What are Articles of Association?
When a company is established, it sets out specific rules and regulations, as well as the goals and purpose of its operations. These laws govern the internal workings of the company. The two key documents that outline these goals and oversee the company’s operations and internal affairs are the Articles of Association (AOA) and the Memorandum of Association (MOA). In this discussion, we will focus on the Articles of Association.
The Articles of Association contain the rules that govern the company’s operations, such as the appointment of directors and the management of financial records, among other things. Think of the company as a machine. The Articles of Association can be seen as the instruction manual for this machine. It outlines the tasks the machine is expected to perform and how to carry them out on a daily basis.
Definition of Articles of Association of a Company
According to Section 2 (5) of the Companies Act, 2013, the definition of Articles of Association is as follows:
The Articles of Association (AOA) of a company, which were initially created, modified, or implemented in accordance with any previous company law or this Act.
Purpose of the Articles of Association
Companies decide to incorporate for various reasons. To make sure they are following the rules, authorities usually ask for a bunch of paperwork. The main document they look at is the articles of association, which helps them determine if the company should be recognized as a separate legal entity from its owners.
This whole set of documents is commonly called the Articles. It might include details like the company’s name, purpose, structure, governance, record-keeping, and other important aspects of its operation.
Different places might use different names for these documents, such as Memorandum of Association, Articles of Incorporation (AOI), Memorandum of Incorporation, Constitution, or Articles of Organization.
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:
- Director’s scope i.e., director’s responsibility and powers
- Proceedings of the board of directors meeting
- Accounts and audits
- Administrative powers and duties
- Process of shares
- Distribution of dividends
- Forfeiture of shares
- Share warrants
- Rights and duties of shareholders
- Voting power of shareholders
- Borrowing powers of the company
- Provision relating to winding up of company
Common Components of the Articles of Association
Although articles of association differ slightly between countries, they are generally comparable in many regions of the world. It generally consists of the following:
- Name of the company and kind of business
- The company’s objective
- Capital arrangement
- Corporate leadership
- Management of company documentation
Name of the company and kind of business
A corporation needs a distinctive name in order to be recognized as a legal entity. It needs to be included in the association’s articles. To make sure the registration is linked to a legitimate address, an address is occasionally provided.
Certain suffixes, such as “Inc,” “Ltd,” and “Plc,” are required by certain jurisdictions to indicate a certain type of corporate structure. Words that are judged rude or vulgar, or that might mislead the public, are prohibited.
Companies can generally last forever, however depending on the situation, articles can specifically state how long they can last and how to close.
The company’s objective
Non-profit organizations seek societal benefit by offering value that may be intangible, whereas for-profit firms seek benefit for their stakeholders by adding value to society. Whatever the goal, the articles of association must specify the organization’s purpose.
General purpose expressions, like management, are permissible in some countries. Others call for a specific goal of the business, such as the development and operation of a chain of restaurants.
Company Structure
The articles outline how a business sets up its capital structure.
Common shares are the standard structure for businesses having share capital. Other share classes and categories could exist, such as preferred shares with distribution and dividend rights or even shares with a liquidation preference.
Companies limited by guarantee, which in some states may be non-profit organizations, are one type of organization that does not require share capital.
The capital structure outlines the company’s connection with its stakeholders. It demonstrates how the business grants the ownership in return for support from stakeholders.
Corporate leadership
This category may be used to outline the roles and responsibilities of directors as well as the rights and obligations of shareholders or members.
Corporate governance regulations are in place in many jurisdictions. Since authorities may allow legal entities other than persons to hold shares or become members, directors are usually the people most directly accountable. The articles of organization may specify the directors’ indemnification, and their culpability varies according to the jurisdiction.
Objectives of Articles of Association
According to section 5 of The Companies Act, Articles of association:
- Must include the rules for the management of the company
- 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,
- 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.
- 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.
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 Association | Articles of Association |
| 1. | The Memorandum of the company contain fundamental information about the company that is required at the time of incorporation | The 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 company | it 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 company | It 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 |
| 6 | Any 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.