The Articles of Association (AoA) is a document that describes the resolve of a company and lays down the guidelines for its procedures. The document summaries the tasks which are to be carried out within an association, including the groundwork and organisation of fiscal records, and the development of executive engagements.
Distinction between Memorandum of Association and Articles of Association
As per Section 2(56) of the Companies Act, 2013 a ‘memorandum‘ denotes to the original memorandum of association that a company registered or an altered one that follows the rules laid down in the Companies Act. Let us further look into the memorandum of association contents.
As per Section 2(5) of the Companies Act, 2013 an “article” denotes the original article of association of a company or a version that has been altered so as to comply with the laws stipulated in the Act.
- The main difference between MOA and AOA while the MOA (Memorandum of Association) defines the authorities and matters of the company, the AOA (Article of Association) defines its rubrics.
- The MOA is subsidiary to the Companies Act, and the AOA (Articles of Association) is subsidiary to the memorandum.
- The memorandum cannot be amended with hindsight while an AOA (Article of Association) may be rehabilitated.
- The main difference between memorandum of association and article of association is that the memorandum includes six clauses while an article may be conscripted as per the company’s necessity.
- The MOA is obligatory for all companies while a public share company can use Table A in place of an AOA (Article of Association).
- A modification may be made in an MOA only after passing Special Resolution in Annual General Meeting after procurement of preceding sanction from the Central Government while variations in an AOA may be made by passing Special Resolution (SR) at Annual General Meeting (AGM).
How does the Article of Association bound members of the company?
This provision comes under the legal effects of Article of Association, where in “The article generates a bond which quandaries the members as well as the company. Each member is certain to the company and they have to follow the articles as well as the memorandum. The members are correspondingly bound by the articles made initially as well as those rehabilitated over a period of time as held in the case of Malleson v. National Insurance Co.
What is Privity of Contract?
The doctrine of privity of contract is a common law principle which delivers that a contract cannot confer rights or impose obligations upon any person who is not a party to the contract. The premise is that only parties to contracts should be able to sue to enforce their rights or claim damages as such. The rule of privity is fundamentally built around the ‘interest theory’ which infers that the only person having an interest in the contract is entitled as per law to protect his rights.
Can a third party sue based on Articles of Association?
As mentioned in the Mothey Krishna Rao vs Grandhi Anjaneyulu and Ors. on 29 October, 1952 “There, is a long catena of English decisions, which have unhesitatingly laid down that not only a third party, but even a shareholder cannot sue the company on anything contained in the Articles, treating the Articles as a contract by the company with him, and that it is incumbent on the party suing to make cut a contract outside and independently of the articles.”
Doctrine of Indoor Management
The doctrine of indoor management, also known as Turquand rule is a 150-year old concept, which guards the strangers in contradiction of the activities done by the company. Any person who enters into a contract with the company shall ensure that the transaction is authorised by the articles and memorandum of the company. There is no obligation to look into the interior indiscretions, and in case of any indiscretions, the company shall be held liable since the person has acted on the grounds of good faith.
Exceptions to the rule
The rule of doctrine of indoor management is though subject to certain exclusions. Basically, respite on the ground of ‘indoor management’ can’t be demanded by a stranger allocating with the company in the following circumstances:
- Where the outsider has knowledge of Irregularity
- Suspicion of Irregularity
- Representation through Articles
- Acts outside apparent authority
Apparent authority is the control of a mediator to act on the behalf of a chief, even though not specifically or impliedly decided. This control ascends only if a third party sensibly concludes, from the chief’s demeanour, that the chief granted such control to the mediator. The idea of apparent authority defends third parties who would then experience losses if the mediator’s signature did not bind the chief after sensible spectators thought that it would. Typically, if a mediator has apparent authority, the mediator’s chief will be held liable for the actions of the mediator which are within the scope of the apparent authority.
Alteration of Articles
Sec. 31 of the Companies Act, 1956, provides that a company may by passing a special resolution, alter regulations contained in its Articles any time subject to
- the provisions of the Companies Act and
- Conditions contained in the Memorandum of Association.
A copy of every special resolution altering the Articles shall be filed in Form no 23, with the Registrar within 30 days of its passing and attached to every copy of the Articles issued thereafter. The fundamental right of a company to alter its articles is subject to the following limitations:
- The alteration must not exceed the powers given by the Memorandum of Association of the company or conflict with the provisions thereof.
- It must not be inconsistent with any provisions of Companies Act or any other statute.
- It must not be illegal or against public policies
- The alteration must be bona fide for the benefit of the company as a whole.
- It should not be a fraud on a minority, or inflict hardship on a minority without any corresponding benefits to the company as a whole.
- The alternation must not be inconsistent with an order of the court. Any subsequent alteration thereof which is inconsistent with such an order can be made by the company only with the leave of the court.
- The alteration cannot have retrospective effect. It can operate only from the date of amendment.
- If a public company is converted into a private company, then the approval of the Central Government is necessary. Printed copies of altered articles should be filed with the Registrar within one month of the date of Central Government’s approval.
- An alteration that has the effect of increasing the liability of a member to contribute to the company is not binding on a present member unless he has agreed thereto in writing.
- A reserve liability once created cannot be undone but may be cancelled on a reduction of capital.
- An assumption by the Board of Directors of a company of any power to expel a member by amending its Articles is illegal or void.
Procedures for Alteration of Articles of Association
For effecting alteration to the articles of association, the following procedures is required to be followed-
1. Take the necessary decision by convening a Board Meeting to change all or any of the existing Articles of Association and fix up the day, time, place and agenda for a general meeting for passing a special resolution to effect the change.
2. See that any such change in the Articles of the company conforms to the provisions of the companies Act, 1956 and the conditions contained in the Memorandum of Association of the company.
3. See that any such change does not increase the liability of any member who has become so before the alteration to contribute to the share capital of or otherwise to pay money to, the company.
4. See that any such change does not have the effect of converting a public company into a private company. If such is the case, then make an application to the Central Government for such alteration.
5. See that any such change does not provide for expulsion of a member by the company.
6. Issue notices for the General Meeting proposing the Special resolution and explaining inter alia, in the explanatory Statement the implication and reasons of the changes being proposed.
7. If the shares of the company are enlisted with any recognised Stock Exchange, then forward copies of all notices sent to the shareholders with respect to change in the Articles of Association to the Stock Exchange.
8. Hold the General Meeting and pass the special resolution.
9. File with the stock exchange with which your company is enlisted six copies of such amendments as soon as the company adopts it in General Meeting. Out of the six copies, one copy must be a certified true copy.
10. Forward promptly to the Stock Exchange with which your company is enlisted three copies of the notice and a copy of the proceedings of the General Meeting.
11. File the Special resolution with the concerned Registrar of companies with an explanatory statement in Form No. 23 within thirty days of its passing after payment of the requisite filing fee in cash as per Schedule X. If the Articles of Association have been completely or substantially changed, file a new printed copy of the Articles after paying the requisite fee in cash prescribed under Schedule X to the Companies Act, 1956. Payments up to Rs. 50/-
12. Effect the changes in all copies of the articles of association.
13. Any alteration so made be as valid as if originally contained in the Articles of Association and be subject to alteration by Special Resolution as above.
14. If the articles are altered pursuant to an order of the Company law Board made under section 397 or 398 then see that such alterations is not inconsistent with the said and if it is so then obtain first leave of the Company Law Board to make such alteration.