This article is written by Aditi Vinzanekar, and Debapriya Biswas. This article explores the meaning and importance of the Articles of Association in corporate governance while also detailing the procedures and legal provisions relating to it.

It has been published by Rachit Garg.

Introduction

The Articles of Association (hereinafter also referred to as AOA) of a company is one of the most essential documents of a company. It prescribes the rules, regulations and by-laws according to which the internal matters of the company are conducted. In simpler terms, it specifies the conduct of the business of a company and is a document of paramount significance for a company.

An AOA is often compared to a rulebook of a company since it regulates the internal management of a company while also giving powers and obligations to its officers and employees. This includes regulations for several details of the company and its workings, such as rights of the shareholders, qualifications of directors, binding effect of contracts, etc. Moreover, the Articles of Association even establishes contracts between, firstly, members of the company, and secondly, members and the company.

However, it must be noted that while the AOA establishes the regulations of the company, it is still subordinate to the Memorandum of Association (hereinafter also referred to as MOA). MOA acts as a constitutional document of the company that supersedes all other documents within the company. If the AOA exceeds the scope laid down in the provisions of the MOA, then it would be considered ultra vires, as laid down by the Calcutta High Court in the landmark judgement of Shyam Chand v. Calcutta Stock Exchange (1945). Thus, in the event of a conflict between the two, the provisions laid down in the Memorandum of Association would prevail. Further, in case of any uncertainty of such provision in the MOA, it shall be read along with the AOA for a more harmonious interpretation and understanding.

What is Article of Association (AOA) 

Under the Companies Act of 2013, Section 2(5) covers the definition of Articles of Association. According to the aforesaid Section, AOA or ‘Articles’ contain all the rules and regulations framed by the Directors of the company to govern the internal management and governance, which can also be altered from time to time. In a nutshell, as mentioned earlier, it is a rulebook that regulates the inner workings of the company while binding the company to its workers and vice versa.

Difference between Memorandum of Association (MOA) and Articles of Association (AOA)

The major differences between the Memorandum of Association (MOA) and the AOA are given below:

S.No	Basis of Differentiation	Memorandum of Association (MOA)	Articles of Association (AOA)
1	On the basis of Content	Lays down the fundamental principles upon which the company is incorporated.	Lays down the provisions for internal regulations of the company, including the rights and obligations of its members.
2	Objective	Acts as an informative document for the benefit and clarity of the public, the creditors, and the shareholders.	Acts as a rulebook that regulates the relationship between the company and its members, as well as amongst the members themselves.
3	Functions	Establishes the scope beyond which the company’s conduct becomes void.	Establishes the rules, regulations and by-laws based on which the company conducts its workings.
4	Jurisdiction	Lays down the scope or the parameters within which the AOA is to function.	Prescribes rules and other details within the parameters set by the MOA.
5	Alteration	MOA has a very rigid procedure for alteration and can only be altered in specific circumstances. Permission of the Central Government is also required in certain cases.	Can be altered in an easier manner than MOA, by passing a special resolution.
6	Position or status	The MOA cannot be in contravention of the Companies Act. It is only a subsidiary of the Companies Act.	AOA cannot include provisions contrary to the MOA. It is subsidiary to both the Companies Act and the MOA.
7	Ratification when breached	Any conduct or actions beyond the scope of the MOA will be considered ultra vires and cannot be ratified even by the shareholders.	Any conduct or actions beyond the provisions of the AOA can be ratified by the shareholders as long as such conduct/action is not in contravention of the MOA.

Objective of Articles of Association (AOA)

While the Memorandum of Association contains the fundamental elements based upon which the company is incorporated, the Articles of Association acts as a complementary document to the Memorandum that fulfils the following objectives: 

• To act as a governing document that regulates the internal affairs and operations of the company with the rules and regulations framed in its articles;
• To provide clarity in regards to the procedures and rules that the company must follow, which should also be accessible by the shareholders of the company;
• To regulate the relationship between the company and its members (shareholders, directors, employees, etc.) along with the relationship among the members;
• To clarify the legal rights and obligations of the different classes of shareholders as well as the directors and other members;
• To cover any additional matters that the Company considers necessary for its governance and management.

In simple terms, the Articles of Association play a vital role in the workings of the company by ensuring that the internal affairs of the company are being conducted lawfully. It further ensures that the aforesaid affairs of the company align with the interests and objectives of the business of the company.

Forms of Article of Association (AOA)

As per the Companies Act of 2013, AOA of different types of companies need to be framed in specific, prescribed forms as given under  Section 5(6) of the aforesaid Act. It is prescribed for companies such as companies limited by shares, companies limited by guarantee having a share capital, companies limited by guarantee not having a share capital, etc. As per Section 5(7), such companies may adopt the model articles in these forms.

The exception to this lies under Section 5 (9), which states that companies that have registered before the commencement of the Companies Act, 2013 shall not need to follow these forms. However, if they amend their AOA anew, then these provisions shall be applicable. Meanwhile, Section 5 (8) clarifies that if the companies follow the models given under the forms to the dot, without any modifications, then such AOA will be treated the same as any other registered Articles of the Company.

Schedule I of the Companies Act, 2013 contains the model Articles under the forms in Tables F, G, H, I and J. The required Companies, as mentioned earlier, are obligated to register the Articles of Association using these forms:

Tables in Schedule I	Details of the Forms
Table F	Form for the Articles of Association for a company limited by shares (as per Section 2 (22) of the Companies Act, 2013)
Table G	Form for the Articles of Association for a company limited by guarantee and having a share capital (as per Section 2 (21) of the Companies Act 2013)
Table H	Form for the Articles of Association for a company limited by guarantee and not having a share capital
Table I	Form for the Articles of Association for an unlimited company and having share capital [as per Section 2 (92) of the Companies Act 2013]
Table J	Form for the Articles of Association for an unlimited company and not having a share capital

Nature of Articles of Association (AOA)

As mentioned earlier, the Articles of Association is the rulebook of the company that acts as the bedrock upon which all the internal affairs of the company are conducted. The internal management and governance depend completely on the AOA. However, while it is an essential document for the company, the Memorandum of Association still supersedes its authority as a sort of ‘Constitution’ of the Company.

Compliance of Articles of Association (AOA) with the law

In addition to the Memorandum of Association, which the Articles of Association cannot contravene or go outside the jurisdiction of, there are also other laws that the provisions in the Articles of Association must not be against:

• The Constitution of India;
• The Public Policy;
• The laws of the land; and
• The Companies Act.

For better understanding, let us explore some relevant case laws. In the case of Hutton v. The Scarborough Cliff Hotel Company Ltd (1865), a resolution dealing with the issue of new shares with preferential dividends was passed in the general meeting of shareholders of the company, resulting in the alteration of the Articles of Association. However, the Memorandum of Association of the company provided no such power of alteration in the aforesaid matter; thus, making the altered clause void and inoperative. The High Court of Chancery held that the purview of alteration of the Articles, either expressly or impliedly, depends directly on what is stated in the Memorandum.

Meanwhile, in the case of Hari Chandana Joga Deva v. Hindustan Co-Operative Insurance Society Ltd. (1923), the Defendant company had issued insurance to the Plaintiff, promising the payment of the prescribed amount on the specified date. However, the Defendant company altered their AOA on a later date, because of which the fund the insurance was based on, changed. The premise of the fund changed into a special one,  which was declared insolvent by the time the date of the payment approached. The Calcutta High Court held the case in the favour of the plaintiff, stating that the alteration was clearly breaching the provisions of the contract by suddenly changing the type of fund the payment had to be given without consulting the other party. Thus, the altered clause was declared to be inoperative and void. The Defendant company was further ordered to compensate Plaintiff for the breach of contract.

Formalities of Articles of Association

There are some formalities to be adhered to in regard to the Articles of Association. These formalities include how the AOA should be framed, which is by dividing the provisions into respective paragraphs. These paragraphs then shall be numbered properly and consecutively. Furthermore, the Articles of Association should be printed and provided to every member or subscriber of the Memorandum of Association as well. 

Articles of Association must be signed

Rule 13 of the  Companies (Incorporation) Rules, 2014 prescribes both the MOA and the AOA of a company to be signed in a specific manner. Furthermore, it is to be signed by each signatory or member of the Memorandum, in the presence of one or more witnesses, explained as below:

• Both the MOA and AOA of a company, as mentioned above, are required to be signed by all the subscribers of the MOA and required to have their personal details mentioned. These details include their name, occupation, address, etc. The singing must be done in the presence of one or more attesting witnesses, who must then sign as well and add their own personal details as required.
• In case of a subscriber being illiterate, the subscriber’s thumb impression can be taken instead of their signature. Any person authorised/appointed shall be present during such procedure to authenticate and witness the ‘signing’ and the addition of the subscriber’s details. Furthermore, this authorised person should also help the illiterate subscriber in reading or understanding the AOA wherever required.
• Where a subscriber is a body corporate, the memorandum and articles must be signed by any director of the said body corporate who is duly authorised to do so by the mutual consent or resolution of the board of directors of that corporation.
• In case the subscriber is a Limited Liability Partnership (LLP), then the partner of the Partnership firm shall be authorised to sign, given that all the other partners of the LLP agree.

Registration of Article of Association (AOA)

Once the above-mentioned conditions are fulfilled, the Articles of Association shall be registered alongside the Memorandum of Association. Without the filing to the Registrar of Companies, the Article of Association nor the company itself will gain any legitimacy. Thus, to avoid such a scenario, the Articles of Association along with the Memorandum is registered while filing for the incorporation of the company as per the provision of Section 7 of the Companies Act. In case of any amendment or alteration, as per Clause (2) of Section 14, a printed version of the altered Articles along with the Tribunal order of approval (in case of any conversion in the class of the company), shall be filed for registration to the Registrar within fifteen days of the alteration and its approval.  

Contents of Articles of Association (AOA)

As the rulebook of the company, the Articles of Association is framed as a legally binding document that has the necessary rules and by-laws on matters prescribed. Section 5 (2) of the Act briefly mentions such matters, some of which include the content as given below:

• The extent to which ‘Table A’ of the Companies Act is applicable
• Management decisions
• Clause relating to adoption of preliminary contracts
• The different classes of shareholders
• The rights and duties of different classes of shareholders 
• Appointment of Directors 
• The powers and rights of Directors 
• Borrowing powers of Directors
• The procedure of issuing share certificates and share warrants
• The voting of the Directors and Chairman
• The Dividend policy of the company
• The creation of reserves
• Confidentiality of the trade secrets and trade know-how of the company and penalty over their unauthorised disclosure
• The intellectual property valuations of the company
• The alteration of share capital
• Issue and transfer of shares
• Transmission clause relating to the transfer of title of share by insolvency, succession, death, etc.
• Forfeiture and surrender of shares 
• The procedure for board meetings and for special resolutions that can be passed
• Arbitration clause in case of disputes 
• Accounts and audits of a company 
• Clause relating to the common seal of the company
• The winding up procedure of a company, including the conditions required and the period of notice given to the members of the company 

These are some of the details that are usually included in the Articles of Association. The company can also give other additional information, which may include the restrictions given in the Memorandum of Association, specifically its objects clause. 

Provisions for Entrenchment

In the contents of the Articles of Association given above, certain contents or provisions are made as such to be harder to change, amend or alter, making them ‘entrenched’ in nature. The literal definition of the word ‘entrench’ can be defined as a firm belief, attitude or habit that is quite difficult or hard to change. In simpler terms, entrenchment clauses can be referred to as clauses or provisions of AOA that are very hard to bring changes to or amend.

Section 5(3) of the Companies Act, 2013 explicitly talks about entrenchment clauses in AOA, stating that certain provisions in the Articles of Association cannot be altered or amended by simply passing a special resolution but also require additional procedures, which would be covered later in the article. Section 5(4) further mentions that such entrenchment clauses can be introduced in the AOA only during:

1. The incorporation;
2. By bringing an amendment later to the provisions of the AOA through:

• An agreement between all the members in case it is a private company.
• Special resolution if it is a public company.  

Notice to Registrar 

Section 5(5) of the Act further provides for the requirement of giving notice to the Registrar of Company if any Articles in the Articles of Association contain the entrenchment provision, let it be framed even before the registration of the Articles or added later by amendment or alteration. This is done so as to avoid unnecessarily hard alteration laws for the provisions where such an elaborate process is not particularly needed.

Scope of Articles of Association (AOA)

While the Articles of Association play a vital role in the running of the company, it is still bound by the Memorandum of Association, which acts as the ‘supreme law’ within the company. Due to this, the Articles of Association cannot exceed or be in contravention of the scope of the Memorandum.

Beyond that, the Articles of Association act as a legally binding document that not only clarifies the power and rights of the members and directors but also sets the obligations that can be accessed and have to be agreed upon by all the future members who are to join. Every contract the company has with its future hires, members or even legal representatives is based upon the clauses of these Articles.

It acts as the base legal system of the company, highlighting the duties and rights of the company towards its members and vice versa. The company can also add rules as per their own requirements but even those need to be signed and approved by every shareholder prior to its enactment. 

The alteration of Articles of Association, while possible, is quite a lengthy and tedious procedure since the process needs to be approved by all the shareholders and Directors of the company as well as be filed to the Registrar of the Companies, who is appointed by the Ministry of Corporate Affairs. 

All this is done to avoid any arbitrary or mischievous clauses that can lead to the company exploiting its members unfairly.

Importance of Articles of Association (AOA)

Both Articles of Association and Memorandum of Association are considered the most important statutory documents of a company. In the case of the Articles of Association, any new company would find it to be of utmost importance; even more so than a Memorandum in some cases since the Articles dictate the internal governance of a company. 

Since many countries have a necessary requirement for both documents, they hold immeasurable power in the context of the legitimacy of a company and its foundation. In addition to that, it also acts as a vital document for shareholders who read and follow it for their due diligence before investing in the company through stocks and shares or to learn more about their rights and obligations in the company.

The Articles of Association also act as a good first step in regulating plans to achieve the company objectives mentioned in the Memorandum of Association. Beyond that, it can also be used to learn more about the internal workings of a company and what it stands for.

Moreover, in many countries, the Articles of Association are also needed while setting up an official bank account for the company or while taking loans from the bank in the name of the company, which is an artificial personality.

Alteration of Articles of Association (AOA)

Section 14 of the Companies Act, 2013, states the power of a company to alter its AOA, given that such alteration is within the bounds of the MOA and is passed by the prescribed procedure of passing a special resolution. This is one of the essential powers of a company since its effect can turn:

• A private company into a public company

A company can be converted from a private company to a public one by altering its clauses. This alteration is done in the form of omitting or removing the three clauses mentioned under Section 2 (68) which states the characteristics of a private company. Once such alteration is made, a copy of the resolution and the altered AOA shall be filed with the Registrar within 15 days of passing such a resolution for alteration.

Other changes

In addition to the obvious change of the shares of the company also being available to the public, as per Section 14 (1) of the Companies Act, any restrictions on the previously private company, such as the limit on the number of members of the company to two hundred and the limit in numbers of directors to two, shall be removed after its conversion to a public company.

The newly converted public company, as per Section 149, would now need to have three directors at minimum for such conversion as well as have more than the two hundred limit of members. Furthermore, the company shall update every copy of the Articles of Association, physical or online, to include the newly updated clauses as per Section 15 of the Act.

• A public company into a private company

For a public company to be converted to a private one, passing a mere special resolution is not enough. The approval of the Tribunal is needed for such alteration and conversion. In addition to that, a copy of the special resolution needs to be filed with the Registrar within 30 days of passing the resolution. Once the altered AOA is approved by the Tribunal, the new, altered Articles of Association and the order of approval of the Tribunal shall also be filed with the Registrar within 15 days of such order being passed.

Other changes 

In addition to the above, in case of such newly converted private companies, the Articles of Association must contain the three restrictions mentioned in the aforesaid section, which include the restriction on the right of members to transfer shares, restriction on the number of employees or members of the company to two hundred and the restriction of invitation to the public for the subscription of its securities. 

Due to such restrictions, the special resolution to be passed by the shareholders becomes even more crucial along with the approval of the Tribunal. If either one of them is not acquired, such conversion will not go through. In certain cases, if the public company is acquired or has shares held by the Government, then such conversion may also require the approval of the Central Government.

Procedure for Alteration of Articles of Association (AOA) 

As mentioned earlier, Section 14 of the Companies Act, 2013 states the requirements for the alteration of Articles of Association, which may include addition, deletion, substitution or modification of the clauses in the aforesaid document. 

To alter the Articles, there are four types of procedures that the company can follow: 

• As per the steps prescribed in the Articles of Association: If the company has provided special steps to be followed for alteration in the Articles of Association itself, then they shall be followed.
• As per the procedure of special resolution: This step of alteration includes the passing of a resolution of at least 75% of the votes in favour of the alterations in the general meeting of shareholders, as per Section 114(2) of the Companies Act, 2013.
• As per the votes of the Board of Directors: The Directors also have the power to alter the Articles of Association as per the clauses given in the AOA. However, such alteration needs to be ratified by the shareholders in the next general meeting or else the alteration will lose its legitimacy.
• As per the Order of the Tribunal: The Articles of Association can also be altered by the National Company Law Tribunal (NCLT), given that the alteration is either subtraction or declaration of a clause as void due to any contravention with the Memorandum of Associations of the company or any legislation of the country. The main power of alteration is mostly only in the hands of the shareholders and Directors of the company and the Tribunal can only do so if there are any contraventions of the clauses with law or if the alteration is necessary for the functioning of the company or to protect the interests of the shareholders from unfair exploitation. Even in case of any mistake in the Articles of Association, be it clerical or otherwise, it can only be rectified by the shareholders.

Before the initiation of any procedure of alteration in the Articles of Association, a notice of at least 7 days is required to be given for the Board meeting of Directors as per Section 173 of the Companies Act.

Once the Board meeting of the Directors is held and recommendations for alterations as well as approval are granted, the notice is issued for the general meeting in accordance with Section 101 of the said Act, which may extend to however much is mentioned in the clauses in the Articles of Association itself.

Filing alteration for registration

After the general meeting of the shareholders is held a special resolution is passed for the approval of the alteration. If the resolution fails to reach the required amount of 75%, then the alteration will not proceed any further. But if it does pass successfully, then the company has to file form MGT-14 with the Registrar of Companies (ROC) within 30 days of passing of such resolution with the required documents, consisting of certified copies of passing of the special resolution as per Section 117, a copy of the notice of the general meeting as well as a printed copy of the new and altered AOA.

The printed version of altered Articles of Association must also be provided to every shareholder of the company once it is approved by the Registrar of Companies.

Limitations on power to alter Articles of Association (AOA)

• As mentioned earlier, the alteration made to the Articles of Association shall not be in contravention of the Memorandum of Association or the Companies Act, given that the AOA is subordinate to both of them.
• The alteration made to the Articles cannot have a retrospective effect. In simpler terms, the alteration made in the Articles of Association changing any of the rules shall not be applicable to the time or situation before its alteration to avoid unfair treatment or arbitrary actions.
• The alteration cannot be in contravention with the order, alterations or suggestions of the Tribunal, as per Section 242 of the Act. If the Tribunal decrees for certain actions or rules, The Articles of Association cannot have any provisions acting against such order or decree.
• The alteration made shall not be in contravention of morality, public policy or any of the laws of the State. In addition to that, such alteration to the AOA should be made for the benefit of the company and not to solely fraud or suppress the minority shareholder. 
• In the case of the conversion of a public company to a private one, no such alteration can be made until consent from the Tribunal is obtained.
• The alteration in the AOA should not be used by the company to breach any contract or escape from the liability of a pre-existing contract.

Binding effect of Memorandum of Association (MOA) and Articles of Association (AOA)

Once the Memorandum and the Articles of Association of a company are registered with the Registrar, both documents legally bind the company with its members. This binding effect is almost akin to a contract since it has much less force than a statute. This effect is explained in further detail as follows:

Binding the company to its members

The first binding effect both the MOA and the AOA have is between the company and its members. The members have the obligation to act and conduct their corporate affairs within the scope of the MOA and the AOA. Meanwhile, the members can restrict the company from doing any actions in contravention of either the MOA or the AOA as an injunction. The members can also enforce their own rights mentioned within the Articles of Association, such as the right to their declared dividends and shares in the company.

However, only a member or a shareholder of the company can restrict the company by enforcing the clauses under the AOA. As seen in the case of Wood v. Odessa Waterworks Co. (1889), The AOA of the Defendant company stated the Directors can declare the payment of the dividends to its members and shareholders, with the official approval of the company at a general meeting. However, a resolution was passed that permitted the payment of dividends through debenture bonds instead of cash. The Court held that the term ‘payment’ referred to the payment in cash and thus, such resolution was held void. In simple terms, the Directors were restricted from executing the resolution since it went against the provisions of the AOA.

Members bound to the company

As mentioned earlier, the first binding effect is always between the company and its members. It is like a contractual relationship with both parties having their rights and obligations mentioned in the provisions of the AOA. Each member or shareholder of the company shall abide by the provisions of the MOA and the AOA. This includes when any member has any amount payable to the company, which shall be considered a debt due. 

In the case of Borland’s Trustee v. Steel Bros. & Co. Ltd. (1901), the AOA stated that in case any member of the company went bankrupt, their share would be sold at the price decided by the Directors of the company. Thus, when the member Borland declared bankruptcy, Borland’s Trustee (the plaintiff, in this case) asked to sell Borland’s shares at their original value. The trustee further contended that since he was not a member, he was not restricted by the AOA. 

It was, however, held that while the trustee may not be bound by the AOA, the shares that were bought were bound by its provisions. In simpler terms, the sale of the shares was to follow as per the provisions given under the Articles.

Binding between members

The second binding effect that the Articles of Association have is on the members of the company with each other. Such powers or rights can only be applied by and against a member of the company. However, it is often noticed that the Courts tend to extend the scope of such binding effect even to the individual members who are not exactly members of the company.

As seen in Rayfield v Hands (1960), the plaintiff was a shareholder of a company. The AOA of the company stated that if any shareholder wanted to transfer their shares, the Directors of the company would have to buy such shares at a reasonable and fair value. Following this provision, the plaintiff informed the Directors, who refused to pay for his shares and argued that it was not within their obligations.

However, the judgement was given in favour of the plaintiff as the High Court stated that the plaintiff was not required to join the company as a member to bring a suit against it. The Directors were ordered to buy the shares of the plaintiff at a fair rate.

No binding in relation to outsiders

Any third party or individual not connected to the company shall not be bound by the AOA or the MOA of the company. Neither the company nor its members are bound to such third parties within the scope of the Memorandum and the Articles. As seen in the case of Browne v. La Trinidad (1887), the AOA of the company contained a clause that implied the plaintiff may be a Director that should not be removable. However, he was still removed later and proceeded to sue the company for the contravention of the Articles. 

It was held by the House of Lords that since the plaintiff was an outsider to the company, he could not restrict the company since he would not have any rights to enforce as a member. In simple terms, an outsider to the company cannot take undue advantage of the AOA to restrict or enforce any claims against the company.

Doctrine of constructive notice

According to Section 399 of the Act, after the registration of the MOA and the AOA of any company with the Registrar, it becomes a public document that can be easily accessible by any member of the public at a prescribed fee for accession. Once such a request is made to any company, as per Section 17 read with Rule 34 of Company (Incorporation) Rules, 2014, the company has the obligation to send that individual a copy of its MOA, AOA and all the other agreements mentioned under Section 117(1) of the Act. However, if the prescribed fee is not paid with such a request, the company has no obligation to send anything.

Thus, since both the MOA and the AOA become public documents, they are easily accessible to all the members of the company as well as anyone outside the company. In such a case, the doctrine of Constructive notice states that the company shall deem the party dealing or contracting with the company to have read such public documents or, at least, be aware of its provisions. This knowledge is important since the AOA can directly affect the contractual obligation of the company. 

The individuals or third parties dealing with the company can request to access the MOA and the AOA just as any other member of the public. If the company fails to provide copies of the aforesaid documents, then every defaulting ‘officer’ of the company who fails to do so may be liable to a fine of Rs. 1000 for each day of default until it is resolved. Or it can be extended to one lakh rupees, given whichever is less.

In the end, it is the duty of every person planning to interact or contract with the company to inspect these aforementioned documents which are easily accessible to the general public. Their knowledge of the workings of the company and its objectives would be assumed since the conducting of such due diligence is their responsibility. 

Whether the individual has actually read the document would not matter since it would be assumed still that they are familiar at least with the relevant provisions in the Memorandum and the Articles of Association of the company. In this context, the MOA and the AOA act as a ‘constructive notice’ to the public and interested parties for the workings of the company.

As seen in the case of Kotla Venkataswamy v. Chinta Ramamurthy (1934), the Article of the Association of the company of the Defendant stated that if any property of the company is mortgaged, then such mortgage deed would require the signatures of the Company’s Secretary, Managing Director and the Working Director. Without all three signatures, the deed would not be held valid. 

In the present case, the plaintiff had filed the suit to enforce her tenancy rights but it was later found that the mortgage deed only had the signatures of the working Director and Company Secretary. Without the signature of the Managing Director, the deed was accepted by the plaintiff. The Madras High Court held the mortgage deed invalid, stating that the plaintiff should have practised due diligence and had knowledge of the provisions of the AOA of the company, which is publicly available.

Doctrine of indoor management

The Doctrine of Indoor Management was first laid down in the case of Royal British Bank v. Turquand (1856), due to which it is also commonly referred to as the ‘Turquand Rule.’

In this case, the Articles of Association of the Appellant company permitted the Directors of the company to borrow bonds by passing a resolution in the general meeting. However, the Directors had given a bond without the passing of such a resolution, resulting in the present suit. The issue that arose was whether the company would be still liable for such a bond or would the transfer be invalid due to the conduct going against the AOA of the company. The (then) Chief Justice, Sir John Jervis held the company liable, stating that the individual receiving the bond was entitled to assume that the prescribed procedure in the AOA was followed and the bond was given in good faith.

This judgement was held quite ahead of its times and was not fully accepted or incorporated into the common law until the case of Mahony v. East Holyford Mining Co. (1875). 

The House of Lords, in the present case, endorsed the Turquand case and explored the concept of indoor management, which is quite opposite to the the doctrine of constructive notice. Simply put, while the Doctrine of Constructive Notice protects the company from the actions of an outside party, the Doctrine of Indoor Management protects the third parties not connected to the company from the company. It is so since the Constructive Notice is solely restricted to matters outside of the company, which has an external position and does not regard the internal mechanism of the company.

Meanwhile, the Doctrine of Indoor Management protects the third party from any default in the inner workings or mechanisms of the company that any outsiders would not be aware of despite practising proper due diligence. If the contract between the company and any third party is consistent with the public documents of the company, then it shall not be prejudiced due to any irregularities arising on the part of the inner workings or ‘indoor’ operations of the company.

From the common law, this doctrine has also been adopted into Indian Law, as seen in the cases of Official Liquidator, Manabe & Co. Pvt. Ltd. v. Commissioner of Police (1967) and M. Rajendra Naidu v. Sterling Holiday Resorts (India) Ltd. (2008), where it was held that while the individuals or third parties lending to the company should be familiar with the MOA and the AOA of the aforesaid company, they should not be expected to know every single inner working of the company. In simpler terms, third parties dealing with the Companies are not obligated to be acquainted either each and every internal action and proceedings occurring in the company.

Exceptions to the Doctrine of Indoor Management

Where the outsider is aware of the irregularity

While third parties are not expected to be aware of the internal workings or actions of a company, if the knowledge of such irregularity is with the party, then they shall not have the protection of the Doctrine of Indoor Management. In simpler terms, if the third party gets to know about the irregularity in the internal procedure, even in an implied manner through their observation of lack of proper process or authority followed, then it is their duty to not go through with the transaction. If the third party still decides to go with the transaction, they would not be protected under the scope of this doctrine.

As seen in the case of Howard v. Patent Ivory Co. (1888), the AOA of the Defendant company allowed the Directors of the company to borrow up to one thousand pounds and not beyond that. To exceed that amount, they need to pass a resolution in the general meeting, which was not followed through by the Directors before they borrowed 3500 pounds in exchange for debentures from the plaintiff, who was one of the Directors present on the Board.

The present suit came to be when the company refused to pay back such an amount and the judgement was held in the favour of the company, stating that the debentures would only be paid up to the amount of 1000 pounds since the plaintiff had full knowledge of the irregularity of internal procedure as a Director.

Lack of knowledge of the AOA

As mentioned earlier, this Doctrine cannot protect anyone who has not acquainted themselves with the AOA and the MOA of the company despite both being available in public records. As seen in Rama Corporation v. Proved Tin & General Investment Co. (1952), the plaintiff Corporation did not acquaint themselves with the Articles of Association of the Defendant company while doing a transaction with them.

Negligence

The Doctrine of Indoor Management does not protect third parties who have not practised proper due diligence. In simpler terms, if the irregularity could have been noticed with proper due diligence or observation on the side of the third parties, then this doctrine does not protect such parties as a consequence of their blatant negligence.

As seen in the case of Al Underwood v. Bank of Liverpool (1924), the officer of the Defendant company had taken actions which were not within their scope of duties. However, the plaintiff did not ensure if the officer contracting with them as the representative of the company was duly authorised, resulting in negligence on their end due to which they were not protected under this doctrine.

Forgery 

Any illegal transactions or transactions involving forgery are not protected under this doctrine. In simpler terms, if there is any forgery that results in a fraudulent transaction where the company had no idea or will would not be protected by the Doctrine of Indoor Management.

As seen in the Ruben v. Great Fingall Consolidated (1906) case, the secretary of the Defendant company had forged the signatures of the Directors on a certificate to issue shares of the company. It was held that since the Directors had no hand or idea of such forgery, they could not be held liable for the fraudulent transaction happening due to it. Furthermore, the forged share certificate was held to be void and hence, would not invoke the Doctrine of Indoor Management. The unauthorised use of the company seal can also be included within the scope of this exception along with the cases of Oppression.

This exception of the doctrine also includes situations where a third agency was involved in the transaction, as seen in Varkey Souriar v. Keraleeya Banking Co. Ltd. (1956) case, where agents of the company had acted on their own without the authorisation of the Defendant company.

Relevant cases 

Eley v. Positive Government Security Life Assurance Co Ltd (1876)

In this case, the Articles of Association of the Defendant company provided that the Petitioner would be hired as the company’s legal representative for his lifetime. However, despite such a clause, the company dismissed him after some while, resulting in the Petitioner suing the company for damages for the breach of contract based on the provisions of the Articles of Association. The Court held that the Petitioner did not have any right of action since the Articles do not bind the company with any third party or outsider; thus, not constituting such a contract between the Defendant and the Petitioner.

Sidebottom v. Kershaw, Leese & Co Ltd (1920)

In the present case, the Defendant company had altered the provision in its Article of Association to authorise its Directors to order any shareholder of the company to transfer their shares at a reasonable value to the person nominated by the Board of Directors. The shareholders sued the company for arbitrariness. However, the Court held the alteration in the Articles of Association valid, stating that such a clause was made to benefit the company with a bonafide intention. In simpler terms, even if the interests of a few individuals were to be affected, the alteration in AOA shall stand valid if it helps in the development of the company. However, since the alteration caused the benefit of the company as a whole, it was not void.

Southern Foundries (1926) Ltd v. Shirlaw, (1939)

In the present case, the Articles of Association of the Appellant company provided that the Managing Director of the company had to be a Director, and any early ceasement would result in the inability to function as a Director. The Respondent was a Director of the company for three years, with a contract period of ten years. However, he was removed from the directorship once the company was taken over by another parent company. Grieved by such removal, the case was brought in front of the Court which held that such alteration had enabled the company to commit such a breach of contract and thus, the company was liable to pay damages for such breach to the Respondent due to his early dismissal before the term of his contract was over.

Economy Hotels India Services Pvt Ltd v. Registrar of Companies (2020)

In this case, the Appellant Company had filed a petition to the NCLAT, stating that the special resolution passed had a few typographical errors due to which the NCLT had rejected its application confirming the amendment for reduction of share capital. The Court observed that the resolution passed under Section 66 was not only unanimous in its voting but also had only one typographical error in the extract of the Minutes of the Meeting characterising the ‘special resolution’ as ‘unanimous ordinary resolution’. However, since the resolution was also registered to the Registrar, all the required conditions were met and the resolution was sound despite such clerical errors. Thus, the appeal was allowed.

S.P. Velumani v. Magnum Spinning Mills India Pvt. Ltd (2020)

In the above-mentioned case, the Appellant had filed a case in the Tribunal against the Respondent company, contending that the company had made several fraudulent transactions that were bogus and allocated the funds in a misappropriate manner. The Tribunal, however, dismissed the case, stating that the conduct showcased did not fall within the purview of Oppression and mismanagement. The case was then appealed to the NCLAT, where the Appellate Tribunal upheld the decision made by NCLT since the decision to write off bad debt was a power conferred to the Directors of the Respondent company by the Articles of Association of the company and was not in contravention of any law. 

Brillio Technologies Pvt. Ltd v. Registrar Of Companies (2021)

In the above-mentioned case, the Directors of the Appellant company had resolved to reduce the share capital selectively, by reducing a portion of the equity share capital from non-promoter shareholders with considerable consideration to compensate for it. This decision was then approved by a special resolution passed under Section 66 (1) and Section 114, where the consensus was unanimous; thus, making the Appellant company a wholly-owned subsidiary company under its holding company. 

However, this arrangement was not approved by the Tribunal, stating that such arrangement is not covered under Section 66 of the Act and since no reason as such was given for such reduction of share capital, the selective reduction would go against the provisions of the Articles of Association of the company. The National Company Law Appellate Tribunal (NCLAT) reversed the judgement of the National Company Law Tribunal (NCLT), holding that such reduction can be covered within the purview of Section 66. Furthermore, the non-promoter shareholders requested such a decision since they were looking for an opportunity to dispose off their shares in the Appellant company; thus, making the decision itself sound and not against the Articles of Association of the company since the majority of the shareholders approved of it.

Conclusion

Articles of Association is an essential document in the scope of corporate governance, without which the regulation of internal matters and management can be challenging, to say the least. The Memorandum and the Articles of Association form the core constitution of the company along with setting the rules and regulations by which the company and its members may abide by.

In the end, both the AOA and the MOA are crucial documents of the company which are also available in the public record for anyone to access with a prescribed fee. Without their presence, no company can even attain their legitimacy, let alone function with proper corporate governance.

Frequently Asked Questions (FAQs)

Is AOA the Constitution of the company?

No, the Articles of Association is not the Constitution of the company, it is the Memorandum of Association. AOA, instead, acts as a rulebook of the company that sets the regulations and by-laws of the company as per the scope set by the MOA since it supersedes the Articles.

Who can enforce the Articles of Association?

The members of a company can enforce the clauses under the Articles of Association since it legally binds the members with the company as well as with the other members of the company. Thus, the members have the right to enforce the AOA in respect of their rights and obligations as well as restrict the company in case of any breach of the provisions given under the AOA.

Where to find a company’s AOA?

As mentioned earlier, both the AOA and the MOA of a company are in public records after their registration and they can be accessed through the following:

• In the Company Public Document Section of the Ministry of Corporate Affairs website;
• In several private platforms that also have company public documents available, such as InstaFinancials, etc.

Is the MOA easier to alter than the AOA?

No, the Articles of Association are much easier to alter than the Memorandum of Association since to alter the AOA, one needs to pass a simple special resolution in the general meeting of shareholders, as mentioned earlier. However, MOA can only be altered in specific circumstances and with the explicit permission of the Central Government in some cases. The alteration procedure of MOA also needs to follow the provisions of the Companies Act, 2013 strictly. 

References 

• Company Law by Avtar Singh (Seventeenth Edition)
• Company Law by H.K. Saharay (Seventh Edition)

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