Articles of association create a type of document that specifies the rules and regulations of a company’s working method or operations, it also defines the purpose of the company. This document lays out how tasks are to be completed within the organization. That task includes the process for appointing directors and the handling of financial records.
It is a second document which has to be registered along with the memorandum. So it is nothing but the most essential form of document in a company. Articles are deemed the most important document which has to be registered along with the memorandum.
Meaning and Definition
Articles as defined in section 2(5) of the Companies Act, 1956 means, the Articles of Association of the company as originally framed or as alternated from time to time or applied in pursuance of any previous company law or of this Act.
Articles are internal regulations and by-laws which regulate the activities of management of the company.
Schedule 1 of the companies Act sets out tables of model forms of articles for different companies (Table F, G, H, I and J). Table F applies to the companies limited by shares. Such a company can either make its own articles or can adopt Table F, this Table automatically applies to the extent to which it is not excluded. The most important benefit of adopting this Table is that its provisions are legal beyond all doubt. This document has to be decided into paragraphs, constructively and must be signed by every subscriber.
This article may contain matters that may have been prescribed from time to time. They may also contain additional matters that may be requisite for the needs of the company. [Section 5(2)]
Provisions for entrenchment
The articles may contain provisions for entrenchment, so that the specified provisions of the article may be altered only if the procedures are more restrictive than applicable in case of special resolution are met with. Such provisions shall be made on the foundation of the company or by particular amendments with the consent of all the members of a private company and by special resolution in a public company. Whenever the provisions have been brought for entrenchment it should be notified to the Registrar in the manner prescribed.
Form and signature of articles
Articles proposed to be registered must be printed. It should be divided into paragraphs, each consisting of generally one regulation and numbered consecutively. All subscribers of the memorandum have to sign the document, there at least one attesting witness has to be presented and both of them have to add their addresses and occupation.
Contents of articles
Articles of the association shall contain such regulations for companies which are convenient to the memorandum as the subscribers. The Act has given subscribers a free hand for it. Any conditions between the company and its members and members inter se may be included in articles.
The document must not contain the provisions which are not in the Act. If any clause is contrary to the Act’s provisions or of any other law in force, then it is simply void one. According to Section 272 of the Companies Act 2013, shareholders have a right to petition for winding up of the company in such circumstances. This right cannot be limited by the articles. However, the company cannot sanction anything which is forbidden by the Act. Section 123 says that no dividend shall be paid except out of profit and this power of the Section cannot be undone by any provision in the articles of association.
Articles in Relation to Memorandum
Articles have always been held subordinate to the memorandum. So whenever there is some inconsistency between articles and memorandum, then the article only has to give way and the article must not contain anything contrary to the provisions of the memorandum. The reason behind it is that the memorandum is there to show the purpose behind the establishment of the company while articles provide the manner in which the company is to be carried on and the proceedings for disposal.
In the memorandum, some of the conditions of incorporation cannot be altered except authoritative sanction and in articles, it can be altered easily by a special resolution. Section 13 says that if the memorandum is also altered according to the procedure of articles then there will be no difference in these two.
If a company does anything which is beyond the scope of objects in the memorandum it will be totally void and also not able to rectify, whereas anything done by the company which is contrary to the provisions of articles will only be irregular and can be confirmed by the shareholders anytime. As now the object clause of the memorandum has now become alterable only by a special resolution, a company should be in a position to adopt suitable and requisite changes in the object clause, some of the clauses of it can only be altered with the sanction of the tribunal.
The binding force of memorandum and articles – Section 10
1. Binding on members in their relation to the company
The members are bound to the company by the provisions in articles just as they had put their seals to them, and had thus contracted to confirm them. As the articles constitute a contract between the company and its members.
2. Binding on the company in its relation today members
Secondly, as the members are bound to the company, it’s also binding to the members to observe and follow the articles. Each member can say that there shall be no breach of articles and he is also entitled to an injunction to prevent the breach. The Section itself says that the memorundum and articles shall bind to the company.
3. But not binding in relation to outsiders
So the articles of the company are binding to the company and the members but not to the outsiders to give effect to the articles. As it has mentioned, “No article can constitute a contract between the company and a third person”. An outsider here means any person who is not a member of the company. But in some circumstances even a member can be an outsider, as mentioned in Section 10 it creates an obligation binding on the company in dealing with ‘members’, but this word means members in their capacity as members.
4. How far binding between members
Lastly, how far the articles are bound one member to another, as unfortunately the law yet not have made provision at this point. The Companies Act has not settled the rights of members inter se and it leaves these to be determined by the articles. There are rights and liabilities of members but it can be used against one and another member is not prescribed yet.
Alteration of articles Section-14
Section 14 gives power to every company to alter its articles and it cannot be negatived by contract. For ex. If a company has a clause that it would not introduce any changes in its original articles, then it will be invalid on the ground contrary to the statute.
The altered articles have the same power as the original articles. But it will not give the alteration a retrospective effect. When the transfer of shares first time presented was permissible in the companies articles but it was rejected because the stamps were not canceled, so before it could be presented again the articles got altered to exclude such transfers. The alteration was held to be effective against the transfer.
This power of alteration is almost absolute. It has only two restrictions, first, the alteration must not be in contravention of the provisions of the Act and it should not do some which are forbidden by the Act, and second is the power of alteration of articles is subject to the conditions contained in the memorundum of association.
Section-15 It says that every alteration of the memorundum or articles is to be noted on every respective document. Not following this will be punishable and the company and defaulting officer may have to pay 1000 rupees for every copy issued without noting the alteration.
Alteration in Breach of Contract: Sometimes alteration can bring a breach of contract with an outsider. For ex. In a Madras case, A clause in the articles of a company-provided rupees 250 per month as the remuneration of the company’s secretary. The plaintiff accepted the post upon those terms. Subsequently, the company modified the article and reduced the secretary’s pay to rupees 25 per month. As in this case, the alteration would naturally be operative because the articles are subject to the statutory power of alteration. Anyone accepting an appointment purely on the terms of the articles takes the risk of those terms being altered.
Constructive notice of memorundum and articles of association
The memorundum and articles of association of every company are registered with the Registrar of Companies. The Registrar office is the public office so memorundum and articles become the public document that is accessible to all. Therefore it is the duty of every person dealing with the company to inspect the public documents and make sure that his conduct is in conformity with their provisions.
Therefore, as explained above the various contents of the articles of association it is an utmost important document of the company and it plays a vital role in its formation and operations.
This Article is Authored by Magaonkar Revati Umashankar, 5th Year BSL Student at Dayanand College of Law.