Articles Of Association: The First Principles

Articles of Association serve as a guide to how the company will be run and help to ensure that it operates within the law. The AOA is a crucial document for every business since it outlines the guidelines for how the organisation will operate and serves to safeguard the interests of its shareholders. They assist in making sure the business complies with the law and defends the interests of its shareholders.

The AOA will typically include information on the company’s registered name, registered office, and the type of company it is (such as a limited company or a public limited company). Additionally, it will include information about the company's authorised share capital, the rights associated with various share classes, and the procedures for issuing new shares. The AOA will also detail the meeting, decision-making, and record-keeping processes as well as the duties and authority of the company's directors. Businesses that disregard the terms of their AOA risk legal repercussions and reputational harm.

The Articles of the association are company’s core regulations, equivalent to a partnership's "partnership deed". Memorandum of Association, termed as the main document and sets forth overall circumstances of company, is superseded and regulated by the Articles, however, the Articles may be used to clarify any inconsistencies in the Memorandum. However, the terms of the articles and memorandum of association cannot be in conflict with Company’s Act.

Introduction:

In accordance with section 2(5) of the Companies Act, 2013, "articles of association" are defined as "the articles of association of a company as initially formed or as subsequently amended or enforced in accordance with any prior legislation or this act."

According to Section 5 of the Company’s Act of 2013, the company's articles must include:

• Regulation for management of company.
• Matters which are prescribed under the rules.

Articles of Association as a contract-

Generally speaking, an article of association is a contract between the Company and its shareholders as the company has a distinct identity from its shareholders, thereby such a contract describes the roles and responsibilities of internal management and it is submitted to the registrar of companies as a part of the process of incorporation. It is a public document governed by Company’s act, 2013, registered at the company's registrar in which the parties to the contract have binding power for existing and new shareholders.

In Naresh Chandra Sanyal vs Calcutta Stock exchange association Ltd^[1], According to the Supreme Court, the articles of association also create a contract between the firm and its members as well as among its individual members. The rights and obligations typical to membership in the company are governed by this contract.

Relationship Between MOA and AOA:

Articles which is subsidiary to memorandum-

Memorandum includes the essential requirements upon which alone the company is permitted to be incorporated, while the articles are the operational rules of the company. As a result, articles are subordinate to the memorandum.

Memorandum and AOA must be read together but articles shall not be deemed to amend or control the terms of the memorandum.

As memorandum is a superior document which cannot be overridden by the articles of the company, and they must be read together to clarify the terms where the memorandum is silent.

The power of alteration of articles is subject to what is prohibited by the memorandum, expressly or impliedly-

Unless a company's memorandum does not stipulate that all shareholders are equal, it may change its articles by special resolution to provide for the issuance of preference shares.

Binding Effect of articles of association:

As per section 10 of the Company’s Act,2013 ^[2]after the registration of MOA and AOA, the document becomes a public document, thereby the members are bound to the company and the company is bound to its members. However, neither the corporation nor its members are obligated to third parties in regard to the articles. When it comes to rights and obligations emanating from the articles, the members are bound one to the other by the articles, but a member is not permitted to sue another member or members on his own behalf to enforce the articles.

The legal effect is discussed as follows: -

Members bound to company: The members are bound due to provisions in the memorandum and articles because they have been signed by each member. It constitutes a contract between each member of company and company.

In Borland’s Trustee v. Steel Brothers & Co. Ltd. ^[3]According to the articles, a member's shares would be sold to another party at a price set by the directors if he or she filed for bankruptcy. A member was declared insolvent. As a result of a member's bankruptcy, the trustee argued that he was not constrained by the articles and could sell the shares to anybody he wanted for the genuine market value. He was ruled to be subject to the articles.

Company bound to members: Members are obligated to abide by and follow the articles of incorporation in the same way that the company is obligated to the members. The firm is obligated to each individual member as well as to the members as a whole.

Articles not binding in relation to outsiders: The articles are not a legally binding contract between the company and any third parties. Therefore, despite what is stated in the articles, neither the firm nor its members may be compelled to comply with the articles by an outsider or a non-member. In any role other than that of a number, he is not permitted to use any right assigned to him by the articles against the company. The word "member" in this context refers to a member functioning in his official capacity.

In Major-general Shanta Shamsher Jung bahadur rana v. Kamani brothers (Pvt.) Ltd.^[4] The articles of a company provided that the board of directors could from time to time appoint one or more of them as managing directors. It was further provided that a managing director could be removed in the same way as other directors of the company, that is, by special resolution.

How far binding between members inter se: Generally speaking, the filing of the memorandum and articles with the company's registrar results in the creation of an express contract between the members and the company but not a contractual relationship between the members personally. This implies that a member cannot pursue legal action against another member for an action he took that was outside the rules. The business has the authority to initiate or enforce a course of action.

Relevant Case Law-

In Ashbury Railway Carriage Co. v. Riche^[5], Lord Cairms observed that “Articles are secondary to the memorandum. The articles go on to specify the obligations, the rights, and the powers of the governing body between themselves and the company as a whole, as well as the manner and the format in which the company's operations are carried out and the manner and the format in which the internal regulations of the company may periodically be modified. They recognise memorandum by way of the charter of company's formation.”

In the case of Hill Properties Ltd. v. Union Bank of India^[6], the issue related to the interpretation and enforcement of the articles of association of Hill Properties Ltd. Specifically, the National Company Law Appellate Tribunal (NCLAT) held that the bank was not entitled to enforce a pledge of shares created by Hill Properties Ltd. in favor of Union Bank of India because the bank had failed to comply with certain procedural requirements under the Companies Act and the company's articles of association. The decision emphasized the importance of complying with procedural requirements set out in the articles of association and the Companies Act when creating and enforcing pledges of shares.

Difference Between the two:

Basis	Memorandum of Association	Articles of Association
Meaning	MOA, serves as company's charter and outlines the basic requirements for incorporation.	The company's internal rules are outlined in the articles.
Subordinate	The Company’s Act is given precedence over memorandum.	Articles are subordinate to both company’s act and memorandum.
Ratification	Any act which is outside the scope of company is void from the beginning which can’t be ratified by the agreed consent of its members.	Anything done by a company in contravention of the AOA can only be called irregular and can only be confirmed by the shareholders.

Alteration of Articles:

The Companies Act of 2013 has the following provisions for changing articles:

Passing of Special Resolution- Section 14(1) stipulates that a company with its own discretion amend its articles by special resolution, in accordance with the requirements of Company’s Act of 2013 and the terms of memorandum.

Every corporation has the legal authority to change its articles by special resolution, and this power cannot be negatived by entering into a contract. As a result, the ability to amend the articles is granted by statute, and a business may contract itself out of this ability.

Power to amend must be bona fide- The authority to change the articles must be legitimately used for the company's benefit.

Alteration to transform a public company into a private company and vice versa- By following the due procedure of the law, the public company can convert into a private company by confirmation of a court of law whereas private company can convert into public company through amending the restrictions and limitations.

Alteration in breach of contract- A company can alter its articles, even If a contractual violation results from such a change is involved. But in such a case it could be held accountable for contract infringement by paying damages to other parties.

To conclude, it can be said that Articles of the company are the core document and are termed as a constitution of the company which regulates the internal matters of the company. Also, a company's articles of association are an important document, especially when it comes to corporate governance. The Articles essentially serve as the company's constitution along with the Memorandum of Association. It occupies a significant position inside the organisation and handles all crucial facets of management.

It establishes a legal contract between the Company and its Members, safeguarding their rights. The Articles of Association aid as a guide that outlines the rights and liabilities of the directors, how shareholders are managed, how audits are to be conducted, how winding up is to be accomplished, etc. Therefore, The Articles of association play a fundamental role in an organization.

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