Article of Association

Introduction

For any corporations, business, or organisations to run, there need to be certain rules, norms and laws which is to be mandatory followed and they are governed under the Companies Act, 2013. These laws help to manage the internal conduct of the business of organisations which facilitates the smooth conduct of the management. In other words, the laws and regulations which help to run the company in an easy way is called Article of Association.

Statutory Definition

The term Article has been well-defined in Section 2(5) of the Companies Act, 2013[1].It is stated in the Act as “The Articles of association of any business or corporation which were initially mounted or different from time to time to be in fulfilment of any preceding company law or of the following Act.”

Objectives

The Articles of Association is supplementary to the memorandum of association of the corporation. They define the privileges, responsibilities, influences of the organisation of the corporation as amongst themselves and the company with maximum strength[2]. Further, it is not just restricted to the rules; still they also provide with the suggestion by which deviation in the internal regulations of a company can be made. It is an imperative for the company to have the article of association as the document involves various rules and regulations and management of the internal direction. They are binding on the company in association to its members- just as associates are assured to the company, the company is bound to the members to perceive and accompany the articles[3]. They may not be the basic structure for the corporation to run like the Memorandum of Association, but they are vital for the working of Corporation.

These articles also have a way of management and a way of dealing and be framed as per the optimal of the corporation. To well understand this, need to refer Section 36 of Indian Companies Act, 2013 which says that “the making of memorandum and articles while in cooperation of the company whenever the corporation gets officially registered and the members are obligatory to follow the systematic laws but until a certain limit as officially inscribed by them.”

Features of Article of Association

The Article of Association provides the vast varieties of features where it gives the powers of directors, the share of the board members and other members. The appointment of people working in companies is managed by these laws mentioned under the Companies Act. These laws ensure members have a contract amongst each other as well the provisions ensure the functioning of the stockholders. The laws that are stated in the Company Act manage the complete control of board members, directors, and everyone in the organisation.

To prevent the company from any bias activity, the court can even declare clause ultra vires which means that even if any action is unreasonable, or if the work is done found unreasonable or arbitrary than the court can make such clause null and void. The most prominent feature of article of association is that any layman individual can go through these laws of management of the company as it is a public document. Companies which partially obliged the law must give particular emphasis to the Article of Association as it very much helps the company to smoothly run the business.[4]

Entrenchment Clause in Articles of Association

The Articles of Association included the clauses of entrenchment, meaning any such rule that is very problematic to change. Thus, an entrenchment clause is something where to make the amendment is very difficult or impossible[5]. However, this entrenchment clause is new to the Companies Act. It has been brought in the Companies Act by the amendment which took place in the year 2013. This whole notion was never added or seen in the Companies Act, 1956[6]. Such clauses may narrate to the consequence that detailed necessities of the articles may be reformed only if circumstances or measures as that are more obstructive than those applicable in the case of a special determination, are met or observed with. Under section 5(4) of the Indian Companies Act, 2013.[7]To bring alteration in the article of association for entrenchment clause is different for different types of company. Like in the case of a private company, the alteration in the entrenchment provisions can be made only by the approval of all the members of the company. Likewise, in the case of public company special resolution is required to be passed to bring change in entrenchment clause[8]. Entrenchment also includes Section 5(3) of Indian companies Act, 2013[9] which says that the modification in the articles of association should be such that the altered clauses become more obstructive. In other words, alteration of the clause becomes very difficult or unlikely to change. This is added to prevent the company to make any changes in the article of association as per its own requirement.[10]

Clauses in Article of Association

The Article of Association must have the following clauses and their alterations:

Company’s name: This clause provides the name of the Company. Depending upon the types of company, a company have to use either the Public Limited or Private Limited in the suffix or Charitable Company in the case of section 8 of the Companies Act. The name of Corporation of any private limited and that must include the limited liability. In fact, selecting the name of the company is the first step towards the formation of the company. The name decided by the company has to follow certain guidelines like it should be specific, non-identical[11].

The Registered office of the company: A corporation can exercise its practice in various places and also abroad, but its registered place of the corporate can only be in one specific place. That specific place should be the registered address of the company. All the business documents of the company shall have the registered address written on it. Also, the name of the company should be written at the conspicuous place of the registered office of the company.

Share capital:  Every Company have the share capital which is on the control of Directors to the company which allot, issue, deviate or dispose of the person either in proportion or at par. It can be enlarged and decreased within these restrictions without a requirement to edit the articles of association.[12]

Share Capitals and variation of rights: The article of association also provided the share capital along with the rights of various shareholders including their payment, share certificate and others. These rights can only be changed by passing of resolution.

Annual general meeting: Every company is expected to hold an annual general in a calendar year. The agenda of the meeting is laid down in the article of association of the company. Consideration of financial statement reports of boards of directors, auditors are also presented in the meeting. So, all mandatory provisions which are to be followed according to the law are also discussed in the meeting like appointing of directors, auditors.  Thus, it can be said that it provides guidance to the company and the members.

The Accounting period of the company: Accounting period is basically the time range during which accounting functions are performed. It is important to know the accounting period because on the basis of this potential shareholders analyze a company’s performance and on the basis of this investment can be made.[13]

Alteration of Clauses

The points which have been above discussed is mandatory to be followed. Alterations to these clauses are the requirement of a special resolution to be passed by the company. It cannot be changed by the ordinary resolution of the company. In case of the violations of any of the provisions, the court can also interfere and refrain the company from performing any illegal act.

As the corporation cannot deviate from the main motive mentioned provided in the memorandum of the company, similarly with the article of association of the company, it has to be followed strictly. The Corporation cannot change or twist the articles as per its own favours.

Case Law

In the case of Naresh Chandra Sanyal vs Calcutta Stock Exchange[14], situation is that in the month of December 1941, one hundred shares were brought by the Sanyal of the company named as Indian Iron & Steel Company Ltd. from Johurmull Daga & Company but did not prepare any management for taking the distribution of the shares on the required date. Johurmull Daga and Company traded the shares pursuant to the authority given to them by the Sub-Committee of the Exchange. The contract resulted in a loss of almost Rs. 438. The Sub-Committee issued Sanyal to reimburse the sum due to him, but he failed to carry out that process. On 7th January 1942, the Committee of Exchange has referred the complaint of Johurmull Daga & Company. The Sanyal by resolution was declared as defaulter because he has failed to pay the amount which he was directed by the committee to pay. So later on, the committee was set, and they met and decided that Sanyal is not the member of the committee. With this Sanyal filed an appeal in the High Court of Calcutta as when he filed the case in session court his suit was dismissed. The issues that were raised in front of court were whether the membership being expelled of Sanyal was correct or not and were the decisions taken by the committee were with respect to the Articles of Association or not?

When the matter was reached to High Court, it has been stated that there was an irregularity in the decision of the Committee as there has been no notice of meeting provided to Sanyal which could declare him as defaulter, that the Committee had no authority under the Articles of Association to direct sale of the share; and that in any event Sanyal was permitted to the balance enduring on hand with the Exchange after satisfying his sum unpaid, obligations and actions under the Articles of Association.

For failure to stand by the result of the Committee in respect of his liability to pay the amount of loss due to Johurmull Daga & Company Sanyal was declared a debtor, and after he constant to continue a defaulter for six months he was by determination of the Committee expelled from the membership of the Exchange. Section 7 of the Indian Companies Act, 1913 was used as the fully paid share Forfeiture of Effect-Sale of forfeited share.

The Supreme Court gave a verdict on this case in later time as they said that the articles of membership of a company also found an agreement between the company and its associates or members as well as between each other. This contract directs the normal rights and responsibilities incidental to the association in the company[15].

Conclusion

It is to be concluded that the article of association is one of the documents which can be easily be accessed by any public. The document is generally kept at the registered office of the company. In other words, it is a legal document which contains the instructions, guidelines, and byelaws for proper functioning the company. It is due to the article of association of company that management of the company become more systematic. It is a fixed clause for every corporation and has its importance like any other legal documents. Further Article of Association contains the well-laid principles of company law and cannot override the provisions of the Companies Act, 2013.

Also, the provisions in the clause cannot be changed simply ordinary resolution but require resolution to be passed by the company in order to change any clause. It also contains the entrenchment provisions which further restrict the amendment in the clause.  It has all the major topics which are needed for the administration and direction of the corporations. As we saw, the law evolved, the concept of entrenchment was added and was successfully drafted in the Indian Companies Act, 2013. This whole notion of Article of Associations manages the entire concept of the handling business in any firm or corporation.

References:

[1] The Companies Act,2013; Section 2(5)

[2] Priyanka Sethia, all about Articles of Association under Companies Act, 2013, Last Updated on 14th April 2020, Available at <https://taxguru.in/company-law/articles-association-aoa-companies-act-2013.html> accessed on 13/09/2020

[3]Business Law- Article of Association, Tutorials Point, Available at <https://www.tutorialspoint.com/business_law/business_law_articles_of_association.htm>  last accessed 13/09/2020 at 1:32 pm

[4]James Chen, Articles of Association, available at <https://www.investopedia.com/terms/a/articles-of-association.asp>  last accessed on 13th September 2020 at 1:52 pm

[5] Vijay Kumar, Entrenchment Clause- Question Mark on Validity, Law Street General Journal, Published Date 9th March 2015 available at <http://www.lawstreetindia.com/experts/column?sid=101> last accessed on 13/09/2020 at 2:21 pm

[6] https://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf was browsed on 13/09/2020 at 2:35 pm.

[7] The Companies Act, 2013; Section 5(4)

[8] Anjali Gorsia, Entrenchment of Article of Association under Section 5 of CA 2013, Published on 13th July 2017, available at <https://taxguru.in/company-law/entrenchment-article-association-section-5-ca-2013.html> last accessed on 13/09/2020 at 3:32 pm.

[9] Rebecca Furtado, Decoding the Entrenchment Clause as Provided by the Companies Act, 2013, Ipleaders Blog, Last updated on June 20, 2016 available at  <https://blog.ipleaders.in/decoding-entrenchment-clause-provided-companies-act-2013/>  last accessed on 13/09/2020 at 3:47 pm.

[10] Divesh Goyal, Alteration in Capital Clause- Memorandum of Association, Last updated on 14th February 2020, available at <https://taxguru.in/company-law/alteration-capital-clause-memorandum-association.html> last accessed on 13/09/2020 at 4:22 pm.

[11] Ebook of MCA available at <http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17937>last accessed on 13/09/2020 at 5:03 pm.

[12]The Companies Act, 2013; Schedule I

[13] Will Kenton, Accounting Period, Corporate Finance and Accounting, Investopedia last updated on 3rd December 2019 available at https://www.investopedia.com/terms/a/accountingperiod.asp, last accessed on 18th September 2020 at 9:10 pm

[14] Saundary Sinha, Case Analysis on Naresh Chandra Sanyal vs. Calcutta Stock Exchange Association Limited, last updated on 25th January 2020 available at </naresh-sanyal-v-calcutta-stock-exchange-air-1971-sc-422/> last accessed on 13/09/2020 at 6:21 pm.

[15] Naresh Chandra Sanyal vs. Calcutta Stock Exchange Association Limited, 1971 AIR 422. Also Referred <http://www.the-laws.com/Encyclopedia/Browse/Case?CaseId=000791693000 >  last accessed on 13/09/2020 at 7:23 pm