The first step towards formation of a company is to prepare the company’s charter documents. There are mainly two documents, Memorandum of Association (MOA) and Articles of Association (AOA). Section 2(56) of the Companies Act, 2013, hereinafter referred to as ‘the Act’ defines the term ‘Memorandum’ along with Section 4 dealing with contents of memorandum read with Schedule I of the Act. MOA has six definite clauses namely, the name clause, situation clause, object clause, liability clause, capital clause and subscription clause.
According to Section 2(5) of the Act, ‘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. 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 of a company. It deals with the rights of the members of the company inter se. They are subordinate to and are controlled by the MOA.
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 altered 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 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.
REGISTRATION OF AOA
Section 7(1) of the Act provides that at the time of incorporation of a company, the company shall file 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 the prescribed manner.
Every type of company whether public or private and whether limited by shares or limited by guarantee having a share capital or not having a share capital or an unlimited liability company must register their AOA. Section 5(2) provides that the articles shall also contain such matters, as prescribed in Rule 11 of the Companies (Incorporation) Rules, 2014. However, 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 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 either in totality or otherwise (Section 5(6)). A company may adopt all or any of the regulations contained in the model articles applicable to such company (Section 5(7)). Section 5(8) provides that in case of any company, which is registered after the commencement of the 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.
Therefore, in terms of Section 5 of the Act, a public company limited by shares may at its option register its AOA signed by the same subscribers as to the memorandum, or alternatively it may adopt all or any of the regulations contained in Table F of Schedule I of the Act. If articles are not registered, automatically Table F in Schedule I would apply, and if registered, Table F in Schedule I would apply except insofar as it is excluded or modified by the articles. To avoid any confusion, normally every public company delivers its articles along with the memorandum for registration.
CONTENTS OF AOA
The articles must be printed, divided into paragraphs, numbered consecutively, stamped adequately, signed by each subscriber to the memorandum and duly witnessed and filed along with the memorandum. The articles must not contain anything illegal or ultra vires of the memorandum, nor should it be contrary to the provisions of the Act.
The articles set out the rules and regulations framed by the company for its own working. The articles should generally contain the following matters:
- Exclusion wholly or in part of Table F.
- Adoption of preliminary contracts.
- Share Capital, variation of rights, number and value of shares.
- Issue of preference shares.
- Allotment of shares.
- Calls on shares.
- Lien on shares.
- Transfer and transmission of shares.
- Forfeiture of shares.
- Alteration of capital.
- Buy back.
- Share certificates.
- Conversion of shares into stock.
- Voting rights and proxies.
- Meetings and rules regarding committees of the Board.
- Directors, their appointment and delegations of powers.
- Nominee directors.
- Issue of Debentures and stocks.
- Audit committee.
- Managing director, Whole-time director, Manager, Secretary, Chief Executive Officer and Chief Financial Officer.
- Additional directors.
- Remuneration of directors.
- General meetings, proceedings at general meetings, adjournment of meetings.
- Board of Directors and proceedings of the Board meetings.
- Borrowing powers.
- Dividends and reserves.
- Accounts and audit.
- Winding up.
- Capitalisation of profits and reserves.
Utmost caution must be exercised in the preparation of the AOA of a company. At the same time, certain provisions of the Act are applicable to the company notwithstanding anything to the contrary in the articles. Therefore, the articles must contain provisions in respect of all matters which are required to be contained therein so as not to hamper the working of the company later.
Articles should be construed as a business document so as to give business efficacy preference to a construction which will prove unworkable [Holmes v. Keyes (Lord) (1958) 2 All ER 129 (CA)].
Articles bind the members to the company, company to the members, members inter se and the company to outsiders. In the case of Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd, the Supreme Court provided that the AOA of a company also establishes 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.
SIGNIFICANCE OF AOA
AOA is a very important document for a company as it holds the rules, regulations and bye-laws for internal administration and management of the company. Following are its significance,
- The articles are basically for the internal management of the company.
- All the powers of directors and other officials are described in the articles.
- All the rights and obligations are prescribed under the AOA.
- In the articles of a private company, all the restrictions are also laid down.
- All the provisions regarding the shares are also mentioned under the AOA.
- In a matter of internal conflict, it is the AOA that’s referred to.
- It is a part of the constitution of an organization.
- It is a contract between the members and among the members themselves.
- It lays down the duties of stakeholders also.
- Some statutory clauses should be included in the AOA and other clauses can be chosen by the shareholders to make them the by-laws of the organization.
- The Court can declare a clause ultra vires, if found unreasonable.
- AOA can be inspected by anyone as it is a public document.
- Special interest in the provision of AOA is taken by the lender of the organization.
ALTERATION OF AOA
The alteration of articles can be done in any of the following manners,
- By adopting a new set of articles.
- By the way of addition or insertion of new clause(s).
- By removing a clause(s).
- By amending a particular clause(s).
- By substitution of a particular clause(s).
- Restrictions on Alteration of the AOA.
The provisions regarding the AOA were different in many aspects under the Companies Act, 1956 but after the 2013 Act, many provisions were amended. The AOA can be found in every company and it is a document containing the rules, regulations and bye-laws for the efficient and hustle free administration of the company. The AOA is compulsory for a few classes of the company such as an unlimited company, a company whose shares are limited by guarantee and a private company. The AOA has all the important subjects which are required for the management and administration of the companies. It can even be altered or amended when required by following the procedures laid down in the Companies Act, 2013.
- Diva Rai, Everything you need to know about Articles of Association, July 31, 2019 https://blog.ipleaders.in/articles-of-association/
- Setting up of Business Entities, ICSI Module https://www.icsi.edu/media/webmodules/FINAL_FULL_BOOK_of_EP_SBEC_2018.pdf