INTRODUCTION TO ARTICLES OF ASSOCIATION

 

UNIT STRUCTURE

1. Learning Objectives
2. Introduction
3. Meaning of Articles of Association
4. Constituent of Articles of Association
5. Alternation of Articles of Association
6. Limitations on power of alteration
7. Difference between Memorandum and Articles of Association
8. Let Us Sum Up
9. Answers to check your progress
10. Further readings
11. Possible Questions.

LEARNING OBJECTIVES

 
After going through this unit, you will be able to:
    define the meaning of Article of Association
explain the constituent of Article of Association
define the Alternation of Article of Association
explain the limitations on power of alteration

INTRODUCTION


In this unit, we are going to discuss the Article of Association that has to be filed with the Registrar of Companies at the time of incorporation. Here, you will be able to know details about the relevancy of documents for the purpose .This unit also encompasses the alteration of the Article of Association.Through this unit, you will be able to know the difference between memorandum of association and article of association.

The unit discusses the limitations on power of the alteration of the Article of Association.Thus, you will able to understand through this unit, the basic concept of Article of Association, constituent and the Alternation of Article of Association.

 


MEANING OF ARTICLES OF ASSOCIATION


The Article of Association is the bye-laws which govern the internal management of the company. According to Section 2 (2) of the Companies Act, 1956,”Article means the Article of Association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act”. It is the subordinate to the memorandum of association. The Article of Association can not contain anything which alters the condition of memorandum of association. The Article of Association must not have any conditions which are contrary to the provision of Companies Act.

According to Lords Cairns,” The articles play a part subsidiary to the memorandum of association. They accept the memorandum of association as the charter of incorporation of the company and so accepting it, the article proceed to define the duties, the rights and powers of the governing body as between themselves and the company themselves and the company at large and the mode and the form in which changes in the internal regulations of the company may from time to time be made.”

FORMS AND SIGNATURE OF ARTICLES (Sec 29 and 30):
Schedule I of the Companies Act gives certain model forms of articles for different types companies as:
Table A, for, public companies having share capital,
Table C, for, a company limited by guarantee and not having share capital,
Table D, for, a company limited by guarantee and having share capital,
Table E, for, an unlimited company.

According to Section30, the Articles of Association of every company must be printed and signed by the each subscriber. They are also the subscribers of memorandum of association. They have to write their addresses, descriptions and occupation if any in presence of witness and attest the signature and shall likewise add his other details.

 


CHECK YOUR PROGRESS


A. …………of the Companies Act gives certain model forms of articles for different types companies?



CONSTITUTENT OF ARTICLE OF ASSOCIATION


The Article of Association of a company should contain the following matters:

  1. Allotment of shares;
  2. Fixation of minimum subscription;
  3. Dividends, reserves and depreciation funds;
  4. Share certificates and share warrants;
  5. Directors, their qualifications, remuneration, rotation etc and board meeting;
  6. Definition of important words and phrases;
  7. Specifying the different classes of share capital ;
  8. Calls on shares;
  9.  Winding up;
  10. Transfer and transmission of shares;
  11. Borrowing;
  12. Management;
  13. Forfeiture and reduction of capital;
  14. Increase and reduction of capital;
  15. Consolidation and sub-division of shares;
  16. Common seal;
  17. Notices;
  18. Arbitration;
  19. Accounts and audit;
  20. The exclusion, total or partial, Table A;
  21. General meeting , proceedings thereof and votes, proxies and polls;
  22. Payment of underwriting commission.
           
Everything stated in the article of association is subject to the Companies Act and contrary to the provision of the Act is inoperative and void. It contains the rules which regulate the business of the company. There are certain matters in respect of which powers can be exercised by the company only if its articles provide.

CHECK YOUR PROGRESS


A. Mention five contents of article of association?

Effects of Article of Association:
The registration of memorandum of association and article of association bind the company as well as its members. Thus, members are bound to the company; the company is bound to the members and the members are bound to the other members by whatever is contained in both the document. The effects may be

 a.The members to the company
b. The company to the members
c. The member inter se,
d. The company to the outsiders.


a.The members to the company: The article of association binds the company as well as its members. Therefore, the company can enforce article of association against any members. But an alteration of article which increase the liability like subscribing more shares  can not bind the member unless he agree to  the same in writing.

b.The company to the members: As the article of association binds the company, it can exercise the right against any members only in pursuance of and in accordance with the article of association.

c.The member inter se: The article regulates the rights of the members which can be enforced only through the company. Each member is bound by the article of association by way of implied contract.

d.The company to the outsiders: The article of association does not constitute any contract between the company and the outsiders. An outsider is not entitled to enforce the article against the company for any breach of right which is conferred on him by the article.

 


CHECK YOUR PROGRESS


A. Mention effects of article of association?


ALTERNATION OF ARTICLE OF ASSOCIATION


A company by special resolution can alter or add to its article of association. This should be filed with the Registrar within 30 days, in the printed form. The right to alter of article of association can be done by passing special resolution. Thus, there are certain limitations regarding alteration of article of association.
Limitations regarding alteration of article of association:

  • A company cannot alter its articles so as to exclude or limit the rights of the shareholders or inconsistent with the provisions of the Companies Act.
  • The article must not override any provision of memorandum of association.
  • It must not be inconsistent with the alteration ordered by the Companies Law Board.
  • In certain cases, the approval must be taken from the Central Government.
  • The alteration must not deprive any person of his rights under a contract.
  • The alteration should be for the benefit of the company.

 

LIMITATIONS ON POWER OF ALTERATION


A company can alter its article of association at any time by passing a special resolution. But, a company can exercise this power subject only to certain limitation.
Limitations on power of alteration:

1. The alteration must not contra any provision of memorandum of association.
2. The alteration must not contra any provision of Companies Act or any Statute.
3. The alteration must not contain anything which is illegal or oppose to public policy.
4. The alteration must be for the benefit of the Company as a whole
5. Approval for alteration from the Central Government is also requiring in certain cases.
6. A company cannot justify breach of contract with third parties or avoid a contractual liability by altering article.
7. The alteration of article of association must not do by any fraud on the minority, by the majority.
8. The alteration cannot be made unalterable.
9. The alteration of article of association should not increase the liability of the members.

10. The alteration of article of association should be made only by special resolution

CHECK YOUR PROGRESS



A. Mention five limitations on power of alteration?




DIFFERENCE BETWEEN MEMORANDUM AND ARTICLE OF ASSOCIATION


The memorandum of association and article of association are public documents and has to be filed to the Registrar of the company. But, both the document is different from each other.

Memorandum of Association

Article of Association

1. Memorandum of association is the charter of the company. It defines the scope of the company.

1. Article of association regulates the internal management of the company.

2. It defines the relation of the company with the outside world.

2. It deals with the rights of the members.

3. It is the supreme document of the company.

3. It is the subordinate document of the company which can not alter any provision of the memorandum of association.

4. It is the fundamental document of the company. But, it does not state any rules and regulations for the company.

4. It states the rules and regulation for the company which bind the members as well as the company as a whole.

5. Memorandum of association can not be altered except in the manner and to the extent provided by the Act.

5. Article of association can be altered by passing special resolution.



CHECK YOUR PROGRESS


A. Mention two differences between memorandum and article of association?


Constructive notice of Memorandum and Article of Association:
The memorandum and article of association are public documents which can be assessable in the office of the Registrar. On the other hand, all the third parties are presumed that they knew the provisions stated in these document. These documents are open for public inspection on payment. When any person whether a shareholder or outsider enters into any contract which is ultra vires, can not bind the company to do such act.

DOCTRINE OF INDOOR MANAGEMENT:

It is a rule of exception of constructive notice. Different persons dealing with a company. They are whether shareholder or outsider is deemed to have knowledge of the memorandum and article of association. Thus, when a transaction appears to be proper according to the memorandum and article of association, the company can not escape from its liability.

In many cases, it is not possible to ask whether prior approval is taken for a particular act or it is necessary to take prior approval by investors, vendors, creditors and other outsiders that dealing with the company; particularly where the directors or other officers of the company were empowered under the articles to exercise certain powers, subjects only to certain prior approval of the shareholders.  In such a case, those dealing with the company like investors, vendors, creditors and other outsiders can assume that if the directors or other officers are entering into those transactions, they would have obtained the necessary sanctions. This is known as “doctrine of indoor management”.
The doctrine had its origin in the leading case of Royal British Bank v. Turquand.

The facts of the case are:
The directors of the bank issued a bond to Mr. Turquand. The articles provided that the directors had the power to issue bond if authorised by a proper resolution of the company. No such resolution was passed. It was held that Turquand could sue on the bond as he was entitled to assume that the resolution must have been passed. It was observed that person dealing with the company bound to read the registered documents and to see that the proposed dealing is not inconsistent therewith. But they are not bound to do more; they need not inquire into the regularity of internal proceedings.

 Here the point decided is that:
The outsider’s dealing with the company are entitled to presume that as far as the internal management of the company is concerned, every thing has been regularly done.

There are certain exceptions to the doctrine of indoor management:
The outsiders can not claim relief on the ground of doctrine of indoor management in the following circumstances:
1. Knowledge of irregularity:
A person shall not get any relief under this doctrine, when he knows fully that the directors do not have the authority to make the transaction but still enter in  to it.

2.Negligence:

   When any officer of the company does any such act for which he is not having   power, the person dealing with him must make proper enquiry and satisfy himself as to the officer’s authority. But, if he fails to do so, he is not getting any relief under this rule.

3.Forgery:

The rule of doctrine of indoor management can not be invoked in favour of transaction involving forgery or otherwise void.

4.Acts outside the apparent authority:

If any act of an officer is beyond the power of the officer, the person entering into such transaction with him can not claim the protection of the Rule.

5.No knowledge of the contents of articles:

The person, who has not read the memorandum and article of association and entered into the contract, can not seek relief under this Rule.

CHECK YOUR PROGRESS


A. Mention three exceptions to the doctrine of indoor management?




LET US SUM UP


In this unit, we have discussed the following:

  • The Article of Association is the bye-laws which govern the internal management of the company.
  • According to Section 2 (2) of the Companies Act, 1956,”Article means the Article of Association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act”.

  • Members are bound to the company; the company is bound to the members and the members are bound to the other members by whatever is contained in both the documents.
  • A company by special resolution can alter or add to its article of association. This should be filed with the Registrar within 30 days, in the printed form.
  • The article of association does not constitute any contract between the company and the outsiders.
  • The article must not override any provision of memorandum of association.
  • Article of association is a subordinate document of the company and it can not alter any provision of the memorandum of association.
  • The alteration cannot be made unalterable.
  • The alteration of article of association should not increase the liability of the members.
  • The outsiders dealing with the company are entitled to presume that as far as the internal management of the company is concerned, every thing has been regularly done and that they know about the memorandum and article of association of the company.
  • A company cannot alter its articles so as to exclude or limit the rights of the shareholders or inconsistent with the provisions of the Companies Act.


ANSWERS TO CHECK YOUR PROGRESS


      ANSWERS to Check Your Progress 1
A)
Schedule I of the Companies Act gives certain model forms of articles for different types companies
                               
       ANSWERS to Check Your Progress 2
A.
Five contents of article of association are—

    1. Allotment of shares;
    2. Fixation of minimum subscription;
    3. Dividends, reserves and depreciation funds;
    4. Directors, their qualifications, remuneration, rotation etc and board meeting;
    5. Definition of important words and phrases;

      ANSWERS to Check Your Progress 3
A)
Effects of Article of Association are—

  1. The members to the company
  2. The company to the members
  3. The member inter se,
  4. The company to the outsiders.

      ANSWERS to Check Your Progress 4
A)
Five limitations on power of alteration are—
i) The alteration must not contain anything which is illegal or opposes public    policy.
ii) The alteration must be for the benefit of the Company as a whole
iii) Approval for alteration from the Central Government is also required in certain cases.
iv) A company cannot justify breach of contract with third parties or avoid a    contractual liability by altering article.
v) The alteration of article of association must not be used for any fraud on the minority   by the majority.
  ANSWERS to Check Your Progress 5
A)
Two differences between memorandum and article of association are—
i) Memorandum of association is the charter of the company. It defines the scope of the company. But, article of association regulates the internal management of the company.
ii) Memorandum of association defines the relation of the company with the outside world. But, article of association deals with the rights of the members.

ANSWERS to Check Your Progress 6
A)
Three exceptions to the doctrine of indoor management are—
i) Knowledge of irregularity
ii) Negligence
iii) Forgery

 


FURTHER READINGS


1.Guide to Companies Act; by A. Ramaiya; Wadhwa & Company, Nagpur.

2. Company Law by Dr. Avtar Singh; Eastern Book Company,34, Lalbagh, Lucknow .

3. Company Law and Practice, by P.K. Ghosh & V. Balachandran

4. Company Law and Practice, by A. K. Majumdar & G. K. KapoorA text book of Company Law, by P.P.S. Gogna;s.Chand and Company Ltd.
 

POSSIBLE QUESTIONS



  1. What do you understand by the article of association?
  2. What are the different contents of article of association?
  3. How can you alter the article of association?
  4. Discuss the various limitations regarding alteration of association?
  5. Distinguish between memorandum and article of association?
  6. Explain the doctrine of indoor management and state the exceptions, if any, to the doctrine?
  7. Explain the principle laid down in Royal British Bank v. Turquand. What are the exceptions to this principle?


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