Articles of Association (AoA)

According to Section 2(5) ― ”articles” means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act.

(It also includes the regulations contained in Table A in Schedule I of the Act, in so far as they apply to the company.)

In terms of section 5(1), The articles of a company shall contain the regulations for management of the company.

The AoA of a company are its bye-laws or rules and regulations that govern the management of its internal affairs and the conduct of its business.

The articles play a very important role in the affairs and the conduct of its business.

The articles play a very important role in the affairs of company.

It deals with the rights of the members of the company inter se.

They are subordinate to and are controlled by the memorandum.

Thus, the memorandum lays down the scope and powers of the company, and the articles govern the ways in which the objects of the company are to be carried out and can be framed and alterd by the members. But they must keep within the limits marked out by the memorandum and the Companies Act.

The articles regulate the internal management of the affairs of the company by way of defining the powers of its officers and establishing a contract between the company and the members and between the members inter se. This contract governs the ordinary rights and obligations incidental to membership in the company (N.C. Sanyal v. The Calcutta Stock Exchange Association Ltd.)

But the Articles of Association of a company are not law and do not have the force of law.

In Kinetic Engineering Ltd. v. Sadhana Gadia, it was held that if any provision of the articles or the memorandum is contrary to any provisions of any law, it will be invalid toto.

Articles Subordinate to Memorandum

The articles of a company are subordinate to and subject to the memorandum of association and any clause in the Articles going beyond the memorandum will be ultra vires.

But the articles are only internal regulations, over which the members of the company have full control and may alter them according to what they think fit. Only care has to be taken to see that regulations provided for in the articles do not exceed the powers of the company, as laid down by its memorandum. Articles that go beyond the company’s sphere of action are inoperative, and anything done under the authority of such article is void and incapable of ratification.

Registration of Articles

Section 7(1) provides that, there shall be filed 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 such manner as may be prescribed.

Every type of company must register their articles of association.

Section 5(2), provides that 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.

The Companies Act, 2013 has introduced “entrenchment” in Articles of Association. What is “Entrenchment”? As per the Oxford Dictionary “Entrenchment” means “to apply additional legal safeguards”. In legal sense it means addition of provision which makes certain amendments either more difficult by way of procedure or checks and safeguards.

Section 5(3) provides that, 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.

Entrenchment provisions allow for certain clauses in the articles to be amended upon satisfaction of certain conditions or restrictions (such as obtaining a 100% consent) greater than those prescribed under the Act.

This provision acts as a protection to the minority shareholders.

Section 5(4) provides that, 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. And,

Section 5(5) provides that, 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.

We can say that, section 5 gives the objectives of Articles of Association which on summary of section 5 can be stated as :

The Articles of association:

• Must include the regulations for the management of the company
• Include matters that have been prescribed under the rules
• They do not prevent a company from including additional matter in the AOA or from doing any alterations as may be considered necessary for the functioning of the company affairs.

Contents of Articles

The articles set out the rules and regulations framed by the company for its own working. The articles should contain generally the following matters :

1. Adoption of preliminary contracts
2. Number and value of shares
3. Issue of preference shares
4. Allotment of shares
5. Call on shares
6. Lien on shares
7. Transfer and transmission of shares
8. Nomination
9. Forfeiture of shares
10. Alteration of capital
11. Directors
12. Buy Back
13. Meetings
14. Dematerialisation
15. Voting rights and proxies
16. Nominee Directors
17. Audit committee
18. Common Seal
19. Remuneration to Directors.

Forms of Articles of Association (AOA)

The forms for Articles of Association (AOA) in tables F, G, H, I and J for different types of companies have been mentioned under Schedule I of the Companies Act, 2013. AOA must be in the respective form.

Difference between Memorandum and Articles of Association

Parameters of Difference Between MOA and AOA	MOA	AOA
The Purpose	The purpose of the Memorandum of Association is to define the objectives of a company and the conditions for its incorporation.	It defines the rules and regulations that govern the internal management of the company for achieving its objectives.
Parties Concerned	It defines the relationship of the company with the external parties	It defines the relationship between the members of the company amongst themselves and with the company
Alteration	MOA can be altered only under special conditions	AOA can be altered by passing a special resolution
Contents	MOA must contain all the six clauses of the Memorandum of Association as specified under the companies act	AOA can be framed as per the discretion of the company
Ratification	Any acts beyond the scope of the MOA are considered ultra-vires and void. Such acts cannot be ratified by the unanimous votes of the shareholders.	Acts that are ultra vires the AOA company but are not ultra-vires MOA can be ratified by a special resolution of the shareholders.
Subsidiary	MOA is subsidiary to the Companies Act	AOA is subsidiary to both the Companies Act as well as the MOA
Section Under the Companies Act	Memorandum of Association meaning has been stated under Sec 2(56) of the Companies Act	Articles of Association meaning has been stated under Sec 2(5) of the Companies Act

If there is any inconsistency between the provisions of the memorandum and those of the articles, the provisions of the memorandum will prevail.

Alteration of Articles

A company has a statutory right to alter its articles of association. But the power to alter is subject to the provisions of the Act and to the conditions contained in the memorandum.

Section 14. Alteration of articles :—

(1) Subject to the provisions of this Act and the conditions contained in its memorandum, if any, a company may, by a special resolution, alter its articles including alterations having the effect of conversion of—

(a) a private company into a public company; or

(b) a public company into a private company:

Provided that where a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under this Act, the company shall, as from the date of such alteration, cease to be a private company

Provided further that any alteration having the effect of conversion of a public company into a private company shall not take effect except with the approval of the Tribunal which shall make such order as it may deem fit.

(2) Every alteration of the articles under this section and a copy of the order of the Tribunal approving the alteration as per sub-section (1) shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of fifteen days in such manner as may be prescribed, who shall register the same.

(3) Any alteration of the articles registered under sub-section (2) shall, subject to the provisions of this Act, be valid as if it were originally in the articles.

Binding force of Memorandum and Articles : Section 10 :

Effect of memorandum and articles :— (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 had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles.

(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.

Constructive Notice of Memorandum and Articles :-

In companies law the doctrine of constructive notice is a doctrine where all persons dealing with a company are deemed (or “construed”) to have knowledge of the company’s articles of association and memorandum of association. (The doctrine of indoor management is an exception to this rule.)

The memorandum and articles, when registered, become public documents and can be inspected by anyone on payment of nominal fee.

Therefore, every person, entering into a contract with aa company has the means of ascertaining and is consequently presumed to know, not only the exact powers of the company but also the extent to which these powers have been delegated to the directors and of any limitations placed upon the exercise of these powers.

In other words, every person dealing with the company is deemed to have a “constructive notice” of the contents of its memorandum and articles. In fact, he is regarded not only as having read those documents but also as having understood them according to their proper meaning (Griffith v. Paget).

Consequently, if a person enters into a contract which is beyond the powers of the company, as defined in the memorandum, or outside the limits set on the authority of the directors, he cannot, as a general rule, acquire any rights under the contract against the company (Mohony v. East Holyfrod Mining Co.). (For example, if the articles provides that a bill of exchange to be effective must be signed by two directors, a person dealing with the company must see that, it is so signed; otherwise he cannot claim under it.

Section 399 of the Companies Act, 2013 points out the rules and regulations governing the inspection, evidence of documents with the Registrar and production.

Doctrine of Indoor Management

While the doctrine of ‘constructive notice’ seeks to protect the company against the outsiders, the principal of indoor management operates to protect the outsiders againt the company.

The doctrine of indoor management, also known as Turquand rule is more than 150-year old concept, which protects the outsiders against the actions done by the company.

Any person who enters into a contract with the company shall ensure that the transaction is authorised by the articles and memorandum of the company. There is no requirement to look into the internal irregularities, and even if there are any irregularities, the company shall be held liable since the person has acted on the grounds of good faith.

The doctrine originated from the landmark case Royal British Bank V Turquand (1856). The facts of the case are as follows :

The Articles of the company provide for the borrowing of money on bonds, which requires a resolution to be passed in the General Meeting. The directors did acquire the loan but failed to pass the resolution. The repayment on loan defaulted, and the company was held liable. The shareholders refused to accept the claim in the absence of the resolution. The Court held that, the company shall be liable since the person dealing with the company is entitled to assume that there has been necessary compliance with regards to the internal management.

Regularity can be presumed rather than the irregularity of the company’s indoor management.

Section 176 provides for the validity of acts of Directors. It states that, No act done by a person as a director shall be deemed to be invalid, notwithstanding that it was subsequently noticed that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles of the company.

The object of the section is to protect persons dealing with the company, outsiders as well as members by providing that the acts of a person acting as director will be treated as valid although it may afterwards be discovered that his appointment was invalid or that it had terminated under anny provision of this Act or the Articles of the company. (Ram Raghubir Lal v. United Refineries (Burma) Ltd.).

To sum up, “The doctrine provides the third parties who enter into a contract with the company is protected against any irregularities in the internal procedure of the company. The third parties cannot find out internal irregularities that take place in a company, hence the company will be liable for any loss suffered by them due to these irregularities.”

Exceptions to Doctrine of Indoor Management

Listed below are the exceptions to the doctrine that have been judicially established, which provide circumstances under which the benefit of indoor management cannot be claimed by a person dealing with the company.

Knowledge of Irregularity :-

This rule does not apply to circumstances where the person affected has actual or constructive notice of the irregularity. In Howard V Patent Ivory Manufacturing Company, the Articles of the company empowered the directors to borrow up to 1,000 pounds. The limit could be raised provided consent was given in the General Meeting. Without the resolution being passed, the directors took 3,500 pounds from one of the directors who took debentures. Held, the company was liable only to the extent of 1,000 pounds. Since the directors knew the resolution was not passed, they could not claim protection because the director had notice or was deemed to have the notice of the internal irregularity.

Suspicion of Irregularity :-

In case any person dealing with the company is suspicious about the circumstances revolving around a contract, then he shall enquire into it. If he fails to enquire, he cannot rely on this rule.

In the case of Anand Bihari Lal V Dinshaw & Co, the plaintiff accepted a transfer of property from the accountant. The Court held that the plaintiff should have acquired a copy of the Power of Attorney to confirm the authority of the accountant. Thus, the transfer was considered void.

Forgery :-

Transactions involving forgery are void ab initio (null and void) since it is not the case of absence of free consent; it is a situation of no consent at all. This has been established in the Rouben V Great Fingal Consolidated case, a person was issued a share certificate with a common seal of the company. The signature of two directors and the secretary was required for a valid certificate. The secretary signed the certificate in his name and also forged the signatures of the two directors. The holder contented that he was not aware of the forgery, and he is not required to look into it. The Court held that the company is not liable for forgery done by its officers. The certificate was held to be nullity and the holder of the certificate was not allowed to take advantage of the doctrine of indoor management.

Acts falling outside apparent authority :-

The doctrine of indoor management, in no way, rewards those who behave negligently. Thus, where an officer of a company does something which shall not ordinarily be within his powers, the person dealing with him must make proper enquiries and satisfy himself as to the officer’s authority. If he fails to make an enquiry, he is estopped from relying on the Rule.

In the Anand Behari case, the plaintiff, was at fault as he acknowledged the transfer of the company’s property on the apparent authority of the accountant.

No Knowledge of memorandum and articles :-

The doctrine of indoor management can not be invoked, in favour of a person who did not in fact read the company’s memorandum and article.

In order to claim protection, under the doctrine of indoor management, knowledge of memorandum and articles is necessary.

Person who did not consult memorandum and articles cannot be protected under this rule.

In Rama Corporation v. Proved Tin & General Investment Co.,it was observed that, the doctrine of constructive notice of company’s registered documents such as its Memorandum and Article and its special resolutions does not operate against a company, but only in its favour. The doctrine operates against the person who failed to enquire but does not operate in his favour.

To sum up, “The doctrine of ‘indoor management’ is evolved as a reaction to the doctrine of constructive notice. It puts a Bar on the doctrine of constructive notice and it protects the third party who acted in the act in the good faith. This doctrine protects outsiders dealing or contracting with a company, It was analyzed that the doctrine does not operate in an arbitrary manner, there are some restriction imposed on it like forgery, third party having knowledge of irregularity, negligence, where the third party don’t read memorandum and articles.”