Articles Of Association: The First Principles

To incorporate the company, the company goes through the process of incorporation and for this the
company needs to have a constitution. The main aspect of the company’s constitution is originated in the
articles of the association because it governs management of Company, which includes the rules and
regulations along with the company’s objectives. It is the contract which contains the Company's
connection with its directors
Articles of Association serve as a guide to how the company will be run and help to ensure that it
operates within the law.
The AOA will typically include information on the company’s registered name, registered office, and the
type of company it is (such as a limited company).

Introduction
In accordance with section 2(5) of the Companies Act, 2013, "articles of association" are defined as "the
articles of association of a company as initially formed or as subsequently amended or enforced in
accordance with any prior legislation or this act.”
According to Section 5 of the Company’s Act of 2013, the company's articles must include:
- Regulation for management of company.
- Matters which are prescribed under the rules.
Articles of Association as a contract-
Generally speaking, an article of association is a contract between the Company and its shareholders as
the company has a distinct identity from its shareholders, thereby such a contract describes the roles and
responsibilities of internal management and it is submitted to the registrar of companies as a part of the
process of incorporation. It is a public document governed by Company’s act, 2013, registered at the
company's registrar in which the parties to the contract have binding power for existing and new
shareholders.
In Naresh Chandra Sanyal vs Calcutta Stock exchange association Ltd, According to the Supreme
Court, the articles of association also create a contract between the firm and its members as well as among
its individual members. The rights and obligations typical to membership in the company are governed by
this contract.
Relationship between MOA and AOA:
Articles which is subsidiary to memorandum-
Memorandum includes the essential requirements upon which alone the company is permitted to be
incorporated, while the articles are the operational rules of the company. As a result, articles are
subordinate to the memorandum.
Memorandum and AOA must be read together but articles shall not be deemed to amend or
control the terms of the memorandum.
As memorandum is a superior document which cannot be overridden by the articles of the company, and
they must be read together to clarify the terms where the memorandum is silent.
The power of alteration of articles is subject to what is prohibited by the memorandum, expressly
or impliedly-
Unless a company's memorandum does not stipulate that all shareholders are equal, it may change its
articles by special resolution to provide for the issuance of preference shares.

Binding Effect of articles of association:

As per section 10 of the Company’s Act, 2013 after the registration of MOA and AOA, the document
becomes a public document, thereby the members are bound to the company and the company is bound to
its members. However, neither the corporation nor its members are obligated to third parties in regard to
the articles. When it comes to rights and obligations emanating from the articles, the members are bound
one to the other by the articles, but a member is not permitted to sue another member or members on his
own behalf to enforce the articles.

The legal effect is discussed as follows: -

Members bound to company: The members are bound due to provisions in the memorandum and
articles because they have been signed by each member. It constitutes a contract between each member of
company and company.
In Borland’s Trustee v. Steel Brothers & Co. Ltd. According to the articles, a member's shares would
be sold to another party at a price set by the directors if he or she filed for bankruptcy. A member was
declared insolvent. As a result of a member's bankruptcy, the trustee argued that he was not constrained
by the articles and could sell the shares to anybody he wanted for the genuine market value. He was ruled
to be subject to the articles.
Company bound to members: Members are obligated to abide by and follow the articles of
incorporation in the same way that the company is obligated to the members. The firm is obligated to
each individual member as well as to the members as a whole.
Articles not binding in relation to outsiders: The articles are not a legally binding contract between the
company and any third parties. Therefore, despite what is stated in the articles, neither the firm nor its
members may be compelled to comply with the articles by an outsider or a non-member. In any role other
than that of a number, he is not permitted to use any right assigned to him by the articles against the
company. The word "member" in this context refers to a member functioning in his official capacity.
In Major-general Shanta Shamsher Jung bahadur rana v. Kamani brothers (Pvt.) Ltd. The articles
of a company provided that the board of directors could from time to time appoint one or more of them as
managing directors. It was further provided that a managing director could be removed in the same way
as other directors of the company, that is, by special resolution.

How far binding between members inter se: Generally speaking, the filing of the memorandum and
articles with the company's registrar results in the creation of an express contract between the members
and the company but not a contractual relationship between the members personally. This implies that a
member cannot pursue legal action against another member for an action he took that was outside the
rules. The business has the authority to initiate or enforce a course of action.

Relevant Case Law-

In Ashbury Railway Carriage Co. v. Riche, Lord Cairms observed that “Articles are secondary to the
memorandum. The articles go on to specify the obligations, the rights, and the powers of the governing
body between themselves and the company as a whole, as well as the manner and the format in which the
company's operations are carried out and the manner and the format in which the internal regulations of
the company may periodically be modified. They recognize memorandum by way of the charter of
company's formation.”

Basis Memorandum of Association Articles of Association

Meaning MOA, serves as company's charter and
outlines the basic requirements for
incorporation.
Subordinate The Company’s Act is given precedence over
memorandum.
Ratification Any act which is outside the scope of company
is void from the beginning which can’t be
ratified by the agreed consent of its members.
The company's internal rules are
outlined in the articles.
Articles are subordinate to both
company’s act and memorandum.
Anything done by a company in
contravention of the AOA can only be
called irregular and can only be
confirmed by the shareholders.

Alteration of Articles:
The Companies Act of 2013 has the following provisions for changing articles:
Passing of Special Resolution- Section 14(1) stipulates that a company with its own discretion amend its
articles by special resolution, in accordance with the requirements of Company’s Act of 2013 and the
terms of memorandum.
Every corporation has the legal authority to change its articles by special resolution, and this power
cannot be negative by entering into a contract. As a result, the ability to amend the articles is granted by
statute, and a business may contract itself out of this ability.
Power to amend must be bona fide - The authority to change the articles must be legitimately used for
the company's benefit.
Alteration to transform a public company into a private company and vice versa- By following the
due procedure of the law, the public company can convert into a private company by confirmation of a
court of law whereas private company can convert into public company through amending the restrictions
and limitations.
Alteration in breach of contract- A company can alter its articles, even If a contractual violation results
from such a change is involved. But in such a case it could be held accountable for contract infringement
by paying damages to other parties.
To conclude, it can be said that Articles of the company are the core document and are termed as a
constitution of the company which regulates the internal matters of the company. Also, a company's
articles of association are an important document, especially when it comes to corporate governance. The
Articles essentially serve as the company's constitution along with the Memorandum of Association. It
occupies a significant position inside the organization and handles all crucial facets of management.