What is “Articles of Association under Companies Act,2013”?

What is “Articles of Association”

Abstract

“Articles of Association” is the next important document to the Memorandum of Association.

In other words, “Articles of Association” means “the rules, regulations, and bye-laws for the general administration of the company.” In the other words, “Articles of Association” contains rules, regulations, and bye-laws for the internal administration of the affairs of the company. The “Articles of Associations” are framed in accordance with the objects of the company as mentioned in the “Memorandum of association.” As per the Tables -F,G,H,I and J given in the schedule I of the companies Act, 2013 various model forms of Memorandum and Articles are stated.

Section 5(6) of the Act states that the articles of a company shall be in respective forms specified in the tables F,G,H,I and J given in the Schedule I as may be applicable to such company. Every such table can be used as a model for one kind of a company.

In this research paper, I will also compare closely the Articles of Association(AoA) with the Memorandum of Association(MoA).

  • Companies required legally to have their own Articles:
  1. Private companies;
  2. Public companies;
  3. Unlimited company;
  4. Company limited by Guarantee;
  5. Private company Limited by Shares.

The articles of Unlimited company must include the information about the number of members with which it is to be registered. If such a company has share capital, the Article of association must also state the amount of share capital with which the company is to be registered.

The Articles of company limited by guarantee must also include the information about the numbers of members/persons with which company is to be registered.

The AoA of a private company must state necessary restrictions provided under the Act.

The AoA is required to be signed by the subscriber of the Memorandum and it must be registered along with the memorandum. A public company should have its own Articles of Association. If the Public Company fails to have its own Articles, such company is required to adopt Table A given in the Schedule I.

  • Contents of Articles of Association:

Articles of association contains the following provisions:

  1. Regulations for management of the company [Section 5(1)];
  2. The Articles shall also contain such additional matters such matters, as may be prescribed [Section 5(2)];
  3. Entrenchment (i.e. protect with a guard) to the effect that specified provisions of the Articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with. [Section 5(3)];
  4. Such entrenchment shall only be made either on formation of a company, or by an amendment in the Articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company [section 5(4)];
  5. Where the Articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the registrar of such provisions in such form and manner as may be prescribed [Section 5(5)].
  6. The Articles of a company shall be in respective forms specified in the tables F,G,H,I and J given in the schedule I as may be applicable to such company. Every such table can be used as a model for one kind of a company [Section 5(6)].
  7. A company may adopt all or any of the regulations contained in the model articles applicable to such companies [Section 5(7)]-

Such as:

  1. Regulation as to lien on shares;
  2. Regulation as to transfer of shares;
  3. Regulation as to Share capital, right of shareholder, payment or underwriting commission;
  4. Regulation as to general meeting and proceedings at the meeting;
  5. Regulation as to forfeiture of share;
  6. Regulation as to transmission of shares;
  7. Regulation as to share warrants;
  8. Regulation as to conversion of shares into shock;
  9. Regulation as to alteration of capital
  10. Regulation as to voting rights of members and its procedure;
  11. Regulation as to appointment of Directors, their remuneration, qualifications, powers and proceedings of Board of Directors;
  12. Regulation as to Manager, Secretary;
  13. Regulation as to dividend and reserves;
  14. Regulation as to account, audit and borrowing power;
  15. Regulation as to winding up and capitalization of profit.

8) In the Case of a company, which is registered after the commencement of this Act, and if such company does not exclude or modify the regulations contained in the model articles, then such model articles will be considered as duly registered articles of that company. [Section 5(8)]. 

  • Effects of Memorandum and Articles [Section 10]:

Section 10(1) – Subject to the provisions of this Act, the memorandum and articles shall, when registered bind the company and the members thereof to the same extent as if they respectively has been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the registered memorandum and articles.

Section 10(2) – All monies payable by any member to the company under the memorandum or articles shall be a debt due from him to the company.

  • Alteration of Articles [Section 14]:

Articles of Association means rules regulations, bye-laws of the company which are necessary for the internal management of the company. Such articles are subject to alteration and therefore, companies are empowered to alter their Article of Association. The Alteration to articles is statutorily recognised. If there is provision which prohibits any alteration to articles, then it must be considered as bad in law.

  • Procedure for alteration: 

Articles of association may be altered by passing a special resolution. In other words, a company may alter regulations, provided that additions or alterations must be consistent with the provisions and objects mentioned in the memorandum.

Section 14(1): A company may alter its Articles by a special resolution. A company may also alter its articles having effect of conversion of:

  1. A private company into a public company; or
  2. A public company into a private company.

Section 14(2): Every alteration of the articles and a copy of the order of the tribunal approval as per sub-section (1) shall be filled with the registrar, together with a printed copy of the altered articles, within a period of 15 days in such a manner as may be prescribed. Then the registrar shall register the alteration of articles.

Section 14(3): Any alteration of articles registered under sub-section (2) shall, subject to the provisions of this act, be valid as if such alterations were originally contained in the articles.

  • Alteration of Articles to be noted in every copy:

Section 15 (1)- Every alteration made in the Articles of a company shall be noted in every copy of the Articles.

Section 15 (2)- If a company makes any default in complying with the provisions of subsection (1), the company and every officer who is in default shall be liable to a penalty of Rs.1,000/- for every copy of the Articles issued without such alteration.

  • Limitations to Alterations:
  1. The alteration to Articles must not conflict with Memorandum:

The AoA must be in consonance or must be in accordance with the objects mentioned in the memorandum of association. There should not be any conflict or anything opposite or contrary to such objects. In other words, the AoA must not conflict with provisions of MoA.

If alteration is in conflict with the provisions of MoA, then such alteration to Articles of association will be ultra vires which will be wholly void and inoperative.

  1. Alteration to Articles must not be inconsistent with Act:

The alterations to AoA must be in accordance with provisions of the Act. In other words, alterations to AoA must not go beyond the provisions of the Companies Act.

  1. Alteration to Articles must be beneficial to company:

Alteration to AoA must be in the interest and benefit of the company. It is necessary that the alteration must be made bonafide for the benefit of the company. If an alteration discriminates between the majority shareholders and minority shareholders in relation to the advantage, the Court will restrain the company from making such alterations which are made not for the benefit of the company, but made for the benefit of a particular class of shareholders. 

  1. Alteration to Articles must not be illegal:

An alteration to AoA must be bonafide and must be made in favour of the company. Such alteration must be for the benefit of the company. If an alteration gives rise to anything which is illegal, such alterations are not valid. In other words, Alteration must not sanction anything which is illegal.

  1. Alteration must be made by special resolution only:

According to the provisions of the act, the alterations to AoA must be made by passing a special resolution. Thus, the Alteration can be made by special resolution only.

  1. Alteration must not increase liability:

An alteration to AoA must not be such as to increase the liability of the existing shareholders/ members of the company to contribute to the share capital, unless the shareholders agree in writing either before or after the alteration.

  1. Approval of Central Govt. in case of conversion of public company into a private company:

The alteration in the Articles which deals with the effect of converting a public company into private company, is to be done with the approval of the Central government.

  1. No power to the court to Amend articles:

The court is not empowered to amend articles, even though there exists a mistake of drafting errors.

  • Comparison Between Memorandum of Association & Articles of Association:
Memorandum of Association (MoA)Articles of Association (AoA)
1)The MoA is the fundamental document of a company. It contains the Fundamental conditions upon which the company is allowed to be incorporated.1)AoA are the rules, regulations, and bye-laws for the internal management of the company. They are framed in accordance with the object mentioned in MoA.
2) It is a written statement of rights of the company and defines the reasons for the existence of a company. It lays down the scope and area of operation.2) It is a written statement regarding rules, bye-laws and regulations which are necessary for carrying out the objectives of the company.
3)The MoA gives power to the company. It also creates legal rights. Therefore, MoA is a supreme document.3) AoA does not give powers to the company and also does not create any legal rights. Thus they are subordinate to the Memorandum.
4) MoA is mandatory or obligatory in the case of every company.4) AoA is not mandatory or obligatory in the case of a company limited by shares. Table A applies in such cases.
5) The alteration of Memorandum of Association is subject to strict restrictions, as appropriate sanction of the company law board is mandatory.5) Alteration of AoA does not require appropriate sanction of the Company Law Board as AoA can be altered by special resolution.
6) Any act of the company which is ultra-vires the Memorandum, is void-ab-initio and such act cannot be ratified subsequently even by all the shareholders.6) Any Act of the company which is ultra-vires the AoA, (but if such an act is intra-vires to the memorandum), it can be ratified by All the shareholders.
  • Conclusion:

These articles may be altered as per Section 14 of the Companies Act, 2013. The entrenchment provisions in the Articles of a company protect the interests of all the minority shareholders by ensuring that amendment in the article can only occur after obtaining the requisite prior approval of the shareholders. The Articles of a company bind the company to its members and bind the members to the company and further also bind the members to each other, they constitute a contract amongst themselves and therefore, its members with respect to their rights and liabilities as members of the company.

Therefore, it is to be understood that in the sphere of corporate governance, the articles of a  company is a crucial document which, along with the memorandum from the company’s core constitution and rule book, and hence defines the responsibilities of its directors,  kinds of business es to be undertaken by the company, and the various means by which the shareholders may exert their control over the directors, and the company itself. While the memorandum lays down the objectives of the company, the articles lay down the rules by which these objectives are to be achieved.  In cases of conflict, the Memorandum supersedes the Articles and the Companies Act further, supersedes both Memorandum and Articles.

  • References:
  1. Articles by Jhabvala Series, Prof. Prakash Mokal
  2. https://blog.ipleaders.in/articles-of-association-under-indian-company-law/
  3. Articles by Avatar Singh, Indian company Law
  4. Bare acts

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