Articles of Association: Purpose, Features, and Essentials Explained
The Articles of Association serve as a fundamental document that defines a company’s purpose and lays out the framework for its daily operations. These articles typically cover essential details such as the company’s name, purpose, share structure, and organisational framework. Often referred to simply as "articles" in the U.S. and Canada, this document plays a crucial role in ensuring the company functions smoothly and in compliance with legal requirements.
What are Articles of Association?
When a company is formed, certain rules and regulations are laid down along with the objectives of the company’s operations and its purpose. These laws regulate the internal affairs of a company. There are two important sets of documents that define these objectives and govern the functioning of the company and its directors or internal affairs. These documents are Articles of Association (AOA) and Memorandum of Association (MOA). Here, we will discuss in detail the Articles of association.
Articles of Association contain the by-laws that regulate the operations and functioning of the company like the appointment of directors and handling of financial records to name a few. Let’s imagine the company as a machine. The articles of association then can be considered the user’s manual for this machine. It defines the operations that the machine is supposed to perform and how to do that on a day-to-day basis.
Definition of Articles of Association of a Company
As per Section 2 (5) of the Companies Act, 2013, Articles of Association have been defined as
“The Articles of Association (AOA) of a company originally framed or altered or applied in pursuance of any previous company law or this Act.”
Objectives of the Articles of Association
Sec 5 of the Companies Act, 2103 states that the Articles of Association:
Must include the regulations for the management of the company
Include matters that have been prescribed under the rules
They do not prevent a company from including additional matters in the AOA or from doing any alterations as may be considered necessary for the functioning of the company affairs.
Purposes of the Articles of Association (AoA)
The Articles of Association fulfil several critical roles under Indian Company Law, including:
Framework for Governance: The Articles of Association serve as the foundational document that outlines the rules and regulations governing a company’s management and operations. They define the rights, responsibilities, and obligations of directors, shareholders, and officers.
Legal Obligation: According to the Companies Act 2013, it is mandatory for every company to have its Articles of Association. These Articles must be submitted to the Registrar of Companies during the incorporation process.
Operational Clarity: The Articles provide clear guidelines for shareholders, directors, and officers, ensuring everyone understands the procedures and regulations for conducting business activities.
Shareholder Protection: They safeguard the interests of shareholders by outlining their rights and establishing procedures for resolving disputes or conflicts.
Adaptability: The Articles of Association offer flexibility, allowing for amendments to address changes in the company’s structure or needs, as long as such modifications comply with the provisions of the Companies Act 2013.
Contents of the Articles of Association
The AOA contains the rules and by-laws for the following;
Share Capital:
Rights of various shareholders, share certificates, payment of a commission, etc.
Lien of shares
Calls on shares
The process for the transfer of shares
Transmission of shares
Forfeiture of shares
Surrender of shares
Process for conversion of shares to stocks
Share warrants
Alteration of capital: Increase, decrease, or rearrangement of capital
General meetings and proceedings
Voting rights of members
The appointment, remuneration, qualifications, powers of directors, etc.
Proceedings of the boards of Directors’ meetings
Dividends and reserves
Accounts and Audits
Borrowing Powers of the company
Provisions relating to the winding up of the company
Forms of Articles of Association (AOA)
The forms for Articles of Association (AOA) in tables F, G, H, I, and J for different types of companies have been mentioned under Schedule I of the Companies Act, 2013. AOA must be in the respective form.
Table F- AOA of a company limited by shares
Table G- AOA of a company limited by guarantee and having a share capital
Table H- AOA of a company limited by guarantee and not having a share capital
Table I- AOA of an unlimited company and having a share capital
Table J- AOA of an unlimited company and not having a share capital
Difference Between Memorandum and Articles of Association
Features of Articles of Association
The Articles of Association (AOA) outline the key rules and regulations for a company's internal management. Key features include provisions for share capital, voting rights, director appointments, dividend distribution, and financial record handling. The AOA ensures smooth operations by defining the company’s structure, responsibilities, and procedures. It is a flexible document that can be amended as needed to adapt to changing business requirements.
Solved Questions on Articles of Association
1. What are the conditions for the provisions of entrenchment in the AOA?
Ans: The provisions for entrenchment provide specific provisions in the AOA that can be altered if certain conditions are complied with. These conditions are usually more restrictive than those applicable for a special resolution. The provisions for entrenchment can be added on the formation or after an amendment. However, in both cases, the company must give notice to the Registrar of the same.
The inclusion of the provisions for entrenchment can be done:
At the time of formation of the company
By amending the Articles with approval from all members of the company.
In the case of a public limited company, it can be done with a special resolution.
2. Can the AOA be altered?
Ans: Section 31 of the Companies Act states that the Articles of Association can be altered at any time by a special resolution. A copy of the same must be filed with the Registrar of Companies. However, this power of alteration is subject to two restrictions:
The alteration must be under the provisions of the Act
The alteration is subject to conditions stated in the MOA
Any alteration that converts a public company into a private company must be approved by the Central Government.
3. Can the AOA go beyond the scope of the MOA?
Ans: MOA and AOA are two key documents that come into being at the time of the company formation. The Articles of Association are subsidiaries not just to the company but also to the Memorandum of Association of a company. The MOA is a fundamental constitutional document of the company. Any articles that go beyond the Memorandum of Association are deemed ultra vires.
Conclusion
The Articles of Association are more than a legal formality; they are a strategic tool for effective corporate governance. By detailing operational protocols and stakeholder roles, the AOA fosters transparency, compliance, and long-term stability. Whether you’re drafting an AOA for a new venture or amending an existing one, prioritising clarity and legal compliance is key.
FAQs on Articles of Association: Definition, Features, and Importance
1. What are the Articles of Association (AOA) of a company?
The Articles of Association (AOA) is a legal document that functions as the rulebook for a company's internal management and day-to-day operations. As defined by Section 2(5) of the Companies Act, 2013, it outlines the regulations, by-laws, and procedures governing the conduct of the business, including the rights and responsibilities of directors and shareholders.
2. What are the main contents of a company's Articles of Association?
The AOA contains the rules and regulations for a company's internal affairs. Key contents typically include:
- Rules regarding share capital, including calls, forfeiture, and transfer of shares.
- Procedures for conducting general meetings and board meetings.
- The appointment, powers, duties, and remuneration of directors.
- The rights of different classes of shareholders and their voting rights.
- Provisions for the creation of reserves and declaration of dividends.
- Details on company accounts and audits.
- The process for the winding up of the company.
3. How do the Articles of Association (AOA) differ from the Memorandum of Association (MOA)?
The primary difference lies in their scope and purpose. The Memorandum of Association (MOA) defines the company's constitution and its relationship with the outside world, outlining its objectives and powers. In contrast, the Articles of Association (AOA) govern the company's internal management and administrative framework. The AOA is subordinate to the MOA; any clause in the AOA that contradicts the MOA is considered void.
4. What are the consequences if a company's actions go against its Articles of Association?
If a company or its directors perform an act that is beyond the authority granted by the Articles of Association, the act is considered 'ultra vires' the Articles. Such an act is irregular but not void. It can be ratified and made valid if the shareholders pass a special resolution, provided the act is 'intra vires' (within the powers of) the Memorandum of Association and the Companies Act.
5. How can the Articles of Association be changed, and what are the main restrictions?
Yes, a company can alter its Articles of Association at any time by passing a special resolution in a general meeting, as per Section 14 of the Companies Act, 2013. However, this power is subject to two key restrictions: the alteration must not violate the provisions of the Memorandum of Association (MOA), and it must not conflict with the Companies Act or any other applicable law.
6. Is it mandatory for every company in India to have its own Articles of Association?
Yes, having Articles of Association is mandatory for certain companies like unlimited companies, companies limited by guarantee, and private companies limited by shares. For a public company limited by shares, if it does not register its own AOA, then Table F of Schedule I of the Companies Act, 2013, automatically applies as its default Articles.
7. What is meant by an 'entrenchment' provision within the Articles of Association?
An entrenchment provision is a special clause included in the AOA that makes certain amendments more difficult to pass than a standard special resolution. It essentially 'locks in' specific articles by requiring a more stringent condition for their alteration, such as approval from all members or a higher majority vote. This is done to protect key principles of the company's governance from being changed easily.
8. Why are there different prescribed forms (like Table F, G, H) for the Articles of Association under the Companies Act, 2013?
The Companies Act, 2013, prescribes different model forms for the AOA to cater to the unique structures and liabilities of different types of companies. For example:
- Table F is for a company limited by shares.
- Table G is for a company limited by guarantee and having a share capital.
- Table H is for a company limited by guarantee and not having a share capital.
This ensures that the internal regulations are appropriate for the specific nature of the company's liability and capital structure.
