ARTICLES OF ASSOCIATION Meaning According to Section 2(2) of the Companies Act, "articles" means the articles of association of a company

as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act. The articles of association of a company are rules and regulations framed for the purpose of internal management of its affairs. The articles define the powers of its officers; establish a contract between the company and members and between the members (members interse). The articles enable the company to carry out the objects of the memorandum. The articles are subordinate to the memorandum and shall not contain anything that contradicts or goes beyond the memorandum. It can be used to explain and make clear anything that is contained in the memorandum. Model form of memorandum and articles Section 14 requires that the memorandum and articles of a company shall be in one of the Forms in Tables B, C, D and E as given in Schedule I to the Companies Act, 1956 as may be applicable in the case of the company. Table B is a form for memorandum of association of a company limited by shares. Table C is a form for memorandum and articles of association of a company limited by guarantee and not having a share capital. Table D is a form for memorandum and articles of association of a company limited by guarantee and having a share capital. Table E is a form for memorandum and articles of association of an unlimited company. Table A is the model set of articles for a public limited company. Companies which must have their own articles The following companies shall have their own articles: a. Private companies limited by shares b. Companies limited by guarantee c. Unlimited companies The articles of all these companies shall be signed by the signatories to the memorandum and registered with the memorandum. Form and signature of the Articles Section 30 requires that the articles shall: a. Be printed; b. Be divided into paragraph numbered consecutively; c. Be signed by each subscriber to the memorandum. Contents of Articles of Association The articles contain the following matters:

1. Exclusion, either wholly or partly, of Table A 2. Adoption of preliminary contracts 3. Number and value of shares 4. Allotment of shares 5. Calls on shares 6. Lien on shares 7. Transfer and transmission of shares 8. Forfeiture of shares 9. Alteration of capital 10. Share certificates 11. Conversion of shares into stock 12. Voting rights and proxies 13. Meetings 14. Directors, their appointment, etc. 15. Borrowing powers 16. Accounts and audit 17. Issue of share warrants 18. Issue of bonus shares 19. Dividends and reserves 20. Winding up Regulations framed in the articles of association should not be beyond the scope of the memorandum and the Companies Act; else the clauses will be considered ultra vires the memorandum and the Act. ALTERATION OF ARTICLES OF ASSOCIATION Companies can alter their articles any time and any restriction placed on such alteration is invalid. To alter the articles, the company needs to pass a special resolution, and a copy of this resolution must be filed with the Registrar within one month of its passing. However, there are certain conditions or limitations placed on companies exercising their freedom of altering articles. These conditions are: 1. The alteration must not go beyond the provisions of the Memorandum. 2. The alteration must not oppose the provisions of the Companies Act. 3. The alteration must be for the benefit of the company as a whole and in good faith. However, an alteration cannot be considered invalid just because it causes hardship to one individual shareholder. 4. The alteration must not oppose or suppress the rights of minority shareholders, nor must it amount to committing a fraud on the minority. 5. The alteration must not in any way increase the liability of any member, that is, the alteration should not cause a shareholder to take up more shares than what he subscribed to, unless and until he has given in writing, either before or after alteration, his willingness to take on more liability. 6. The alteration cannot enable conversion of a public company into a private company unless such alteration is approved by the Central Government. 7. The alteration cannot sanction anything that will lead to a breach of contract entered into with an outsider. 8. The alteration must not sanction anything illegal.

9. The alteration must not oppose public interests and policies. 10. If the court has amended the Memorandum or Articles in cases of oppression and mismanagement, the company cannot, at a later date, alter its articles and make it inconsistent with the court orders. 11. Alteration must not negatively affect the activities carried out by the company in the past. 12. The alteration must not make the articles unalterable. According to Section 39, if a member requires, the company shall send to him within seven days of the requirement and on paying a fee of one rupee, a copy each of the following documents as in force for the time being a. The memorandum; b. The articles, if any; If the company makes default in complying with the requirement of this section, the company, and every officer of the company who is in default, shall be punishable, for each offence, with a fine which may extend to fifty rupees. LEGAL EFFECT OF MEMORANDUM AND ARTICLES When the memorandum and articles are registered, it shall bind the company and each member and they shall be bound to observe all the provisions of the memorandum and the articles. The memorandum and articles bind: a. The members to the company b. The company to the members c. The members inter se d. The company to the outsiders. Members bound to the company: Every member is bound to observe the various provisions of the memorandum and articles as though he were a signatory to the same. Each member is bound not only to the originally framed memorandum and articles, but also to any alterations that have taken place. The shareholders themselves cannot enter into any agreement that is inconsistent with the articles. Company bound to the members: A company can exercise it rights against any member of the company only in accordance to the provisions laid down in its memorandum and articles. However, if the company has taken an action that will prevent a member from exercising his right as a member, then he can sue the company for breach of the articles. For example, chairman of a company meeting trying to deprive a member his right to vote. Members inter se: Though the memorandum and articles do not constitute an express agreement between the members, yet each member is bound to one another on the basis of an implied contract. The articles regulate the rights of members inter se, but these rights can be enforced only through the company. For example, if any member brings a complaint for breach of terms of articles by another member, a law suit can be filed against the offending member, not by the grieved member, but by the company. Company bound to outsiders: Outsiders are persons who are not members of the company. Members who are solicitors or directors are also treated as outsiders under certain

circumstances. The articles do not constitute a contract between the company and outsiders and they cannot enforce any provision of the articles against the company. CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES Since every company is required to register its memorandum and articles with the Registrar of Companies, whose office is a public office, these documents are also considered as public documents, which are made available for public reading on payment of a nominal fee. Thus, every member and outsider is considered to have read the two documents and have knowledge of its contents. This deemed knowledge of the contents of the memorandum and articles of a company by a member or outsider dealing with the company is termed as constructive notice of memorandum and articles. These persons are expected to have not only read the documents but to also have understood the meaning. Thus, if a person enters into a contract with the company and the transaction is ultra vires the memorandum or articles or beyond the powers of the company itself, such person will have to suffer the consequences of the transactions. DOCTRINE OF INDOOR MANAGEMENT The doctrine of indoor management is an exception to the rule of constructive notice. Normally, a person dealing with the company is expected to have a knowledge of the memorandum and articles of the company and cannot hold the company liable and bound for transactions entered into which are ultra vires the company and its documents. However, if the transactions appear to be proper when compared with its memorandum and articles, it would be grossly unfair if the company is allowed to escape its obligation to the other party, on the grounds that there was some irregularity in the conduct of the companys affairs leading to the transaction. In other words, the outsider is not expected to assume that there were irregularities in the conduct of the companys internal affairs. Therefore, the doctrine of indoor management assumes that the companys internal management is in order and the outsider has the right to presume that internal affairs are regularly and properly done and he does not lose his rights in a transaction for irregularities he was not aware of and had no means of discovering. This doctrine has its origin in the leading case of Royal British Bank vs. Turquand (1856) The directors of the bank issued a bond to Mr. Turquand. The articles provided that the directors had the power to issue bonds if authorised by a proper resolution of the company. No such resolution was passed. It was held that Turquand could sue on the bond as he was entitled to assume that the resolution must have been passed. It was observed that persons dealing with the company are bound to read the registered documents and to see that the proposed dealing is not inconsistent. But they are not bound to do any more than that; they need not inquire into the regularity of internal proceedings. EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT 1. If any person dealing with the company has knowledge of irregularities in its internal management, then such person cannot claim ignorance of internal proceedings, and obtain the benefit of the doctrine of indoor management.

2. If the person dealing with the company could have exercised proper care and diligence and made inquiries to find irregularities in internal management, he too cannot claim the benefits of the Turquand case. 3. This doctrine will also not apply if the document used in the transaction is forged, or if signatures and seals are forged or if an agent signs in a document where he has no authority to do so. 4. A person who has entered in a contract with an official of a company who does not have any authority from the company to do so, then such person will not be protected by the doctrine of indoor management. 5. A person who has not read the memorandum or articles of the company, and has no idea of its contents, and enters into contract with a company cannot claim ignorance of the documents and avail of protection.

Distinction between memorandum and articles of association Memorandum is the charter Articles regulate the Contents and scope of the company and defines internal management and the scope of its activities. aids in carrying out the objectives laid out in the memorandum. Relationship between Memorandum defines the Articles deal with the company, members and relationship of the company relation of members inter se with the outside world. and establish the outsiders relationship of the company with its members. Memorandum cannot be Articles can be altered by Alteration altered other than in the passing a special resolution. manner and to the extent provided in the Act. Memorandum is the Articles are subordinate to Supremacy supreme document of the the memorandum. company. Every company needs to Companies limited by Adoption have its own memorandum. shares can adopt Table A, and need not register its own articles.