Law and You > Corporate Laws > Companies Act, 2013 > Introduction to Articles of Association
The Companies Act, 2013 defines ‘articles’ as the “articles of association of a company originally framed, or as altered from time to time in pursuance of any previous company laws or of the present.”
The second document which must be filed along with the Memorandum of Association for the incorporation of a company is Articles of Association. The Articles of Association are the rules and regulations or by-laws for governing the internal affairs and conduct of the company. It is a very important document and must be carefully drafted. They may be described as the internal regulations of the company governing its management and embodying the powers of the directors and officers of the company as well as the rights of the shareholders. Articles of Association generally prescribe the relation between shareholders and the Board of Directors, the relation among shareholders, and Directors themselves.
In Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd, AIR 1971 SC 422 case, the Supreme Court observed: “the articles of association of a company also establish a contract between the company and its members as well as between the members. This contract governs the ordinary rights and obligations incidental to the membership in the company.”
The Articles of a company have often been compared to a rule book of the company’s working that regulates the management and powers of the company and its officers. It gives provisions for the company’s inner workings such as the manner of making calls, director’s/employees qualifications, powers and duties of auditors, forfeiture of shares, dividend policy, etc. The provisions of the articles are binding on the members as well as the company.
In Ashbury Railway Carriage and Iron Co. v. Riche, (1875) LR 7 HL 653 case, the Court observed: “the articles defined duties, the rights and the powers of the governing body as between themselves and the company at large, and the mode and the form in which the business of the company is to be carried on and the form in which changes in the internal regulations of the company may from time to time be made.”
It must be noted that the articles of association, are subordinate to the memorandum of association of a company, which is the dominant, fundamental constitutional document of the company. Thus the articles should be in harmony with the memorandum and there should not be any provisions in the articles that go beyond the memorandum. In case of any ambiguity or uncertainty regarding details in the memorandum, it should be read along with the articles.
In Shyam Chand v. Calcutta Stock Exchange, AIR 1949 Cal 337 case, the Court held that any and all articles that go beyond the memorandum of association will be deemed ultra vires.
The memorandum and articles are the public document and can be accessed by any person. One can get access to any company’s memorandum and articles from any of the following:
- Ministry of Corporate Affairs website (Company public documents section)
- Company public documents may be obtained from several from private players.
Importance of Articles of Association:
- The Articles of Association are the rules and regulations or by-laws for governing the internal affairs and conduct of the company.
- It prescribes the internal regulations for the governing of the company and powers of the directors and officers of the company as well as the rights of the shareholders.
- It prescribes the relation between shareholders and the Board of Directors, the relation among shareholders, and Directors themselves.
- It gives provisions for the company’s inner workings such as the manner of making calls, director’s/employees qualifications, powers and duties of auditors, forfeiture of shares, dividend policy, etc.
- Neither company nor members bound to outsiders.
- The provisions of the articles are binding on the members as well as the company.
- On breach of the articles of association, a member may thus, sue the company, just as the company may sue its members to enforce and also restrain any breach of the articles of the company.
In Wood v. Odessa Waterworks Co., (1889) 42 Ch D, 636 case, issues were whether the memorandum and articles could constitute a contract between not just the company and its shareholders but also among shareholders and whether a minority shareholder could prevent a company from acting in a particular way. The articles of the company provided that the directors can declare a dividend to be paid to the members, with the sanction of the company at a general meeting. However, instead of paying the dividend to the shareholders in cash a resolution was passed to give them debenture bonds. It was finally held by the court, that the word “payment” referred to payment in cash, and the directors were thus restrained from acting on the resolution so passed.
In Borland’s Trustees v. Steel Bros. & Co. Ltd., [1901] 1 Ch 279 case, the articles of the company provided that in the event of bankruptcy of any member, his shares would be sold at a price affixed by the directors. Thus, when Borland went bankrupt, his trustee expressed his wish to sell these shares at their original value and contended that he could do so since he was not bound by the articles. The issue was that whether pre-emption rule created by the company related to shareholders bankruptcy went against bankruptcy laws and eventually void? The Court held that he was bound to abide by the company’s articles since the shares were bought as per the provisions of the articles.
In the case of Rayfield v Hands, 1960 Ch 1 case, plaintiff was a shareholder in a particular company, who was required to inform directors if he intended to transfer his shares, and subsequently, the directors were required to buy those shares at a fair value. The plaintiff remained in adherence to the articles and informed the directors. The directors, however, contended that they were not bound to pay for his shares and the articles could not impose this obligation on them. The issue was did the articles give rise to contract between the plaintiff and the directors. The Court held that the articles related to relationship between the plaintiff as a member and the defendants not as directors but as members of the company. The Court, however, dismissed the directors’ argument and compelled them to buy Rayfield’s shares at a fair value.
Forms of Articles of Association:
Schedule I of the Companies Act, 2013 provides forms for AOA in tables F, G, H, I and J for different types of companies. Further, the articles must be in the respective form. The different forms of Articles of Association prescribed under Companies Act, 2013 are as follows:
| Forms | Applicable to |
| Table F | Company limited by Shares |
| Table G | Company limited by Guarantee having share capital |
| Table H | Company Limited by Guarantee not having share capital |
| Table I | Unlimited company having share capital |
| Table J | Unlimited company not having share capital |
Contents of Articles of Association:
According to Section 5 (1) of the Companies Act, 2013, the articles must include the regulations of for the company’s management along with the matters directed by the Central Government.
Contents of Articles of Association of a limited company is prescribed in Table-F of the Companies Act, 2013. Generally, the contents of AOA are as follows:
- Interpretation
- Provisions for Private Company
- Share Capital and Variation Of Rights
- Lien on Shares
- Calls on Shares
- Transfer Of Shares
- Transmission of Shares
- Forfeiture of Shares
- Alteration of Capital
- Capitalization of Profits
- Buy-Back of Shares
- General Meetings
- Proceedings at General Meetings
- Adjournment of meeting
- Voting Rights
- Proxy
- Board of Directors
- Proceedings of The Board
- Chief Executive Officer, Manager, Company Secretary or Chief Financial Officer.
- Accounts
- Audit
- Winding Up
- Indemnity
- Preference Shares
- Alteration to Memorandum
- Control of Shares
- Shares held Jointly
- Increase of Capital
- Dividends and Reserve
- Issue of Shares in Kind
- Borrowing Powers
- Operation of Bank Accounts
- Secrecy
- Execution Clause
Provision of Entrenchment:
The word entrench means to establish an attitude, habit, or belief so firmly that change is very difficult or unlikely. The company has the discretion to include entrenchment provisions in its articles of association. The concept of Entrenchment was introduced in the Companies Act, 2013 in Section 5(3) which implies that certain provisions within the Articles of Association will not be alterable by merely passing a special resolution, and will require a much lengthier and elaborate process. Thus, an entrenchment clause is the one which makes certain amendments either impossible or difficult.
Provisions for entrenchment can only be introduced in the articles of a company during its incorporation, or an amendment to the articles brought about by a special resolution in case of a public company, and an agreement between all the members in case of a private company.
Signing Articles of Association:
- The document of articles of association should be required to be signed by all subscribers.
- They are also required to add their names, addresses, and occupation.
- At least one witness should be present at the time of the signing of the document. He must attest signatures with his own signature and details.
- Where a subscriber is illiterate, the appointed person should read out the content of the documents to the illiterate subscriber for his understanding and such an illiterate person must affix a thumb impression in place of his signature, and the appointed person has to authenticate the impression with his signature and details.
- If a subscriber is a body corporate, the memorandum and articles must be signed by any director of the body corporate who is duly authorized to sign on behalf of the body corporate, by passing a resolution of the board of directors of the body corporate.
- If the subscriber is a Limited Liability Partnership, the partner of the LLP who is duly authorized to sign on the behalf of the LLP by a resolution of all the partners shall sign.
Alteration of Articles:
A company has an inherent powers to alter its articles to suit its requirements from time to time. Section 14 of the Companies Act, 2013, permits a company to alter its articles, subject to the conditions contained in the memorandum of association, by passing a special resolution. Alteration of Articles shall be discussed in upcoming articles.
Distinguishing Memorandum and Articles:
| Memorandum of Association | Articles of Association |
| It contains fundamental information required for the incorporation of the company. | It contains the provisions for all the rules and regulations to manage the company. |
| It subordinate to the Companies Act and cannot include provisions contrary to the Companies Act. | It is the subordinate to the memorandum and cannot include provisions contrary to the Memorandum. |
| It is defined in 2(56) of the Companies Act, 2013. | It is defined in 2(5) of the Companies Act, 2013. |
| It contains power and objects of the company. | It contains rules and regulations for running the company. |
| It defines the relation between company and outsider. | It regulates the relationship between company and its members and also amongst the members of the company. |
| It is a public document meant for the benefit and clarity of the public, the creditors, investors, and the shareholders. | It Regulates the relationship between the company and its members, as well amongst the members of the company. |
| It is compulsory to file Memorandum with the ROC. | There is no such requirement in case of articles. |
| It lays down the area beyond which the company’s conduct cannot go. | It establishes the regulations for working within that area. |
| Acts done beyond the memorandum are ultra vires and cannot be ratified even by the shareholders. | Acts done beyond the Articles can be ratified by the shareholders as long as the act is not ultra vires to memorandum. |
| The memorandum of association of the company cannot be amended retrospectively. | The articles of association can be amended retrospectively. |
| Memorandum lays down the parameters for the articles to function. | Articles prescribe details within those parameters. |
| It can only be altered under specific circumstances after passing Special Resolution (SR) in Annual General Meeting (AGM) and obtaining previous approval of Central Government (CG) or Company Law Board (CLB). | It can be altered a lot more easily, by passing a special resolution at Annual General Meeting (AGM). |
Conclusion:
Articles of Association is a document which describes the roles and responsibilities of the directors and every member of the company. It governs internal management of the company. Along with memorandum it is a crucial document forms the company’s core constitution and rule book. It defines roles of directors and their relation between members of the company at the same times it relates with relation between the members of the company.