Articles of Association

A document that specifies the regulations for a company’s operation is called as articles of association.

This document contains rules , regulations and bye laws for general administration of company.

Articles when compulsory: Companies which must have articles of association are

1. Unlimited companies

2. Companies limited by guarantee

3. Private companies limited by shares

Forms and signatures [S.30]1. Articles proposed to be registered must be printed and

divided in paragraphs. Each paragraph must contain one regulation and numbered consecutively

2. Each subscriber of memorandum to sign the document in the presences of at least one attesting witness. Both of them adding their address and occupations.

Contents of articles1. It prescribes such regulations for the company as the

subscriber to the memorandum deem expedient.

2. The act gives subscribers free hand. Any stipulations between the company and its members.

3. Everything stated therein is subject to Companies Act.

Articles in relation with memorandum

Articles are subordinate to memorandum1. It must not contain anything the effect of which is to alter a condition in

memorandum or contrary to its provisions.

2. This is because the memorandum is to state the purposes for which company is established while the articles provide manner in which company is to be carried and the proceedings are to be disposed.

In words of LORD CAIRNS the difference is this1. The memorandum is as it were the area beyond which action of

company cannot go ; inside that area the shareholders may make such regulations for their own government as they think fit

In words of Bowen LJ1. The memorandum contains the fundamental conditions upon which

alone the company is allowed to incorporated. The condition introduced for benefits of the creditors and the outside public as well as share holders

2. The articles of associations are internal regulations of the company.

Constructive notice

Memorandum and Articles of Association should be registered with the Registrar of companies

Since Registrar of companies is a public office once registered Articles of Association becomes public documents

 Open and accessible to all  The person will be presumed to know the

contents of documents

Constructive notice

 Constructive notice is also with special resolution and particular of charges 

 According to palmer the principles applies to those documents which affects the powers of the company

 The court said ,” the common law doctrine of constructive notice should apply to the form”

Constructive is more or less an unreal doctrine

Examples

People know the company through its officers and not through its documents

 The courts in India also do not seem to take the notice so seriously

 For example in dehradun , mussorie electric tramway jagmandardas articles of company expressly provided that the directors could delegate all the powers except the power to borrow

 Also Calcutta high court enforced a security which was not in accordance with the company’s articles

Binding force of memorandum and articles (Section 36)

Company to members1. The members are bound to the company by the articles

2. The members can restrain the company from committing a breach of the articles.

3. (Eg -The member can enforce his right to vote or his right to recover dividend)

Members to company1. Members are bound to follow the provision of the articles

2. All money payable by member is a debt due from him

3. In this regard , the company can sue its member for the enforcement of its article as well as restraining its breach

Members to members

1. Members are no bound to each other

2. No member is allowed to sue other member for any wrong done by latter to the company

3. Exception- when the person against whom relief is sought control the majority of shares and will not allow an action to be brought against the name of the company

Not to outsider

1. The article create no contact with any person/entity external to the organization

2. A member is also an outsider if the matter in question is not concerned with its membership rights

3. An outsider therefore cannot take advantage of this documents to find a claim against the company

ALTERATION OF ARTICLES Every company has a clear power to alter its article of

association by a special resolution. It is a statutory power given by section 31.

The power of alteration as conferred by section 31 is almost absolute. It is subject only to two restrictions.

In the first place, the alteration must not be in contravention of the provisions of the act. It should not be an attempt to do something which the act forbids.

Secondly, the power of alteration of article is subject to the conditions contained in the memorandum of association.

The provisions to sub-section 1 says that an alteration which has the effect of converting a public company into a private company would not have any effect unless it is approved by the central government.

LIMITATIONS ON POWER TO ALTER ARTICLES

The alteration must not exceed the powers given by memorandum.

The alteration must not be inconsistent with any provision of companies act as no company can purchase it’s own share sec.77

The altered article must not include any thing which is legal.

The alteration must be bonafied for the benefit of the company.

ALTERATION IN BREACH OF CONTRACT

But, where apart from the articles, the company has entered into an independent agreement, the company may repudiate it by changing articles, but it will be answerable in damages for the breach.

The court may even restrain an alteration where it is likely to cause a damage which cannot be adequately compensated in terms of money.

INCREASING LIABILITY OF MEMBERS.

An alteration cannot require a member to purchase more shares or increase his liability in any way except with his consent in writing.

A person who becomes a member under the protection of limited liability cannot be converted into a member with unlimited liability except with his consent in writing.

DOCTRINE OF 'INDOOR MANAGEMENT'

SCOPE OF OPERATION The doctrine of indoor management is opposed to that of the doctrine of constructive notice. The latter seeks to protect the company against the outsider. Firstly , the memorandum and articles of association

are public document, open to public inspection It has been used to cover acts done on behalf of a

company by de facto directors who have never been appointed.

The rule had its genesis in royal british bank v turquand

1.Knowledge Of Irregularity

The first and the most obvious restrictions is that the rule has no application where the party affected by an irregularity had actual notice of it.Example of howard v patent ivory manufacture companyBut apart from this, the principle is clear that a person who is himself a part of the internal machinery cannot take the advantage of irregularities.

2.Suspicion Of Irregularity

The protection of "TURQUAND RULE" is also not available where the circumstances surrounding the contract are suspicious and therefore invite inquiry.

Suspicion should arise ,for example,from the fact that an officer is purporting to act in a manner which is apparently outside the scope of his authority

3. Forgery

"It is quite true that persons dealing with limited liability companies are not bound to inquire into their indoor management and will not be affected by irregularities of which they have nonotice. Case of madras high court .

"Where there was a group of companies all controlled by the same person who was in full control of everything -it had to be supposed that he was the chairman & managing director of each. It seemed that he had not only actual but also otensible authority“ Thus the otensible position allowed to an officer is the most crucial factor.

OTENSIBLE POSITION ALLOWED TO DIRECTORS

"A person who at the time of entering into a contract with a company has no knowledge of the company's articles of association , cannot rely on those articles as conferring otensible or apparent authority on the agent of the company with whom he dealt."

CONTRACTING PARTY'S KNOWLEDGE OF ARTICLES

"If the act is one which is ordinarily within the powers of such an officer, then the company cannot dispute the officer's authority to do the act, whether the directors have have not actually invested him with authority to do it."

SCOPE OF AUTHORITY

If the act of an officer of a company is one which would ordinarily be beyond the powers of such an officer , the plaintiff cannot claim the protection of "TURQUAND RULE" simply because under the articles power to do the act could have been delegated to him.

Acts Outside Apparent Authority

A company is an incorporated body so there should be some rules & regulations formed for the management of its internal affairs & conduct of its business as well as the relationship between the members and the company. Moreover, the rights and duties of its members and the company are to be recorded. This is why articles of association are necessary. The articles of association is a document that contains the purpose of the company as well as the duties and the responsibilities of its members defined and recorded clearly. It is an important document which needs to be filed with the registrar of companies

Conclusion

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