Article of Association or Articles is rules, regulation, and bye-laws for internal management of the company. Articles refers to a document that defines the purpose of the company. The Articles of a company are often compared to a rule book of the company’s working, which regulates the management and powers of the company and its officers. Articles prescribe several details of the company’s inner working.
Further, the Articles also establish a contract among the members and between the members and the company. The said contract governs the ordinary rights and obligations that are incidental to having membership in the company.
However, the articles of association are subordinate to the Memorandum of Association of a company, which establishes the fundamental objective of the company and is the fundamental constitutional document of the company. Further, as laid down in (Shyam Chand v. Calcutta Stock ExchangeAIR 1949 Cal 337) any and all articles that go beyond the memorandum of association will be deemed ultra-vires. Therefore, there should not be any provisions in the articles that go beyond the memorandum. If a conflict arises between the memorandum and the articles, the provisions in the memorandum prevail. If there is any uncertainty in the content of memorandum then it may be read with the articles.
Essentials of Articles of Association (Section 5 of Companies Act, 2013)
The Articles contain the regulation of management of the company deals with the essential elements that shall be present in the Articles of Association. This section doesn’t prevent a company to include any additional matters which are necessary for the company’s management.
The signing of the Articles of Association
The Companies (Incorporation) Rules, 2014 prescribes that both the Articles and MoA of a company are to be signed in a specific manner.
• Both are to be signed by all subscribers, who are further required to add their names, addresses, and occupation, in the presence of at least one witness, who shall attest the signatures with his own signature and details.
• Where a subscriber is illiterate, he must affix a thumb impression in place of his signature and shall appoint a person to authenticate the impression with his signature and details.
• Where a subscriber is a body corporate to be signed by any director of the body corporate who is duly authorized to sign on behalf of the body corporate.
• Where the subscriber is a Limited Liability Partnership, the partner of the LLP who is duly authorized to sign on the behalf of the LLP by a resolution of all the partners shall affix his signature.
Provisions for Entrenchment
The concept of Entrenchment (Section 5(3) of Company Act, 2013) implies that certain provisions within the Articles of Association will not be alterable by merely passing a special resolution, and will require a much lengthier and elaborate process. The literal meaning of the word “entrench” means to establish an attitude, habit, or belief so firmly that bringing about a change is unlikely. Thus, an entrenchment clause included in the Articles makes certain changes or amendments either impossible or difficult to change.
Provisions for entrenchment can either be introduced in the articles of a company during its incorporation, or an amendment can be made by bringing a special resolution in case of a public company, and an agreement between all the members in case of a private company.
A public company into a private company
For a company to convert itself from public to a private company simply passing a special resolution is not enough. The company has to acquire the consent and approval of the Tribunal. Further, it has to file a copy of the special resolution with the Registrar of Companies within 30 days of passing it. Further, a company has to file a copy of the altered, new articles of association, as well as the approval order of the Tribunal with the Registrar of Companies within 15 days of the order being received.
A private company into a public company
For a company to convert from its private status to public, it may do so by removing/omitting clauses as per section 2(68) which define the requisites of a private company. Similarly, as for the conversion of the public to a private company, a copy of the resolution and the altered articles is to be filed with the Registrar within the specified period of time.
Binding effect of Memorandum and Articles of Association
After the Articles and the MoA of a company are registered, they bind the company and its members to the same extent as if they had been signed by each of the members. However, while the company’s articles have a binding effect, it does not have a force as a statute does.
The doctrine of Constructive Notice
When the MoA and Articles of a Company, are registered with the Registrar of Companies they become “public documents” (Section 399 of Company Act, 2013). A member of the public may request a specific company, and the company, in turn, must, within seven days send that person a copy of the memorandum, the articles, and all agreements and resolutions. (Section 117(1) of Company Act, 2013)
It is the duty of every person that deals with the company to inspect the public documents and ensure in his capacity that the workings of the company are in conformity with the documents. The memorandum and articles are deemed as notices to the public, hence they are considered as constructive notice.
The doctrine of Indoor Management
The concept of the Doctrine of Indoor Management have been elaborately explained by examining in the case of Royal British Bank v. Turquand ((1856) 6 E&B 327) which first laid down this doctrine. Hence, the doctrine of Indoor Management can also be called as Turquand Rule.
The directors of a company are authorized in its articles to engage in the borrowing of bonds from time to time, bypassing a resolution in a general meeting. However, the directors gave away a bond to someone without such a resolution being passed, and hence the question arose whether the company was still liable with respect to the bond. The company was held liable, and that a person receiving the bond was entitled to assume that the resolution had been passed, and hence had accepted those bonds were in good faith.
However, the judgment of the above case, was not fully accepted into law until it was accepted and endorsed by the House of Lords in the case of Mahony v East Holyford Mining Co. (Mahony v East Holyford Mining Co(1857) LR 7 HL 869)
The primary role of the doctrine of indoor management is completely opposed to that as discussed under constructive notice. While constructive notice protects the company from an outsider, indoor management protects outsiders from the company.
This doctrine of Indoor Management been adopted into Indian Law. (Official Liquidator, Manabe& Co. Pvt. Ltd. v. Commissioner of Police)
There are a few exceptions to the Doctrine of Indoor Management
1. Where the outsider had knowledge of the irregularity (Howard v. Patent Ivory Co.38 Ch. D 156)
2. Lack of knowledge of the articles (Rama Corporation v. Proved Tin & General InvestmentCo. (1952) 1All. ER 554)
3. Negligence (Al Underwood v. Bank of Liverpool.(1924) 1 KB 775)
4. Forgery (Ruben v. Great Fingal Consolidated(1906) AC 439)
5. Where there was third agency is involved or inexistent
Hence, it can be stated that the Articles of the company is a crucial document. The Articles and memorandum of the company together constitute the company’s core constitution and rule book. That defined the responsibility of the directors and the kind of business it can undertake. Further, it elaborates on the control and extent of power granted to the stakeholders. On one hand, the memorandum lays down the objective of the company the articles specify the rules by which these objectives are meant to be achieved.
“The views of the authors are personal“
Frequently Asked Questions
What happens when Article of Association and Memorandum conflict?
The Memorandum is the constitution of the company. The Articles are subordinate yo the MoA which is dominate and fundamental of the company. Where MoA is a document that contains all the fundamental information the Articles contain all the rules and regulation that governs the company.
How can one obtain a Company’s Articles?
The Articles are a public document and can be accessed by the public from either Ministry of Corporate Affairs website or can be obtained from several private portals.
What is the difference between the doctrine of Constructive Notice and Doctrine of Indoor Management?
Where Constructive Notice seeks to protect the company from outsiders Doctrine of Indoor Management protects outsiders from the company.
Is there a binding effect of Articles?
After the Memorandum and articles are registered the members and the company are bind together.. However this effect does not have much force in comparison of statute. The effect of binding is seen as company is bound to its members; members are bound to the company; and between members of the company.