The Scope and Purpose of Article of Association


An Article of Association is like a user manual for a company that regulates the day-to-day activities of a company. It defines how to accomplish any tasks in an organisation. These are the articles which regulate the internal affairs and functioning of the company. They also contain some by- laws like how to handle financial records, appointment of directors, power of auditors, forfeiture of shares, etc.

What is Article of Association?

Articles of association establishes a contract between the company and its members which governs the rights and obligations that are incidental to the membership of the company. It is important to note that the Articles of Association is subservient to the Memorandum of Association of a company which is more dominant and a fundamental document of a company.

In Shyam Chand v. Calcutta Stock Exchange, it was held that all articles shall be deemed to be ultra-vires which go beyond the Memorandum of Association. In case of any conflict between the Memorandum of Association and Articles of Association, the former shall prevail. Activities done beyond the Article of Association can be ratified by the shareholders if they are within the parameters of Memorandum of Association, the articles of an organisation can be altered easily through a special resolution.

According to Section 2(5) of The Companies Act, 2013- Article of Association has been defined as “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.

Objectives of the Articles of Association

Section 5 of the Companies Act, 2013 stipulates Articles of Association-

  • It shall consist of regulations for management of the company, any additional matters or articles can be added in the article of association from time to time that is necessary for the company’s management.

  • Specified provisions of the Articles of Association can be altered only if the conditions that are more restrictive than those to be met or complied in the passing of special resolution. This is for the purpose of entrenchment provisions where certain provisions are not alterable merely by passing a special resolution and a more elaborative procedure is required.

  • The provisions for entrenchment shall be made either on the formation of the company or through amending the articles agreed by all the members (private company) and by special resolution (public company).

  • When articles contain provisions for entrenchment, the registrar shall be notified in the prescribed manner and form.

  • The articles of the company shall be in respective forms specified in Tables F, G, H, I, J and schedule I as applicable.

  • All or any of the regulations can be adopted by the Company for regulation as applicable.

The Signing of the Articles of Association

The Companies (Incorporation) Rules, 2014 stipulates that the Articles of a company are to be signed in a specific manner-

  • Articles of Association is required to be signed by all the members, all the members must attest their signatures and details like name, address, etc in the presence of one witness.

  • Where a subscriber to such Articles is illiterate, he can affix his thumb impression and can also appoint a person. For his understanding, the appointed person can read out loud or can make him understand the contents of the document.

  • Where a subscriber is a company, the articles is required to be signed by the director of the company who has the authority on behalf of the company to sign on the document, by a resolution of the board of directors of the company.

  • Where the subscriber is a Limited Liability Partnership, the partner of the LLP is responsible for signing the articles of association on behalf of the LLP by a resolution in which all the partners shall sign.

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 might change its bylaws so that it would turn-

A Public Company into a Private Company

Simply adopting 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 after 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 altered, new articles of association together with the Tribunal's approval decision/order to the Registrar of Companies within 15 days of receiving it.

A Private Company into a Public Company

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 clauses. A copy of the resolution and the modified articles must be submitted with the Registrar within the allotted timeframe, just like when a public company becomes a private one.

Limitations on Power to Alter Articles

  • Since Articles of Association is subservient to the Memorandum of Association any sort of alterations made in the article shall not contravene the memorandum. In case of any conflict memorandum shall prevail. The alterations cannot contravene the provisions of the Companies Act also since it supersedes both- the articles and memorandum of association.

  • The Articles cannot contravene the orders, alterations or suggestions made by the tribunal.

  • The alterations must not be opposed to the public policy and must be for the benefit of the company.

  • A body corporate cannot alter its articles, to expel a member from the board of directors, it is against company’s jurisprudence.

Conclusion

When a corporation is founded, certain rules and regulations are established, as well as the firm's aims and purpose. These laws govern a company's internal operations. There are two main sets of documents that establish these aims and control the company's and its directors' or internal affairs' operation. Articles of Association (AOA) and Memorandum of Association (MOA) are the names of these documents.

Frequently Asked Questions

What are Articles of Association?

Articles of Association are a legal document that outlines the internal rules, regulations, and procedures for governing a company's operations and management. They are one of the key documents required for the incorporation of a company.

What is the purpose of Articles of Association?

The purpose of Articles of Association is to define the rights, responsibilities, and powers of the company's directors, shareholders, and officers. They help establish the framework for how the company will be run and how important decisions will be made.

Are Articles of Association mandatory for all companies?

Yes, Articles of Association are mandatory for all companies. They must be submitted during the company incorporation process and are a legal requirement in most jurisdictions.

Can the Articles of Association be changed after incorporation?

Yes, the Articles of Association can be changed after incorporation. However, any changes must follow the procedures outlined in the existing articles and often require approval from the shareholders through a special resolution.

What are some common components of Articles of Association?

Common components of Articles of Association include information about the company's share capital, shareholder rights, directors' powers and responsibilities, procedures for holding meetings, voting methods, dividend distribution, and winding up of the company.

How do Articles of Association differ from Memorandum of Association?

The Memorandum of Association outlines the company's external activities and objectives, while the Articles of Association focus on the internal governance and operational aspects. The Memorandum defines the company's scope and purpose, while the Articles provide guidelines for its day-to-day functioning.

Updated on: 13-Oct-2023

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