Articles of Association (AoA) of a Company

The Articles of Association (AoA) is a fundamental document that defines a company’s nature, purpose, and operational framework. Along with the Memorandum of Association, it constitutes the company’s legal foundation. The AoA must be submitted at the time of incorporation and outlines the responsibilities of directors, the type of business the company will undertake, and the mechanisms by which shareholders exercise control over the board of directors.

Legal Framework and Requirements

• Mandatory Provisions

Section 5(1) of the Companies Act, 2013, mandates that the articles contain regulations for managing the company. The use of the term ‘shall’ in this provision indicates that certain clauses must necessarily be included (State of U.P. v Manbodhan Lal Srivastava, AIR 1957 SC 912). However, courts have recognized that the term ‘shall’ may sometimes be interpreted as directory rather than mandatory (Sainik Motors v State of Rajasthan, AIR 1961 SC 1480).

• Additional Provisions

Under Section 5(2), the articles must also contain other prescribed matters, which are detailed in Rule 11 of the Companies (Incorporation) Rules, 2014. Companies may adopt the model articles specified in Tables F, G, H, I, and J either wholly or with modifications.

The Act does not prohibit companies from incorporating additional provisions or making amendments to facilitate their operations, provided they comply with legal requirements.

Role and Legal Binding Nature of AoA

The AoA governs the internal management of the company and defines the powers of its officers. It creates a binding contract between the company and its members (Naresh Chandra Sanyal v Calcutta Stock Exchange Limited, 1971 41 Comp Cas 51 (SC)). Furthermore, it establishes a contractual relationship between shareholders regarding their rights (Hanuman Prasad Gupta v Hiralal, 1970 40 Comp Cas 1058 (SC)).

If the memorandum is silent or ambiguous, the articles help interpret its provisions but cannot expand its scope (A. Lakshmanaswami Mudaliar (Dr) v LIC, 1963 33 Comp Cas 420 (SC)).

Purpose of AoA

The Articles of Association serve several purposes:

• Governing Document: Defines the rules and regulations for the management and operation of the company.
• Legal Requirement: The Companies Act, 2013, mandates its submission at incorporation.
• Clarity: Provides shareholders, directors, and officers with procedural guidelines for business operations.
• Protection: Safeguards shareholder interests by defining their rights and procedures for dispute resolution.
• Flexibility: Can be amended to adapt to changing business needs, subject to compliance with the Act.

Key Contents of AoA

The AoA outlines:

• Exclusion (wholly or partially) of Table F provisions
• Adoption of preliminary contracts
• Share capital, variation of rights, and share structure
• Meetings and committee regulations
• Provisions on shareholder meetings

These provisions ensure smooth company operations and compliance with legal requirements.

 

Entrenchment Provisions in AoA

Entrenchment provisions are special clauses requiring a specified procedure for amendment or repeal. They are used to protect fundamental rights or provisions crucial to the company’s structure.

• Conditions for Entrenchment Provisions

• Must be included at incorporation or approved by a special resolution.
• Must apply to fundamental provisions such as shareholder rights or board powers.
• Must be registered with the Registrar of Companies.
• Must specify the amendment or repeal procedure.

Entrenchment provisions cannot override compliance with the Companies Act, 2013, or other applicable laws.

Ultra Vires Acts and AoA

If a company acts beyond the scope of its Articles but within the powers of the Memorandum of Association, the act is ultra vires the Articles but not the Memorandum. Such acts are void but may be ratified through a special resolution in a general meeting. For instance, paying interest on advance calls at a higher rate than permitted by the articles is an ultra vires act that can be rectified by an amendment.

The Articles of Association serve as a critical regulatory document governing a company’s internal affairs. By setting out essential management rules, shareholder rights, and operational procedures, they provide a structured framework ensuring compliance and effective corporate governance.

Difference between MoA and AoA

Memorandum of Association	Articles of Association
The Memorandum of Association serves as the company’s charter, outlining its fundamental conditions and objectives for incorporation.	The Articles of Association establish the internal rules and regulations for managing the company.
The clauses in the memorandum are not easily modified and can only be altered following the prescribed legal procedures. In some cases, approval from the Court or Central Government is required.	Members can amend the articles through a special resolution without necessarily obtaining approval from the Court or Central Government.
The memorandum cannot contain any provisions that conflict with the Companies Act.	The articles must comply with both the Companies Act and the memorandum, as they are subordinate to them.
The memorandum primarily defines the relationship between the company and external parties.	The articles govern the relationship between the company and its members, as well as among the members themselves.
Any actions taken by the company beyond the scope of the memorandum are considered void and ultra vires, meaning they cannot be validated even with unanimous shareholder approval.	Actions by directors that exceed the provisions of the articles can be ratified by shareholders.

 

This article is presented by CA B K Goyal & Co LLP Chartered Accountants, your trusted partner in audit and compliance solutions. For expert assistance, feel free to contact us.