Articles of Association

ARTICLES OF ASSOCIATION

PROJECT SUBMISSION FOR COMPANY LAW

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TABLE OF CONTENTS

1. Introduction .2-4

1.1 Introduction ... 2 1.4 Definition ...3 1.5 Form, Content, Implication ... .3-4

2. Relationship between memorandum and articles of association 5-7 2.1 Flexibility 5 2.2 Subordinate .5 2.3 Contemporaneous Documents 5 2.4 Distinction ...7 2.5 Registration .7

3. Binding Force of Articles of Association ..8-9 3.1 Introduction .8 3.2 Members as members ..8 3.3 In Relation to Outsiders ... 8 3.4 Invalidity of the articles by reason of conflict 9

4. Construction and interpretation of the Articles 10-12 4.1 Introduction ..10 4.2 Case Law .. 10 4.3 Terms in Articles by Implication .. 11 4.4 International Law ... ..12

5. Alteration of articles of association .. ..13-15 5.1 Introductin .. 13 5.2 Case Law.. 13, 14 5.3 Restrictions ... 14, 15 5.4 United Kingdom .15

6. Doctrine of Constructive Notice and Indoor Management 16-17 6.1 Doctrine of Constructive Notice ..16 6.2 Doctrine of Indoor Management .17

7. Conclusion 18

8. Bibliography .17


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I.INTRODUCTION

1.1 Introduction

The articles of association of a company, often simply referred to as the articles are

the regulations governing the relationships between the shareholders and directors of the

company, and are a requirement for the establishment of a company under the law of the

United Kingdom and many other countries. Together with the memorandum of

association, they form the constitution of a company. The equivalent in the United States

is Articles of incorporation. Articles of association typically cover the issuing of shares

(also called stock), the different voting and dividend rights attached to different classes

of share, restrictions on the transfer of shares, the rules of board meetings and

shareholder meetings, and other similar issues.

In English Law, the articles of association are also referred to as regulations and deal

with regulations for the management of the affairs of the company. This is contained in

S.6 of The English Companies Act, 1948.1

The project is divided into seven parts. After the introduction, the relationship between

memorandum and articles of association has been looked at. The binding force of articles

of association has been deal with next. The next chapter deals with the construction and

interpretation of articles of association followed by alteration of the articles. Finally, the

doctrines of constructive notice and indoor management have been dealt with. The last

chapter is the conclusion with suggestions.

1.2 Definition

Basically, they are the bye-laws or rules and regulations that govern the management of

its internal affairs and the conduct of its business.2 Articles means articles of

association of a company as originally framed or as altered from time to time in

pursuance of any previous companies laws or of the present Act.3 The articles establish a

contract between the company and its members and between the members inter se. this

contract governs the ordinary rights and obligations incidental to the membership of the

1 H.H,J. Tophan, Palmer s Company law , 17th ed. 1942, rep. 1943, p. 28. 2 A.K. Majmudar and Dr. G.K. Kapoor, Company Law and Practice , 12th ed. 2007, p. 164. 3 S.2(2) of The Companies Act, 1956.


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company.4 It is optional for a public company limited by shares to have its own articles

of association. However, it is compulsory for an unlimited company or a company

limited by guarantee or a private company limited by shares to have its own articles of

association.5

1.3 Form, content and implication:

Contents of Article of Association and form are prescribed in sections 26, 27, 28 and 29

but it not mandatory for public companies limited by shares. But it is better to take care

of peculiarities of the Article of Association and not take resort to Table A which is a

general provision. Anything in the Article of Association overrides a conflicting

provision in Table A and if it is on a different point, not inconsistent with the Article of

Association then Table A will be considered as part of Article of Association (only those

parts). Table A can be excluded by an explicit provision. Further Table A applies only to

companies limited by shares alone.

Any provisions of Table A can be adopted by reference but the model articles in Tables

C, D and E are merely models which cannot be adopted by reference and will not apply

to fill lacunae in the registered articles. The contents of the memorandum and articles, as

distinct from their arrangement, must correspond to the models in the regulations but

their contents will be held to be valid even though they differ radically from those of the

models.

Theoretically speaking, one rule is enshrined in one paragraph which bears a number.

Articles are to be in a printed form and to be signed by the signatories of the

Memorandum. An important implication of the Articles is that their provisions amount to

a public notice to all those who deal with the company. The Act gives model forms of

Articles of Association for each type of company. However, these are rarely adopted in

practice.6 In India, the memorandum of association of an Indian company shall contain

the following clauses: the name clause, the registered office clause, the object clause, the

4 Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd: AIR 1971 SC 422. 5 T.N. Pandey, R.K.Gupta, et al. (Rev.) J.M.J. Sethna s Indian Company Law, 11th ed. 2005, Vol 1, p. 644. 6 A. Ramaiya, Guide to The Companies Act , 11th ed. 1988, p.142.


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liability clause, the capital clause and the association clause. The memorandum of

association of a company varies in forms according to the kind of company.7

In the United Kingdom, model (and default) articles of association known as Table A

have been published since 1865. The articles of association of most companies

particularly small companies

are Table A, or closely derived from it. However, a

company is free to incorporate under different articles of association, or to amend its

articles of association at any time by a special resolution of its shareholders, provided

that they meet the requirements and restrictions of the Companies Acts. Such

requirements tend to be more onerous for public companies than for private ones8. The

matters with which a company s articles usually deal are (a) the exclusion or partial

exclusion of Table A; (b) the execution or adoption of a preliminary agreement if any;

(c) the allotment of shares by the directors; (d) calls and forfeiture for non-payment of

calls; (e) transfer and transmission of shares (f) increase of capital; (g) reduction of

capital; (h) borrowing; (i)general meetings; (j) directors; (k) dividend and reserve fund;

(l) accounts and audit; (m) notices; (n) special provisions for winding up9.

7 H.K.Saharay, Company Law , 4th ed. 1996, p.34. 8 M. C Bhandari, R. D Makheeja, Guide to Memorandum of Articles and Incorporation of Companies , 4th ed. 2005, p.69. 9 H.H,J. Tophan, Palmer s Company law , 17th ed. 1942, rep. 1943, p. 38.


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II. RELATIONSHIP BETWEEN MEMORANDUM AND

ARTICLES

2.1 Flexibility

The articles regulate the manner in which the company s affairs will be managed. The

memorandum defines the company s objects and various powers it possesses; the articles

determine how those objects shall be achieved and those powers exercised. But the

Companies Act, 1956 does not require the articles to provide for certain specified matters

in the same way as it requires the memorandum to do. Thus the articles of companies

might vary substantially, and the utmost flexibility is allowed to persons who formed the

company to organize its management as they wish.10

2.2 Subordinate

The articles are subordinate and controlled by the memorandum. Also, the articles are

only internal regulations which the members can alter as long as they don t exceed the

powers of the company as laid down by the memorandum.11 Also in cases of conflict, the

memorandum prevails.12

2.3 Contemporaneous Documents

The memorandum and articles are basically contemporaneous documents and can be

read together and any ambiguity or uncertainty in the one can be removed by referring to

the other. In fact this has been done in various cases. In Re, South Durham Brewery

Company13, the memorandum was silent as to whether the company s shares were to be

all of one class or of different classes, it was held that a power a power given by the

articles to issue shares of different classes resolved the uncertainty and enabled the

company to do so. In Rainford v. James Keith and Blackman Company Ltd.14, where

the memorandum of a training company empowered to do all things incidental to

achieving the object, it was held that provision in the articles empowering the company

10 A.K. Majmudar and Dr. G.K. Kapoor, Company Law and Practice , 12th ed. 2007, p. 164-165 11 Ashbury v. Watson: [1885] 30 Ch .D 376 CA 12 A.K. Majmudar and Dr. G.K. Kapoor, Company Law and Practice , 12th ed. 2007, p. 164-165 13[1885] 31 Ch. D 261 14[1905] 2 Ch. 147


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to lend money merely exemplifies the general words of the memorandum and the

company was, therefore entitled to lend money to its employees.

2.4 Distinction between memorandum and articles

While memorandum contains the fundamental conditions upon which the company must

be incorporated, the articles provide the internal regulations of the company. While

memorandum must be within the framework of the Companies Act, the articles are

subsidiary to both the act and the memorandum. Finally, while acts done by a company

beyond the scope of the memorandum are absolutely void, acts beyond the articles can

be ratified by the shareholders provided the particular provisions are not beyond the

memorandum.15

The distinction between the two was well brought out by Bowen, L.J. in Guiness v. Land

Corporation of Ireland16 where he pointed out that the memorandum contains the

fundamental conditions upon which alone the company is allowed to be incorporated.

They are conditions introduced for the benefit of the creditors and the outside public, as

well as share-holders. The articles are the internal regulations of the company .In any

case it seems to me, certain that for anything which the Act of Parliament says shall be in

the memorandum, you must look to the memorandum alone.

2.5 Registration

Articles of association may be registered along with the memorandum of association in

the case of (a) a public company limited by shares, (b) an unlimited company, (c) a

company limited by guarantee, or (d) a private company limited by shares.17 As per

English law, where articles have been registered, a copy of every special resolution for

the time-being in force is annexed to or embodied in every copy of the articles of

association that may be issued after passing of such resolution, and where no articles

have been registered, a copy of any such special resolution is to be forwarded in print to

any member requesting the same on payment of one shilling. There is a penalty for

default.18

15 A.K. Majmudar and Dr. G.K. Kapoor, Company Law and Practice , 12th ed. 2007, p. 165. 1622 Ch. D. 349, 381. 17 S.26 of The Companies Act, 1956. 18 H.H,J. Tophan, Palmer s Company law , 17th ed. 1942, rep. 1943, p.29.


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III. BINDING FORCE OF ARTICLES

3.1 Introduction

The articles constitute a social contract19 which is also a sophisticated way of saying that

they constitute the constitution of an association. The articles create a contract binding

each member of the company but the member is only bound qua member. The articles

also create certain rights and obligations between the members and the company. Even

between a member and a company, the articles of association constitute a contract only

in respect and liabilities as a share holder but not in respect of rights and liabilities which

he has in a capacity other than that of a member. The articles constitute a contract

between individual members. Normally this would be enforceable through the company

but it may be possible in certain circumstances to have direct redress.20

3.2 Members as members

The company is bound to its members in the same way members are bound to the

company, and just as the liabilities imposed upon the member are limited to the liabilities

incurred by him in this capacity, so are the rights which he has against the company

limited to rights qua member. Consequently, a right purported to be conferred upon him

by the Articles as a director or an outsider cannot normally be enforced by him by virtue

of the articles.21

3.3 In relation to outsiders

The articles do not per se constitute an enforceable contract between a company and an

outsider.22 This is no doubt due to privity of contract and lack of mutuality. Outsider

means a person who is not a member or a member acting in a capacity other than that of

a member. Even a director is normally treated as an outsider for this purpose. Any right

claimed by an outsider must be conferred by a separate contract or relationship outside

the articles.23

19 Dutton V. Goron, (1917) 23 CLR 362 at p.395. 20T.N. Pandey, R.K.Gupta, et al. (Rev.) J.M.J. Sethna s Indian Company Law, 11th ed. 2005, Vol 1, ps. 646-647. 21Ibid. 22Hickman v. Kent, (1915) 1 Ch 881. 23Supra note 3.


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3.4 Invalidity of the articles by reason of conflict between the Act,

Memorandum of association and other laws:

Any provision in a company s Articles will be ineffective if it is in conflict with the

memorandum, the Companies Act or any other law for the time being in force. For

example, in the case of Peveril Gold Mines, Re24 it was held that statutory rights of

members under the Companies Act cannot be nullified through articles like right placing

restrictions to present a petition for winding up. Where the memorandum defines the

rights f the respective classes of shareholders such rights cannot be altered by the

articles. However, where the class rights are set out in the memorandum and the

memorandum and articles do not contain a variation of the rights clause, those rights can

be varied if all the members of the company agree to the variation. The articles are void

to the extent of inconsistency even if the provision in the memorandum with which it is

inconsistent is not required by law to be there.25

24 (1808) 1 Ch 122 25 T.N. Pandey, R.K.Gupta, et al. (Rev.) J.M.J. Sethna s Indian Company Law, 11th ed. 2005, Vol 1, p. 649.


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IV. CONSTRUCTION AND INTERPRETATION OF ARTICLES

4.1 Introduction

Articles of association are commercial documents and must be liberally constructed. In

interpreting them, the maxim, ut res magis valeat quam periat should be applied which

basically means validate if possible26 . The general presumption is that the parties have

expressed every material term which they intended to govern their agreement, whether

oral or in writing. But it is well recognized that there may be cases where obviously

some term must be implied if the intention of the parties is not to be defeated, some

terms of which it can be predicated that it goes without saying , some term not

expressed but necessary to give to the transaction such business efficacy as the parties

may have intended.

4.2 Case Law

An article cannot be rectified by the courts as held in Scott V. Frank F. Scott (London)

Ltd.27 The power to alter is purely statutory. Any alteration must be effected by special

resolution of the company. If there is any inconsistency between different parts of the

articles, the court will follow the ordinary canons of construction and look to the whole,

seeking to achieve harmony between the different provisions and compliance with the

law.

It was held in the case of S.S.Rajkumar v. Perfect Castings Pvt. Ltd.28 that the articles of

association of a company, being a business document must be interpreted strictly, unless

there are compelling circumstances to import into it a meaning other than normal.

Though the general presumption is that every material term in the articles regulating a

company have bee expressed, yet in some cases, certain terms are necessarily implied in

order to give effect to the intention of parties as held in Somesh Chandra Manilal

Nanavati v. Jivan Lal C. Chenai.29

The articles are drawn up for the purpose of internal administration of the business and

cannot supersede the objects set out in the memorandum of association. The courts

26 Vaisey J. in Rayfield V. Hands, (1960) Ch 1 at p.4. 27(1940) Ch 794: 56 TLR 924. 28(1968) 38 Comp Cas 187. 29(1956) 26 Comp Cas 148


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should hesitate to place an interpretation on the articles which may have the effect of

imposing restrictions on transferability which may be in restraint of trade and therefore,

opposed to public policy.30

In construing the relevant articles of association, the court may, before accepting any

specific construction, take into account all the relevant Articles together with the bye-

laws. If the words are ambiguous, attempt should be made to reconcile them and adopt

such construction of the words as would avoid conflict between them. This was held in

Shiv Omkumar Maheshwari V. Bhansidar Jagannath.31 It was also held in the same

case that, where the articles of association of the Chamber of Commerce provided that

all disputes arising out of or n the course of all dealings and transactions between its

members shall be settled by arbitration, it was held that a dispute as to the existence of a

transaction or dealing itself was not covered by the articles and there was no obligation

upon any member to refer such dispute to arbitration.

It was held in Sunil Dev V. Delhi and District Cricket Association32, where the conduct

of the parties reveals that there has been some practice in vogue for several years which

was accepted by everyone concerned without any challenge or question, then that

practice in the course of long years in itself becomes an indication that the articles of

association were understood in that sense.

It was further held in G. Karunakaran V. State of Kerela33 that unless the exercise of

pleasure by the Governor is shown to be mala fide or against the public interest, the court

cannot interfere with the order nominating a person as director in the place of another.

4.3 Terms in Articles by implication

The articles of a company constitute a statutory contract with its own distinctive features.

For example, the articles cannot be defeated on the grounds of misrepresentation, nor

rectified on the grounds of mistake, whereas an ordinary contract is subject to these

processes. It may be possible for the court to infer a term purely by way of constructional

30Jarnail Singh Harjit Singh v. Bakshi singh Shan Singh, (1960) 30 Comp Cas 192 at p.199: AIR 1960 Punj 455. 31(1957) 27 Comp Cas 255: AIR 1956 Bom 459. 32(1994) 80 Comp cas 174 (Del) 33(1987) 61 Comp cas 334 (Ker).


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implication, but it is not possible to go further and imply a term from extrinsic

circumstances. It is not possible to imply a term that the shareholders of the company

should be under an obligation to make an additional financial contribution. This also

seems to the court to be going beyond the language of the articles.34

4.4 International Law

In the case of Powell Duffryn Plc v Petereit35 the main question before the Court of

Justice was whether a jurisdiction clause contained in the articles of association of a

company (a voluntary association under Dutch law which although not the same thing as

a company is analogous to a company; therefore, the rule adopted in Peters was

extended to companies.) was an ""agreement" in terms of Article 17 of the Brussels

Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial

Matters 1968 Art.17. In most Member States, the articles of association of a company are

regarded as being contractual in nature, but in some they create obligations which are

considered institutional, normative or sui generis. It was this difference in the conceptual

nature of the relationship between a shareholder and the company which led to doubts

regarding the effect of a jurisdiction clause contained in the articles of association. The

court held that the concept of an ""agreement" in Article 17 must in all cases be

interpreted on an autonomous basis.36

34Bratton Seymour Service Co. Ltd v. Oxborough, (1992) BCLC 693 (CA). 35Times, April 15, 1992 (ECJ) 36 Trevor C. Hartley, Case Comment: Convention under Article 220, EEC , E.L. Rev. 1993, 18(3), 225-228.


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V. ALTERATION OF ARTICLES OF ASSOCIATION

5.1 Introduction

A company can alter its internal regulations by a special resolution provided the

alteration does not stand in direct or implied conflict with the memorandum or provisions

of the statute. So subject to the provisions of the Act, and the Memorandum, a company

may alter and add anything to its articles by special resolution. When alteration of the

articles is made to give effect to the conversion of a public company into a private

company, it shall require the approval of the central government37. On approval of such

alteration by the Central government, a printed copy of the altered articles shall be filed

with the Registrar of companies within one month of the date of receipt of the order of

approval. If alteration of the articles is not inoperative or void by reason of inconsistency

with the provisions of the Act or Memorandum, the alteration shall be deemed to be

valid as is originally contained in the articles. In the garb of alteration of articles of

association, a Company cannot provide for expulsion of a member by the management

because it is opposed to the fundamental principles of company jurisprudence and is

therefore ultra vires the company. It is not necessary to prove that all alterations in the

memorandum or articles are to be effected in all copies of the memorandum and articles.

If in any time a company issues any copy of the memorandum or articles without

showing the alterations made therein, the company and every officer of the company is

liable to punishment with a maximum fine of ten Rupees for every copy so issued38.

5.2 Case Law

In Scott V. Frank F. Scott (London) Ltd39 it was held that the court has no

jurisdiction to rectify the mistakes in the articles of those do not accord with what is

proved to have been the concurrent intention of the signatories at the time of signature.

In the case of Grant V. U.K. switchback Rys. Co.,40 it was held that although a resolution

giving the directors powers to do certain acts in future which they are not authorized by

the articles to do would amount to alteration of the articles and would require a special

resolution to be passed. But where the directors entered into a contract without authority

37S.31(1) of The Companies Act, inserted in 1960. 38S.40 of The Companies Act, 1956. 39(1940) 3 All ER 508 40(1888) 40 Ch D 135


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of the adoption of the contract which was within the objects of the company by ordinary

resolution would not amount to alteration of the articles.

5.3 Restrictions

Alteration of the articles is made subject to few restrictions. Firstly, the articles must not

exceed the powers given by the memorandum or be in conflict any provisions of the

memorandum. In such a case, the memorandum will prevail. Second, the alteration must

not be inconsistent with any provisions of the Companies Act or any other statute. In

Madhava Ramachandra Kamath v. Canara Banking Corporation41, where a resolution

was passed expelling a member and authorizing him the director to register the transfer

of his shares without an instrument of transfer, the resolution was held to be invalid as

being against the provisions of the act. However, the Articles may impose on the

company conditions stricter than those provided under the law but must not dilute the

conditions of the memorandum and of The Act. Nether can the alteration be inconsistent

with an order of The Company Law Board, now Tribunal.42Third, the altered articles

must not include anything which is illegal or opposed to public policy or unlawful.

Fourth, the alteration must be bona fide for the benefit of the company as a whole. In

Allen V. Gold Reefs of West Africa Ltd43. a company had a lien on all shares not fully

paid-up for calls due to the company. There was only one shareholder A who owned

fully paid up shares. He also held partly paid up shares in the company. A died. The

company altered its articles by striking the words fully paid up and thus giving itself a

lien on all shares

whether fully paid up or not. The legal representative of A

challenged the alteration on the ground that the alteration had retrospective effect. It was

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 had a retrospective effect.

Fifth, the alteration must not constitute a fraud on the minority by the majority. In Brown

v. British Abrasive Wheel Co.44 the majority which held 98% of the shares passed a

special resolution that upon the request of the holders of 9/10th of the issues shares, a

41[1941] 11 Comp Cas 78 (Mad) 42S. 397 or 398 of The Companies Act, 1956. 43[1900] 1 Ch. 656. 44[1919] 1 Ch 290


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shareholder shall be bound to sell and transfer his share to the nominee of such holder at

a fair value. The alteration was held to be invalid since it amounted to oppression of

minority.

Sixth, there cannot be alteration of articles so as to compel an existing member to take or

subscribe for more shares or in any way increase his liability to contribute to share

capital, unless he gives his consent in writing.45 Seventh, an alteration of articles to effect

a conversion of a public company into a private company cannot be made without the

approval of the Central government.46 Eighth, a company cannot justify breach of

contract with third parties or avoid a contractual liability by altering articles.

Ninth, the amended regulations in the articles of association cannot operate

retrospectively but only from the date of amendment.47 Also provisions by way of

contractual obligation in articles of association of a company cannot limit statutory

power of a company to alter its articles. Finally, amendment of articles to empower

Board of Directors to expel a member is opposed to the fundamental principles of

company jurisprudence and is ultra vires the company.48

5.4 United Kingdom:

In UK, shareholders may vote at the general meeting to alter the articles of

association, which requires a three-quarters super-majority. The board of a typical public

company in the U.K. is comprised of both non-executive directors and executive

directors. The board, as a whole, does not typically manage the day-to-day operations of

the company; rather, the board delegates these duties to the chief executive (also called

the "managing director") and other executive directors.49

45 S.38 of The Companies Act, 1958. 46 S.31 of The Companies Act, 1958. 48 Pyare Lal Sharma V. Managing director J&K Industries Ltd.: [1989] 3 Comp. L.J. (SL) 70 49 A.K. Majmudar and Dr. G.K. Kapoor, Company Law and Practice , 12th ed. 2007, ps. 169 - 172. 50 Jaclyn Braunstein, Pound foolish: Challenging executive compensation in the U.S. and the U.K. , 29 Brook. J. Int'l L. 747.


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VI. DOCTRINE OF CONSTRUCTIVE NOTICE AND INDOOR

MANAGEMENT

6.1 Doctrine of Constructive Notice

Section 610 provides that the memorandum and articles when registered with Registrar

of Companies become public documents and then they can be inspected by anyone on

payment of a nominal fee. Therefore any person who wants to enter into a contract with

the company has the means of ascertaining and is thus presumed to know the powers of

the company and the extant to which they have been delegated to the directors. This is

known as doctrine of constructive notice .50

However, this is more or less an unreal doctrine as people know a company through its

directors and not its documents. S.9 of The European Communities Act, 1972 has

abrogated this doctrine and this change is now incorporated in S.35 of The English

Companies Act, 1985. In TCB Ltd. V. Grey51 where a debenture issued by a company

was signed by a solicitor as attorney of director of a company but not the director

personally. The articles of the company provided that every instrument to which the

seal shall be affixed shall be signed by a director . Even so the company was held liable.

Stating the effect of the new provision, the court said that before this enactment came

into force a person dealing with the company was required to look at the memorandum

and articles to satisfy that the transaction was within the corporate capacity. However S.9

(1) of The English Companies Act, 1985 says that good faith is to be presumed and the

person dealing with the company is not bound to enquire.52

The courts in India also do not seem to have taken the doctrine of constructive notice

seriously. In the case of Dehra Dun Mussoorie electric tramway Company V.

Jagmandardas53 the articles of a company expressly provided that the directors could

deligate all their powers except their power to borrow. Even so, an overdraft taken by the

51 A.K. Majmudar and Dr. G.K. Kapoor, Company Law and Practice , 12th ed. 2007, p. 178. 52 1986 JBL 10 53Avtar Singh, Company Law , 15th ed. 2007, ps. 95-96. (Eastern Book Company, Delhi) 54AIR 1932 All 141


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managing agents without approval of the board was held to be binding, the court saying

that such temporary loans must be kept outside the purview of the relevant provision.54

6.2 Doctrine of Indoor Management

This rule, as against the previous rule, tries to protect outsiders from the company. The

rule is based on obvious reasons of convenience in business relations. The memorandum

and articles of association are public documents, open to public inspection. But the

details of internal procedure are not thus open to public inspection. Hence an outsider is

presumed to know the constitution of the company but not what may or may not have

taken place within the doors that are closed to him 55. The rule is of great practical utility

and has been used in cases involving rights and liabilities. Thus where the directors of a

company, having the power to allot shares only with the consent of the general meeting,

allotted them without any such consent, where the managing director of a company

granted a lease of the company s properties, something which he could do only with the

approval of the board, where the managing agents having the power to borrow with the

approval of directors borrowed without any such approval, the company will be held

bound.56

The doctrine of indoor management cannot be resorted to in the following cases. Firstly,

the rule does not protect any person who had actual or even an implied notice of the lack

of authority of the person acting on behalf of the company. Also, the rule cannot be

invoked in favor of a person who did not consult the memorandum and articles and thus

did not rely on them. Neither does it extend to transactions involving forgery nor those

that are otherwise void ab initio. The doctrine also does not reward those who behave

negligently. Nor does is apply in cases where the question is with regard to the very

existence of an agency. It is also not applied where a pre-condition is required to be ful-

filled before the company itself can exercise particular power. Finally, the doctrine can

be invoke only with reference to acts which relate to provisions of memorandum and

articles, and not in a case where oppression is alleged.57

55 Supra note 3. 56Pacific Coast Coal Mines Ltd. V. Arbuthnot, 1917 AC 607. 57Avtar Singh, Company Law , 15th ed. 2007, p. 98. 58Ibid at p. 182.


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VII. CONCLUSION

Thus articles of association are an essential part of incorporation of a company. Articles

of association deals with the matter of internal regulation. It is optional in the case of

public companies limited by shares but is obligatory in all other cases. For all these cases

except public companies limited by shares, there is a necessity under section 3(1)(iii) to

file Article of Association and for guarantee company and unlimited company, the

number of members must be stated in the Articles pursuant to section 27(1) and 27(2).

Hence it is only non-obligatory for public companies limited by shares and Table A can

be adopted. When a company has a share capital, then one share must be held at least for

membership.

The applicability of Table A is automatic only in case of companies limited by shares

only when they are not in consistent with the Articles itself; though it can be expressly

overridden. This automatic application is only for companies limited by shares registered

under Companies Act, 1956.

Ultimately, constitutional documents should be crystal clear and no scope should be left

for its ambiguity. Tables given in the First Schedule should be their role model.

Memorandum of Association should contain the fundamental document of the company

and should be unalterable in the interest of the shareholders, public and especially the

creditors of the company while the Articles of Association should be freely alterable by

the shareholders in the general meeting.


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BIBLIOGRAPHY

CASES REFFERED

1. Allen V. Gold Reefs of West Africa Ltd [1900] 1 Ch. 656.

2. Bratton Seymour Service Co. Ltd v. Oxborough, (1992) BCLC 693 (CA).

3. Brown v. British Abrasive Wheel Co. [1919] 1 Ch 290

4. Dutton V. Goron, (1917) 23 CLR 362

5. G. Karunakaran V. State of Kerela (1987) 61 Comp cas 334 (Ker).

6. Grant V. U.K. switchback Rys. Co (1888) 40 Ch D 135

7. Guiness v. Land Corporation of Ireland 22 Ch. D. 349, 381.

8. Hickman v. Kent, (1915) 1 Ch 881.

9. In Re, South Durham Brewery Company [1885] 31 Ch. D 261

10. Madhava Ramachandra Kamath v. Canara Banking Corporation [1941] 11 Comp

Cas 78 (Mad)

11. Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd: AIR 1971 SC

422.

12. Peveril Gold Mines, Re (1808) 1 Ch 122

13. Pyare Lal Sharma V. Managing director J&K Industries Ltd.: [1989] 3 Comp. L.J.

(SL) 70

14. Rainford v. James Keith and Blackman Company Ltd [1905] 2 Ch. 147

15. Rayfield V. Hands, (1960) Ch 1

16. S.S.Rajkumar v. Perfect Castings Pvt. Ltd (1968) 38 Comp Cas 187.

17. Scott V. Frank F. Scott (London) Ltd. (1940) Ch 794: 56 TLR 924.


19

18. Shiv Omkumar Maheshwari V. Bhansidar Jagannath AIR 1956 Bom 459.

19. Somesh Chandra Manilal Nanavati v. Jivan Lal C. Chenai. (1956) 26 Comp Cas 148

20. Sunil Dev V. Delhi and District Cricket Association (1994) 80 Comp cas 174 (Del)

BOOKS REFFERED

1. A.K. Majmudar and Dr. G.K. Kapoor, Company Law and Practice , 12th ed. 2007,

Taxman Publications, New Delhi.

2. Avtar Singh, Company Law , 15th ed. 2007, p. 98, Wadhwa Publishers, Nagpur.

3. H.H,J. Tophan, Palmer s Company law , 17th ed. 1942, rep. 1943, stevens and

Sons, London.

4. H.K.Saharay, Company Law , 5th ed. 2007, p.69.

5. M. C Bhandari, R. D Makheeja, Guide to Memorandum of Articles and

Incorporation of Companies , 4th ed. 2005, p.69, Wadhwa Publishers, Nagpur.

6. Ramaiya, Guide to The Companies Act , 11th ed. 1988,Wadhwa and Company,

Nagpur.

7. T.N. Pandey, R.K.Gupta, et al. (Rev.) J.M.J. Sethna s Indian Company Law, 11th

ed. 2005, Vol 1, Modern Law Publications, New Delhi.

ARTICLES

1. Jaclyn Braunstein, Pound foolish: Challenging executive compensation in the U.S.

and the U.K. , 29 Brook. J. Int'l L. 747.

2. Trevor C. Hartley, Case Comment: Convention under Article 220, EEC , E.L. Rev.

1993, 18(3), 225-228.

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