All about articles of association of the company

An article of Association is one of the important documents which have to be filed with the Registrar at the time of the incorporation/registration of the company. The articles of association sets out the rules and regulations related to the internal management of the company. The Articles bind the company and its members as soon as they sign the document. It is a contract between the company and its members. Members have certain rights and duties towards the company and the company have certain obligations towards its members [Section 5(1)].  

According to section 2 (5) of the Companies Act, 2013 '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 law or of this Act. The articles of association are a subsidiary to the memorandum of association of the company. They define the rights, duties, powers of the management of a company as between themselves and the company at large. Further, they also prescribe the mode and form in which changes in the internal regulation of a company may be made from time to time. The articles of association of a company must always be in consonance with the memorandum of that company and being subordinate to the memorandum; they cannot extend the objects of a company as specified in the memorandum of the company.

2. MEANING

Articles of Association is a document which prescribes the rules and bye-laws for the general management of the company and for the attainment of its object as given in the memorandum It is a document of paramount significance in the life of a company as it contains the regulations for the internal administration of the company's affairs.

EXAMPLE:-In the case of Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd, the Supreme Court provided that the articles of association of a company also establish a contract between the company and its members as well as between the members. This contract governs the ordinary rights and obligations incidental to the membership in the company.

Articles of association are like the partnership deed in a partnership. They particularly provide for matters such as the making of calls, forfeiture of shares, directors qualifications, and the procedure for transfer and transmission of shares and debentures, powers, duties and appointment of auditors. The articles of association contains the rules and regulations of a company framed for the purpose of management of its internal affairs.  They define the powers of its officers. They also establish a contract between the company and members and the members interest.  The articles are framed for carrying out the aims and objects of the memorandum of association. The articles should also not authorize the company to do anything which contravenes the provisions of the Companies Act.  If they do, they would be ultra vires the Memorandum or the Act and will be null and void

3. SCOPE AND EXTENT OF ARTICLES OF ASSOCIATION

REQUIREMENT TO HAVE ARTICLES OF ASSOCIATION

The following companies shall have their own articles namely :

(a)  Private companies limited by shares
(b)  Companies limited by guarantee
(c)  Unlimited companies

Regulations required in case of an unlimited company, a company limited by guarantee and a private company (Section 5)

1. The articles of a company shall contain the regulations for management of the company.
2. The articles shall also contain such matters, as may be prescribed: Provided that nothing prescribed in this sub-section shall be deemed to prevent a company from including such additional matters in its articles as may be considered necessary for its management.
3. The articles may contain provisions for entrenchment 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.
4. The provisions for entrenchment referred to in sub-section (3) 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.
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.
6. The articles of a company shall be in respective forms specified in Tables, F, G, H, I and J in Schedule I as may be applicable to such company.

SCOPE OF ARTICLES OF ASSOCIATION

1. The article is binding not only to the existing members, but also to the future members who may join in the future. The hires of members, successors and legal representatives are also bound by whatever is contained in the Article.
2. The Articles bind the company and its members as soon as they sign the document. It is a contract between the company and its members. Members have certain rights and duties towards the company and the company have certain obligations towards its members. At the same time the company also expects some duties and obligations which the member has to fulfil for the smooth functioning of the company.
3. The Objectives and the purpose of the Company are determined in advance by the shareholders and the Memorandum of Association (MOA), if separate, which denotes the name of the Company, its Head- Office, street address, and (founding) Directors and the main purposes of the Company - for public access.
4.  It cannot be changed except at an AGM or Extraordinary General Meeting (EGM) and statutory allowance. The MOA is filed with a Registrar of Companies who is an appointee of the Ministry of Corporate Affairs. For their assurance, the shareholders are permitted to elect an Auditor at each AGM. There can be Internal Auditors (employees) as well as an External Auditor.

4. REGISTRATION OF ARTICLES

Section 7(1) provides that at the time of incorporation of a company the company shall file with the Registrar within whose jurisdiction the registered office of a company is proposed to be situated, the memorandum and articles of the company duly signed by all the subscribers to the memorandum in the prescribed manner.

1. Every type of company whether public or private and whether limited by shares or limited by guarantee having a share capital or not having a share capital or an unlimited liability company must register their articles of association.
2. Section 5(2) provides that the articles shall also contain such matters, as prescribed in Rule 11 of the Companies (Incorporation) Rules, 2014. However, nothing prescribed in this sub-section shall be deemed to prevent a company from including such additional matters in its articles as may be considered necessary for its management.
3. The articles of a company shall be in respective forms specified in Tables, F, G, H, I and J in Schedule I as may be applicable to such company either in totality or otherwise. [Section 5(6)]
4. A  company  may  adopt  all  or  any  of  the  regulations  contained  in  the  model  articles  applicable  to  such company. [Section 5(7)]
5. Section 5(8) provides that in case of any company, which is registered after the commencement of Companies Act 2013, in so far as the registered articles of such company do not exclude or modify the regulations contained in the model articles applicable to such company, those regulations shall, so far as applicable, be the regulations of that company in the same manner and to the extent as if they were contained in the duly registered articles of the company.
6. A public company limited by shares may at its option register its articles of association signed by the same subscribers as to the memorandum, or alternatively it may adopt all or any of the regulations contained in Table F of First Schedule of the Act. If articles are not registered, automatically Table F in Schedule I would apply, and if registered, Table F in Schedule I would apply except in so far as it is excluded or modified by the articles. To avoid any confusion, normally every public company delivers its articles along with the memorandum for registration. Further, it will be specifically stated therein that Table ‘F' will not apply. The articles of a private company must contain the three restrictions as contained in Section 2(68).
7. A company limited by guarantee having a share capital or a company limited by guarantee not having a share capital or an unlimited company having a share capital or an unlimited company not having a share capital might adopt any of the appropriate regulations of Table G, H, I and J respectively in Schedule I [Section 5(6)].

However, nothing in section 5 shall apply to the articles of a company registered under any previous company law unless amended under this Act [Section 5(9)].

5. MODEL FORMS OF ARTICLES 

Schedule I to the Act gives various model forms of Memorandum of Association and Articles of Association for various types of companies.  The schedule is divided into tables which serve as a model for various companies.

6. CONTENTS OF ARTICLES

The contents of articles of association should not contradict with the Companies Act and the MoA. If the document contains anything contrary to the Companies Act or the Memorandum of Association, it will be inoperative. The Private company limited by shares and those limited by guarantee and unlimited companies must have their articles of association.

Articles that are profound to be registered should be printed, segmented well and sequenced consecutively. Each subscriber to Memorandum of Association must sign the articles in the presence of at least one witness.

If a company's constitution contains any restrictions on the objects at all, those restrictions will form part of the articles of association. The Articles of Association also include, among other details:

• valuation of intellectual rights, say, the valuations of the IPR of one partner and, in a similar way as how we value real estate of another partner
• the appointments of directors - which shows whether a shareholder dominates or shares equality with all contributors
• directors meetings - the quorum and percentage of vote
• management decisions - whether the board manages or a founder
• transferability of shares - assignment rights of the founders or other members of the company do
• special voting rights of a Chairman, and his/her mode of election
• the dividend policy  - a percentage of profits to be declared when there is profit or otherwise
• winding up - the conditions, notice to members
• confidentiality of know-how and the founders' agreement and penalties for disclosure
• first right of refusal - purchase rights and counter-bid by a founder

Disclaimer: The article is based on the relevant provisions and as per the information existing at the time of the preparation. In no event I shall be liable for any direct and indirect result from this article. This is only a knowledge sharing initiative.

The author can also be reached at vinayak.charu@gmail.com