Abstract
An article of association is a legal document that outlines the rules and regulations governing the internal affairs of a company. It is a crucial document that defines the relationship between the company and its shareholders, directors, and other stakeholders. The articles of association are a subset of the memorandum of association for the company. They specify a company’s management’s rights, duties, and powers in relation to the company as a whole. They also specify how and when changes to a company’s internal regulations may be made. A company’s articles of association must always be in accordance with and subordinate to its memorandum; they cannot extend the company’s objects as specified in the memorandum. In this article we discusses the meaning, explanation, importance, and case laws related to the article of association.
Keywords
Article of association, company, shareholders, directors, stakeholders, rules, regulations, internal affairs, legal document, share capital, share transferability, memorandum of association.
Introduction
The Companies Act of 2013 defines ‘articles’ as the “original articles of association of a company, or as altered from time to time in pursuance of any previous company laws or of the present.” The article of association is an essential legal document that governs the internal affairs of a company. It is a contract between the company and its shareholders, directors, and other stakeholders. The article of association outlines the rights and obligations of all parties involved and provides a framework for the company’s operations.
The Articles of Association is the charter document that establishes a company’s legal existence in many jurisdictions around the world, including the United Kingdom[1], Europe[2], and China[3]. This regulatory document defines a company’s purpose and operations. Regulatory authorities determine the minimum requirement for establishing companies within their jurisdiction, also known as articles. Although this is the bare minimum for conducting commercial activity as a separate legal entity, businesses can grow to meet the demands of the situation.
Meaning of Article of Association
The Articles of Association serve as a company’s operating manual. This is in the form of a document that, along with the memorandum, is included in the company’s constitution. This document contains the detailed internal governing aspects of the company. Examples include shares (and the rights that come with them), the conduct of company meetings, and the role and powers of the directors. The Articles define the rules that govern director behaviour, shareholder rights, and the relationship between the two. The article of association also specifies the procedures for holding meetings, voting, and making decisions.
The article of association is a crucial document that defines the relationship between the company and its stakeholders. It provides a clear framework for the company’s operations and ensures that all parties involved understand their roles and responsibilities. The article of association helps to prevent disputes and misunderstandings by outlining the rules and regulations that must be followed.
Purpose of Article of Association
The articles of association describe how the company is managed, governed, and owned. The articles of incorporation can limit the company’s powers, which can be useful if shareholders want assurance that the directors will not take certain actions without shareholder approval. The Companies Act of 2006, on the other hand, gives a company unlimited powers by default.
In addition to the articles, which are a public document, the shareholders may enter into a shareholders’ agreement to supplement the articles in relation to the company’s operation, governance, and ownership that they wish to keep out of the public domain.
Importance of Article of Association[4]
The memorandum and articles, once registered, bind the company and its members to the same extent as if they had been signed and contained a covenant on their part that the memorandum and the articles would be followed, according to section 36.
The importance of articles of association can be summarised in relation to the preceding section as follows:
- Members’ obligations to the company- the provisions of the articles bind the members to the company in the same way that they would if they had all signed them.
- Obligation of the company to its members- Just as members owe the company, the company owes its members the obligation to observe and follow the articles.
- Neither the company nor its members are bound to outsiders- Articles bind the members to the company and the company to the members, but neither is bound to an outsider in order for the articles to have effect.
- Inter-member binding- the articles define the rights and liabilities of the members. The articles constitute a contract between the members and bind each member against the other or others. Such a contract can only be enforced through the company.
Key elements of Article of Association
- Name and Registered Office
The article of association should start with the name of the company, which must be unique and not similar to any other registered company. It should also mention the registered office of the company, which is the official address where all legal documents will be served.
- Object Clause
The object clause defines the purpose for which the company is formed. It should clearly state the main business activities that the company will undertake. This clause is essential as it helps to determine the scope of the company’s operations.
- Share Capital
The share capital clause specifies the amount of capital that the company can raise through the issuance of shares. It should also define the types of shares that can be issued, such as ordinary shares, preference shares, or redeemable shares. The clause should also outline the rights and restrictions attached to each type of share.
- Shares Transferability
This clause specifies the conditions under which shares can be transferred from one shareholder to another. It should also outline any restrictions on share transferability, such as pre-emption rights or limitations on the number of shares that can be transferred.
- Directors
The article of association should specify the number of directors that will manage the affairs of the company. It should also outline their powers, duties, and responsibilities. The clause should also specify the process for appointing and removing directors.
- Meetings
This clause outlines the procedures for holding meetings of shareholders and directors. It should specify the notice period needed for calling a meeting, the quorum needed for conducting business, and the voting procedures.
- Dividends
The tip clause specifies how gains will be distributed among shareholders. It should outline the conditions under which tips will be paid and the quantum of tip that will be paid. The clause should also specify any restrictions on tip payments.
- Winding Up
The winding- up clause outlines the procedures for dissolving the company. It should specify the circumstances under which the company can be dissolved and the process for distributing the means of the company among its shareholders.
Important Case laws
- In the case of Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd[5], the Supreme Court held that the papers of association of a company also establish a contract between the company and its members as well as between the members. This contract governs the ordinary rights and scores incidental to the class in the company.
- In Wood v. Odessa Waterworks Co[6]., the WaterworksCo.’s article provided that the directors could declare a tip to be paid to the members with the blessing of the company at a general meeting. Rather of paying the tip in cash, a resolution was passed to give the shareholders debenture bonds. The court eventually determined that the term” payment” appertained to cash payment, and the directors were therefore barred from acting on the resolution.
- In Borland’s Trustees v. Steel Bros. & Co. Ltd[7]., the company’s articles stated that if any member declared bankruptcy, his shares would be sold at the directors’ discretion. When Borland declared bankruptcy, his trustee stated that he wanted to sell these shares at face value, claiming that he was not bound by the articles. He was, however, held to be bound by the articles of the company because the shares were purchased in accordance with the provisions of the articles.
- In V.B. Rangraj v. V. B. Gopalakrishnan, AIR 1992 SC 453 case[8], where the issue was whether private agreements between shareholders can impose supplementary restrictions in addition to those provided in the articles. The Court held that such additional restrictions which are not mentioned in the articles would not be binding on the shareholders or on the company.
- The Supreme Court in 2003 in its decision in M.S. Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd 6.[9] Not disagreeing with the decision in V.B Rangaraj but distinguishing itself from the facts in that judgment, held that a restriction in relation to identified members on identified shares of a private company did not amount to restriction of transferability of shares per se.
Conclusion
The article of association is a crucial legal document that defines the relationship between a company and its stakeholders. It outlines the rules and regulations governing the company’s operations and provides a framework for decision-making. The article of association is essential for protecting the interests of shareholders and ensuring that the company operates in a fair and transparent manner. It is important to adhere to the rules and regulations outlined in the article of association to prevent disputes and misunderstandings.
This article is written by Muskan Jaiswal, Bharti Vidyapeeth New Law College, Pune, BBA-LLB 2ND year during her Internship at LeDroit India.
[1] https://corporatefinanceinstitute.com/resources/equities/articles-of-association/#citation-back-memorandum-and-articles-of-association
[2] https://www.dlapiperintelligence.com/goingglobal/
[3] http://mg.mofcom.gov.cn/article/policy/201910/20191002905610.shtml
[4] https://www.legalservicesindia.com/article/2313/Articles-of-Association.html#:~:text=Association%3A%20An%20Overview-,Articles%20of%20Association%20is%20a%20document%20which%20prescribes%20the%20rules,for%20the%20internal%20administration%20of
[5] https://www.the-laws.com/Encyclopedia/Browse/Case?CaseId=000791693000&CaseId=000791693000
[6] https://simplestudying.com/wood-v-odessa-waterworks-1889-co-42-ch-d-636
[7] https://en.wikipedia.org/wiki/Borland%27s_Trustee_v_Steel_Bros_%26_Co_Ltd
