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Articles of Association

Articles of Association as originally framed or as altered from time to time in pursuance of this Act or any other previous company’s law.

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Articles of Association_AOA

When a company is formed, it is required to maintain two major documents that define the company’s objectives as per the Companies Act 2013. Not just they lay down the objectives but rules and regulations as well.

These two major documents are MOA and AOA. MOA stands for Memorandum of Association and the other such document is AOA that stands for Articles of Association.  Herein, we will discuss Articles of Association in brief.

The articles of association are the company’s bylaws, which regulate its operations and functioning, including the appointment of directors, the handling of financial records, and other matters. To continue this analogy, articles of association can be considered the users’ manual that defines how the company should operate daily.

As per section 2(5) of The Companies Act, 2013

Meaning of Articles of Association is defined as under

Articles of Association as originally framed or as altered from time to time in pursuance of this Act or any other previous company’s law.

A company’s articles of association are a contract between the company and shareholders. Directors are not parties to this contract, but they have their own director’s duties, which are contractual in nature.

What needs to be a part of Articles of Association?

Companies have an option to choose either from the model articles of association provided by the company house or to choose them from the tables given.

If a company decides to go with the model Articles of Association, then it has to cover these headings:

  1. Director’s scope i.e., director’s responsibility and powers
  2. Proceedings of the board of directors meeting
  3. Accounts and audits
  4. Administrative powers and duties
  5. Process of shares
  6. Distribution of dividends
  7. Forfeiture of shares
  8. Share warrants
  9. Rights and duties of shareholders
  10. Voting power of shareholders
  11. Borrowing powers of the company
  12. Provision relating to winding up of company

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Objectives of Articles of Association

According to section 5 of The Companies Act, Articles of association:

  1. Must include the rules for the management of the company
  2. Must include the matters prescribed under the rules

However, this does not stop the company from including additional matters later in life of the company. A company has the power to alter or modify the Articles of Association as they may like.

With regards to alterations in the original AOA, there is an internal committee that looks after different alterations following their needs and requirements.

As per section 197 (ii), alterations can be done only if it does not affect or nullify any decision taken by previous meetings. The Articles of Association of a company can be amended at any time by the resolution of the members.

 A copy of the resolution shall be sent to each member. The resolution shall take effect from the date on which it is passed or from any later date specified therein, and where no such date is specified, it shall take effect immediately after the passing thereof.

The company may make in the Articles any alteration (other than a change in the name of the company) which does not prejudice any right or interest acquired by any person under the articles as they stand immediately before the alteration.

Alteration of Articles of Association

Companies are mandated by Section 14 of the Companies Act, 2013 to alter their articles following that section and the conditions contained in their memorandum. In other words, a company may change its articles, provided that it complies with Section 14 of the Companies Act, 2013 and the conditions outlined in its memorandum.

A company is empowered by the Articles of Association Act to alter its articles, as long as any alteration is made in compliance with the specific provisions of this act and the conditions noted in the memorandum. Section 14 of the Articles of Association Act states that a company may alter its articles through a special resolution and adds that any alteration made shall be as valid as if it had originally been contained in the articles.

Section 31 determines the conditions under which a private company may be formed. If a public company desires to convert into a private company, central government approval is required (section 31(1)).

 If a resolution is passed to amend the articles of association in any way, that alteration may take effect on the day it is passed or on some later date specified in that resolution (section 31(2)).

Section 31(3) provides that for companies that were initially established under Acts 19 or 7 of 1857, Table B of those acts forms part of their articles and so is alterable.

However, for unlimited companies registered under such acts, alterations may also be made to regulations concerning the distribution of capital regardless of any regulations contained in the memorandum.

Legal effects of Articles of Association:

Articles of association gives certain legal effects on the company, its members and outsiders. These are:

1. The members are bound to the company:

The articles and the memorandum of association create the contract among the members and the company. The individual members are bound to follow the original articles and those that are altered from time to time as held in the case of Malleson v. National Insurance Co.

2. Members can sue the company:

Companies are bound by the documents that govern their creation and operation. If a company breaches its articles, an aggrieved member may bring an action against it. In most cases, only a majority of members can seek redress in court. However, there may be additional remedies available to an individual member or a minority group of members when personal rights are violated or when the company engages in illegal or fraudulent activities.

3. Company is bound to the outsiders:

The articles of association bind a company with outsiders, which means any person who is not a member of the company. The articles do not give any contractual rights against the company. Even if the name of an outsider appears in those documents as contemplated for carrying out business, there is no contractual obligation.

4. Members are bound to each other:

Members of a company are bound by the articles of association and, further, each member is bound by the other members. However, this does not mean that, in an express contract among the members of the company. Therefore, it cannot be inferred that one member has the right to bring a suit against other members for the enforcement of articles.

When Articles of Association Is Mandatory?

Some classes of the company are mandatory to have Articles of Association. Such as,

  1. Unlimited company: An unlimited company is the one defined under section 2(92) of the companies Act. It Is a company that has no limit on its members.
  2. Companies limited by guarantee: As been defined under section 2(21) of the Companies Act, 2013 a company limited by guarantee is one having its shareholders liability limited by guarantee.

Private companies limited by shares: As been defined under section 2(68) of the Companies Act, 2013 a private company limited by shares has to mandatorily make Articles of Association.

The Entrenchment of Articles of Association:

Entrenchment is a concept that was not included in the Companies Act, 1956. Entrenchment means establishing such a type of attitude or habit which is very difficult to change.

 Thus, this clause makes some amendments in the article of association difficult. Some companies may choose to include entrenchment provisions in the articles of association.

This provision can be made either at the time of incorporation of the company or after the incorporation of the company by way of an amendment in the articles of association. The amendment that is made to include this provision must be agreed by all members/shareholders of a private limited company, and by special resolution for a public limited company.

Section 5(3) states that in the case of entrenchment, the articles of association must be altered to include provisions that are more restrictive than those applicable in the case of a special resolution.

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Articles of Association under English Law

The concept of Articles of Association under English law is very similar to that of India. In England, the law governing articles of association is the Companies Act, 2006. According to the Act, every company must have an article of association if it is formed in England and Wales. No company can be formed legally without the articles of association. Under English law, even while a company is being formed, a set of model articles are required.

The articles of association may override the Companies Act. The articles of association should be following the Companies Act, but it is not always possible that the provisions of the Company Law will be suitable for every company. The articles of the company can override Company Law under English Legal System. To vary or exclude some of these provisions are allowed under English Law.

MOA V/S AOA:

SR. No. Memorandum of AssociationArticles of Association
1.The Memorandum of the company contain fundamental information about the company that is required at the time of incorporationThe Articles of Association contain regulations regarding the running and management of the company
2.it should be there at the time of incorporation of the companyit is not necessary at the time of incorporation.
3.    It is a major document for the company.It is not a major document, but a subordinate.
4.  It contains the power and objectives of the companyIt provides the rules by which these objectives are to be implemented.
5      It is the dominant instrument and it controls the articles of association.The provision which is invalid to the memorandum will be declared invalid
6Any acts which are done beyond the powers of MOA are considered to be ultra vires and hence void.Acts that are ultra vires the AOA can be ratified by a special resolution

Conclusion

The articles of association is a document containing the rules, regulations and bye-laws for the efficient and hustle free administration of a company. The articles of association are compulsory for some classes of companies such as unlimited companies, companies whose shares are limited by guarantee, etc.

The articles of association have all the important subjects which are required for the management and administration of the companies. These subjects can even be altered or amended when required by following the procedures laid down in the Companies Act, 2013.

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