ARTICLES OF ASSOCIATION CONTENTS OF ARTICLES OF ASSOCIATION IMPORTANCE & EFFECTS OF MEMORANDUM AND ARTICLES ALTERATION TO ARTICLES DOCTROINE OF CONSTRUCTIVE NOTICE DOCTROINE OF INDOOR MANAGEMENT

DEFINITION‘Article’ means the 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 this Act’

MEANINGArticles of Association sets out the rules for the internal running of the company, governing the rights and duties of the members of a company among themselves. Articles deal with internal matters such as general meetings, appointment of directors, issue and transfer of shares, dividends, accounts and audit

CONTENTS OF ARTICLES OF ASSOCIATION

Share capital and variation of rights Exercise of lieu by the company Calls on shares Transfer, transmission, forfeiture and surrender of shares Conversion of shares into stock and its reconversion into shares Issue of share warrants and rights of their holders Alternation of capital Conduct of any proceedings at general meetings of shareholders, Voting by members. Powers, rights, remuneration, qualification and duties of directors, Proceedings of Board, Appointment of manager, secretary, etc., Seal of the company, Dividend, reserves and capitalization of profits Accounts, and Winding up

DEFINITION“Memorandum of Association of a company is its charter & defines the limitations of the powers of a company. It contains the fundamental condition upon which alone the company is allowed to be incorporated”.

MEANINGMemorandum of Association sets out, the company's name, where the registered office of the company is situated and what operations it will do.

Name Objects Registered office Liability Capital Association or Subscription

As per sub section (1) of Section 36 of the Companies Act, 1956 provides that when Memorandum and Articles of Association once registered shall bind the company and its shareholders. Whatever terms and conditions are in the Memorandum and Articles of Association shall bind the company and its members.

As per Sub section (2) of Section 36 of the Companies Act provides that all money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company.

Sub section (1) of Section 41 provides that the subscribers of the memorandum of a company shall be deemed to have agreed to become members of a company, and on its registration, shall be entered as members in its register of members.

Sub section (2) of Section 41 provides that every other person who 1[agrees in writing] to become a member of a company and whose name is entered in its register of members, shall be a member of the company.

The company may alter or add the content of the articles by passing the special resolution.

The copy of the resolution must be sent to the registrar within 30 days of passing the resolution.

The copy of altered articles to be registered within 3 months of passing the resolution.

The alteration must be within the scope of Memorandum of Association. However, if there would be any conflict between Memorandum of Association and Article of Association, it is Memorandum of Association that will prevail.

It must not be inconsistent with any provision of the companies act or any other law.

The altered article must not include anything illegal or unlawful.

The alteration must be bonafide for the benefit of the company as a whole.

The alteration must not constitute a fraud on minority.

An alteration of Articles to effect a conversion of public company into a private company cannot be made without approval of central government.

A company cannot justify breach of contract with third party or avoid a contractual liability by altering articles.

Amendment to expel the member in not valid.

Documents are open & accessible to all. Presumption that any outsider dealing with company has read

& understood the documents. It is a negative doctrine, acting only against the outsiders & not

the company

MEANINGThe basic principle underlying the proposition is that “a purchaser of

property, as an ordinary prudent man, is expected, for the protection of his own interest, to make proper and usual inquiries into his vendor's title before he purchases the property and if he omits to do so, without any reasonable explanation, an inference can legitimately be drawn that either he has willfully abstained from making inquiries for the purpose of avoiding notice of facts which he would have known had he made the inquiries or he is guilty of gross negligence”.

Persons dealing with the company in good faith have a right to assume that the internal requirements prescribed in public documents have been observed

Persons are not bound to enquire into regularity of internal proceedings

MEANINGPerson dealing with the Company in good faith have a right to

assume that the internal requirements prescribed in public documents have been observed.

Persons are not bound to enquire into regularity of internal proceedings.

In other words, relief on the ground of ‘indoor management’ can’t be claimed by an outsider dealing with the company in the following circumstances:1. Knowledge of Irregularity The rule has no application where the party affected by an irregularity had actual notice of it. Knowledge of an irregularity may arise from the fact that the person contracting was himself a party to the inside procedure.

Case Studies:As in Devi Ditta Mal v The Standard Bank of IndiaA transfer of shares was approved by two directors, one of whom within the knowledge of the transferor was disqualified by reason of being the transfer himself and the other was never validly appointed, the transfer was held to be ineffective.

Similarly in Howard v. Patent Ivory Manufacturing Co.The directors could not defend the issue of debentures to themselves because they should have known that the extent to which they were lending money to the company required the assent of the general meeting which they had not obtained.

Morris v Kansseen, A director could not defend an allotment of shares to him as he participated in the meeting, which made the allotment. His appointment as a director also fell through because none of the directors appointed him was validly in office.

But after the Hely-Hutchinson v Brayhead Ltd. according to which the mere fact that a person is a director does not mean that he shall be deemed to have knowledge of the irregularities practiced by other directors.A newly appointed director does not mean that he shall be deemed to have knowledge of the irregularities practiced by the other directors.A newly appointed director entered into contracts of indemnity and guarantee with the company through a director whom the company had knowingly allowed to hold himself out as having the authority to enter into such transaction, although in fact he had no such authority. The company was held liable.

2. Suspicion of IrregularityThe protection of the “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 matter, which is apparently outside the scope of his authority.

Case studies:Anand Bihari Lal v. Dinshaw & co.,the plaintiff accepted a transfer of a company’s property from its accountant, the transfer was held void. The plaintiff could not have supposed, in absence of a power of attorney, that the accountant had authority to effect transfer of the company’s property.Haughton & co v. Nothard, Lowe & Wills Ltd.,a person holding directorship in two companies agreed to apply the money of one company in payment of the debt to other, the court said that it was something so unusual “that the plaintiff were put upon inquiry to ascertain whether the persons making the contract had any authority in fact to make it.” Any other rule would “place limited companies without any sufficient reasons for so doing, at the mercy of any servant or agent who should purport to contract on their behalf.”

3. Forgery

Forgery may in circumstances exclude the ‘Turquand Rule’.

Case studies:

Ruben v Great Fingall Consolidates;The plaintiff was the transferee of a share certificate issued under the seal of the defendant’s company. The company’s secretary, who had affixed the seal of the company and forged the signature of the two directors, issued the certificate.

The plaintiff contended that whether the signature were genuine or forged was a part of the internal management, and therefore, the company should be stopped from denying genuineness of the document. But, it was held, that the rule has never been extended to cover such a complete forgery.

This doctrine which is well established, applies to irregularities, which otherwise might affect a genuine transaction. It cannot apply to Forgery.”

4. Representation through Articles

Articles of association generally contain what is called ‘power of delegation’.Lakshmi Ratan Lal Cotton Mills v J.K. Jute Mills Co. explains the meaning and effect of a “delegation clause”.

Here one G was director of the company. The company had managing agents of which also G was a director. Articles authorized directors to borrow money and also empowered them to delegate this power to any or more of them. G borrowed a sum of money from the plaintiffs. The company refused to be bound by the loan on the ground that there was no resolution of the board delegating the powers to borrow to G. Yet the company was held bound by the loans. “Even supposing that there was no actual resolution authorizing G to enter into the transaction the plaintiff could assume that a power which could have been delegated under the articles must have been actually conferred. The actual delegation being a matter of internal management, the plaintiff was not bound to enter into that.”

Thus the effect of a “delegation clause” is “that a person who contracts with an individual director of a company, knowing that the board has power to delegate its authority to such an individual, may assume that the power of delegation has been exercised.”

The question of knowledge of Articles came up in the case of Rama Corporation v Proved Tin and General Investment Co. here; Tin was the active director of the defendant company. He, in order to act on behalf of his company, entered into a contract with the plaintiff company under which he took a cheque from the plaintiffs.The company’s article contained a clause providing that “the directors may delegate any of their powers, other than the power to borrow and make calls to committees, consisting of such members of their body as they think fit”.The board had not in fact delegated any of their powers to Tin and the plaintiffs had not inspected the defendant’s articles and, therefore, did not know of the existence of power to delegate.

It was held that the defendant company was not bound by the agreement. Slade J’, was of the opinion that knowledge of articles was essential. “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 ostensible or apparent authority on the agent of the company with whom he dealt.” He could have relied on the power of delegation only if he knew that it existed and had acted on the belief that it must have been duly exercised.

Knowledge of articles is considered essential because in the opinion of Slade J; the rule of ‘indoor management’ is based upon the principle of estoppels.

Articles of association contain a representation that a particular officer can be invested with certain of the powers of the company. An outsider, with knowledge of articles, finds that an officer is openly exercising an authority of that kind. He, therefore, contracts with the officer. The company is estoppels from alleging that the officer was not in fact authorized.

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This view that knowledge of the contents of articles is essential to create an estoppel against the company has been subjected to great criticism. One point is that everybody is deemed to have constructive notice of the articles. But Slade J brushed aside this suggestion stating constructive notice to be a negative one. It operates against the outsider who has not inquired. It cannot be used against interests of the company. The principle point of criticism, however, is that even if the directors had the power to delegate their authority. They would not yet be able to know whether the director had actually delegated their authority. Moreover, the company can make a representation of authority even apart from its articles. The company may have held out an officer as possessing an authority. A person believes upon that representation and contract with him. The company shall naturally be stopped from denying that authority of that officer for dealing on its behalf, irrespective of what the articles provide. Articles would be relevant only if they had contained a restriction on the apparent authority of the officer contained

5. Acts outside apparent authority Lastly, if he act of an officer of a company is one which would ordinarily be beyond the power of such an officer, the plaintiff cannot claim the protection of the “Turquand rule” Anand Behari Lal v Dinshaw[18] here the plaintiff accepted a transfer of a company’s property from its accountant. Since such a transaction is apparently beyond the scope of an accountant’s authority’ it was void. Not even a ‘delegation clause’ in the articles could have validated it, unless he was, in fact, authorized.