Articles of Association of a company and its importance

What is Articles of Association (AOA) – Section 2(2) of the Companies Act, 1956 defines the term ‘articles’ as the Article of Associationarticles of association of a company as originally framed or as altered from time-to-time in pursuance of any previous companies law or of the Companies Act, including, so far as they apply to the company, the regulations contained in the tables of any of the specified previous companies laws or Table A in Schedule I annexed to the present Act. Basically, Articles of Association of a company governs the running of a company; setting out voting rights of shareholders, conduct of shareholders’ and directors’ meetings, powers of the management, to name some. The articles contain regulations for the internal affairs and management of the company.  As per section 26 every unlimited company or a company limited by guarantee or a private company limited by shares shall be registered with its memorandum, articles of association signed by the subscribers of the memorandum, prescribing regulations for the company. A public company limited by shares may opt for not registering with the ROC its articles along with the memorandum, in which case Table A will be treated as the company’s articles. But in the following cases, it is obligatory to register the articles along with the memorandum with the Registrar at the time of incorporation of a company: (a) an unlimited company (with or without a share capital); (b) a company limited by guarantee (with or without share capital); and (c) a private company limited by shares. Articles serves as a contract – between the members and the company, binding the members to the company. Although there is no contract in terms between each individual member and every other, yet the articles regulate their rights one to another inter se. The articles of association of a company serve as a contract between all the shareholders to comply with the regulations contained therein. They are binding on all until they are altered in the manner provided by the Companies Act, i.e. by a meeting duly called to pass a resolution for altering them. Any dispute that may arise among them must be primarily decided with reference to the principles contained in these articles. Thus, the articles bind the members. It is well-settled that the articles of association will have a contractual force between the company and its members as also between members inter se in relation to their rights as such members. Since the articles constitute a contract between the members inter se, any contract entered into between them subsequent to their joining the company must inevitably be subject to the provisions of the articles. But this contract is not for the benefit of strangers or even of members in some other capacity, for the articles are not contracts with outsiders. However, the articles do not bind the company to persons who are not members; even if they are not directors of the company, solicitors to the company, etc., nor do the articles bind the company to the members in any capacity other than that of members. If a member is also a director, the articles give him his rights as a member but in no way give him rights as a director. It has been, however, held in some cases that the articles constitute part, though not the whole, of a contract between the company and its directors. Enforceability of Articles – The articles constitute a contract between each member and the company and there is no contract in terms between the individual members of the company; but the articles do not any the less, regulate their rights inter se. Such rights can only be enforced by or against a member through the company or through the liquidator representing the company; but no member has, as between himself and another member, any rights beyond that which the contract with the company gives. The articles, as provided in this section, constitute a contract between each member and the other members to observe the provisions of the articles. It follows that when some members of a company, may be the majority of members, do not carry out the terms of that agreement, but they act contrary to the articles one or more of the other members has or have the right to come to Court and ask for the agreement to be enforced against those members who have violated their obligations. In a suit by the minority shareholders concerning the affairs of the company the company can, and indeed should, be a party. Courts have been consistent in upholding the value of articles of association and in ignoring actions of directors and shareholders which are inconsistent with the regulations in the articles. The Courts in the process also ignore all extraneous documents, if the latter conflict with the articles.   Further, in case of a conflict, the provisions of the Companies Act shall have an overriding effect against the provisions of— (a) memorandum of association, (b) Articles of association, (c) An agreement executed by a company, (d) a resolution passed at a general meeting of a company, (e) a resolution passed at a Board meeting. Provisions of section 9 and other provisions of the Act make it clear that the articles of association are the regulations of a company binding on the company and its shareholders. The only restrictions on the transfer of the shares of a company are laid down in its articles, if any. A restriction, which is not specified in the articles, is, therefore, not binding either on the company or on the shareholders. The vendee of the shares cannot be denied the registration of the shares purchased by him on a ground other than that stated in the articles. Relation between memorandum and articles – The memorandum is called as the primary document, and the articles are called as the secondary document, of a company. A memorandum is the constitution of a company, whereas articles are its bye-laws or a book of rules and regulations for the conduct of affairs of the company. Whereas the memorandum is the company’s charter, that includes its objects, nationality, name and its capital; its articles are the regulations for the internal arrangement and management of the company. As between the memorandum and the articles, the memorandum is the dominant instrument, so that in so far as their provisions conflict, the memorandum would always prevail. Apart from the matters which are required by statute to be stated in the memorandum, a reference may be made to the articles to explain any ambiguity in the memorandum or to supplement the memorandum in cases of conflict, or in cases where the memorandum is silent. The principal reasoning behind the references of the memorandum to be supplemental to the articles is to have more clarity. Both the memorandum as well as the articles should be construed and read together in cases of inconsistency. Articles of Association of a company and its importance