ARTICLES OF ASSOCIATION AND ITS AMENDMENT UNDER COMPANIES ACT,1956

ARTICLES OF ASSOCIATION AND ITS AMENDMENT  UNDER COMPANIES ACT,1956

2 (2) Articles" means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act, including, so far as they apply to the company, the regulations contained, as the case may be, in Table B in the Schedule annexed to Act No. 19 of 1857 or in Table A in the First Schedule annexed to the Indian Companies Act, 1882, (6 of 1882.) or in Table A in the First.

Contents of Articles

1.      Exclusion wholly or in part of table A

2.      Adoption of preliminary contracts.

3.      Number and values of shares

4.      Issue of preference share

5.      Allotment of shares

6.      Call on shares

7.      Lien on shares

8.      Transfer and transmission of shares

9.      Nomination

10.  Forfeiture of shares

11.  Alternation of capital

12.  Buy back

13.  Share certificates

14.  Dematerialization

15.  Conversion of shares into stock

16.  Voting rights and proxies

17.  Meeting and rules regarding committees

18.  Directors, their appointment and delegation of power

19.  Nominee directs

20.  Issues of debentures and stock

21.  Audit committee

22.  Managing director, whole time director, manager, secretary

23.  Additional director

24.  Seal

25.  Remuneration  of director

26.  General meeting

27.  Directors meeting

28.  Borrowing powers

29.  Dividend and reserve

30.  Accounts and audit

31.  Winding up

32.  Provision regarding common seal

33.  Capitalization of reserve.

SCHEDULE I - TABLE A of Companies Act, 1956 provides regulations for management of a    company limited by shares

Stamp duty is compulsory for the Memorandum and Articles of Association. The Stamp duty chargeable is Rs 200/- for Memorandum and Rs 300/- for Article of association.

.Sections in the Companies  Act 1956 relating to Articles of Association

Sec 26   - Articles prescribing regulation.

There may in the case of a public company limited by shares, and there shall in the case of an unlimited company or a company limited by guarantee or a private company limited by shares, be registered with the memorandum, articles of association signed by the subscribers of the memorandum, prescribing regulations for the company.

Sec 27  Regulations required in case of unlimited company, company limited by guarantee or private company limited by shares.

(1) In the case of an unlimited company, the articles shall state the number of members with which the company is to be registered and, if the company has a share capital, the amount of share capital with which the company is to be registered.

(2) In the case of a company limited by guarantee, the articles shall state the number of members with which the company is to be registered.

(3) In the case of a private company having a share capital, the articles shall contain provisions relating to the matters specified in sub-clauses (a), (b) and (c) of clause (iii) of sub-section (1) of section 3; and in the case of any other private company, the articles shall contain provisions relating to the matters specified in the said sub-clauses (b) and (c).

Sec 28 Adoption and application of Table A in the case of companies limited by shares.

(1) The articles of association of a company limited by shares may adopt all or any of the regulations contained in Table A in Schedule I.

(2) In the case of any such company which is registered after the commencement of this Act, if articles are not registered, or if articles are registered, in so far as the articles do not exclude or modify the regulations contained in Table A aforesaid, those regulations shall, so far as applicable, be the regulations of the company in the same manner and to the same extent as if they were contained in duly registered articles.

Sec 29  Form of articles in the case of other companies.

The articles of association of any company, not being a company limited by shares, shall be in such one of the Forms in Tables C, D and E in Schedule I as may be applicable, or in a Form as near thereto as circumstances admit:

Forms and signature of articles

Articles shall –

1)     be printed

2)     be divided into paragraphs numbered

3)     signed by each subscribers 

Subject to the provision

The Articles of Association of the company should authorize the buy-back. Section 77 and also as per the articles of association qualification of shares in accordance with  section 270 of the Companies Act, 1956 is applicable. In case of Public limited company when the articles of Association is silent then Table A is applicable. For Private limited company qualification of shares is nor mandatory unless the articles provides for the same.

Section 36 in The Companies Act, 1956
Effects of Article of Association:

(1) Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles.

(2) All money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company
The registration of memorandum of association and article of association bind the company as well as its members. Thus, members are bound to the company; the company is bound to the members and the members are bound to the other members by whatever is contained in both the document. The effects may be
 a. The members to the company
b. The company to the member’s
c. The member inters se,
d. The company to the outsiders.
a. The members to the company: The article of association binds the company as well as its members. Therefore, the company can enforce article of association against any members. But an alteration of article which increase the liability like subscribing more shares  can not bind the member unless he agree to  the same in writing.
The Company to the members: As the article of association binds the company, it can exercise the right against any members only in pursuance of and in accordance with the article of association.

c. The member inter se: The article regulates the rights of the members which can be enforced only through the company. Each member is bound by the article of association by way of implied contract.

d. The company to the outsiders: The article of association does not constitute any contract between the company and the outsiders. An outsider is not entitled to enforce the article against the company for any breach of right which is conferred on him by the article.

A company by special resolution can alter or add to its article of association. This should be filed with the Registrar within 30 days, in the printed form. The right to alter of article of association can be done by passing special resolution. Thus, there are certain limitations regarding alteration of article of association.

Meaning of Alteration of Articles of Association

Sec. 31 of the Companies Act, 1956, provides that a company may by passing a special resolution; alter regulations contained in its Articles any time subject to –

a) The provisions of the Companies Act and

b) Conditions contained in the Memorandum of Association [Section 31(1)].

A copy of every special resolution altering the Articles shall be filed in Form no 23, with the Registrar within 30 days its passing and attached to every copy of the Articles issued thereafter. The fundamental right of a company to alter its articles is subject to the following limitations:

Conditions that must be satisfied for Alteration of Articles of Association

a) The alteration must not exceed the powers given by the Memorandum of Association of the company or conflict with the provisions thereof.

b) It must not be inconsistent with any provisions of Companies Act or any other statute.

c) It must not be illegal or against public policies

d) The alteration must be bona fide for the benefit of the company as a whole.

e) It should not be a fraud on minority, or inflict a hardship on minority without any corresponding benefits to the company as a whole.

f) The alternation must not be inconsistent with an order of the court. Any subsequent alteration thereof inconsistent with such an order can be made by the company only with the leave of the court.

g) The alteration cannot have retrospective effect. It can operate only from the date of amendment.

h) If a public company is converted into a private company, then the approval of the Central Government is necessary. Printed copies of altered articles should be filed with the Registrar within one month of the date of Central Government’s approval [Section 31 (2A)].

i) An alteration that has the effect of increasing the liability of a member to contribute to the company is not binding on a present member unless he has agreed thereto in writing.

j) A reserve liability once created cannot be undone but may be cancelled on a reduction of capital.

k) An assumption by the Board of Directors of a company of any power to expel a member by amending its Articles is illegal or void.

Procedure of Alteration of Articles of Association

1. Take the necessary decision by convening a Board Meeting to change all or any of the existing Articles of Association and fix up the day, time, place and agenda for a general meeting for passing special resolution to effect the change.
2. Issue notices for the General Meeting proposing the Special resolution and explaining inter alia, in the explanatory Statement the implication and reasons of the changes being proposed.
3. If the shares of the company are enlisted with any recognized Stock Exchange, then forward copies of all notices sent to the shareholders with respect to change in the Articles of Association to the Stock Exchange.
4. Hold the General Meeting and pass the special resolution.
5. File with the stock exchange with which your company is enlisted six copies of such amendments as soon as the company adopts it in General Meeting. Out of the six copies, one copy must be a certified true copy.
6. Forward promptly to the Stock Exchange with which your company is enlisted three copies of the notice and a copy of the proceedings of the General Meeting.
7. File the Special resolution with the concerned Registrar of companies with explanatory statement in Form No.23 within thirty days of its passing after payment of the requisite filing fee. If the Articles of Association have been completely or substantially changed, file a new printed copy of the Articles after paying the requisite fee.
8. Effect the changes in all copies of the articles of association.

Limitations regarding alteration of article of association:

• A company cannot alter its articles so as to exclude or limit the rights of the shareholders or inconsistent with the provisions of the Companies Act.
• The article must not override any provision of memorandum of association.
• It must not be inconsistent with the alteration ordered by the Companies Law Board.
• In certain cases, the approval must be taken from the Central Government.
• The alteration must not deprive any person of his rights under a contract.
• The alteration should be for the benefit of the company.

A company can alter its article of association at any time by passing a special resolution. But, a company can exercise this power subject only to certain limitation.

Limitations on power of alteration:

1. The alteration must not contra any provision of memorandum of association.
2. The alteration must not contra any provision of Companies Act or any Statute.
3. The alteration must not contain anything which is illegal or oppose to public policy.
4. The alteration must be for the benefit of the Company as a whole
5. Approval for alteration from the Central Government is also requiring in certain cases.
6. A company cannot justify breach of contract with third parties or avoid a contractual liability by altering article.
7. The alteration of article of association must not do by any fraud on the minority, by the majority.
8. The alteration cannot be made unalterable.
9. The alteration of article of association should not increase the liability of the members.

10. The alteration of article of association should be made only by special resolution.

Decided Case Laws with Reference to Article of Association.

1.      Where a resolution was passed expelling a member and authorizing the director to register the transfer of his shares without an instrument of transfer the resolution was held to invalid as being against the provisions of the act. ( Madhava ramachandran kamath v. Canara Banking Corporation (1941) 11. Comp case 78 mad ) )

2.      In Allen v. gold reefs of west Africa limited (1900) I.C 656; a company had a lien on all shares not fully paid up for call due to the company. There was only one shareholder” A “who owned fully paid up shares. He also held partly paid shares in the company, “A” died. The company altered its articles by striking the word fully paid up and thus giving itself a lien on shares- whether fully paid up or no. The legal representative of “A” challenged the alteration on the ground that the alteration has a retrospective effect. Held that, the alteration was good, as it was done bona fide for the benefit of the company as a whole, even though the alteration has a retrospective effect.

3.      In side bottom V.Kershaw Leese & co (1920) ch.154 (C.A) a company was empowered by an alteration in the article to expropriate shares held by any member who was in business in competition with the company. At the time of alteration, there was only one member doing business in the competition with the company. He challenged the alteration. Held that, the alteration was valid as it bona fide the benefit of the company.

4.      In Brown v British A brasive wheel co (1919) ch 290, the majority which held 98% of the shares passed a special resolution that upon the request of holders of 9/10 of issued shares, a shareholder shall be bound to sell and transfer his shares to the nominee of such holder at a fair value the alteration was held to be invalid since it amounted to oppression of the minority.

5.      In Mathrubumi printing & publishing co. ltd  v Vardhaman publication ltd comp. case 80. The Kerala high court held that the power conferred on the company under section 31 to alter by special resolution is not to be abused by majority of shareholder can by altering the article retrospectively affect, to the prejudice of the consenting owner of shares, the right already existing under a contract nor take away the right accrued e.g. after a transfer of share is lodged, the company cannot have a right of lien so as to defeat the transfer.

6.      In British murac syndicate ltd v Alperton rubber co. (1915) 2 ch.. 186, an agreement provided that so long as the plaintiff syndicate should hold 5000 shares in the defendant company it should have right of nominating 2 director whom the defendant company.

7.      In southern foundries (1962) ltd. Shirlus (1940) comp case 225 (HL) the article of the company provided that the director may appoint one of them  to be the M.D. In Dec 1933 an agreement was entered in to between and the company, by which “S” was appointment as M.D.  for 10 years and could not resign his office during this period nor was the power to remove him to be exercised within 3 years of the agreement the company became a fully owned subsidiary of another company “F” and its articles were altered giving F the power to remove any directs S was removed. Held that the altered articles had provided for dismissal of the managing director and the said dismissal would be intra virus the company to action for damage as the appointment had been made for a term of 10 years and he was dismissed before the term was over.

8.      The amended regulation in the articles of association cannot operate retrospective but only from the date of amendment (Pyare lal Sharma v managing director J&K Industries ltd )

9.      In the state of Karnataka v Mysore coffee curing work ltd 1884 55 comp case 70 (Kar). The state govt. held shares in company had articles of the company provided that the state govt. could nominate 3 director and also chairman of the board in consideration of having subscribed to the capital of the company. Later the company issued right shares in the ratio 1:1 which the state govt. did not take and consequently its shareholders dwindled to 19.6%. Held it could do so.

10.  The articles of a company provided that E should be a solicitor for life to the company and should not be removed from office except misconduct. Later on has also became a member a company. But after  employing him as a solicitor for a number of years, the company discontinued his service. He being a member, sued the company for damage( Eley v Positive government security life assurance co.1876)

11.  Royal British bank v Turquand 1856. The facts of the case are, the directors of the bank issued a bond to Mr. Turquand. The articles provided that the directors had the power to issue bond if authorized by a proper resolution of the company. No such resolution was passed. It was held that Turquand could sue on the bond as he was entitled to assume that the resolution must have been passed. It was observed that person dealing with the company bound to read the registered documents and to see that the proposed dealing is not inconsistent therewith. But they are not bound to do more; they need not inquire into the regularity of internal proceedings.12.  Madras case of official liquidator, manasube sico pvt ltd v commissioner of police, the learner judge observed that the lender to a company should acquaint themselves which MOA and AOA , but cannot expected to embark upon an investigation.

13.  Howard v patent ivory co (38 ch D 156), the article of a company empowered the director to borrow upto one thousand pounds only. They could however exceed the limit of one thousand pounds with the consent having been obtained; they borrowed 3500 pounds from one director, who took debentures. The company refused to pay the amount. Held that debentures were good to extend of one thousand pounds only because the director had noticed or was deemed to have the notice of the internal irregularity the director being an insider, the door of the company and not closed to him.

Constructive notice of Memorandum and Article of Association: 

The memorandum and article of association are public documents which can be assessable in the office of the Registrar. On the other hand, all the third parties are presumed that they knew the provisions stated in these document. These documents are open for public inspection on payment. When any person whether a shareholder or outsider enters into any contract which is ultra vires, cannot bind the company to do such act.

DOCTRINE OF INDOOR MANAGEMENT:

It is a rule of exception of constructive notice. Different persons dealing with a company. They are whether shareholder or outsider is deemed to have knowledge of the memorandum and article of association. Thus, when a transaction appears to be proper according to the memorandum and article of association, the company cannot escape from its liability.

In many cases, it is not possible to ask whether prior approval is taken for a particular act or it is necessary to take prior approval by investors, vendors, creditors and other outsiders that dealing with the company; particularly where the directors or other officers of the company were empowered under the articles to exercise certain powers, subjects only to certain prior approval of the shareholders.  In such a case, those dealing with the company like investors, vendors, creditors and other outsiders can assume that if the directors or other officers are entering into those transactions, they would have obtained the necessary sanctions. This is known as “doctrine of indoor management”.
The doctrine had its origin in the leading case of Royal British Bank v. Turquand.

The facts of the case are:
The directors of the bank issued a bond to Mr. Turquand. The articles provided that the directors had the power to issue bond if authorised by a proper resolution of the company. No such resolution was passed. It was held that Turquand could sue on the bond as he was entitled to assume that the resolution must have been passed. It was observed that person dealing with the company bound to read the registered documents and to see that the proposed dealing is not inconsistent therewith. But they are not bound to do more; they need not inquire into the regularity of internal proceedings.

 Here the point decided is that:
The outsider’s dealing with the company is entitled to presume that as far as the internal management of the company is concerned, everything has been regularly done.

There are certain exceptions to the doctrine of indoor management: 

The outsiders cannot claim relief on the ground of doctrine of indoor management in the following circumstances:
1. Knowledge of irregularity:
A person shall not get any relief under this doctrine, when he knows fully that the directors do not have the authority to make the transaction but still enter in to it.

2. Negligence:

   When any officer of the company does any such act for which he is not having   power, the person dealing with him must make proper enquiry and satisfy himself as to the officer’s authority. But, if he fails to do so, he is not getting any relief under this rule.

3. Forgery:

The rule of doctrine of indoor management cannot be invoked in favor of transaction involving forgery or otherwise void.

4. Acts outside the apparent authority:

If any act of an officer is beyond the power of the officer, the person entering into such transaction with him cannot claim the protection of the Rule.

5. No knowledge of the contents of articles:

The person, who has not read the memorandum and article of association and entered into the contract, cannot seek relief under this Rule.

 Section 9 in the Companies Act, 1956

9. Act to override memorandum, articles, etc. Save as otherwise expressly provided in the Act-

(a) the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its Board of directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Act; and

(b) any provision contained in the memorandum, articles, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be.

Thus Article of Association is the most important document in the company and any one who deal with the company must see the Article of Association.