Articles of Association

The Articles of Association or AOA are the legal document that along with the memorandum of association serves as the constitution of the company. It is comprised of rules and regulations that govern the company’s internal affairs.

The articles of association are concerned with the internal management of the company and aims at carrying out the objectives as mentioned in the memorandum. These define the company’s purpose and lay out the guidelines of how the task is to be carried out within the organization. The articles of association cover the information related to the board of directors, general meetings, voting rights, board proceedings, etc.

The articles of association are the contracts between the shareholders and the organization and among the shareholder themselves. This document often defines the manner in which the shares are to be issued, dividend to be paid, the financial records to be audited and the power to be given to the shareholders with the voting rights.

The articles of association can be considered as the user manual for the organization that comprises of the methodology that can be used to accomplish the company’s day to day operations. This document is a binding on the shareholders and the organization and has nothing to do with the outsiders. Thus, the company is not accountable for any claims made by any external party.

The articles of association is comprised of following provisions:

• Share capital, call of share, forfeiture of share, conversion of share into stock, transfer of shares, share warrant, surrender of shares, etc.
• Directors, their qualifications, appointment, remuneration, powers, and proceedings of the board of directors meetings.
• Voting rights of shareholders, by poll or proxies and proceeding of shareholders general meetings.
• Dividends and reserves, accounts and audits, borrowing powers and winding up.

It is mandatory for the following types of companies to have their own articles:

1. Unlimited Companies: The article must state the number of members with which the company is to be registered along with the amount of share capital, if any.
2. Companies Limited by Guarantee: The article must define the number of members with which the company is to be registered.
3. Private Companies Limited by Shares: The private company having the share capital, then the article must contain the provision that, restricts the right to transfer shares, limit the number of members to 50, prohibits the invitation to the public for the further subscription of shares in the form of shares or debentures.

According to Section 5 of the Companies Act, 2013, the AOA must have the following components:

Regulations

The AOA must contain the regulations for the management of the company.

Inclusion of matters

The Articles must specify all matters, in accordance with the rules. Furthermore, a company can include additional matters deemed necessary for its management.

Provisions for entrenchment

Entrenchment means fortification or protection.

The AOA can contain provisions for entrenchment for specific provisions. The provisions for entrenchment can ensure that the specified provisions are altered only if certain conditions or procedures are met or complied with. These conditions are usually more restrictive than those applicable for a special resolution.

The inclusion of the provisions for entrenchment is possible:

• On the formation of the company
• Also, by amending the Articles with approval from all members of the company. Further, in the case of a public limited company, with a special resolution.

Regardless of whether the provisions for entrenchment are added on the formation or after an amendment, the company must give a notice to the Registrar of the same.

Forms of AOA

Schedule I of the Companies Act, 2013 provides forms for AOA in tables F, G, H, I and J for different types of companies. Further, the articles must be in the respective form.

Model Articles

A company can adopt all or any of the regulations specified in the model articles.

Company registered after the commencement of the Act

IF… The registered articles of such a company do not exclude or modify the regulations contained in the model articles applicable to such company

THEN… Those regulations are the regulations of that company as if they were contained in the duly registered articles of the company.

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:

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 which of 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. [Pyarelal Sharma v. Managing Director, J & K Industries Ltd. [1989] 3 comp. L.J. (SL) 70].

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.

Section 14 of the Companies Act, 2013 contains the provisions for the alteration of the Articles of Association of a company. A company may modify, delete or add any article in the following manner:

Meeting of the Board of Directors: The company has to convene a meeting of the Board of Directors. All the directors must be served seven days’ notice of the board meeting. The board has to recommend the proposed alteration to the members. A special resolution, with a 75% majority, has to be passed by the Board to give effect to any alteration of the articles. The votes which are cast in favour of the resolution should be at least three times more than the number of votes if any cast against the resolution.

General meeting of the company: The company should call for a general meeting or an extraordinary general meeting (EGM). The company has to give at least 21 day’s notice for holding the meeting specifying the date, time and place and business to be transacted. An EGM can be called with a shorter notice with the consent of at least 95% of the members entitled to vote. The notice should be sent to all the directors, members and auditor of the company. The meeting should have the prescribed quorum, presence of auditor (leave of absence otherwise), conducted with the passing of a special resolution for the alteration of the AOA.

Compliance with Companies Act, 2013 The amendment or the alteration to AOA should conform to the provisions of the Companies Act, 2013. For example, the alteration should not modify the membership or shareholding of the company. The alteration should not increase or alter the liability of any member or shareholder of the company. The articles are procedural, and hence the alteration can be of only the procedural matters contained therein.

Compliance with Memorandum of Association: The alteration of the articles should not violate the memorandum of association of the company. The alteration cannot alter the objects of the company or the address of the registered office of the company. These matters are dealt with by the Memorandum of Association of the company. The AOA is subordinate to the memorandum of association of the company. The alteration should be in accordance with the powers conferred by the memorandum.

Changing the status of the company: The alteration should not have the effect of changing the status of the company. In a case where the alteration has the effect of converting a private company into a public company or a public company into a private company, the same cannot be carried out without the approval of the Central Government.

Filing compliance with ROC: After the passing of the board resolution, the company has to file Form MGT-14 with the Registrar of Companies for the filing of resolutions and agreements with the Registrar or ROC. The form has to be filed within 30 days of the passing of the board resolution. The form shall be accompanied with such fees as may be prescribed. In a case of delayed filing, the company will be liable to pay additional fees at the time of filing of the form, calculated based on the number of days of delay. The fee is calculated as per The Companies (Registration offices and fees) Rules, 2014.

Stamp duty on alteration of articles: The Company need not pay any stamp duty on the alteration of articles. Stamp duty has to be paid only at the time of incorporation of a company.

Effect of alteration of Articles of Association: The amended Articles of Association comes into effect on the date of passing of the board resolution. The altered articles will have the same effect as the original articles. The alteration is effective only when the procedure laid down in the Companies Act and Memorandum is followed. The changes shall be made in all the copies of the Articles of Association.

Procedures for Alteration of Articles of Association

For effecting alteration to the articles of association, the following procedures is required to be followed:

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. See that any such change in the Articles of the company conforms to the provisions of the companies Act, 1956 and the conditions contained in the Memorandum of Association of the company.
3. See that any such change does not increase the liability of any member who has become so before the alteration to contribute to the share capital of or otherwise to pay money to, the company.
4. See that any such change does not have the effect of converting a public company into a private company. If such is the case, then make an application to the Central Government for such alteration.
5. See that any such change does not provide for expulsion of a member by the company.
6. 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.
7. If the shares of the company are enlisted with any recognised 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.
8. Hold the General Meeting and pass the special resolution.
9. 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.
10. 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.
11. 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 in cash as per Schedule X. If the Articles of Association have been completely or substantially changed, file a new printed copy of the Articles after paying the requisite fee in cash prescribed under Schedule X to the Companies Act, 1956. payments upto Rs.50/-