Incorporation of a company is not as easy as it seems; it requires loads of paper works and preparation of many documents.
The two major documents that are required to be prepared by a company during its incorporation are Memorandum of Association and Articles of Association.
Any small defect in these documents can cause a disaster for your business.
What is Articles of Association as per Indian Company Law
Article of Association as defined under Section 2(5) of the Companies Act of 2013 provides that:
“Articles” means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act.
The laws of the company are written in “Memorandum of association” which is the charter of the company and defines the conditions and objects for which the company is granted incorporation. In contrast to that, “Articles of association” are the rules and regulations framed to govern this internal management of the company.
Article of association as provided under Section 5 of the Companies Act 2013 states the following:
- The articles of a company shall contain the regulations for management of the company
- The articles shall also contain such matters, as may be prescribed.
Provided that nothing prescribed in this sub-section shall be deemed to prevent a company from including such additional matters in its articles as may be considered necessary for its management.
The Article of Association must not contain any clause which is in contradiction with the Memorandum of Association and the Company Act of 2013, otherwise such clause will be declared void because of being ultra vires, which means beyond its powers.
This was also laid under Shyam Chand v. Calcutta Stock Exchange. Therefore, if there is a conflict between the memorandum and the articles, the provisions in the memorandum will prevail. In case of any ambiguity or uncertainty regarding details in the memorandum, it should be read along with the articles.
Articles of Association need to be divided into paragraphs and numbered and signed by subscribers to the memorandum and there needs to be at least one attesting witness when the subscribers sign the articles. The signatories and the witness need to provide their addresses and occupations after the signatures.
The article of association contains the rules, regulations and bye- laws regarding internal management of the company, and this internal management is entrusted in the hands of the managing director of the Company.
This power of the managing director is defined under Section 2(54) of the Companies Act 2013 as:
“managing director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.
According to Companies Act 2013 it is compulsory for all the companies whether private or public to prepare these two documents, namely Memorandum of association and Article of association.
Binding Effect of Articles of Association
Binding force of the Article of Association is defined under Section 10 of the Companies Act 2013, which states:
- Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles.
- All monies payable by any member to the company under the memorandum or articles shall be a debt due from him to the company.
The members of the company exercise their binding power in the form of right to vote , right to receive dividends etc whereas the company exercises its binding power by taking action against the member who has breached the contract or by reimbursing the members the money they have provided on behalf of the company.
A member can also be treated an outsider if the matter in question is not related to the membership rights and obligations as mentioned in the Article of Association and thus the company and its members are not bound to the outsiders with respect to the provisions of the memorandum and the articles.
The articles also create a binding contract between and amongst each member of the company. However, such rights can only be enforced by or even against a member of the company.
Form of Articles of Association for Indian Companies as per the Indian Company Law
There are different forms of Articles of Association which are defined under section 5(6) of the Companies act 2013 which states “The articles of a company shall be in respective forms specified in Tables, F, G, H, I and J in Schedule I as may be applicable to such company.”
Related: Download the Schedule I PDF.
- Form in TABLE – F is applicable for a Company Limited by Shares.
- Form in TABLE – G is applicable for a Company Limited by Guarantee and Having Share Capital.
- Form in TABLE – H is applicable for a Company Limited by Guarantee and Not Having Share Capital.
- Form in TABLE – I Is Applicable For an Unlimited Company having A Share Capital.
- Form in TABLE – J Is Applicable For an Unlimited Company, not having A Share Capital.
Model Articles for Private Companies Limited by Shares
The information contained in the model articles for private companies are divided into 5 parts which are as follows:
PART 1: INTERPRETATION AND LIMITATION OF LIABILITY
- Defined terms related to company and its internal management
- Liability of the members which says the liability of the members is limited to the amount, if any, unpaid on the shares held by them.
PART 2: DIRECTORS
- Directors’ Powers and Responsibilities
- The directors are responsible for the management of the company’s business
- Shareholder’s reserve power.
- The directors may delegate any of the powers which are conferred on them under the articles.
- The directors may make rules of procedure for all or any committees, which prevail over rules derived from the articles if they are not consistent with them.
- Decision-Making by Directors
- Unanimous decision is compulsory.
- Calling a directors’ meeting
- Casting vote
- Participation in directors’ meetings
- Chairing of directors’ meetings
- Records of decisions to be kept
- Directors’ discretion to make further rules
- Appointment of Directors
- Methods of appointing directors
- Termination of director’s appointment
- Directors’ remuneration
- Directors’ expenses
PART 3: SHARES AND DISTRIBUTIONS
- All shares to be fully paid up.
- Powers to issue different classes of share
- Share certificates
- Replacement share certificates
- Share transfers
- Transmission of shares.
- Dividends and Other Distributions
- Procedure for declaring dividends
- Payment of dividends and other distributions
- No interest on distributions
- Unclaimed distribution
- No cash distribution
- Waiver of distributions
- Capitalisation of Profit
- Authority to capitalise and appropriation of capitalised sums
PART 4: DECISION-MAKING BY SHAREHOLDERS
- Organisation of General Meetings
- Attendance and speaking at general meetings
- Quorum for general meetings
- Chairing general meeting
- Voting At General Meetings
- Voting general
- Errors and disputes
- Poll votes
- Amendments to resolutions
PART 5: ADMINISTRATIVE ARRANGEMENTS
- Means of communication to be used
- Company seals
- No right to inspect accounts and other records.
- Provision for employees on cessation of business
- Director’s indemnity and insurance
Contents of Articles of Association
The Articles Of Association contain information regarding the following aspects:
- Definition of important terms.
- Share Capital which is under the control of Directors and Variation of rights exercised by the company and the holder of the shares.
- Allotment of shares is also done by the directors according to the procedure mentioned in articles.
- Lien of shares by the company which is the right to retain possession of shares until a claim is satisfied (usually, the Company provides that if there’s an outstanding sum owed by shareholders to the company, the company would enjoy the right of lien over his shares). Articles contain the procedure in which the companies can sell the shares on which the company has a lien.
- Calls on share are made by the board of directors in respect of any monies unpaid on their shares and accordingly the holder of the share has to pay to the company.
- Transfer of shares is done between the transferor and transferee. The procedure of the same is provided by Articles of Association.
- Transmission of shares involves the entitlement of the shares to the person by reason of any operation of law such as marriage, succession, death or insolvency of the holder.
- Forfeiture of shares is made by Article of Association when the member is unable to pay any call, or installment of a call or any payment thereof.
- Alteration of capital is done by the company by way of Ordinary resolution to increase or decrease the share capital.
- Capitalisation of profits procedure is provided under Article of association.
- Buy back shares provisions i.e. the company may purchase its own shares or specified securities as may be provided under Article of association.
- What Proceedings are to be followed in the general meeting are provided by the Article of associations.
- Adjournment of general meetings as specified.
- Voting rights of the members holding shares.
- Rules and regulations regarding the board of directors.
- Regulations regarding Chief Executive Officer, Manager, Company Secretary or Chief Financial Officer.
- Provisions regarding the Dividends and reserves of the company.
- Rights relating to the inspection of account or book or document of the company.
- Procedures regarding Winding up of a company.
- Common Seal of the company.
- Provisions regarding
Provisions Regarding Entrenchment
Entrenchment clauses are those clauses relating to which amendments are very difficult and unlikely to be passed.
They are mentioned under Section 5(3) , 5(4) and 5(5) of the Companies Act of 2013. These provisions were introduced in 2013 Act itself .The provisions are as follows:
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 the 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 provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed. Usually entrenchments are made with regard to provisions on auditing, key managerial personnel, company business strategy including objects of the memorandum etc.
Alteration of Articles of Association
Section 14 of the Companies Act of 2013 provides for the alteration of ArticleS of Association. It provides that-
Subject to the provisions of this Act and the conditions contained in its memorandum, if any, company may, by a special resolution, alter its articles including alterations having the effect of conversion of–
- a private company into a public company; or
- a public company into a private company.
It is however, 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 be valid unless it is approved by an order of the Central Government on an application made in such form and manner as may be prescribed.
There is a further exception that any application pending before the Tribunal, as on the date of commencement of the Companies (Amendment) Act, 2019, shall be disposed of by the Tribunal in accordance with the provisions applicable to it before such commencement.
Every alteration of the articles under this section and a copy of the order of the Central Government 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, who shall register the same.
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.
Furthermore under section 15 of the Companies Act of 2013, every alteration made in the memorandum or articles of a company shall be noted in every copy of the memorandum or articles, as the case may be.
And if a company makes any default in complying with these provisions, then the company and every officer who is in default shall be liable to a penalty of one thousand rupees for every copy of the memorandum or articles issued without such alteration.
However the power of alteration of articles of association on a company is not unrestricted.
What to Look Out for During Alteration of Articles of Association:
- While altering one should always keep in mind that articles are subordinate to the memorandum of association and its provisions and thus the provisions which are being altered should not be in contradiction with the Memorandum of Association and the Companies Act 2013, otherwise the required provisions will be void ab-intio.
- It should be for the benefit of the company and cannot be in contravention with the rules, alterations of the tribunal.
- The alteration must not attempt to legalize something that is illegal.
- It should not be against the substantive rights of minority shareholders.
Registration of Articles of Association
Process of registration is provided under section 7(1) of the Companies Act 2013.
During incorporation of the company the promoters of the proposed company are required to file with the Registrar Of Company in whose jurisdiction the office of the company is proposed to be situated, the copies of Memorandum and Article of Association for registration.
At the time of registration the memorandum and articles of the company should be duly signed by all the subscribers to the memorandum in such manner as may be prescribed and are further required to add their names, addresses and occupation in the presence of a witness who must attest the signatures with his own signature and provide details of his own occupation and address.
As per the Act, a declaration should be made from each of the subscribers to the memorandum and from persons named as the first directors, that he is not convicted of any offence in connection with the promotion, formation or management of any company, or that he has not been found guilty of any fraud or misfeasance or of any breach of duty to any company under this Act or any previous company law during the preceding five years.
Any time after incorporation, if the company want to adopt new set of Memorandum and Articles of Association, then it has to file the same with the registrar for registration.
Wrapping Up the Articles of Association!
Since the Articles of Association governs the relationship between the members and the company and also contains the rules for the internal management of the company, it is a very important document that you need to be careful while drafting.
It’s quite like drafting a contract, but a much more important one than those regular contracts. If you want to hire someone to do it, you need to draft a power of attorney first.
This document can be accessed by the public on the Ministry of Corporate Affairs Website.
Articles contain the particulars of the interests of the persons as the first directors of the company in other firms or bodies corporate along with their consent to act as directors of the company in such form and manner as may be prescribed and are very important documents for private companies.
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Sugandha Nagariya hails from a legal background at GLC, Mumbai and was an intern at WinSavvy.com. Connect with her on LinkedIn.