Articles of Association

Introduction

Articles of Association is the second important document, which in the case of some companies, has to be registered along with the memorandum. As per sec 26, companies that must have articles are:

• 1) Unlimited companies;
• 2) Companies limited by guarantee;
• 3) Private companies are limited by shares.

This document contains rules, regulations, and bye-laws for the general administration of the company. Schedule I of the Act sets out tables of model forms of articles for different companies.

Contents

A of A may prescribe such regulations for the company as the subscribers to the memorandum deem expedient. The Act gives the subscribers a free hand. Any stipulations as to the relation between the company and its members or members inter se may be inserted in the articles. But everything stated therein is subject to the Companies Act. Usually, articles contain provisions relating to the following matters:

• 1) Share capital, rights of shareholders, share certificates, payment of a commission.
• 2) Lien on shares.
• 3) Call on shares.
• 4) Transfer of shares.
• 5) Transmission of shares.
• 6) Forfeiture of shares.
• 7) Conversion of shares into stock.
• 8) Share warrants.
• 9) Alteration of capital.
• 10)  General meetings and proceedings thereat.
• 11)  Voting rights of members, voting and poll, proxies.
• 12)  Directors, their appointment, remuneration, qualifications, powers, and proceedings of Board of Directors.
• 13)  Manager.
• 14)  Secretary.
• 15)  Dividends and reserves.
• 16)  Accounts, audit, and borrowing power.
• 17)  Capitalization of profits.
• 18)  Winding up.

Importance of Articles of Association

Under sec 36, the memorandum and the articles when registered shall bind the company and its members to the same extent as if it had been signed by them and had contained a covenant on their part that the memorandum and the articles shall be observed.

With respect to the above section, the importance of articles of association can be summed up as follows:

1) Binding on members in their relation to the company– the members are bound to the company by the provisions of the articles just as much as if they had all put their seals to them.

2) Binding on company in relation to its members– just as members are bound to the company, the company is bound to the members to observe and follow the articles.

3) Neither company, nor members bound to outsiders– articles bind the members to the company and company too the members but neither of them is bound to an outsider to give effect to the articles.

4) Binding between members inter se– the articles define the rights and liabilities of the members. As between members inter se the articles constitute a contract between them and are also binding on each member as against the other or others. Such a contract can be enforced only through the medium of the company.

Difference between articles and memorandum.

1) The memorandum contains the fundamental condition upon which alone the company is allowed to be incorporated. The articles are for the internal regulation and management of the company.

2) Memorandum defines the scope of the activities of the company or the area beyond which the actions of the company cannot go. Articles are the rules for carrying out the objects of the company as set out in the memorandum.

3) Memorandum being the character of the company, is the supreme document. Art is subordinate to the memorandum. If any conflict between them, the memorandum prevails.

4) Every company must have its own memorandum. A company limited by shares need not have articles of its own. In such a case, Table A applies.

5) An action of the company outside the scope of its memorandum is void and incapable of ratification. An act of the company outside the scope of its articles can be confirmed by the shareholders.

6) There are strict restrictions on its alteration. The change of name requires the prior permission of the central government and change of registered office to another state requires the prior approval of the Company Law Board. Articles can be altered by a special resolution, to any extent, provided they do not conflict with the memorandum and the Companies Act.

Alteration of articles (sec 31)

Section 31 empowers every company to alter its articles at any time with the authority of a special resolution of the company and filing copy with the Registrar. Since it is a statutory power a company will not be deprived of the power of alteration by a contract with anyone.

The power of alteration of articles conferred by sec 31 is almost absolute. It is subject only to two restrictions-

• a. It must not be in contravention with the provisions of the Act.
• b. It is subject to the conditions contained in the memorandum of association.

The proviso to sub-section (1) says that an alteration that has the effect of converting a public company into a private company would not have any effect unless it is approved by the Central Government.

Alteration against memorandum– in Hutton v. Scarborough Cliff Hotel Co, a resolution was passed in a general meeting of a company that altered the articles by inserting the power to issue preference shares that did not exist in the memorandum. It was held inoperative. However, after Andrews v. Gas Meter Co Ltd this view has been changed where a company was allowed by changing articles to issue preference shares when its memorandum was silent on the point. The power of alteration of art is subject only to what is clearly prohibited by the memorandum, expressly or impliedly.

Alteration in breach of contract– a company may change its articles even if the alteration would operate as a breach of contract. If the contract is wholly dependent on the articles, the company would not be liable for damages if it commits a breach by changing articles. But if the contract is independent of the articles, the co will be liable for damages if it commits a breach by changing articles. Thus in Southern Foundries Ltd v. Shirlaw, where a Managing Director was appointed for a term of ten years, but was removed earlier under the new articles on amalgamation with another company, the company was held liable for breach of contract.

Alteration as a fraud on minority shareholders– an alteration must not constitute a fraud on the minority. It should not be an attempt to deprive the company or its minority shareholders of something that in equity belongs to them.

Alteration increasing the liability of members­– no alteration can require a person to purchase more