Turquand (1856): In this case, it was held that a person dealing with a company is entitled to assume that the internal procedures of the company have been complied with, and that the company has the power to enter into a particular transaction, even if the person has not actually read the company’s AoA. The case involved a company that had issued a bond to the plaintiff, and the company argued that the bond was invalid because it had not been authorized by its AoA. The court held that the bond was valid, as the plaintiff was entitled to assume that the directors had the authority to issue it.

An example of the doctrine of indoor management is:

Suppose that Company A’s AoA requires that all contracts above a certain amount must be approved by the company’s board of directors. If the company’s secretary, who is not authorized to approve such contracts, enters into a contract with a third party, the contract would be considered invalid under the company’s AoA. 

However, the doctrine of indoor management would protect the third party who entered into the contract with the company in good faith and without knowledge of the secretary’s lack of authority. The third party would be entitled to assume that the secretary had the authority to enter into the contract, and the contract would be deemed valid.

Landmark cases on doctrine of indoor management 

Mahony v East Holyford Mining Co. (1875)

In this case, the court held that a person dealing with a company is entitled to assume that the directors have the authority to enter into a particular transaction, even if there are irregularities in the internal management of the company. 

The case involved a company that had issued a mortgage to the plaintiff, and the company argued that the mortgage was invalid because it had not been authorized by the company’s AoA. 

The court held that the mortgage was valid, as the plaintiff was entitled to assume that the directors had the authority to issue it, even if there were irregularities in the internal management of the company.

Official Liquidator, Manabe & Co. Pvt. Ltd. v. Commissioner of Police (1999) 

In this case, the court held that the doctrine of indoor management applies to criminal proceedings as well, and that a person accused of a crime cannot be held liable if they entered into a transaction with a company based on the assumption that the internal procedures of the company had been complied with.

M. Rajendra Naidu v. Sterling Holiday Resorts (India) Ltd. (2012)

In this case, the court held that the doctrine of indoor management does not apply if the person dealing with the company had knowledge of the irregularities in the internal management of the company. 

The case involved a person who had purchased shares in a company and later challenged the validity of the company’s resolution on the ground that it had not been passed in accordance with the company’s AoA. 

The court held that the person was not entitled to the protection of the doctrine of indoor management, as he had knowledge of the irregularities in the internal management of the company.

Exceptions to the Doctrine of Indoor Management

Although the doctrine of indoor management provides protection to outsiders who deal with a company in good faith and assume that its internal procedures have been complied with, there are certain exceptions to this doctrine. Here are some relevant exceptions:

Knowledge of Irregularity

The doctrine of indoor management does not protect an outsider who has knowledge of any irregularity or lack of authority on the part of the company’s officers. In such cases, the outsider cannot rely on the indoor management rule and is bound to make further inquiries. The principle was established in the case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1875).

Ultra Vires Acts

The indoor management rule cannot validate an act that is ultra vires or beyond the powers of the company as laid down in its memorandum or articles of association. Any act that is beyond the scope of the company’s objects is deemed to be ultra vires. The rule was established in the case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1875).

Forgery

The doctrine of indoor management does not apply where the outsider is dealing with a forged document or the signature of the officer is forged. In such cases, the company is not bound by the transaction, and the outsider cannot claim protection under the indoor management rule. This principle was established in the case of Ruben v. Great Fingall Consolidated Ltd. (1906).

Misrepresentation

If the outsider has been induced to enter into the transaction by misrepresentation or fraud on the part of the company’s officers, the indoor management rule does not apply. The principle was established in the case of Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (1916).

Conclusion

Articles of Association is a vital document that sets out the internal regulations and management framework for a company. It defines the rights, duties, powers, and obligations of its members and directors, and also outlines the procedures for meetings, decision-making, and other corporate actions. 

The Articles of Association must be drafted carefully and in compliance with the Companies Act, 2013, as they have a binding effect on the company and its members. Any alterations to the Articles of Association must also comply with the legal provisions and be approved by a special resolution in a general meeting of the company. 

Understanding the Articles of Association is crucial for the smooth functioning and effective governance of a company.