The provisions of Section 2(20) of the Companies Act, 2013, define a company as “a company incorporated under this act or any previous company law.” A corporation is an artificial person created by law and carries various characteristics, including being a separate legal entity, an eternal successor, having a common seal, and limited liability. As a company, it is one of the most popular forms of business organizations, particularly for entrepreneurs who face strict legal compliance. Compliance with company regulations is a complex activity that involves many procedures and formalities. Companies form in stages, with many documents and predefined procedures at every step. Among these documents, the Articles of Association (AOA) and the Memorandum of Association (MOA) are the most important.
A company is essentially a corporation formed by a group of people to operate on commercial or industrial property. The Articles of Association and Memorandum of Association are the fundamental documents for the organization. The Articles of Association are also known as the company’s “user manual.” The AOA provides objectives and strategies to achieve short-term or long-term goals. It defines the rules and regulations that govern the internal control of the organization to achieve its goals. While the AOA is a critical document, it is considered a secondary document compared to the MOA. The AOA exceeds the scope specified in the MOA provisions and is considered ultra vires if it goes beyond the MOA’s limits, as ruled by the Supreme Court of Calcutta in Sham Chand v. Calcutta Stock Exchange (1945). In case of any dispute between the two, the provisions specified in the MOA will be enforced. When uncertainties arise, the MOA takes precedence, and interpretations are made accordingly along with the AOA.
What is the Articles of Association (AOA)?
According to the Companies Act, 2013, Section 2(5) defines the Articles of Association (AOA) as containing all the rules and regulations determined by the company’s directors for the internal governance and management of the company. Simply put, it acts as a rulebook that regulates the internal functions of a company and serves as the connection between the company and its stakeholders, including employees and shareholders.
The founders typically draw up the AOA when forming the company. Since it is an essential document, it directly concerns the management and finances of the company. Therefore, the founders often consult with lawyers, accountants, or both when drafting it. The Articles of Association enumerate the nature of the company and how it operates. It contains fundamental information such as the company name, the founders and original shareholders, the company’s objectives, shareholder meetings, and the appointment of directors.
Contents of the Articles of Association
As the rulebook of the company, the Articles of Association is a legally binding document that includes all the necessary rules and bylaws related to matters prescribed by the Companies Act. Section 5(2) of the Companies Act, 2013, provides details on the matters to be included in the AOA. Some of the key content includes:
- The extent to which Table A of the Companies Act is applicable
- Decisions that can be made by management
- Adoption of preliminary contracts and related clauses
- Different classes of shareholders
- The rights and duties of shareholders based on their classes
- Appointment of directors
- Rights and powers of directors
- Borrowing powers of directors
- Procedure for issuing share certificates and share warrants
- Voting procedures for directors and the chairman
- Dividend policy of the company
- Process for creating reserves
- Confidentiality of trade secrets and trade know-how
- Penalties for the unauthorized disclosure of trade secrets
- Valuation of the company’s intellectual property
- Procedure for altering share capital
- Issues related to share issuance and transfer
- Provisions for share transmission, surrender, and forfeiture
- Procedures for special resolutions and board meetings
- Arbitration clauses in case of disputes
- Entrenchment clauses
- Audit and accounts of the company
- Common seal of the company
- Winding-up procedure of the company
- Forms of the Articles of Association
What is Included in the AOA?
The Articles of Association address the essential operational aspects of the company, such as stock issuance, dividend payments, financial reporting, and voting rights. These rules form the company’s user manual. Although the content may vary by jurisdiction, the document generally follows similar formats worldwide. Some essential elements covered in the AOA include:
- Company Name:
The company name must be clearly stated in the articles. It usually includes a suffix like “Inc.” or “Ltd.” to indicate that the company is a corporate entity. Certain terms, such as “government” or “church,” can only be used by specific entities. - Corporate Purpose:
The AOA specifies the company’s purpose. Some jurisdictions accept broad purposes like “management,” while others may require more specific details, such as “wholesale bakery operations.” - Stock Capital:
The AOA specifies the number and types of shares issued, including the company’s capital. It also addresses various types of preferred stock. - Legal Organization:
The AOA details the legal structure of the company, including the address, number of directors, civil servants, and the identities of the founders and original shareholders. - Shareholder Meetings:
The provisions for the first general meeting of shareholders, subsequent annual meetings, and the regulations governing such meetings are outlined, including resolutions and voting procedures.
Forms of AOA
The forms of the Articles of Association are provided under Tables F, G, H, I, and J, with each form being applicable to different types of companies, as specified in Schedule I of the Companies Act, 2013.
| Table | Content Description |
| Table F | Articles of Association for a company limited by shares |
| Table G | Articles of Association for a company limited by guarantee with share capital |
| Table H | Articles of Association for a company limited by guarantee without share capital |
| Table I | Articles of Association for an unlimited company with share capital |
| Table J | Articles of Association for an unlimited company without share capital |
Importance of AOA
Both the Articles of Association and the Memorandum of Association are considered the most important legal documents for a company. For new companies, the AOA is crucial because it governs the internal workings of the company. In some cases, it is even more significant than the MOA. These documents have immense power in establishing the legitimacy of the corporation and its foundation. They are vital for shareholders, who use them to understand their rights and obligations before investing in the company.
The AOA also helps regulate how the company will achieve its goals as stated in the MOA. Additionally, in many jurisdictions, the AOA is required for opening a corporate bank account or obtaining loans for the company.
Case Laws
1. S.P. Velumani v. Magnum Spinning Mills India Pvt. Ltd (2020)
In this case, the appellant filed proceedings against the respondent company for alleged fraudulent transactions. The Tribunal dismissed the case, ruling that the conduct shown could not be categorized as oppression or mismanagement. The decision was upheld by the National Company Law Appellate Tribunal (NCLAT), as the decision was within the powers granted by the AOA.
2. Brillio Technologies Pvt. Ltd v. Registrar of Companies (2021)
In this case, the company reduced its share capital selectively, affecting non-promoter shareholders with compensation. The NCLT initially declined to ratify the decision, citing the AOA. However, the NCLAT reversed the judgment, stating that such a reduction fell within the scope of Section 66 of the Companies Act, 2013, and was not against the AOA.
Conclusion
The Articles of Association are essential documents in corporate management. Without them, a company would lack a structured set of rules governing its internal affairs and management. Together with the MOA, the AOA forms the core constitution of the company, outlining the rules and regulations that members and stakeholders must adhere to. Both documents are critical for the legitimacy and effective operation of the company. Moreover, they serve as public records, ensuring transparency and accountability in corporate operations.
This article has been written by Isha Gupta. For any other queries, reach out to us at: queries.ylcc@gmail.com
