As per Section 5 of the Companies Act 2013, Articles of Association (AOA), also known as Articles is defined as:
“Section 5: Articles-
- The Articles of a Company shall contain the regulations for management of the company.
- The articles shall also contain such matters, as may be prescribed:
Provided that nothing prescribed in this sub-section shall be deemed to prevent a company from including such additional matters in its articles as may be considered necessary for its management.
- The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with.
- The provisions for entrenchment referred to in sub-section (3) shall only be made either on formation of a company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company.
- Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed.
- The articles of a company shall be in respective forms specified in Tables F, G, H, I and J in Schedule I as may be applicable to such company.
- A company may adopt all or any of the regulations contained in the model articles applicable to such company….”[1]
The Memorandum of Association (MOA) and Articles of Association (AOA) of a corporation are two crucial legal records. Each business needs a set of guidelines to govern its internal affairs. The AOA defines any company’s internal rules and regulations which function as an epic entre for the performance and conduct of almost every activity in the company. In other words, the AOA of a company contains the company’s bye-laws, which govern how the director and other members must carry out their duties.
Bye-laws are nothing but the rules or laws that an organization or community establishes to regulate itself, as permitted or obligated by some higher authority. The by-laws are mandatorily required to be by and not contrary to the law in force. The degree of control that the bye-laws may exercise is deduced by a higher authority, which is most often a law-making body i.e. legislature or another government body.
When we say “articles,” we mean a company’s original articles of association as well as any updates made over time or provisions implemented in accordance with this Act or any other earlier company law. And the term “Company” refers to a company that was incorporated under this Act or any previous company law.[2] The significance of the Articles is secondary to the memorandum of association. The company’s memorandum of association is recognized as its charter for incorporation. The model Article’s rules, which are included in Schedule I of the 2013 Companies Act, may be adopted in full or in part by a business and Tables F, G, H, I, and J, which are provided for diverse types of companies in accordance to their applicability as provided below in the tabular form.
Respective forms for Articles of a Company[3]
| S. No | Particulars | Details |
| 1. | Table F | “AOA of a company limited by shares” |
| 2. | Table G | “AOA of a company limited by guarantee and having a share capital” |
| 3. | Table H | “AOA of a company limited by guarantee and not having a share capital” |
| 4. | Table I | “AOA of an unlimited company and having a share capital” |
| 5. | Table J | “AOA of an unlimited company and not having a share capital” |
CONTENTS OF ARTICLES OF ASSOCIATION (AOA):
AOA defines the relationship between the members and the company and vice-versa. According to Section 36 of the Companies Act, when the memorandum and articles of organization are registered, the company and the members are bound in the same way as if each member had signed the documents individually.[4] From the perspective of the company’s operations, the articles of association’s formulation are crucial. The benefits that shareholders can eventually obtain from the company may be diminished by poorly drafted articles of association which are inappropriate for all those reasons. Given that the articles of association can be amended, however, adequate attention must be given to its contents even during the company’s founding phase.
Some statutory provisions must be included in the article of associations, and additional provisions may be adopted by the stockholders to serve as the organization’s bye-laws. Some of the general yet crucial contents or clauses, which are usually included in an AOA of a company are provided as follows[5]:
| S. No | Particulars | Description |
| 1. | Share capital | Share Capital consists of divisions, the rights of different shareholders, how these rights relate to one another, etc. |
| 2. | Lien of shares | To retain or hold the possession of shares if the member cannot pay his debt to the firm. |
| 3. | Transfer of shares | The AOA details the procedure for the shareholder’s share transfers to a third party. |
| 4. | Transmission of shares | The transmission includes the transfer of title by the virtue of law due to succession, death, insolvency, etc. |
| 5. | Alteration of capital | Change in the structure of share capital by increasing, decreasing, or rearranging can be done as per the procedures established by AOA. |
| 6. | General meetings and proceedings | The bye-laws for conducting meetings are being regulated by AoA. |
| 7. | Voting rights | The procedures and regulations to make use of owner’s voting rights are entitled in AOA. It speaks out how and when voting will be conducted example poll, proxies, etc. |
| 8. | Board of Directors | A director’s appointment, compensation, credentials, role, etc in board meetings are all covered in AOA. |
| 9. | Borrowing Powers | Every company has the power to accept loans and create a liability but only in accordance with the AOA. |
| 10. | Winding Up | Rules and regulations pertaining to the winding up of the firm are defined in AOA which must be complied with at the time of the company’s winding up. |
| * Note: The provided list of contents of AOA is not exhaustive and may vary in accordance with the requirements, nature, and functions of the company. | ||
THE ENTRENCHMENT OF ARTICLES OF ASSOCIATION:
The nascent concept of entrenchment is codified in the new amendment of the Companies Act 2013 and hence was not present in the previous enactments. The provision of Entrenchment is provided in section 5 of the Act. Establishing a difficult-to-change attitude or habit is referred to as entrenching. Thus, this provision makes some articles of association amendments challenging. Such a clause may state that some articles’ provisions may only be changed under conditions or by means more stringent than those that would apply in the usual case.
The articles of association may contain entrenchment clauses if the firm so desires. This clause may be included either at the time of the company’s incorporation or afterward through an amendment to the articles of association. Every member of a private company must approve any amendments made to contain the entrenchment clause, and a special resolution must be approved to include this clause in a public company.
EFFECTS OF ARTICLES OF ASSOCIATION:
The legal effect of ratifying the articles is manifold. Some of the effects on the company are as follows:
1. Members bound to the company:
Each member of the organization is required by law to abide by and accept all of the terms of the firm’s articles which was well held as a principle in V.B Rangaraj vs V.B Gopalkrishnan[6]. As a result, stakeholders are not allowed to make agreements with one another that would be in conflict with the company’s bylaws.
2. Company bound to its members:
Whatever is stated in the articles of a business is binding on all of its members, provided the same is in accordance or consistent with provisions of the AOA and Memorandum of Articles. The company is bound not only to the “members as a body” but also to the individual members as to their rights.
3. Members bound to members:
When it comes to the powers and obligations emanating from the articles are regarded, the articles bind the members among themselves.[7] It is a well-known fact that the articles of association will operate as a contractual obligation between the firm and its members as well as among members themselves with respect to their own rights.
4. Company and the outsiders:
The articles are not legally enforceable agreements between a firm and a third party. The articles cannot be used by a third party to bring a lawsuit against the firm.[8] This is rooted in the fundamental legal principle that a third party to a contract cannot get any rights thereunder. As a result, the corporation cannot be held liable for any rights granted by the articles to a person acting in any role except the member.
When the memorandum and articles of association are registered, it becomes public document and henceforth is available for the public at large to have access to the said fundamental documents of the company by paying nominal fees to the registrar of the company (ROC). The ratification of the AOA of the company bounds its shareholders and the company. The AOA serves as a deemed contract of a unique kind between an organization and its members.
By- Adv. Vidhi Jain (Bcom Hons, LLB, LL.M- Batch Topper)
[1] Section 5 Companies Act 2013
[2] Companies Act 2013
[3] Companies Act 2013
[4] Companies Act 2013
[5] Prakash Matre, Articles of Association (AOA) available at: https://www.mastersindia.co/blog/articles-of-association-aoa/ published on 29 November, 2022; Schedule I of Companies Act, 2013
[6] (1992) 1 SCC 160
[7] Kaushik Dhar, Articles of Association And Alteration of Articles available at: http://www.legalservicesindia.com/article/1050/Articles-of-Association-
[8] Kaushik Dhar, Articles of Association And Alteration of Articles available at: http://www.legalservicesindia.com/article/1050/Articles-of-Association-
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