Article of Association-CS Executive best online class

Article of Association

Articles of Association

Articles of Association can be defined as rules book of company. AOA define

  • the duties, rights and powers of the governing body of the company and
  • the mode and form in which business of the company is to be carried on, and
  • the mode and form in which changes in the internal regulations of the company may be done from time to time.

AOA are subordinate to MOA
AOA works as subordinate to MOA means the provisions of AOA cannot override provisions of MOA. Any clause in the Articles going beyond the provisions of memorandum will be ultra vires. It should be noted that if there be any ambiguity in the memorandum, the articles may be used to explain it (but not so as to extend the objects).

AOA are subordinate to Company Laws
According to Section 6 of Companies Act, 2013, MOA & AOA are subordinate to Companies Act. It means the provisions of MOA/AOA cannot override provisions of Companies Act. Any clause in the MOA/AOA going beyond the provisions of Companies Act will be ultra vires.

Registration of Articles

According Section 7 of Companies Act, 2013 and Companies (Incorporation) Rules, 2014, every company shall, at the time of incorporation, register its AOA & MOA with ROC.

Can a company (Director/s) expel any member by making provisions in AOA?

As discussed above, according to Section 6 of Companies Act, 2013, any provision of AOA cannot override provisions of Companies Act. Expelling any member from company is opposed to the fundamental principles of the company’s jurisprudence (power) and is ultra vires of the company. Therefore AOA of any company shall not have any provisions otherwise they shall be considered as void and null ab initio.

But a stock exchange company may have such provision in its AOA. This is because stock exchange companies are regulated by Securities Contracts Regulations Act, 1956 & SEBI Act, 1992 (along with company laws).

Alteration of Articles of Association

A company has a statutory right to alter its articles of association. But the power to alter is subject to the provisions of the Act and to the conditions contained in the memorandum.

According to Section 14(1), a company may, by a special resolution alter its AOA.

Registration of Alteration
According to Section 14(2) read with rule 33 of Companies (Incorporation) Rules, 2014, every alteration of the articles shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of fifteen (15) days in Form No. INC 27 with fee, who shall register the same.

Effect of Alteration of Articles of Association
According to Section 14(3), any alteration of the articles registered with ROC shall, subject to the provisions of this Act, be valid as if it were originally in the articles.

Points to Note

  1. The alteration of AOA must not exceed the powers given by the memorandum. In the event of conflict between the memorandum and the articles, it is the memorandum that will prevail.
  2. The alteration of AOA must not be inconsistent with any provisions of the Companies Act or any other statute.
  3. Articles may impose on the company conditions stricter than those provided under the law;
  4. The Articles must not include anything which is illegal or opposed to public policy.
  5. The alteration must be bona fide for the benefit of the company as a whole.
  6. The alteration must not constitute a fraud on the minority by a majority. If the alteration is not for the benefit of the company as a whole, but for majority of shareholders, then the alteration would be bad.
  7. Articles cannot be altered so as to compel an existing member to take or subscribe for more shares or in any way increase his liability to contribute to the share capital, unless he gives his consent in writing (Section 38).
  8. By effecting alteration in its articles, a company cannot defeat escape from its contractual obligation with any person.
  9. The Articles of Association cannot be altered so as to have retrospective effects.
  10. The alteration must not be inconsistent with an order of the Court under Sections 397 or 398 and 404 of the Companies Act, 1956.
  11. Section 8 Company cannot alter Article except with the approval of Central Government.

Alterations of MOA or AOA to be noted in every copy (Section 15)

Every alteration made in the memorandum or articles of a company shall be noted in every copy of the memorandum or articles, as the case may be.

In case of default, the company and every officer who is in default shall be liable to a penalty of one thousand rupees for every copy of the memorandum or articles issued without such alteration.

Copies of memorandum, articles, etc., to be given to members (Section 17)

A company shall, on being so requested by a member, send to him within seven days of the request and subject to the payment of such fees as may be prescribed [in Companies (Registration offices and fees) Rules, 2014), a copy of each of the following documents, namely:—

  • the memorandum;
  • the articles; and
  • every agreement and every resolution referred to in sub-section (1) of section 117, if and in so far as they have not been embodied in the memorandum or articles.

If a company makes any default in complying with the provisions of this section, the company and every officer of the company who is in default shall be liable for each default, to a penalty of

  • one thousand rupees for each day during which such default continues or
  • one lakh rupees,

whichever is less.

Distinction between Memorandum and Articles

Memorandum of association Articles of association
MOA is the charter of the company and defines the fundamental conditions and objects for which the company is granted incorporation. AOA are the rules and regulations framed to govern this internal management of the company.
Clauses of the MOA can only be altered in accordance with the mode prescribed by the Companies Act. In some of the cases, alteration requires the permission of the Company Law Board or the Court. In the case of AOA, members have a right to alter the articles by a special resolution. Generally there is no need to obtain the permission of the Court or the Company Law Board for alteration of the articles.
MOA cannot include any clause contrary to the provisions of the Companies Act (Section 16) AOA cannot include any clause contrary to the provisions of the Companies Act as well as MOA
MOA generally defines the relation between the company and the outsiders AOA regulate the relationship between the company and its members and between the members inter se
Acts done by a company beyond the scope of the memorandum are absolutely void and ultra vires and cannot be ratified even by unanimous vote of all the shareholders. Acts of the directors beyond AOA can be ratified by the shareholders if such act is within the scope of MOA.

Doctrine of Constructive Notice of Memorandum and Articles

The memorandum and articles, when registered with ROC, become public documents and can be inspected by anyone on payment of nominal fee. Therefore it is deemed that every person dealing with the company is having a constructive notice (knowledge) of the contents of its memorandum and articles.

Consequently, if a person enters into a contract which is beyond the powers of the company, as defined in the memorandum, or outside the limits set on the authority of the directors in AOA, he cannot, as a general rule, acquire any rights under the contract against the company.

This is known as doctrine of constructive notice. Thus doctrine of constructive notice saves the company from an outsider from an act which is Ultra Vires the company.

Doctrine of Indoor Management (also known by the case Royal British Bank v. Turquand)

According to this doctrine, persons dealing with a company having satisfied themselves that the proposed transaction is not in its nature inconsistent with the memorandum and articles, are not bound to inquire the regularity of any internal proceedings. In other words, while persons contracting with a company are presumed to know the provisions of the contents of the memorandum and articles, they are entitled to assume that the provisions of the articles have been observed by the officers of the company. It is no part of the duty of an outsider to see that the company carries out its own internal regulations. Thus doctrine of indoor management saves the outsiders from company from an act which is Ultra Vires the company.

Exceptions to the Doctrine of Indoor Management

  1. Where the outsider had knowledge of irregularity
    A person knowing well that directors do not have the authority to make certain transaction but still enters into it, cannot seek protection under the rule of indoor management
  1. No knowledge of memorandum and articles
    A person who did not consult the memorandum and articles and thus did not rely on them cannot seek protection under the rule of indoor management.
  1. Forgery
    The rule of indoor management does not extend to transactions involving forgery or to transactions which are otherwise void or illegal ab initio. In the case of forgery it is not that there is absence of free consent but there is no consent at all. The person whose signatures have been forged is not even aware of the transaction, and the question of his consent being free or otherwise does not arise.
  1. Negligence
    Where an officer of a company does something which shall not ordinarily be within his powers, the person dealing with him must make proper enquiries and satisfy himself as to the officer‘s authority. If he fails to make an enquiry, he cannot seek protection under the rule of indoor management.
  1. In case an act is Ultra Vires the company.

DOCTRINE OF ALTER EGO

According to this doctrine, courts may ignore the status of shareholders, officers, and directors of a company in reference to their liability in their respective capacity so that they may be held personally liable for their actions when they have acted fraudulently or unjustly.

Thus a MD who is the directing mind and will of the company, would be held for the wrong doing of the company.

Doctrine of Alter Ego is the limitation of Corporate Personality of Company.

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