Articles of Association: Meaning, Nature and Explanation

The Articles of Association (AoA) of a company or just “articles” are in simple terms, its bylaws. These are the rules and regulations which govern and facilitate the daily working of the company. So when a person joins a company, by the virtue of being a member, s/he imbibes certain rights and duties in his/her name. These rights and duties are incidental to such membership in that company and are vested by the AoA of the company. This article explains the various aspects of Articles of Association such as their registration and alteration.

I. Articles of Association and their Binding Nature

We know that the memorandum of association defines a boundary for the company within which its subscribers can exercise their rights. The Articles fill this boundary with what the rights and obligations of the subscribers are, and how they can exercise it. In sec 5(1) of the Companies Act, 2013, it has been categorically stated that the AoA is a compilation of all the regulations and bylaws essential for managing the company.

The same was reiterated by the Hon’ble apex court in Naresh Chandra Sanyal v. The Calcutta Stock Exchange Association Ltd. where the court observed that AoA creates a binding contract between each member in a company (officers of the company) and the company itself. It means that the members are under a contractual obligation to manage and regulate the internal affairs of that specific company. The court further observed that it is a bipartite contract, i.e., a dual contract, one as aforementioned, between the company itself and its members and the second contract among the members of the company inter se (between two or more members).

The Companies Act, 2013 (“the Act”) defines Articles in Section 2 (5) and deals with it in Section 5. Section 2(5) states that the word “articles” refers to the articles of association of the company as framed originally or as altered later. It includes the regulations laid down in Table A in Schedule 1 annexed to the Act, in so far as they are applicable to that company.

II. Sub-ordinate to the Memorandum

The Articles of Association fill the boundary defined by the memorandum. Hence, it is also bound by the limits drawn by the memorandum, and any regulation contained in the Articles which are ultra vires the memorandum will be a nullity. Any act done on the basis of such a regulation would also be void and incapable of subsequent rectification, as there was no authority for it to be done in the first place (Ashbury v. Watson [1]).

Thus, it is said that the Articles run subordinate to and subject to the memorandum of a company. This nature was clarified beyond doubt by Lord Cairns in Ashbury Railway Carriage and Iron Co. Ltd. v. Riche [2]:

“Articles accept the memorandum of association as the charter of incorporation of the company and, so accepting it the articles proceed to define the rights, duties and powers of the governing body as between themselves and the company at large.”

However, it must be understood that neither the Articles nor the memorandum is above the Act or any other law in force. Any provision in both these documents contravening a provision of law will be void. This has been held in Kinetic Engineering Ltd. v. Sadhana Gadia [3].

Further, Articles are only internal regulations of the company and hence the company has complete power to alter them when needed following the prescribed procedure.

III. Registration of Articles (Statutory Requirement)

Section 7(1) requires a company to file with the registrar within whose jurisdiction the registered office of the company lies, the Articles of association along with the memorandum. This is required for the incorporation of the company. The Articles need to be written, printed, divided into paragraphs, consecutively numbered, adequately stamped and signed by all the subscribers to the memorandum and duly witnessed. They should not contain any provision ultra vires the memorandum or the Act.

The Act contains model articles in Tables F, G, H, I and J in Schedule 1. The whole or some part of any of these tables could be applicable to a certain kind of company. Section 5 (7) says that a company may adopt any or all of these model regulations as its own.

Section 5 (8) says that any company registered after the Act of 2013 came in force, the whole or any part of the table applicable to that company which has not been excluded or modified by the company’s articles will be deemed to be a part of the Company’s articles itself in the same manner and extent as if they were made by the company. Apart from this, Section 5(2) requires that Rule 11 of the Companies (Incorporation) Rules, 2014 shall also be contained in the Company’s Articles.

Satisfying the above-stated points of requirements, a company is free to include any additional regulations in its Articles as it feels necessary.

IV. Clauses in Articles of Association

The Articles of Association may be based on the models given in the tables F, G, H, I, J in Schedule 1, whichever may be applicable to the company. Additional details may be then added, and requirements fulfilled. An ordinary Article of Association should contain the following clauses:

• Exclusion of whole or part of Table F of Schedule 1
• Adoption of Preliminary Contracts
• Provisions Regulating Shares and Share Capital: The first major thing to deal with is the detailed provisions for regulation of issue, allotment, transfer, transmission, conversion and forfeiture of shares. The number of shares and their value should be mentioned. Allotment of preference shares should be dealt with. The matters of buying back shares, their forfeiture, and issuing share certificate should also be governed accordingly. The share capital should be written, and the procedure of its alteration specified.
• Provisions Regulating Voting Rights: The voting rights and all matters incidental thereto should be dealt with precision. The effect of certain alterations to the voting rights should be made out. The procedure for proxy voting should be stated.
• Provisions of Meetings: Two kinds of meetings are to be covered here. The date, frequency, agenda, quorum and so on of the general meeting should be laid down. Similarly, the details of the Director’s meeting should be provided. The several committees required to be formed should be detailed, along with the rules and procedure regarding the same. Separate provision for the Audit Committee should be made.
• Provisions on Directors: Directors are an integral part of the management of a company. The Articles should be meticulous on specifying their appointment, number, powers, duties, protocols, and removal in all foreseeable cases. Delegation of powers should be done. Separate provisions for Managing Directors, Whole-time Directors, Additional Directors, Nominee Directors, Independent Director, and the managers and secretaries required should be laid out clearly. The issue of remuneration should be written.
• Accounting, Auditing, and Winding up: Matters of bookkeeping should be governed by these provisions. Provisions should be made about when, how and by whom will the auditing be undertaken. Provisions relating to winding up of the company should be drawn out. Matters of indemnity and insurance should be covered.
• Sign and Seal: Finally, the Articles should be signed by all those are subscribed to the Memorandum, duly witnessed and appropriately stamped.

V. Alteration of Articles of Association

The company has a right to alter its articles. It is an essential right of a company that it may add, remove or modify any clause as it feels imminent. This right is protected such that a company itself cannot waive it off by including a clause in its articles taking away the power to alter articles. Such a clause would be void. Similarly, it cannot even enter into an independent contract which takes away the right. This was held in Walker v. London Tramway Co. [4]

Section 14(1) says that a company is free to alter its articles by passing a special resolution to that effect. It states that this power includes the power to make such alterations as would convert a Private company to a public company and vice versa. However, approval by the Tribunal would be additionally required for the latter, i.e. for conversion from Public to Private.

Section 14(2) states that all of these alterations when made, the order of the Tribunal approving the alterations (if required) and the printed copy of the altered articles in whole, is supposed to be filed with the Registrar within 15 days so that they can be registered by him.

Section 14(3) states that once registered under the previous subsection, the altered articles will be binding in effect on all subscribers as if they were registered with the original articles. This means that with respect to their operation and binding nature, they will apply on all subscribers as if they were originally present. However, this does not mean that the alteration can be made with retrospective effect (Pyare Lal Sharma v. Managing Director, J.K. Industries Ltd. [5]).

A company may alter an article even if it results in the breach of any contract. The right cannot be taken away by the existence of the contract, but the company may be sued for breach (Southern Foundries v. Shirlaw [6]).

• Entrenchment

A unique concept of entrenchment has been introduced in the Act of 2013 by Section 5(3). This is with respect to the alteration of the registered Articles of Association of the company. Entrenchment empowers the company to specify in its Articles that certain provisions contained in the Articles may only be altered by satisfying a higher degree of a requirement than that in a special resolution, such as requiring 100 per cent consent. This means that some provisions could be stated in the Articles which say that certain other, pre-greed provisions of the Articles will only be amended on satisfying the given conditions, which are more restrictive than the ordinary requirement of a special resolution.

This provision allows for greater certainty for investors and acts as a guarantee for mostly the smaller investors that their rights will be protected. This is a useful tool to enforce certain pre-agreed conditions. The entrenchment provisions may be made during the formation of the company or maybe introduced later by alteration following the procedure for alteration. In either case, a separate notice of such provisions is required to be given to the Registrar as prescribed (Section 5(5).

VI. Limitations on the Right to Alter

• The Articles cannot be ultra vires the Memorandum.
• The alteration cannot be ultra vires the Act itself.
• The alteration cannot be illegal or opposed to Public Policy.
• The alteration cannot be male fide or deceitful in nature.
• The alteration should not be with the motive to defraud the minority shareholders by the majority. This means that while alteration is done, the benefit of the whole company should be kept in mind, and not the majority only. Such an alteration would be bad in law if it puts the minority at a disadvantage (All India Railway Men’s Benefit Fund v. Jamadar Baheshwarnath Bali [7]).
• The Articles cannot compel an existing shareholder to buy more shares, or subscribe himself to more liability unless he gives his consent in writing (Section 38).

---

References

• Study Material, Executive Programme, Company Law by ICSI
• Avatar Singh, Company Law
• Taxmann’s Company Law

[1] (1885) 30 Ch. D 376 (CA).

[2] (1875) L.R. 7 H.L. 653.

[3] (1992) 74 Com Cases 82.

[4] (1879) 12 Ch. D. 705.

[5] (1989) 3 Comp LJ (SL) 70

[6] [1940] AC 701

[7] (1945) 15 Com Cases 142 (Nag.).

---

1. Law Library: Notes and Study Material for LLB, LLM, Judiciary and Entrance Exams
2. Master Your Judicial Services Preparation