Articles of Association

Section 26 to 32 of the Companies Act, 1956 specifically deals with

the issue of Articles of Association. Section 26 of the Companies Act, 1956
is as follows:
Section 26. There may be in the case of public company limited by
shares and there shall in the case of an unlimited company or a company
limited by guarantee or a private company limited by shares, be
registered with the memorandum, articles of association signed by the
subscribers of the memorandum, prescribing regulations for the
Company.

Thus, while it is a requirement for the Private Limited Companies to

have an Articles of Association, it is an option when it comes to Public
Limited Companies. The detailed provisions of the Companies Act, 1956
regulates the Public Limited Companies while liberty is given to the
Private Limited Companies to have their own regulations on many issues
or aspects. Normally, a care is taken while preparing articles of
association of a Public Limited Company in view of their exposure, stakes
and professional guidance.

The schedules to the Companies Act, 1956 provides model Articles

of Association which can be adopted by different kind of companies. I do
strongly feel that preparation of Articles of Association is a difficult
exercise unless the model articles are adopted or only very few changes
are made to the model articles to the extent provided under the
Companies Act, 1956.

I want to express my view on preparation of Articles of Association

of Private Limited Companies as Public Limited Companies normally are
very careful and takes a good professional advice on everything from the
beginning.

It is the settled company law principle that Articles can not override
the provisions of the Act. Again, certain privileges under the Companies
Act, 1956 are available only when those are backed by the Articles of
Association. Though, we use the word preparation, I feel that the
professionals advising the Company or involved in incorporation of a
Company normally may only do few additions or alternations to the model
Articles of Association provided in the Act itself. But, when the promoters
want to have their own say on the Companys regulation, two preliminary
things should be in mind while preparing Articles of Association of a
Private Limited Company and those are:
1. It is not correct to delete the regulations contained in the model
articles of association without considering its impact and in view
 of the fact that many provisions of the Act can be availed only
when those are backed by the Articles of Association.
2. While incorporating a regulation which is not there in the model
articles provided, one should be very careful about the provisions
of the Companies Act, 1956 and no provision should go against
the provisions of the Act.
I have seen interesting regulations in the Articles of Association of a
Private Limited Company which can not sustain at all in view of the
express bar under the Act. Private Limited Companies or the closely held
companies may, at times, enter into interesting arrangements in the
course of their business and they take the provisions of the Company Law
so easily. In practice, even the professionals advising the companies, will
go by the wish of the managerial personnel of the Company or the
Company and they may not insist on the Companies to be in strict
compliance of the provisions of the Act or the Company Law.

It is settled legal principle that any act which is against the

Memorandum and Articles, and which is against the provisions of the Act
are void and those are normally referred to as ultra vires.
Though, there is a principle of doctrine of constructive notice, we
can not expect the third parties to probe into the Company with which
they are entering a business transaction and it is not possible practically
in many cases. Only Public Financial Institutions or the Financial
Institutions may be in a position to probe companys internal regulations
and other things when the Company approaches them for a loan. Barring
that, in many cases, a third party may not be able to look at the
companys internal regulations and other internal issues and also we are
aware of doctrine of indoor management etc, though it operates in a
different situation.

Company Law is very complicated and interesting. Any laxity on the

part of the promoters or the professionals advising the Company, can lead
to lot of complications or difficulties.

Assuming a case that the promoters or the majority in a Company

has no intention at all to impeach the rights of the other or cause any loss
or damage; even in those cases, the procedural irregularity may cause so
many problems to the Company when a dispute arises.

The complications can be like:

1. Can we say that an act which is against the provisions of the Act
or the regulations is legal?
2. Can we get all the business deals of a Company set-aside on the
ground that there exist a simple procedural irregularity or the
business deals are entered into ignoring the regulations of the
Company?
 3. Where is the effective mechanism to find-out as to whether the
Company functions in accordance with the provisions of the Act
or not?
4. How to get a company corrected when it is proceeding with an
untenable regulation in its Articles?
I have just listed few complications that we can see with the laxity
on the part of the promoters while getting the regulations prepared or
ensuring that the Company functions in accordance with the provisions of
the Act. I can definitely say that the non-compliance of the provisions of
the Act, would lead to numerous complications.
A creditor or a shareholder can not sustain a winding-up petition
against a Private Limited Company showing that the company contains a
regulation and functions based on the regulation which is clearly against
the express provisions of the Act. It is difficult really. Section 397/398 of
the Companies Act, 1956 are not meant for ensuring that the Company
functions in accordance with the regulations thought the Company Law
Board is conferred with extraordinary powers while entertaining an
application under section 397/398 of the Act. There will be lot of problems
when some one approach the Civil Court seeking a declaration that a
regulation contained in the Articles of a Company is void or the
transaction entered into in violation of the regulations in the Articles are
void.

In view of numerous complications with incorrect drafting of Articles

of Association, I would like to mention few points which can be considered
while preparing an Articles of Association of a Company or getting a
Private Limited Company incorporated.
1. It is to be remembered that though we use the word
preparation of articles while getting a company
incorporated, it is actually an adoption even when the
promoters insist for few changes in the model articles
provided in the Act.
2. It is advisable to convince the promoters not to insist for
additions, changes, alternations or deletions in the model
articles provided in the Act.
3. Promoters are to be convinced that the Articles can be
altered easily.
4. It is to be remembered that the additions, changes or
alternations in the model articles provided requires
careful scrutiny of the provisions of the Act.
5. Unless it is necessary to have a new regulation in the
Articles of Association or a new regulation is must for
promoting the Company, it is better not to resort to
additions, alternations, changes etc. in the model Articles
provided in the Act.
Note:
1. I have focused only on the preparation of Articles of a Private
Limited Company.
2. I have not detailed all provisions dealing with the Articles of
Association under the Act.
3. I have not discussed many company law concepts surrounding the
issue.
4. I am aware of the vastness of the subject.