Corporate Law –

Lecture 11
Article of Association
Textbook: Khalid Mehmood Cheema & Muhammad Imran Akhtar,
Corporate Law , West Pakistan Publishers, Lahore, Pakistan
• Dr. Qais Aslam
• (PhD in Economics, LLB)
• Professor, University of Central Punjab (UCP)
• Former Chairman, Department of Economics, GCU, Lahore
 • Article of Association
• Meaning and Definition - Article of Association contain the rules and regulations for the internal
management of the company.
• It shows the relationship between the company and its members and among the members
themselves.
• Some definitions are as under:
• (Sec.2(1)(3) ) “Article means the article of Association of a company framed in accordance with
the Company Law or Act (2017)”
• Charlsworth, “Article of Association is a document regulating the rights of members of a
company among themselves and the manner in which the business of the company shall be
conducted”.
• Brown, “Article of Association Article of Association are the internal regulations of the company
are for the benefit of the shareholders”
• Articles and Table A – A company limited in shares shall form its own Articles or adopt the
regulations containing in Table A of the First Schedule of the Companies Act. All other
companies shall make their own Articles. (Sec. 36(2)).
• Forms of Articles - The Articles of various companies must be in accordance to the format given
in Table C, D and E in the First Schedule.
• Printing and Signing – The Articles shall be (Sec. 37)
1. Printed in an acceptable manner.
2. Divided into paragraphs, numbered consecutively.
3. Signed by each subscriber who shall add his present name, occupation, nationality and usual residential
address and other particulars as may be specified, in the presence of a witness who shall attest the
signatures and add his particulars.
4. Dated.
• Contents of Articles – It contains regulations pertaining to the following matters.
1. The Regulations adopted from Table A. (Sec. 36(2))
2. In case of an unlimited company or a company limited by guarantee having a share capital ,
the Article shall state the amount of share capital with which it is to be registered. (Sec. 36(3))
3. In the case of unlimited company or a company limited by guarantee having no share capital ,
the Article shall state the number of members with which it is to be registered. (Sec. 36(4))
4. The article shall list the voting and other rights of different classes of shares and other
securities (Sec. 36(6))
5. Rules of allotment, issues and forfeitures of shares
6. Rules of notice and procedures of general meetings.
7. Rules of voting and Proxy
8. Powers and duties of directors
9. Rules regarding records and minutes.
10. Rules of fixation of minimum subscriptions.
11. Rules of transfer and transmission of shares.
12. Rules of calls on shares.
13. Rules of issue of bonus shares.
14. Rules on increasing, decreasing and altering the share capital.
15. Rules of the declaration of dividends and its payments.
16. Rules relating to accounts and Audit.
17. Procedure for the winding up of the company.
18. Rules relating to the appointment, powers, duties, qualifications, removal and remuneration of
chief executive, directors, secretary and manager.
19. Rules for filling vacancies.
20. Rules for keeping reserves.
21. Rules for arbitration for settlement of disputes.
• Restrictions on Alteration – Any alteration to the Articles is subject to the
following restrictions.
I. Statutory Restrictions – The following are the statutory restrictions:
• (a) Special Resolutions – A company can alter its Articles through a special
resolution. A copy of the altered Articles shall be filed with the Registrar within
15 days. (Sec. 38)
• (b) Contrary to Memorandum – No alteration can be made to the Articles which
is against the conditions contained in the memorandum of the company.
• (c ) Violation of Company’s Act - No alteration can be made to the Articles
which is in violation to the Company Act.
• (d) Additional Liability –Where an alteration affects the major rights and
liabilities of members, or a class of members, it shall be carried out, if at least
three- fourth of members or a class of members affected by such alteration vote
for such alteration. (Sec.38).
II. Judicial Restrictions – The Judicial Restrictions are as follows:
• (a) Breach of Contract – A company cannot avoid contractual liability by
altering its articles. An . If a company alteration must not allow the company
to break the contract. If a company commits a breach of contract, it shall be
liable for damages.
• (b) Benefit for the Company – Alteration in the Articles must be for the
benefit of the company. The alterations are binding, even though the private
interests of some members are affected.
• (c ) Fraud on Minority – The alteration in the Articles is not vailed, if it
results in fraud with minority shareholders. An action that results in
discrimination between majority shareholders and minority shareholders will
be considered a fraud with minority shareholders.
• (d) Illegal Business - No company can be formed to run an illegal business.
An alteration in the Articles to run an illegal business is void.
• Effect of Alteration - No member shall be bound by an alteration made in the
memorandum or Articles after the date on which he becomes a member.
• If the alteration requires him to take more shares or increase his liability to
contribute to the share capital or pay money to the company unless he gives his
consent in writing. (Sec. 35)
• Copies of Memorandum and Articles – Every company shall send a copy of the
memorandum and Article to every member at his request within 14 days on
payment of a fixed fee.
• If a company makes a default, it shall be liable to a penalty of level 1.
• Every copy of the memorandum or article issued after the date of the alteration
shall contain the alteration .
• If copies of the memorandum or articles do not contain the alteration, the
company and every officer in default shall be liable to penalty of level 1. (Sec.
39, 40)
 Difference between
Memorandum of Association and Articles of Association
Memorandum
1. Meaning – Memorandum is a document that
explains the powers and objects of a company
2. Main Objects – Memorandum provides
information to outsiders about the activities of
the company
3. Importance- Memorandum is a fundamental
document and most essential for the company
4. Provisions – The provisions of the memorandum
must not be against the provisions of the
Company Act
5. Alteration –Memorandum can be altered by a
specific resolution and in some cases with the
permission of the Commission
6. Approval = If a company violates the
memorandum, it can not be approved by the
shareholders
Articles
1. Meaning –Articles is a document that
contains rules and regulations of the company
2. Main Objects – Articles controls and regulates
internal matters of the company
3. Importance – Articles is a secondary
document and subordinate to the
memorandum
4. Provisions - The provisions of the articles
must not be against the memorandum and the
provisions of the Company Act
5. Alteration – Articles can be altered by a
specific resolution
6. Approval - If the company violates the
articles, it can be approved by the
shareholders.
 • Doctrine of Ultra Vires
• Ultra Virus is a Latin word that means beyond powers.
• In company’s Law Ultra Virus means an act bryond the powers of the
company or its directors.
• Ultra Virus acts are void.
• It is called the doctrine of ultra virus.
• It protects the interests of shareholders and creditors.
• Ultra virous acts can be divided into the following acts:
1. Ultra Virus The Act – An act that violates the provisions of the Company’s
Act 2017 is ultra virus and void abinito (absolutely and utterly).
• An ultra virus act can not be rectified by a unanimous resolution of
shareholders
• e.g. payments of dividends out of capital , reducing the share capital without
fulfilling legal formalities.
2. Ultra Virus the Memorandum – An act of a company which is beyond the
powers defined by the object clause of the memorandum is ultra virus. An ultra
virus act can not be rectified by a unanimous resolution of shareholders
3. Ultra Virus the Articles – An act not authorized by the Articles is ultra virus.
• E.g., Violating rules of transfer of shares.
• The company may alter the rules through a special resolution to rectify the ultra
virus act.
4. Ultra Virus the Directors – An act beyond the powers of the Directors is ultra
virus.
• A company can hold the directors personally liable for loss caused by an ultra
virus act. If a director performs an act that is beyond his powers but within the
company’s powers, it can be ratified by shareholders.
• For example, if a company restricts the authority of directors to borrow a certain
sum but directors borrow more the company may rectify the director’s act.
 • Doctrine of Constructive Notice
• Meaning – The Doctrine of Constructive Notice means that every person
dealing with the company is deemed to have notice of its memorandum and
Articles.
• The memorandum and Articles are public documents . It is the responsibility
of the person dealing with the company to inspect tese documents.
• It is assumed that every person has read the documents and determined the
powers of the company and its directors.
• When a person deals with the company in a manner inconsistent with the
memorandum and Articles or enters into contract beyond the power of the
company, he shall be personally liable.
• A person can not claim relief on the ground that he was unavair of the powers
of the company.
 • Doctrine of Indoor Management
• Meaning – The Doctrine of Indoor Management states that outsiders dealing
with the company can assume that the internal proceedings of that company are
being carried out as per law.
• Outsiders are not bound to inquire into the internal regulations of the company
and will not be affected by any irregularity.
• The Doctrine of Indoor Management protect people who do business with the
company.
• If there is any irregularity in the internal dealings of the management and the
contract is within the powers of the company , the company will be liable.
• A company cannot avoid liability on the grounds that ther was a irregularity in
internal management.
• Exceptions – The Doctrine of Indoor Management does not apply in the
following circumstances:
1. Knowledge of Irregularity - If a person dealing with th company had
notice of irregularity in internal management of the company, he can not
claim benefit under the Doctrine of Indoor Management
2. Apparent Authority – The Doctrine of Indoor Management does not apply
where an act of an employee of a company is ordinarily beyond his powers. If
an officer of a company acts beyond his authority, suspicion should arise, and
the outsider must make a proper inquiry before making a contract.
3. Suspicion of irregularity – The Doctrine of Indoor Management is not
applicable where the circumstances of the contract are suspicious and require
an inquiry.
4. Void Ab-Inito – When an act done on behalf of a company is void Ab-Inito the
Doctrine of Indoor Management does not apply. The doctoring applies only to
irregularities that affect valid transactions. A company can not be hald liable
for fraud committed by its employees.