To incorporate the company, the company goes through the process of incorporation and for this the company needs to have a constitution. The main aspect of the company’s constitution is originated in the articles of the association because it governs management of Company, which includes the rules and regulations along with the company’s objectives. It is the contract which contains the Company’s connection with its directors.
Articles of Association serve as a guide to how the company will be run and help to ensure that it operates within the law. The AOA is a crucial document for every business since it outlines the guidelines for how the organisation will operate and serves to safeguard the interests of its shareholders. They assist in making sure the business complies with the law and defends the interests of its shareholders.
The AOA will typically include information on the company’s registered name, registered office, and the type of company it is (such as a limited company or a public limited company). Additionally, it will include information about the company’s authorised share capital, the rights associated with various share classes, and the procedures for issuing new shares. The AOA will also detail the meeting, decision-making, and record-keeping processes as well as the duties and authority of the company’s directors. Businesses that disregard the terms of their AOA risk legal repercussions and reputational harm.
The Articles of the association are company’s core regulations, equivalent to a partnership’s “partnership deed”. Memorandum of Association, termed as the main document and sets forth overall circumstances of company, is superseded and regulated by the Articles, however, the Articles may be used to clarify any inconsistencies in the Memorandum. However, the terms of the articles and memorandum of association cannot be in conflict with Company’s Act.
In accordance with section 2(5) of the Companies Act, 2013, “articles of association” are defined as “the articles of association of a company as initially formed or as subsequently amended or enforced in accordance with any prior legislation or this act.”
According to Section 5 of the Company’s Act of 2013, the company’s articles must include:
- Regulation for management of company.
- Matters which are prescribed under the rules.
Generally speaking, an article of association is a contract between the Company and its shareholders as the company has a distinct identity from its shareholders, thereby such a contract describes the roles and responsibilities of internal management and it is submitted to the registrar of companies as a part of the process of incorporation. It is a public document governed by Company’s act, 2013, registered at the company’s registrar in which the parties to the contract have binding power for existing and new shareholders.
In Naresh Chandra Sanyal vs Calcutta Stock exchange association Ltd[1], According to the Supreme Court, the articles of association also create a contract between the firm and its members as well as among its individual members. The rights and obligations typical to membership in the company are governed by this contract.
As per section 10 of the Company’s Act,2013 [2]after the registration of MOA and AOA, the document becomes a public document, thereby the members are bound to the company and the company is bound to its members. However, neither the corporation nor its members are obligated to third parties in regard to the articles. When it comes to rights and obligations emanating from the articles, the members are bound one to the other by the articles, but a member is not permitted to sue another member or members on his own behalf to enforce the articles. The members are bound due to provisions in the memorandum and articles because they have been signed by each member. It constitutes a contract between each member of company and company. Members are obligated to abide by and follow the articles of incorporation in the same way that the company is obligated to the members. The firm is obligated to each individual member as well as to the members as a whole. The articles are not a legally binding contract between the company and any third parties. Therefore, despite what is stated in the articles, neither the firm nor its members may be compelled to comply with the articles by an outsider or a non-member. In any role other than that of a number, he is not permitted to use any right assigned to him by the articles against the company. The word “member” in this context refers to a member functioning in his official capacity.
The Companies Act of 2013 has the following provisions for changing articles:
Passing of Special Resolution- Section 14(1) stipulates that a company with its own discretion amend its articles by special resolution, in accordance with the requirements of Company’s Act of 2013 and the terms of memorandum.
Every corporation has the legal authority to change its articles by special resolution, and this power cannot be negatived by entering into a contract. As a result, the ability to amend the articles is granted by statute, and a business may contract itself out of this ability.
Power to amend must be bona fide– The authority to change the articles must be legitimately used for the company’s benefit.
Alteration to transform a public company into a private company and vice versa- By following the due procedure of the law, the public company can convert into a private company by confirmation of a court of law whereas private company can convert into public company through amending the restrictions and limitations.
Alteration in breach of contract- A company can alter its articles, even If a contractual violation results from such a change is involved. But in such a case it could be held accountable for contract infringement by paying damages to other parties.
To conclude, it can be said that Articles of the company are the core document and are termed as a constitution of the company which regulates the internal matters of the company. Also, a company’s articles of association are an important document, especially when it comes to corporate governance. The Articles essentially serve as the company’s constitution along with the Memorandum of Association. It occupies a significant position inside the organisation and handles all crucial facets of management.