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Articles of Association of a company and its importance

What is Articles of Association (AOA) – Section 2(2) of the Companies Act, 1956 defines the term ‘articles’ as the articles of association of a company as originally framed or as altered from time-to-time in pursuance of any previous companies law or of the Companies Act, including, so far as they apply to the company, the regulations contained in the tables of any of the specified previous companies laws or Table A in Schedule I annexed to the present Act.

Basically, Articles of Association of a company governs the running of a company; setting out voting rights of shareholders, conduct of shareholders’ and directors’ meetings, powers of the management, to name some. The articles contain regulations for the internal affairs and management of the company.  As per section 26 every unlimited company or a company limited by guarantee or a private company limited by shares shall be registered with its memorandum, articles of association signed by the subscribers of the memorandum, prescribing regulations for the company.

A public company limited by shares may opt for not registering with the ROC its articles along with the memorandum, in which case Table A will be treated as the company’s articles. But in the following cases, it is obligatory to register the articles along with the memorandum with the Registrar at the time of incorporation of a company: (a) an unlimited company (with or without a share capital); (b) a company limited by guarantee (with or without share capital); and (c) a private company limited by shares.

Articles serves as a contract – between the members and the company, binding the members to the company. Although there is no contract in terms between each individual member and every other, yet the articles regulate their rights one to another inter se.

The articles of association of a company serve as a contract between all the shareholders to comply with the regulations contained therein. They are binding on all until they are altered in the manner provided by the Companies Act, i.e. by a meeting duly called to pass a resolution for altering them. Any dispute that may arise among them must be primarily decided with reference to the principles contained in these articles.

Thus, the articles bind the members. It is well-settled that the articles of association will have a contractual force between the company and its members as also between members inter se in relation to their rights as such members.

Since the articles constitute a contract between the members inter se, any contract entered into between them subsequent to their joining the company must inevitably be subject to the provisions of the articles. But this contract is not for the benefit of strangers or even of members in some other capacity, for the articles are not contracts with outsiders.

However, the articles do not bind the company to persons who are not members; even if they are not directors of the company, solicitors to the company, etc., nor do the articles bind the company to the members in any capacity other than that of members. If a member is also a director, the articles give him his rights as a member but in no way give him rights as a director. It has been, however, held in some cases that the articles constitute part, though not the whole, of a contract between the company and its directors.

Enforceability of Articles – The articles constitute a contract between each member and the company and there is no contract in terms between the individual members of the company; but the articles do not any the less, regulate their rights inter se. Such rights can only be enforced by or against a member through the company or through the liquidator representing the company; but no member has, as between himself and another member, any rights beyond that which the contract with the company gives.

The articles, as provided in this section, constitute a contract between each member and the other members to observe the provisions of the articles. It follows that when some members of a company, may be the majority of members, do not carry out the terms of that agreement, but they act contrary to the articles one or more of the other members has or have the right to come to Court and ask for the agreement to be enforced against those members who have violated their obligations. In a suit by the minority shareholders concerning the affairs of the company the company can, and indeed should, be a party.

Courts have been consistent in upholding the value of articles of association and in ignoring actions of directors and shareholders which are inconsistent with the regulations in the articles. The Courts in the process also ignore all extraneous documents, if the latter conflict with the articles.   Further, in case of a conflict, the provisions of the Companies Act shall have an overriding effect against the provisions of—

(a) memorandum of association,
(b) Articles of association,
(c) An agreement executed by a company,
(d) a resolution passed at a general meeting of a company,
(e) a resolution passed at a Board meeting.

Provisions of section 9 and other provisions of the Act make it clear that the articles of association are the regulations of a company binding on the company and its shareholders. The only restrictions on the transfer of the shares of a company are laid down in its articles, if any. A restriction, which is not specified in the articles, is, therefore, not binding either on the company or on the shareholders. The vendee of the shares cannot be denied the registration of the shares purchased by him on a ground other than that stated in the articles.

Relation between memorandum and articles – The memorandum is called as the primary document, and the articles are called as the secondary document, of a company. A memorandum is the constitution of a company, whereas articles are its bye-laws or a book of rules and regulations for the conduct of affairs of the company. Whereas the memorandum is the company’s charter, that includes its objects, nationality, name and its capital; its articles are the regulations for the internal arrangement and management of the company.

As between the memorandum and the articles, the memorandum is the dominant instrument, so that in so far as their provisions conflict, the memorandum would always prevail. Apart from the matters which are required by statute to be stated in the memorandum, a reference may be made to the articles to explain any ambiguity in the memorandum or to supplement the memorandum in cases of conflict, or in cases where the memorandum is silent. The principal reasoning behind the references of the memorandum to be supplemental to the articles is to have more clarity. Both the memorandum as well as the articles should be construed and read together in cases of inconsistency.

Procedure of Alteration in Articles of Association

The articles of association of a company are its by-laws or rules and regulations which govern the management of its internal affairs and the conduct of its business. They are framed with the object of carrying out the aims and objects as set out in the Memorandum of Association. According to Section 2(2) of the Companies Act, 1956 ‘articles’ means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous companies laws or of the present Act, i.e. the Act of 1956. It regulate the internal management of the company

Meaning of Alteration of Articles of Association

Sec. 31 of the Companies Act, 1956, provides that a company may by passing a special resolution; alter regulations contained in its Articles any time subject to –

  1. a)The provisions of the Companies Act and
    b)Conditions contained in the Memorandum of Association [Section 31(1)].

A copy of every special resolution altering the Articles shall be filed in Form no 23, with the Registrar within 30 days its passing and attached to every copy of the Articles issued thereafter. The fundamental right of a company to alter its articles is subject to the following limitations:

Conditions that must be satisfied for Alteration of Articles of Association

  1. a) The alteration must not exceed the powers given by the Memorandum of Association of the company or conflict with the provisions thereof.
    b) It must not be inconsistent with any provisions of Companies Act or any other statute.
    c) It must not be illegal or against public policies
    d) The alteration must be bona fide for the benefit of the company as a whole.
    e) It should not be a fraud on minority, or inflict a hardship on minority without any corresponding benefits to the company as a whole.
    f) The alternation must not be inconsistent with an order of the court. Any subsequent alteration thereof inconsistent with such an order can be made by the company only with the leave of the court.
    g) The alteration cannot have retrospective effect. It can operate only from the date of amendment.
    h) If a public company is converted into a private company, then the approval of the Central Government is necessary. Printed copies of altered articles should be filed with the Registrar within one month of the date of Central Government’s approval [Section 31 (2A)].
    i) An alteration that has the effect of increasing the liability of a member to contribute to the company is not binding on a present member unless he has agreed thereto in writing.
    j) A reserve liability once created cannot be undone but may be cancelled on a reduction of capital.
    k) An assumption by the Board of Directors of a company of any power to expel a member by amending its Articles is illegal or void.

Alteration of Memorandum of Association

As per Section 16 of the Companies Act 1956 Alteration of Memorandum of Association should be as below:

(1) The Alteration of Memorandum of association will not be applicable for changing of conditions contained by the company except in the cases, in the mode, and to the extent, for which express provision is made in this Act.

(2) Provisions which are required only by section 13 or by any other specific provision contained in this Act, to be stated in the memorandum of the company concerned shall be deemed to be conditions contained in its memorandum.

(3) Other provisions that are contained in the memorandum, including those relating to the appointment of a managing director or manager, may be altered in the same manner as the articles of the company, but on the occasion of any express provision in this Act permitting alteration of such provisions in any other manner, alteration of Memorandum of Association can also be done in such other manner.

(4) All references to the articles of a company in this Act shall be construed as, including references to the other provisions aforesaid contained in its memorandum.

Alteration of Articles of Association

Alteration of Articles of Association can be done by the shareholders passing a special resolution in a general meeting or by written resolution. A copy of the resolution and the new Articles of Association of association must be sent to Companies House within 15 days. The Alteration of Articles of Association cannot be made in breach of other company law rules and there are protections against such changes where they increase the liability of individual shareholders, vary the rights of any class of shareholders or otherwise prejudice minority shareholders. Special resolutions require the votes of 75% of members present in person or by proxy, who are entitled to vote and do vote at the meeting. The meeting at which the resolution is proposed must have had at least 14 days’ notice, unless a shorter period was agreed by a majority in number of members holding at least 90% of the shares (95% in the case of public companies). Alternatively, the written resolution procedure can be used, and the special resolution will be passed if approved by shareholders representing not less than 75% of the total voting rights of the shareholders entitled to vote on the written resolution on the day it is circulated. This Special Resolution – Alteration of Articles of Association is in open format. Either enter the requisite details in the highlighted fields or adjust the wording to suit your purposes.

Any Alteration of Articles of Association of  must be made in good faith for the benefit of the company as a whole. It is for the shareholders to determine whether or not the alteration is for the benefit of the company. The Alteration of Articles of Association may affect the rights of a member as between himself and the company by retrospective operation, since the shares are held subject to the statutory power of altering the Articles of Association. If a contract whether with a member or an outsider is so drawn as by its terms or implication to prohibit the company from Alteration of Articles of Association to the prejudice of the other contracting party, then, although the company cannot be precluded from altering its Articles of Association, thereby giving itself power to act upon the provisions of the altered Articles of Association, so to act may nevertheless be a breach of the contract. The Articles of Association cannot be so altered as to increase the liability of a member to contribute to share capital or otherwise to pay money to the company without his consent; and a special resolution altering Articles of Association may be impeached if its effect is to discriminate between the majority of shareholders and the minority shareholders so as to give the former an advantage of which the latter are deprived. In a case where an order by the court by way of protection of a member of the company against unfair prejudice requires the company not to make any, or any specified, alteration in its Articles of Association, the company has no power without leave of the court to make any such alteration.

Procedures for Alteration of Articles of Association

  1. Take the necessary decision by convening a Board Meeting to change all or any of the existing Articles of Association and fix up the day, time, place and agenda for a general meeting for passing special resolution to effect the change.
  2. It must be seen that for Alteration of Articlesof Association the company conforms to the provisions of the companies Act, 1956 and the conditions contained in the Memorandum of Association of the company.
  3. See that any such Alteration of Articles of Association does not increase the liability of any member who has become so before the alteration to contribute to the share capital of or otherwise to pay money to, the company.
  4. See that any such Alteration of Articles of Association does not have the effect of converting a public company into a private company. If such is the case, then make an application to the Central Government for such alteration.
  5. See that any such Alteration of Articles of Association does not provide for expulsion of a member by the company.
  6. Issue notices for the General Meeting proposing the Special resolution and explaining inter alia, in the explanatory Statement the implication and reasons of the changes being proposed.
  7. If the shares of the company are enlisted with any recognized Stock Exchange, then forward copies of all notices sent to the shareholders with respect to change in the Articles ofAssociation to the Stock Exchange.
  8. Hold the General Meeting and pass the special resolution.
  9. File with the stock exchange with which your company is enlisted six copies of such amendments as soon as the company adopts it in General Meeting. Out of the six copies, one copy must be a certified true copy.
  10. Forward promptly to the Stock Exchange with which your company is enlisted three copies of the notice and a copy of the proceedings of the General Meeting.
  11. File the Special resolution with the concerned Registrar of companies with explanatory statement in Form No.23 within thirty days of its passing after payment of the requisite filing fee in cash as per Schedule X. If the Articles ofAssociation has been completely or substantially changed, file a new printed copy of the Articlespaying the requisite fee in cash prescribed under Schedule X to the Companies Act, 1956. payments up to Rs.50/-
  12. Effect the changes in all copies of the Articles of Association of association.
  13. Any Alteration of Articles of Association so made be as valid as if originally contained in the Articles ofAssociation and be subject to alteration by Special Resolution as above.
  14. If the Alteration of Articles of Association is pursuant to an order of the Company law Board made under section 397 or 398 then see that such alterations is not inconsistent with the said and if it is so then obtain first leave of the Company Law Board to make such alteration.