This article is written by Syed Abul Abbas of 2nd Year of LLB Hons. of University of Lucknow
The guidelines for managing a company’s internal affairs and rules and regulations are contained in the articles of association. They outline the management’s responsibilities, rights, and obligations as well as the way the operations of the firm should be conducted and how occasionally modifications to its internal rules may be made. The relationships between the company and its members and amongst members are outlined in the articles. Nothing that is against the Memorandum of Association, the Companies Act, or public policy may be contained in the Articles of Association. Articles are an adjunct to a memorandum. An open-ended public business with shares may file its own articles of association. Alternately, it may choose to adopt Table A, which contains the sample set of 99 articles listed in Schedule I of the Companies Act.
The number of members with which the company is to be registered must be stated in the Articles for both limited by guarantee and unlimited companies. In the event that an unlimited business has a share capital, the articles must additionally include the share capital requirement for registration. Each signatory to the memorandum must have the Articles of Association printed, separated into paragraphs, consecutively numbered, and signed by them in the presence of at least one attesting witness.
Keywords – company, members, article of association, shares, memorandum of association
A company’s goals for its operations and purpose are established when it is formed, along with a number of rules and regulations. These laws govern how a firm conducts itself internally. These goals are outlined in two key sets of documents that also control how the corporation and its directors or internal affairs are run. These papers are the Memorandum of Association (MOA) and the Articles of Association (AOA). We shall go into great detail about the articles of association here.
The bylaws that govern how the company operates, including, among other things, the appointment of directors and the handling of financial data, are contained in the articles of association. Consider the business like a machine.
The user guide for this equipment would then be the articles of association. It specifies the tasks that the machine must complete as well as the best way to carry them out consistently.
Definition of Article of Association – Sec 2  of the companies act 2013 defines it as –
“The Articles of Association (AOA) of a company originally framed or altered or applied in pursuance of any previous company law or this Act.”
Nature/Purpose of Articles of Association
The articles of association serve as a guide for how a corporation should run. These articles provide detailed information about business transactions and may cover duties like how to make a financial report or choose new directors for a company.
Articles of association serve as a guide for managing a business on a daily and overall basis, which is valuable to both business owners and staff.
Although the fundamentals of articles of association are the same across all industries, there are variations from business to business. Corporate bylaws, signing power, and even shareholder’s agreement details must be considered when drafting the incorporation forms.
Companies can ensure that all necessary elements are included in their articles of association as long as the whole as the big picture of daily goals is taken into consideration.
Articles of Association are essential when it comes to stock market investing. Corporate lawyers assist businesses in defining the issuance of stocks and bonds, the distribution of dividends, and the documentation and sharing of information both inside and outside the business.
These documents are also a wonderful method for businesses to establish weekly, monthly, or annual goals and to lay out a clear plan for how to get there.
Objectives of the Articles of Association
According to Section 5 of the Companies Act of 2103:
- Rules for the organization’s management must be included.
- Include items that fall under the rules’ prescriptions
- They do not prohibit a corporation from adding further information to the AOA or from making other changes that may be deemed necessary for the company to operate.
- Simply said, “these are basically the bylaws or rules of the company.” These are created by the corporation to provide rules for the business. On the other side, government-prepared legislation that apply to all businesses, like the Companies Act of 2006, are general corporate laws. Such laws must be followed, and this requires the involvement of a third party (an auditor).
- Articles, however, are self-made regulations within the Company. Furthermore, because a firm is a distinct legal entity, each one must prepare these regulations. It follows that byelaws are necessary for the administration and management of the entity in a lawful way and within established boundaries.
- Only when specifically permitted by the articles do the directors, officials, and shareholders acquire legal authority. Private limited businesses are prohibited from borrowing money from common shareholders. A private limited corporation is also subject to a number of limitations when acting as a corporation. These are outlined by law; thus, private limited company regulations must include these constraints.
- The lawyers and auditors would first check if the articles grant the authority in the event of a disagreement regarding any activity by the Company.
- Articles of association assist in establishing rules and regulations for a variety of issues, such as the following:
- Key Managerial Persons (KMP) are chosen to carry out the company’s management function.
- Conditions for a director’s appointment, dismissal, resignation, and compensation.
- Conduct of all meetings, including board meetings, annual general meetings, general meetings, special meetings, and any other meetings held during the Company’s existence.
- Conditions for the appointment, discharge, rotation, and compensation of the Company’s auditors.
- a prerequisite for the creation of any unique committee for the business.
- Conditions in case the Company needs to be dissolved.
- Limit the company’s ability to borrow money.
- The articles give shareholders privileges such as voting and others.
- The shareholders have the authority to make decisions in every circumstance, in case any provision is missing in the articles.
Contents of article of association
The contents of the articles of association are outlined in Sections 5(1) and 5(2) of the Companies Act of 2013, respectively. The articles must include both the items that the Central Government has mandated as well as the rules for the management of the organisation. The following information must also be included in the articles of association:
Share capital, including its split, the rights of different shareholders, how these rights relate to one another, commission payments, and share certificates.
- Lien of shares: To hold onto shares in the event that a member is unable to pay his debt to the company is known as a lien of shares.
- Calls on shares: Calls on shares refer to the entire or portion of an unpaid share that must be paid by the shareholder upon demand from the corporation.
- The process for transferring shares from a shareholder to a transferee is outlined in the articles of organisation.
- Shares can pass down through death, succession, marriage, insolvency, and other legal processes. It is actually brought about by the application of law and is not voluntary.
- Share forfeiture: If the purchase criteria, such as paying any allocation or call money, are not met, the shares will be forfeited, according to the articles of organisation.
- Shares surrendered: Shares surrendered are shares that shareholders voluntarily give back to the corporation.
- Shares may be converted into stock in accordance with the articles of association through a regular resolution passed at a general meeting.
- Share warrant: Only public limited businesses are permitted to issue share warrants, which are bearer documents that relate to the ownership of shares. Private corporations are not permitted to issue share warrants.
- Capital Adjustment: Capital may be increased, decreased, or rearranged in accordance with the articles of organisation.
- General meetings and proceedings: The articles of organisation must contain all provisions pertaining to general meetings and the way in which they are to be conducted.
- Members’ voting rights, voting by poll, and the use of proxies are all outlined in the articles of association, as are the procedures for voting on specific business issues.
- Directors, their selection, compensation, qualifications, and participation in board meetings are all covered.
- Reserves and dividends: A company’s articles of association also outline the distribution of dividends to shareholders.
- Accounts and Audits: A company’s audit must be performed in accordance with the company’s articles of association.
- Every corporation has the ability to borrow money, but this must be done in accordance with the firm’s articles of association.
- Dissolution: The company’s articles of association contain provisions relating to dissolution, which must be carried out as specified.
Difference between the Memorandum and the Articles:
1.Nature – A company’s memorandum of association, or charter, outlines the fundamental requirements and purposes for which incorporation has been granted. It describes the company’s business, nationality, and capital. The internal management of a firm is governed by the Articles of Association, on the other hand.
2.Contents: The Memorandum of Association outlines the company’s goals and authority. It establishes the extent of the business’s operations or the operational boundaries that it cannot cross. On the other hand, the company’s pre-laws for achieving its goals in this field are contained in the articles of association.
3.Relations: The Memorandum of Association establishes a company’s contacts with other parties, whilst the Articles establish those with its members.
4. Status: The Memorandum, which serves as the company’s charter, is the only document that comes before the Companies Act. Contrarily, the Memorandum and the Companies Act come before the Articles.
5.Filing. At the time of incorporation, each company is required to submit its Memorandum of Association. A public corporation limited by shares, however, can adopt Table A of the Companies Act rather than having to file its own Articles.
6. Alterations. The Memorandum is subject to stringent limitations, and certain of its clauses cannot be changed without the approval of the Company Law Board. However, a special resolution can change the Articles, and only the government’s approval is needed to turn a public business into a private one.
7. Legal effects – Any action taken by a corporation is unquestionably extra vires or invalid, and it cannot be approved even by the approval of all of its members. The members may approve any corporate action that goes beyond the provisions of the articles.
Alteration of Articles of Association
A business may amend its articles in accordance with the terms of the memorandum of association by passing a special resolution, according to Section 14 of the 2013 Companies Act. This authority is crucial to the operation of the business. The business may change its bylaws in a way that would change:
Becoming a private firm from a public one
Simply passing a special resolution is insufficient for a corporation looking to change its status from public to private. The Tribunal’s consent and approval must be obtained by the corporation. Additionally, within 30 days of its passage, a copy of the special resolution must be lodged with the Registrar of Companies. Additionally, a business must submit a copy of the modified, new articles of organisation along with the Tribunal’s approval decision to the Registrar of Companies within 15 days of receiving it
Becoming a public corporation from a private one
According to section 2(68), which outlines the requirements for a private corporation, a firm that wishes to change from being private to being public may do so by eliminating or omitting the three phrases. A copy of the resolution and the modified articles must be filed with the Registrar within the allotted timeframe, just like when a public company becomes a private one.
Restrictions on the ability to alter articles
- Since the memorandum trumps the articles and will take precedence in the event of a dispute, the modification must not violate any of its terms.
- Since the modification trumps both the firm’s memorandum and its articles, it cannot be in violation of the Companies Act or any other company legislation.
- Cannot go against the Tribunal’s rulings, changes, or recommendations.
- The modification cannot be unlawful or against public policy. Furthermore, it must be in the legitimate interest of the business. The changes must be for the company’s overall advantage and cannot be an attempt to commit fraud against the minority.
- Any change that would turn a public corporation into a private firm cannot be implemented until the Tribunal has granted the necessary authorisation.
- A business cannot escape contractual liability or utilise the modification to cover up or correct a violation of contract with a third party.
- A firm cannot change its bylaws in order to remove a director from the board of directors since doing so would violate company law and be illegal.
The articles of a corporation are a key document in corporate governance since they outline the duties of its directors, business operations, and shareholder control, along with the memorandum from the firm’s fundamental constitution and rule book. The articles provide forth the guidelines for achieving these goals. When there is a contradiction, the Memorandum takes precedence over the Articles, and then the Companies Act takes precedence over both.
According to Section 14 of the Companies Act of 2013, the articles may be changed. The entrenchment requirements ensure that revisions can only take place with the prior consent of shareholders, protecting the interests of minority shareholders. The Articles also create a contract between the company and its members outlining their rights and obligations, as well as a contract between the members and the firm.
The organisational structure of the corporation is outlined in its articles. Every business needs a law to anchor its activities in a long-term plan. Lack of such measures would restrict the directors’ capacity to manage the business as a proprietary company. As a result, articles control how the corporate entity principle is used legally. It recognises a company’s standing as a separate legal entity.
s. chand’s isc commerce