ARTICLES OF ASSOCIATION

Meaning of Articles of Association (AOA) : It contains the rules relating to the management of the Company’s internal affairs. According to Section 26, of the Indian Companies Act, 2013, Registration of AOA is : OPTIONAL for – PUBLIC Companies limited by share (if in case it does not have AOA, Table-A will be applicable) COMPULSORY for – All other Companies All other companies include : Company limited by guarantee, Unlimited Company, Private Company limited by shares. Companies limited by share : Companies, whose shareholders are responsible for paying debts up to the amount of their unpaid shares, if the company goes bankrupt. A company limited by guarantee does not usually have a share capital or shareholders, but instead has members who act as guarantors. The guarantors give an undertaking to contribute a nominal amount (typically very small) in the event of the winding up of the company.

Contents of AOA : Different classes of shares and their rights; Alteration of share capital; Borrowing power of directors; Procedure of making an issue of share capital & allotment; General meetings, Proxies and polls; Voting rights of members; Procedure of issuing Share Certificates & Warrants; Payment of dividend & creation of reserves; Forfeiture of shares & their re-issue; Appointment, Powers, Duties, Qualification, & Remuneration of Directors; Procedure for transfer & transmission of shares; Time lag in between Calls on shares; Use of the common seal of the company; Conversion of shares into stock; Keeping books of accounts and their audit; Lien of shares; Payment of commission on shares & debentures to underwriters; Capitalisation of Profits; Arbitration Provision; Rules for adoption for preliminary contract; Rules as to resolution. Re organization & consolidation of shares; For example, "stock" is a general term used to describe the ownership certificates of any company, in general, and "shares" refers to a the ownership certificates of a particular company. So, if investors say they own stocks, they are generally referring to their overall ownership in one or more companies. Lien of shares : A lien is the right to retain possession of a thing until a claim is satisfied. In the case of a company lien on a share means that the member would not be permitted to transfer his shares unless he pays his debt to the company.

Difference between Memorandum & Articles of Association : MOA AOA Conditions upon which the company is incorporated; Internal regulations of the company; It is subordinate to the Act only; It is subordinate to the Act as well as Memorandum; It is to be filled by all types of companies; Public companies limited by share need not file; Can no be easily altered; Can be easily altered; Defines relation between Company & Outsiders i.e Creditors, Buyers etc Governs the internal relationship between Company & Members

ALTERATION OF ARTICLES : Being the internal regulations, the company can alter it by passing a Special Resolution only, according to Section 31. A copy must be filed with the Registrar within 30 days of passing the said resolution. A copy of Altered Articles must also be filled with Registrar within 3 months of passing the Resolution. LIMITATIONS : The Alteration must not be inconsistent with : - The provisions of the Companies Act, - The conditions contained in the Memorandum, - Alteration ordered by the Company Law Board, Must not deprive any person of his right under a contract; Must not constitute a fraud on the minority; Must be bonafide for the benefit of the company as a whole; Central Government approval has to be obtained in certain cases - Conversion of Public Co. Into Private Company; - Appointment or Re-appointment of Directors; - Increase in remuneration of a Director.

BINDING FORCE OF ARTICLES OF ASSOCIATION : 1 Company to Member 2 Member to Company 3 Member to Member 4 No boundation to outsiders * Member to Member : Members are not bound to each other by default. Any member is not allowed to sue another member for any wrong done by the latter to the company. Exception : when the person against whom relief is sought controls the majority of the shares. * Articles do not create any contract with any person/entity external to the Organization.

DOCTRINE OF CONSTRUCTIVE NOTICE : After registration, AOA becomes “Public Document”. The legal effect of this doctrine is that if a person deals with a company in a manner inconsistent with the provisions of AOA, he is deemed to have dealt with the company at his own risk. A person is expected to inspect the basic public document of the company (memorandum & articles) available at Registrar of Companies Office, before entering in any transaction.

DOCTRINE OF INDOOR MANAGEMENT : It is an exception to Doctrine of Constructive Notice; It offers protection to the outsider dealing with the company; Doctrine has been applied to make companies liable in case where deals were made by the directors : Whose appointment was defective; Who were appointed properly but were yet to be delegated necessary authorities; Who had not yet been appointed as Director; Who have been delegated authority in a meeting which had lacked quorum.

EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT : Though the doctrine provides outsiders, protection while dealing with registered companies, court did not find it proper to apply the doctrine in following cases and protection was denied : Knowledge of irregularity; Sufficient ground for suspicion; Acts outside apparent authority; Acts ultra vires the Company. * Ultra Vires = Beyond one’s legal power or authority.