Articles of Association

Introduction 

Section 2(5) of the Companies Act, 2013 defines the Articles of Association (AoA) as the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or the present Act. 

• The AoA are the bye-laws or rules and regulations governing the internal management of a company.  
• They define the powers of its officers and establish a contract between the company and its members, and amongst the members inter se — Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. (1971).  
• Articles are often compared to a partnership deed, setting out the manner in which the company is to be administered. 

What are the Contents of Articles of Association (Section 5)? 

• The AoA typically contain rules and regulations relating to the following matters: 
  • Share capital and its division into equity and preference shares. 
  • Rights of each class of shareholders and procedure for variation. 
  • Allotment, calls, and forfeiture of shares. 
  • Transfer and transmission of shares; lien on shares. 
  • Appointment, remuneration, and powers of directors. 
  • Constitution of Audit, Remuneration, and CSR Committees. 
  • Notice of meetings, voting rights, proxy, and quorum. 
  • Borrowing powers of the company. 
  • Winding up of the company. 
• The Companies Act, 2013 also introduced Provisions for Entrenchment for the first time. Under Section 5(3), the AoA may provide that certain clauses shall not be alterable merely by a special resolution but shall require a more elaborate procedure.  
• Such entrenchment provisions can be made only at formation or by amendment agreed to by all members in a private company, and by special resolution in a public company, with notice to the Registrar.

How can the Articles of Association be Altered? 

• Section 14 provides that a company may alter its AoA by passing a Special Resolution, including alterations effecting conversion of a private company into a public company, or vice versa. Where the alteration converts a public company into a private company, approval of the Tribunal is additionally required. 
• The power to alter articles is subject to important limitations: 
  • Must not conflict with the Memorandum or the Companies Act. 
  • Must not be illegal or opposed to public policy. 
  • Must be bona fide for the benefit of the company as a whole and must not oppress the minority — Allen v. Gold Reefs of West Africa Ltd. (1900). 
  • Cannot be used to breach contracts with third parties — British Murac Syndicate Ltd. v. Alperton Rubber Co. (1915). 
  • Cannot operate retrospectively — Pyare Lal Sharma v. Managing Director, J & K Industries Ltd. (1989). 
• A copy of the special resolution must be filed with the Registrar within 30 days under Section 117, and the altered articles along with the Tribunal's order, where applicable, must be filed within 15 days under Section 14(2).

What is the Doctrine of Constructive Notice and Indoor Management? 

• Once registered, the Memorandum and Articles become public documents under Section 399. Every person dealing with the company is therefore presumed to have read and understood them — this presumed knowledge is called Constructive Notice. 
• To counterbalance this, the Doctrine of Indoor Management, first laid down in Royal British Bank v. Turquand (1856), protects outsiders by allowing them to assume that internal procedures required under the AoA have been duly followed. However, this doctrine has exceptions — it cannot be invoked in the following circumstances: 
  • Where the outsider had actual knowledge of irregularity. 
  • Where the outsider had no knowledge of the Articles at all — Rama Corporation v. Proved Tin & General Investment Co. (1952). 
  • In cases of forgery, which renders the transaction a nullity — Ruben v. Great Fingal Consolidated (1906). 
  • Where the outsider acted negligently without making due enquiry — Al Underwood v. Bank of Liverpool (1924).

Conclusion

The Articles of Association serve as the operational constitution of a company, governing internal management and defining the rights and obligations of members. While alterable by special resolution, this power is subject to significant constraints to protect minority shareholders, creditors, and third parties. The doctrines of Constructive Notice and Indoor Management together balance the interests of the company and those dealing with it.