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ARTICLES OF ASSOCIATION

ARTICLES OF ASSOCIATION

 



WHAT IS ARTICLES OF ASSOCIATION?

Section 2(5) of the Companies Act, 2013 defines the “Article of Association.”AOA contains all the rules and regulations that govern the company policy. According to the Companies Act, 2013, every company must have its own AOA.

The Articles of Association (AOA) of the institution is a secondary document, which defines the rules and regulations framed by the company for its administration and management of the day. In addition, the article contains the rights, responsibilities, powers and duties of the members and directors of the company. It also includes information about the company's accounts and audits.

Each company maintains its own separate article and it is also necessary. However, a public company limited by shares may adopt Table A instead of Articles. It contains all the necessary details about internal affairs and management of the company. It is designed for individuals inside the company, ie members, employees, directors, etc. The company is governed according to the rules laid down in it. Companies can frame their articles of association according to their requirement and choice.

It is a document that makes the company's constitution, its purpose and its functioning. It also mentions how directors will be appointed, how financial records will be handled, how stock shares will be issued, dividend will be given. It also contains information on the methods of auditing financial records and voting rights. These rules can be considered as the user manual of the company. It also has a methodology for everyday activities of the company.

 

ARE THESE ARTICLES REGISTERED?

Yes They have to be registered with the Registrar of Companies of the state where the company has its registered office.

 

 

WHAT IS THE IMPORTANCE OF ARTICLES OF ASSOCIATION?

It states what the rights of the shareholders are and how the company will run its business. Registered articles apply equally to both shareholders and the company. Under the Memorandum of Articles, all funds payable to the company are considered to be the debt of the company.

 



CAN ARTICLES OF ASSOCIATION BE CHANGED?

Under section 31 of the Companies Act, 1956, companies can change, remove, add new ones to the article of the Articles of Association from the shareholders' special resolution. However, the change in the article by which a company can become public to private is not allowed to be done unless it has been approved by the Central Government.

 



WHAT CAN HAPPEN WITH THE CHANGE IN ARTICLES OF ASSOCIATION?

A change in the Articles of Association shall not compel any existing shareholder to subscribe to the shares in addition to the holding on the day of the change. The change will not apply even if it increases the liability of the existing shareholder and he has to contribute to the company's share capital or pay the company.

 



WHY DOES YOUR COMPANY NEED ARTICLES OF ASSOCIATION?

Every company formed in India under Companies Act is required to have articles, without which a company cannot legally be formed. This requirement applies to all types of Companies

 

FEATURES OF ARTICLES OF ASSOCIATION

1. It is a part of the constitution of an organization.

2. A contract between the members and among the members themselves.

3. It lays down the duties of shareholders.

4. Few statutory clauses should be included in the article of associations. Other clauses can be chosen to make the bye-laws of the organization.

5. Article of Association can be inspected by anyone as they are a public document.

 




THE ARTICLES OF ASSOCIATION IS COMPRISED OF FOLLOWING PROVISIONS:

Share capital, call of share, forfeiture of share, conversion of share into stock, transfer of shares, share warrant, surrender of shares, etc.

Directors, their qualifications, appointment, remuneration, powers, and proceedings of the board of directors meetings.

Voting rights of shareholders, by poll or proxies and proceeding of shareholders general meetings.

Dividends and reserves, accounts and audits, borrowing powers and winding up.

It is mandatory for the following types of companies to have their own articles:

Unlimited Companies: The article must state the number of members with which the company is to be registered along with the amount of share capital, if any.

Companies Limited by Guarantee: The article must define the number of members with which the company is to be registered.

Private Companies Limited by Shares: The private company having the share capital, then the article must contain the provision that, restricts the right to transfer shares, limit the number of members to 50, prohibits the invitation to the public for the further subscription of shares in the form of shares or debentures.

 



CAN ARTICLES OF ASSOCIATION BE ENFORCED AND BY WHOM?

The Articles of a company bind the company to its members, and vice-versa and binds the members to each other, they constitute a contract amongst themselves.

A member may sue the company and vice-versa to enforce and restrain breach of the articles of the company.

 



DO ARTICLES OF ASSOCIATION OVERRIDE THE COMPANIES ACT?

Section 6 of the Companies Act 2013 states that the Companies Act overrides the Articles.

In the case of existing companies, in so far as their articles are inconsistent with the Companies Act, the requirements of the Companies Act will override those of the existing articles.

 


ALTERATION OF ARTICLES

Section 31 empowers every company to alter its articles at any time with the authority of a special resolution of the company and filing copy with the Registrar. Since it is a statutory power a company will not be deprived of the power of alteration by a contract wit anyone.


The power of alteration of articles conferred by sec 31 is almost absolute. It is subject only to two restrictions-

It must not be in contravention with the provisions of the Act.

It is subject to the conditions contained in the memorandum of association.


The proviso to sub-section (1) says that an alteration which has the effect of converting a public company into a private company would not have any effect unless it is approved by the Central Government.

1) Alteration against memorandum- in Hutton v. Scarborough Cliff Hotel Co, a resolution was passed in a general meeting of a company altered the articles by inserting the power to issue preference shares which did not exist in the memorandum. It was held inoperative. However, after Andrews v. Gas Meter Co Ltd this view has been changed where a company was allowed by changing articles to issue preference shares when its memorandum was silent on the point. The power of alteration of art is subject only to what is clearly prohibited by the memorandum, expressly or impliedly.

2) Alteration in breach of contract- a company may change its articles even if the alteration would operate as a breach of contract. If the contract is wholly dependant on the articles, the company would not be liable in damages if it commits breach by changing articles. But if the contract is independent of the articles, the co will be liable in damages if it commits breach by changing articles. Thus in Southern Foundries Ltd v. Shirlaw, where a Managing Director was appointed for a term of ten years, but was removed earlier under the new articles on amalgamation with another company, the company was held liable for breach of contract.

3) Alteration as fraud on minority shareholders- an alteration must not constitute a fraud on the minority. It should not be an attempt to deprive the company or its minority shareholders of something that in equity belongs to them.

4) Alteration increasing liability of members- no alteration can require a person to purchase more shares in the company or to increase his liability in any manner except with his consent in writing.

Thus, the power of alteration should be exercised in absolute good faith in the interest of the company.

 

 


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