ARTICLE OF ASSOCIATION
This article is in continuation with the previous article on Memorandum of Association.
ARTICLE OF ASSOCIATION :
SECTION 5
-
Articles
of the company shall contain the regulations for management of the company. It
is the internal bye-laws of the company.
-
It shall
not supersede the Act and memorandum of the company. The Articles of Association are subsidiary both
to the Companies Act and the Memorandum of Association.
-
The model
articles as prescribed in Schedule I are as follows:
·
Table
F: AOA of a company limited by
shares.
·
Table
G: AOA of a company limited by
guarantee and having a share capital.
·
Table
H: AOA of a company limited by
guarantee and not having share capital.
·
Table
I: AOA of an unlimited company and having a share
capital.
·
Table
J: AOA of an unlimited company
and not having a share capital.
-
The
company may adopt all or any of the regulations contained in the model article
as it is or add any additional matters in its article as may be considered
necessary for its management.
-
If the
company frames its own article, then the
respective model article still apply to the company upto the extent it is not
contradictory with the existing article, unless it is specifically excluded by
the AOA of the company.
-
The
provisions of the Section 5 do not apply to the articles of a company
registered under the previous law unless amended under this Act.
-
The articles may contain
provisions for entrenchment to the effect that specified provisions of the
articles may be altered only if conditions or procedures as that are more restrictive
than those applicable in the case of a special resolution, are met or complied
with.
-
The provisions for entrenchment
shall only be made either on formation of a company, or by an amendment in the
articles agreed to by all the members of the company in the case of a private
company and by a special resolution in the case of a public company.
-
Where the articles contain the
provisions for entrenchment, the company shall give notice to the Registrar of
such provisions in Form No.INC.2 or Form No.INC.7, as the case
may be, along with the fee as provided in the Companies (Registration
offices and fees) Rules, 2014 at the time of incorporation of the company
or in case of existing companies, the same shall be filed in Form No.MGT.14 within
thirty days from the date of entrenchment of the articles, as the case
may be, along with the fee as provided in the Companies (Registration
offices and fees) Rules, 2014.
ALTERATION OF ARTICLE OF
ASSOCIATION: SECTION 14
(1) Subject to the provisions of this Act and the conditions contained in
its memorandum, if any, a company may, by a special resolution, alter its
articles including alterations having the effect of conversion of—
(a) a private company into a public
company; or
(b) a public company into a private
company:
Provided that where
a company being a private company alters its articles in such a manner that
they no longer include the restrictions and limitations which are required to
be included in the articles of a private company under this Act, the company
shall, as from the date of such alteration, cease to be a private company:
Provided further that any
alteration having the effect of conversion of a public company into a private
company shall not take effect except with the approval of the Tribunal which
shall make such order as it may deem fit.
(2) Every alteration of the articles under this section and a copy of the
order of the Tribunal approving the alteration as per sub-section (1) shall be filed with the Registrar,
together with a printed copy of the altered articles, within a period of
fifteen days in such manner as may be prescribed [Form INC 27], who shall
register the same.
(3) Any alteration of the articles registered under sub-section (2) shall, subject to the provisions
of this Act, be valid as if it were originally in the articles.
*Rule 33
of Companies (Incorporation) Rules, 2014
Alteration
of articles
1. For effecting the conversion of a private
company into a public company or vice versa, the application shall be filed in Form
No. INC.27 with fee.
2. A copy of order of the competent authority
approving the alteration, shall be filed with the Registrar in Form No.
INC.27 with fee together with the printed copy of the altered articles
within fifteen days of the receipt of the order from the Central Government.
Explanation.- For the purposes of this sub-rule, the term
“competent authority” means, the Central Government.
Note:- As per Section 8(4)(i) of the Companies Act, 2013 a company registered under
section 8 i.e. companies with charitable objects shall not alter the provisions
of its memorandum or articles except with the previous approval of the Central Government
(now power is delegated to ROC).
However, in
spite of the power to alter its articles, a company can exercise this power
subject only to certain limitations. These are:
1. The alteration 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 must not be
inconsistent with any provisions of the Companies Act or any other statute.
3. Altered AOA must not contain anything
illegal or against public policy.
4. The alteration must be bona
fide for the benefit of the company as a whole.
5. An alteration to the articles
must not discriminate between the majority shareholders and the minority
shareholders so as to give the former an advantage over the latter. [All
India Railway Mens Benefit Fund v. Jamadar Baheshwarnath Bali]
6. By effecting alteration in
its articles, a company cannot defeat escape from its contractual obligation with
any person. The company will always be liable in such a case.
7. Alteration of the article
cannot have retrospective effect.
LEGAL EFFECT OF THE
MEMORANDUM AND ARTICLES
The memorandum and articles,
when registered, bind the company and its members to the same extent as if they
have been signed by the company and by each member to observe and be bound by
all the provisions of the memorandum and of the articles. Also, all monies
payable by any member to the company under the memorandum or articles shall be
a debt due from him to the company (Section 10).
The contractual relationship
between different stakeholders are as follows:
(a) Company and Members
Members are bound to the company
and also bound to follow AOA. They have to pay the calls demanded by the
company for their partly paid shareholding.
Company is not wholly bound to
its members, hence they can enforce any article against it. Members can take
injection order against the company, if the board of directors acts in
contravention of AOA. Members can sue company if there is any contravention or
their rights likely to get affected.
(b) Members per se
Right exists but through the
company. No personal right or obligation per se. The rights of members inter se are regulated
they cannot sue others directly for the action of the company as it is the
outside scope of AOA and MOA.
(c) Company and Outsiders
The term “outsider” signifies a
person who is not a member of the company even if he is a director of or
solicitor to the company.
As between outsiders and the
company, neither the memorandum nor the articles would give any contractual rights
to outsiders against the company or its members even though the names of
outsiders are mentioned in those documents in connection with the arrangements
that the company might have contemplated for carrying on its business. The
articles do not confer any contractual rights even upon a member in a capacity other
than that of a member. To succeed, the party suing must prove a contract outside
and independent of the articles [Eley v. Positive Life Insurance Co.]
The question sometimes arises as
to whether directors are bound by whatever is contained in the articles. In case
the directors contravene the provisions in the articles, the directors render
themselves liable for an action by members. On the other hand, members can also
ratify acts of directors. If any loss is incurred by the company, directors are
liable to reimburse to the company any loss so incurred.
DOCTRINE OF CONSTRUCTIVE NOTICE
-
Constructive
notice means notice to the world at large .
-
When the
company get registered, its AOA and MOA becomes public document and be
inspected by any person by paying nominal fee (Rs.100). So, the MOA and AOA
become notice to the world at large.
-
Therefore
any person entering into a contract is presumed to have read and understand the
AOA and MOA of the company before signing the contract.
-
As per
Doctrine of Constructive Notice, the company and its directors have right to
presume that everybody entering into contract with the company has read and
understood MOA and AOA before signing any contract with the company.
-
AOA of
company provided that the company can borrow the money on bond signed by any of
its two directors but the company has borrowed the money on the bond signed by
only one director. Later on the company made default in payment of the borrowed
amount. The court held that the bond is void and the company is not liable to
pay. [Griffith v. Paget]
DOCTRINE
OF INDOOR MANAGEMENT
-
Doctrine
of Indoor Management has the effect of diluting the harsh effect of Doctrine of
Constructive Notice against the outsiders.
-
As per
this doctrine, outsider have right to presume that the company or its board of
directors has followed all the requirements of its MOA and AOA i.e. company has
fulfilled all the requirements of its AOA and MOA internally and has not
contravened the provisions of the same.
-
Once the
outsider read and understood the MOA and AOA, they shall not be effected by the
irregularities inside the door of the company by its board of directors or
members.
-
In Royal
British Bank v. Turquand, the directors of a banking company were
authorised by the articles to borrow on bonds such sums of money as should from
time to time, by resolution of the company in
general meeting, be authorised to borrow. The directors gave a bond to
Turquand without the authority of any such resolution. It was held that Turquand
could sue the company on the strength of the bond, as he was entitled to
assume that the necessary resolution had been passed. Lord Hatherly observed
: “Outsiders are bound to know the external position of the company, but
are not bound to know its indoor management”.
Exception to
doctrine of Indoor Management
-
The person
dealing has the knowledge of the irregularities inside the company, then this
doctrine will not apply.
-
The rule
cannot be invoked in favour of a person who did not consult the memorandum and
articles.
-
The rule
of indoor management does not extend to transactions involving forgery or to transactions
which are otherwise void ab initio.
-
The rule
cannot be invoked against the company if any officer of the company has acted
beyond their power and cheated the outsider by a forged document.
DOCTRINE
OF ALTER EGO
It is used by
the courts to 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.
In Lennards
Carying Co. Ltd. v. Asiatic Petroleum Co. Ltd. [1915] AC 705, Viscount
Haldane propounded the “alter ego” theory and distinguished it from vicarious
liability. The House of Lords stated that the default of the managing director
who is the “directing mind and will” of the company, would be attributed to him
and he be held for the wrong doing of the company.
DIFFERENCE
BETWEEN MEMORANDUM AND ARTICLE OF ASSOCIATION OF A COMPANY
Following are
the difference between the memorandum and the article of association:
|
Memorandum of Association
|
Article of Association
|
|
1. MOA is the charter
of the company and defines the fundamental objects for which company is being
incorporated.
|
1. AOA contains the
rules and regulation framed to govern internal management of the company.
|
|
2. Memorandum cannot
be easily altered and require to follow detailed procedure prescribed.
|
2. Article can be
altered by passing special resolution.
|
|
3. MOA cannot contain
provision ultra vires to the Companies Act.
|
3. AOA cannot contain
the provisions ultra vires to the Act and MOA.
|
|
4. MOA defines relation
between the company and the outsiders.
|
4. AOA regulate the
relationship between the company and its members and between the members
inter se.
|
|
5. Acts done by a
company beyond the scope of MOA are void and ultra vires and cannot be
ratified.
|
5. Acts done by the
director beyond the scope of AOA can be ratified by the shareholders.
|
Note: If you need any clarification or have query then, do write to us at csprincekumar@gmail.com or chat with the team by visiting the our webpage: www.csprincekumar.com.