The Memorandum of Association (MoA) and Articles of Association (AoA) are two vital documents for any company. While the object of the Memorandum of Association is to state the ‘purpose’ of the company, the Articles of Association of a company specify the manner in which the company is to carry out its activities to meet that ‘purpose.’ During the registration of a company, drafting these two documents mindfully is of utmost importance.
What are the Articles of Association in Company Law?
Articles of Association of a company is an extremely important document that every company is required to have; it is essentially a contract between the company and its members. The Articles of Association of a company provide the rules and regulations for the internal affairs of a company. It also contains the regulations for any additional matters for internal management. Schedule I of the Companies Act 2013 provides model forms of AoA. A company can adopt any of the regulations as specified in the model Articles of Association. If a company registered under the Companies Act 2013, does not make modifications to the regulations of the model AoA or exclude any of the regulations, all the regulations of the model AoA are presumed to apply.
AoA of a company carries varied provisions, such as provisions in respect of share capital and variation of rights, lien on shares, call on shares, transfer of shares, the transmission of shares, forfeiture of shares, alteration of capital, capitalization of profits, buy-back of shares, general meeting, Board of Directors, CEO, CFO, Manager, Company Secretary, Common Seal, dividends and reserves, accounts, winding up, etc.
Importance of the Articles of Association of a Company
Mandated by law: As per section 7(1) of the Companies Act, 2013, all companies are required to have Articles of Association while filing for incorporation. Many provisions in the Companies Act state that a corporate transaction is only valid if the same is authorized by that company’s Articles of Association. To carry out an activity that is not specified in the Articles of Association, the company is first required to amend its AoA; otherwise, the activity is invalid and illegal.
Validated other documents: Any document or contract that the company gets into has to be first allowed by the Articles of Association of the company. Even private agreements, like a Memorandum of Understanding, are not binding on the company unless the company’s Articles of Association allow for it. Indian courts have gone as far as to hold that even shareholder agreements are not valid unless the same is incorporated in the Articles of Association.
Entrenchment Provision: An essential provision that the AoA in Company Law can have are entrenchment provisions. An entrenchment provision is such a provision that cannot be amended by the company going forward. To add an entrenchment provision to a company’s rights and regulations, the same can either be added in the Articles of Association of a company while incorporation, or it needs to be added via a special resolution in case of a public company or an absolute agreement by every member in case of a private company.
Binding Nature: The provisions of the Articles of Association are binding on the company and its members. They are bound to follow every provision as specified in the AoA. The courts in India have specified time and time again that the Articles of Association of a company govern all the ordinary rights and obligations that relate to the membership of a company.
Drafting your Articles of Association carefully, hence, is of the utmost importance. Taking the help of experts, such as those at LegalWiz.in, could help you draft an AoA that could help protect your company’s best interests.
Doctrines related to the Articles of Association
The doctrine of constructive notice: Once registered, the Articles of Association of a company become documents that are available to the public and hence can be inspected by absolutely anyone on the payment of a nominal fee. Due to this, anyone getting into any sort of contract or agreement with the company is presumed to know what is specified in the Articles of Association– the kind of rights granted to different members, and so on and so forth.
The doctrine of indoor management: This doctrine states that when an outside person or a third party is interacting with the company, such as getting into a contract, and has checked and is satisfied that their interaction is consistent with the AoA and the memorandum of association, they are not expected to know about any other internal proceeding nor are they expected to inquire into it. Exceptions to this doctrine are: when the outsider is aware of the irregularity; where the 3rd party did not acquaint themselves with the Memorandum and Articles of Association properly; in case of forgery; and finally, in case of negligence.
Articles of Association vs Shareholders Agreement
The shareholder’s agreement (SHA) is an agreement between the company and its shareholders. It specifies the rights, duties, liabilities, and operational control the shareholders will have. The purpose of a shareholders agreement is similar to that of the Articles of Association of a company.
However, the difference is that a shareholders agreement is not mandatory, and it is only enforceable if the same is allowed by the Articles of Association. In other words, the shareholder’s agreement is generally subordinate to the AOA in Company Law.
But what about the rights specified in a valid SHA vs the rights in the AoA?
There can be two kinds of conflicts between the shareholder’s agreement and the Articles of Association of a Company. The first is a conflict relating to the management of the company, and the second is a conflict relating to the transferability of shares. The Supreme Court of India has stated that while the shareholders can have additional rights and get into agreements that are in the best interest of the company, they shall only be valid as long as they are not contrary to the Articles of Association.