Articles of Association

Articles of Association can be defines as a rule book within a company. It contains detailed governing aspects of a company. It is subsidiary to memorandum of association. These include shares, (issue and rights attached), details in manner of holding the company meetings, the role and powers of the directors. It defines the regulations and the purpose or the objective for which the company is incorporated.

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.

It has the same role of as of a partnership ship 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.

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 or applied in pursuance of any previous company law or of this Act.

Effect of Articles of Association

According to section 10 of the Companies Act, 2013 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.

From the above mentioned section it can be easily concluded that the articles of association binds the members with the company and vice-versa. It also binds the members inter se- means with each other as the articles define rights and liabilities of the members. As between members inter se the articles constitute a contract between them and are also binding on each member as against the other or others. Such contract can be enforced only through the medium of the company.

in the case of Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd,[1] 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 under English Law
There are enormous similarities in the concept of articles of association in English law and Indian law. The legislation under U.K law is Companies Act, 2006 according to the act it is mandatory for every company incorporated in England and Wales to have an articles of association. The company formed without the articles of association will be abstained from having legal status of a company.

Just like the provisions in Indian law the English law also has provisions regarding the alteration of articles of association. Under English Law the articles of association may override the parent legislation which the companies act, 2006. The articles of the company can override the company law under the English Legal System. To vary or exclude some of the provisions are allowed under English Law. However, under the Indian Legal System, the articles must be in accordance with the Companies Act, 2013.

Contents of Articles of Association
Section 5 of the Companies Act, 2013 provides model article of association. The section in a elaborate explain the contents of articles of association.

Articles:

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.
7. A company may adopt all or any of the regulations contained in the model articles applicable to such company.
8. In case of any company, which is registered after the commencement of this Act, 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.

The company under section 5(3) of the legislation has the discretion to include entrenchment in articles of association. However, the concept of entrenchment was not present under the previous act which is companies Act, 1956. The format for the articles of association of a company must be in the manner prescribed by the form provided in Schedule I of the Companies Act, 2013.

Alteration of Articles
Section 14 of the Companies Act, 2013 lays down the provisions for the alteration of articles of association. The alterations made under this section is subject to the provisions of this act.

Under this section there can be conversions of:

• A Private company into public company or,
• A Public company into private company

The proviso of subsection 1 of section 14 puts on a restriction on the alteration of articles of association of private companies in such a manner where it no longer includes the limitations which are required to be included for private company under this act, after such alteration from the same date onwards will cease to be a private company under this act.

Company can alter its Article by:

• By adopting a new set of articles;
• By the way of addition or insertion of new clause/s;
• By removing clause/s;
• By amending particular clause/s;
• By substitution of particular clause/s;

Restrictions on alteration of articles

• The alteration must be subject to the provisions of Companies Act, 2013.
• Powers provided under memorandum association shall not be exceeded by the alteration. In case of conflict the memorandum of association shall prevail.
• The alteration must be bonafide in nature. Anything illegal or opposing public policy must not be included.
• No alteration can conclude fraud by the majority on minority.
• The provisions for retrenchment can be inserted only when agreed by all the members in the case of a private company and in case of a public company by special resolution.
• No retrospective effect shall take place by alteration of articles. Articles come into operation only from the date of the amendment.

Alteration in cross purposes with memorandum of association
When there are alteration in articles of associations it clearly effects the memorandum of association. In the case of Hutton vs. Scarborough Cliff Hotel Co.[1], in the general meeting a resolution was passed by providing the power to issue new shares with preferential dividend but no such power was provided by the memorandum.

This alteration was declared inoperative as the issuing of new shares with the preferential dividend was considered as a variation of the constitution of the company fixed by the memorandum. Memorandum was silent as it neither authorize nor did it prohibit the issue of preference shares. The court said that either expressly or impliedly the power of alteration of the articles is only subject to what is clearly prohibited by the memorandum.

In Chithambaram Chettiar vs. Krishna Aiyangar[2] a company secretary accepted the job on the remuneration of Rs. 50 per month. This provision was provided in the articles of association. After the alteration, the monthly remuneration reduces to Rs. 25 per month. The court held that if the contract totally depends upon the provision of the articles of association then the alteration will naturally be operative but if the company has entered into an independent agreement than the company may repudiate it by changing articles but will be answerable in damages for breach.

The amended articles have same effect as that of the original articles of association. The articles shall have a binding effect on both the company and its member articles shall have a binding effect on both the company and its members to the same extent as if it was signed by the company and by each member.

Relation between Articles of Association and Memorandum of Association
Articles of association is a subsidiary of memorandum of association. Memorandum of association is the supreme document while Articles of association is subordinate document. The articles must be in consonance with the memorandum of association. This is because the object of the memorandum is to provide the purpose for which the company is established whereas the articles provide the manner in which the conduct of the company has to be carried out.

If the company does something that is beyond the memorandum than it is completely void and incapable of ratification whereas if a company does anything in contravention of the articles of association then such provision will be held irregular and can always be confirmed by the shareholders.

Conclusion
The concept of articles of association is found in every company. It is a document which contains rules, regulations, and procedures for the smooth and efficient working of the company. The procedures regarding articles of association varies in both the act (Companies Act, 1956 & Companies Act, 2013) for e.g. earlier the alteration cannot led to the conversion of company from public to private and vice- versa.

Similarly there was no provision regarding entrenchment in the prior legislation. The article of association holds a very pivotal position in any company and all the major aspects of a company's management are dealt with the articles of association. However, it must be in consonance with the memorandum of association as well the companies act, 2013 or any other company law in force at that time.

References:
Books:

• A.K. Majumdar and DR. G.K Kapoor, Taxman company law and practice, 12th Ed., Taxman Allied services Pvt. Ltd.
• Dr. Avatar Singh, Company Law, 14th Ed., Eastern Book Company, 2005

Bare-Act:

• Companies Act, 2013

Web Sources:

• http://www.legalservicesindia.com/article/2313/Articles-of-Association.html
• https://blog.ipleaders.in/articles-of-association/

End-Notes:

1. [1865] 62 ER 717
2. ILR 33 MAD 36
3. AIR 1971 SC 422