Article of Association: Company Law in India

Every company needs a set of regulations to function to get the optimum output with a transparency at every stage of the work. A company has two important business documents – Memorandum of Association (MOA) and Articles of Association (AOA). Article of Association deals with all the internal matters of the company including the rules and regulations of the company, management of the company, and other additional matters which the company thinks fit for the purpose.

The Companies Act, 2013 has the definition of ‘articles’ as “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.”

We could also treat articles of Association as the partnership deed in a partnership.

AOA is particularly provided for matters such as –

  • The making of calls, forfeiture of shares;
  • Director’s qualifications;
  • The procedure for transfer and transmission of shares and debentures;
  • powers, duties, and appointment of Auditors.

The Signing of the Articles of Association (AOA)

The Companies (Incorporation) Rules, 2014 prescribes the specific manner in which the Memorandum and the Articles of a company are to be signed. The manner is:

  • All the subscribers should sign the Memorandum and Articles of a company, in the presence of at least one witnesses, who shall also mark the presence with his/ her signature and details. The signing should have their names, addresses, and occupation.
  • In those cases where the subscriber is illiterate, a thumb impression is to be to affixed in place of the signature and the person may appoint a person to authenticate the impression with his signature and details. Also, the person is supposed to read out the content of the documents to the illiterate subscriber so he may understand the Article of Association.
  • If the subscriber is a body corporate, any director of the body corporate can sign the memorandum and articles who have the authority to sign on behalf of the body corporate.
  • Where the subscriber is a Limited Liability Partnership (LLP), any authorised partner can sign on behalf of the Limited Liability Partnership (LLP). The partner is to be authorised by a resolution of all the partners.

In Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd], the Supreme Court of India, held that the “Articles of Association” of any company could be looked upon as a contract between the company and the members of the company and between the members themselves. This contract governs the rights and obligations gained while acquiring the membership in the company.

Contents of Articles of Association

The contents of the Article of Association are present in Section 5(1) and section 5(2) of the Companies Act, 2013. The articles must necessarily contain all the regulations for the functioning of the company along with the matters advised by the Central Government.

The Articles of Association (AOA) must also contain:

  • Share capital including sub-division, share certificates, rights of various shareholders, payment of a commission, the relationship of these rights.
  • Lien of shares
  • Calls on shares which is that the whole or part remaining unpaid on each share which has to be paid by the shareholders on the company’s demand.
  • The procedure by which the Article of Association could be transferred by the shareholders to the transferee should be included in the AOA
  • The Transfer of title by death, succession, marriage, insolvency, etc. should be included in AOA.
  • The Articles of Association provide for the forfeiture of shares in those cases where the purchase requirements such as paying any allotment or call money, are not met with.
  • Surrender of shares should be included in the Article of Association which is the voluntary return of the shares which once they acquired of the company
  • By an ordinary resolution, any company can convert the shares into stock, with accordance to the AOA
  • A share warrant which is a bearer document relating to the title of shares, cannot be issued by private companies; only public limited companies can issue a share warrant
  • Any Increase, decrease or rearrangement in the capital of the company must be done as the articles of association suggests
  • All the provisions by which the general meetings are to be conducted and the manner in which they are to be conducted are to be contained in the Articles of Association
  • The manner in which the member’s right to vote on certain company matters can be exercised is provided in the articles of association
  • The appointment, remuneration, qualifications, powers of the Director and proceedings of the boards of directors’ meetings should be included in AOA
  • The information related to the distribution of the dividend to the shareholders is contained in AOA
  • Subject to the Article of Association, the decisions regarding the auditing of a company shall be done
  • The Borrowing powers of every company has to be exercised according to the Articles of Association of the company
  • The winding-up of any company should be done in accordance with the AOA

Format of Article of Association

Articles of Association of a company must be in the way as prescribed by the form provided in Schedule I of the Companies Act, 2013.

It is the discretion of the company to either adopt all or any of the regulations specified in the model articles.

Entrenchment

The Articles of Association may contain provisions for “Entrenchment. Though the concept of Entrenchment was not present there in the Companies Act, 1956. It establishes this clause to make certain amendments impossible or restricted. It is the discretion of each company if to include Entrenchment in Article of Association. This provision allows certain amendments by a more restrictive and difficult procedure than in any other case of a special resolution.

When can the Entrenchment provision be made?

The Entrenchment provision could be made, either:

  • At the time of incorporation of the company; or,
  • Of amendments in the Article of Association
  • With a private company, the approval of all can make an amendment the members;
  • With a public company, a special resolution can make an amendment

       The company shall give notice to the Registrar stating about the Entrenchment.

Alteration of Articles of Association

Section 14 of the Companies Act, 2013, contains the provisions according to which a company can alter its articles by passing a special resolution, subject to the conditions in the memorandum of association.

The alternation in the Article of Association may turn a company’s status to the other, i.e., either the company may turn “private company” from a “public company” or from “public company” to a “private company”.

  • The consent and approval are to be required of the Tribunal by the company.
  • Also, the copy of the special resolution must be filed with the Registrar of Companies within 30 days of passing it.
  • Then the company has to file a copy of the new Articles of Association, and besides that, it should file the approval order of the Tribunal with the Registrar of Companies, within 15 days of the order being received. (A passing of mere special resolution won’t bring any effect.)
  • If the company wants to convert itself from Private to Public company then, the following steps should be followed-
  • the three clauses as per section 2(68) which defines the requisites of a private company should be removed/omitted.
  • Then the company has to file the copy of the special resolution and the altered articles with the Registrar within the stipulated time.

Limitations on power to alter articles

  • Any of the alterations done should not contravene with the memorandum. They should treat the Memorandum as superior to the Article of Association. The memorandum shall prevail in cases of conflict.
  • Any of the alterations done should not contravene the Companies Act, or any other company law because the Company Law is to be treated superior to both the Memorandum and the Articles of the company
  • No alternation shall contravene the rules, alterations or suggestions of the Tribunal
  • No alternation should be illegal or in contravention with public policy. The alternation should be for the bona fide benefit and interest of the company.
  • There shall be no fraud in the name of alternations
  • We cannot make any alteration to convert a public company into a private company until we get the requisite approval from the Tribunal
  • No company shall use the alteration to cover up the breach of contract with the third parties
  • No company can escape their contractual liability in the name of the alternations done
  • No company shall alter its articles only for the purpose of expelling a member of the board of directors

Case Laws

In Wood v. Odessa Waterworks Co. [1], the Articles of Association of Waterworks Co. provided if the director desire then he can declare a dividend to be paid to the members, with the sanction of the company. Here, instead of paying the dividend to the shareholders in cash, it passed a resolution to give them debenture bonds. Therefore, it was held by the court that the word “payment” is only to be treated as the ‘payment in cash’, and the directors were thus restrained from acting on the resolution so passed.

In Rayfield v Hands [2], Rayfield 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. For which, Rayfield informed the directors. The directors contended that they were not bound to pay for the shares of Rayfield and the Article of Association also could not impose this obligation on them. The courts dismissed the arguments of the directors’ and compelled them to buy the subjected shares at a fair value. Besides this, the court held that it was not mandatory for Rayfield to join the company to be allowed to sue the company’s directors.

Conclusion

Article of Association deals with all the internal matters of the company. The Companies (Incorporation) Rules, 2014 prescribes the specific manner in which the Memorandum and the Articles of a company are to be signed. The Companies Act, 2013 covers the contents of the Article of Association in Section 5(1) and section 5(2). Entrenchment provisions are to be mentioned in the AOA, to restrict or to make a change or amendment more difficult. Section 14 of the Companies Act, 2013, contains the provisions according to which a company can alter its articles by passing a special resolution, with some limitations.

Frequently Asked Questions (FAQs)

Ques 1: Who can enforce articles of association?

Ans: A member may sue the company while exercising his rights and in the same manner the company may sue its members to enforce or to restrain any breach of the articles of the company.

Ques 2: What is Section 14 of Companies Act, 2013?

Ans 2:  Alteration of articles –

Subject to this Act and the conditions in its memorandum a company may, by a special resolution, alter its articles including alterations having the effect of conversion of—

a.      a private company into a public company; or

b.     a public company into a private company:

Provided that where a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under this Act, the company shall, as from such alteration, cease to be a private company:

Provided further that any alteration having the effect of conversion of a public company into a private company shall not take effect except with the approval of the Tribunal which shall make such order as it may deem fit.

Every alteration of the articles under this section and a copy of the order of the Tribunal approving the alteration as per sub-section (1) shall be filed with the Registrar, together with a printed copy of the altered articles, within fifteen days in such manner as prescribed, who shall register the same.

Any alteration of the articles registered under sub-section (2) shall, subject to this Act, be valid as if it were originally in the articles

Ques 3: What is the definition of “Board of Directors”?

Ans: According to Section 2 (10) –

“Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company.

Ques 4: What are Debentures?

Ans: According to Section 2(30) –

“debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether making up a charge on the assets of the company or not.

Ques 5: Tribunal means What under the Companies Act, 2013?

Ans: “Tribunal” means the National Company Law Tribunal made up under section 408.

Reference

[i] AIR 1971 SC 422

[1] https://www.lawteacher.net/cases/wood-v-odessa-waterworks.php

[2] https://www.lawteacher.net/free-law-essays/company-law/companies-act-1985-section-14.php

[3] https://www.advocatekhoj.com/library/bareacts/companies2013/2.php?Title=Companies%20Act,%202013&STitle=Definitions.

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