memorandum of association
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This article is written by Shivani Verma, a student of Guru Gobind Singh Indraprastha University, New Delhi and Pankhuri Anand, a student of Banasthali University, Rajasthan. In this article, elaborative discussion on the Article of Association including its contents, effects, entrenchment, the procedure of alteration and amendment has been done.

Table of Contents

What is AOA?

The by-laws, rules and regulations which help in governing the management of internal affairs of the company and also conduct the company’s business are known as the “articles of association” of a company. The term article has been defined in Section 2(5) of the Companies Act, 2013. They mean articles of association of a company which were originally framed or altered from time to time that to be in pursuance of any previous company law or of this Act. All the regulations contained in Table A in Schedule I of the Act are also included in articles, so far these regulations apply to a company. A very crucial and pivotal role has been played by articles in regulating the affairs of the company. 

The full form of AOA is Article of Associations.

Importance of Articles of Association

The articles of association is a very important document for a company as it holds the rules, regulations and bye-laws for internal administration and management of the company. The articles are basically for the internal management of the company.

All the powers of directors and other officials are described in the articles. All the rights and obligations are prescribed under the articles of association. In the articles of a private company, all the restrictions are also laid down. All the provisions regarding the shares are also mentioned under the articles of association. In a matter of internal conflict, it is the article of association what’s referred to.

There are several rules, rights and provisions which leads to the importance of an article of association such as:

  1. The valuation of intellectual rights and assets are done in accordance with the articles.
  2. The appointment of directors and other key personnel are done in accordance with the articles.
  3. All the meetings either board meetings, annual meeting or a general meeting or any type of meetings are conducted in accordance with the articles.
  4. The managerial operations are dealt with the articles.
  5. The voting rights and other rights of shareholders are dealt with the articles of association.
  6. The audit and accounts are managed through the articles.
  7. The appointment, removal and remunerations are managed by the articles.
  8. The borrowing power is decided by the articles.
  9. The winding of the company is done according to the articles.
  10. The dividend policy is decided by the articles.

So, the articles of association hold key importance in any company or organisation as whole internal management is done in accordance with it.

Article of Association meaning in Hindi

In Hindi, we call articles of association as “साहचर्य के अनुच्छेद” that is “sahacharya kay anuchched”. So it is basically a document which regulates the rights of the members of the company as well as provides the manner in which the affairs of the company is to be conducted by its members.

Features of Articles of Association

The features of Article of Association are:

  1. It is a part of the constitution of an organization.
  2. It is a contract between the members and among the members themselves.
  3. It lays down the duties of stockholders also.
  4. Some statutory clauses should be included in the article of associations and other clauses can be chosen by the stockholders to make them the by-laws of the organization.
  5. The Court can declare a clause ultra vires if it is unreasonable.
  6. Article of associations can be inspected by anyone as they are a public document.
  7. Special interest in the provision of Articles of Association is taken by the lender of the organization.

Contents of the Articles of Association

All the rules and regulations of the company for its own working are set out through the articles. 

Clauses of Articles of Association

  1. Adoption of preliminary contracts:, A statement adopting all preliminary contracts.
  2. Number and value of the shares: What is the total number of shares and what is the value of shares needs to be mentioned.
  3. Issues of preference share: The number of preference shares issued need to be mentioned.
  4. Allotment of shares: How many shares have been allotted to whom and what are its values should be mentioned in the articles.
  5. Calls on shares: How much money is to be called on shares is to be mentioned.
  6. Lien on shares i.e., if the member is unable to fulfil his debt to the company, who will retain the possession of shares. 
  7. Transfer and transmission of shares: The provisions related to the transfer of shares need to be mentioned in the articles.
  8. Nominations: All nominations need to be mentioned.
  9. Forfeiture of shares: How can a company forfeit its shareholders.
  10. Alteration of capital: The provisions related to the alteration of shares must be mentioned in an article of association.
  11. Buyback: How can a company buy back its shares from existing shareholders.
  12. Share certificate:The provisions regarding the share certificate is required to be mentioned in the articles.
  13. Dematerialisation: The process by which securities are converted into electronic format.
  14. Conversion of shares into stock: Procedure to be adopted for the conversion of shares into stock should be mentioned.
  15. Voting rights and proxies: All the voting rights and proxies need to be mentioned.
  16. Meeting and rules regarding committees.
  17. Directors: their appointment and delegation of power.
  18. Nominee directors: Who can be appointed as a director to the board of a company in order to represent the interests of his appointor on that board.
  19. Issue of debentures and stocks: How can the debentures and stocks be issued.
  20. Audit Committee: All the provisions regarding the audit committee along with its functions and powers must be prescribed in the articles.
  21. Managing director, Whole-time director, Manager and Secretary.
  22. Additional directors: Who can be the additional directors.
  23. Seal: what will be the official seal of the company. 
  24. Remuneration of directors: The amount of remuneration to be provided to the directors.
  25. General meetings:When will the general meeting to be held.
  26. Director’s meetings: When will the director’s meetings will be held.
  27. Borrowing powers: Every company should have borrowing power and the provision regarding the borrowing power must be mentioned in the articles.
  28. Dividends and reserves: The amount of dividends to be distributed and reserves to be kept.
  29. Accounts and audit: When will be an audit of the accounts will be done.
  30. Winding up: The provisions related to the winding up of the company is required to be mentioned in the articles. in this procedure is required to be followed during the winding up.
  31. Provisions regarding common seal: Contains all the provisions regarding common seal.
  32. Capitalisation of reserves: The amount of reserve that needs to be capitalized.

While the preparation of the articles of association, the utmost caution should be exercised. Certain provisions of the Company Act are also applicable to the company at the same time “notwithstanding anything to the contrary in the articles”. So, the articles must contain the provisions in respect of all matters which are required to be contained therein so that the workings of the company couldn’t be hampered later.

Entrenched Articles of Association

The articles of association may contain the provisions for entrenchment. This concept was not included in the Companies Act, 1956. Entrench means to establish such type of attitude or habit which is very difficult to change. Thus this clause makes some amendments in the article of association difficult. If the company wants then it can include entrenchment provisions in the articles of association. This provision can be made either at the time of incorporation of the company or after the incorporation of the company by way of an amendment in the articles of association. In the case of a private company the amendment that is made to include the provision of entrenchment must be agreed by all the members and in case of a public company special resolution has to be passed to include this provision.[Section 5(4)]

Section 5(3) states that the alteration in the articles of association should be such that the altered provisions become more restrictive than those applicable in the case of a special resolution.

Whenever the condition of entrenchment are brought then it must be notified to the registrar in the manner prescribed under [Section 5(5)].

Articles are now compulsory in all cases.

Understanding Articles of Association

Rights of the members of the company, inter se, are dealt with by the articles of association. Hierarchy wise, the Articles of Association are subordinate to the memorandum of association. 

In Ashbury Railway Carriage and Iron Co. Ltd v. Riche [1], the general functions of articles were summarised as follows: 

The role played by articles is subsidiary to the memorandum of association. The memorandum of association is accepted as the charter of incorporation of the company. After its acceptance, the articles proceed to define the rights and duties and also the powers of the governing body between themselves and the company. Further, the articles define the mode and form in which the business of the company shall be carried on and the changes in the internal regulations of the company shall be made. 

The scope and powers of the company are laid down by the memorandum of association, whereas, the ways in which the objects of the company are to be carried on and to be framed and altered by the members:

  1. By defining the powers of the officers of the company and through the establishment of the contract both between the members of the company and the company and between the members inter se, the internal management of the affairs of the company is regulated by the articles. 
  2. Ordinary rights are governed through the above-said contract. 

Alteration of Articles of Association/ Amendment of Articles

A company is empowered with the statutory rights to alter its articles, provided the altering of articles is subjected to the provisions of this Act and the conditions contained in the memorandum. Section 14 of the Companies Act, 2013 lays down the provision for the alteration or amendment of the articles of association of the Company. This section specifies that subject to the provisions of this particular section and the conditions of the memorandum, a company may alter its articles through a special resolution and add that any alteration made shall be as valid as if it was originally contained in the articles. 

A company can amend its articles of association under Section 31 of the Companies Act, 2013 which states that in order to amend or repeal any provision in the article of association there should be a special resolution. A company can amend its articles of association by a special resolution of the shareholders. These amendments should meet the requirements and restrictions of the Companies Acts. 

Section 31(1) states that, if the alteration is about converting a public company into a private company then such alteration must be approved by the Central Government.

In Section 31(2), it is given that when the resolution for amended in the article of association is passed that resolution can take effect on the day it is passed or it can be on a later date provided in the resolution.

Section 31(3) provides that in case if the company is formed under Act No. 19 of 1857 and Act No. 7 of 1360, the power of altering the article extends to altering any provision contained in Table B that is annexed to Act 19 of 1857. In case of an unlimited company that is registered under such acts, the altering power extends to altering any regulations related to the amount of capital or its distribution in the form of shares, regardless of those regulations that are contained in the memorandum.

If the alterations are inconsistent with the requirements of Section 12 of the Companies Act, 2013 then a private company is prohibited from altering its article. The alteration of some article is restricted with some limitations in order to protect the interests of the minority members.

Altering Articles of Association

The alteration can be in case of:

  1. Conversion of a public company to a private company.
  2. Conversion of a private company to a public company.

The right to alter the articles is an essential factor for a company because it cannot in any manner deprive itself of the powers to alter its articles.

The alteration of articles can be done in any of the following manners 

  1. By adopting a new set of articles;
  2. By the way of addition or insertion of new clause/s;
  3. By removing a clause/s;
  4. By amending a particular clause/s;
  5. By substitution of a particular clause/s.

Restrictions on Alteration of the Articles of Association

There are certain limitations subject to which a company can exercise the power to alter its articles, which are as follows:

  1. Powers given by the memorandum shall not be exceeded by the alteration. The memorandum shall prevail in the event of a conflict between alteration and memorandum.
  2. Alteration of articles must not be inconsistent with the provisions of any other statute or with the provisions of Company Act, 2013.
  3. When on alteration there is a conversion of the company from a private company to a public company or vice-versa then the company also needs to follow the additional procedure of conversion prescribed by the law for the conversion of a public company to a private company and conversion of a private company to a public company.
  4. The alteration which has anything illegal or opposing public policy must not be included.
  5. The alteration must be beneficial for the company, that is it must be bona fide for it. If in a case alteration is beneficial for the majority of the shareholders and not beneficial for the company as a whole then the alteration is considered bad. Thus, alteration of articles cannot lead to discriminating between the majority and the minority shareholders of the same company for the sake of keeping the former at an advantageous position.
  6. No alteration can constitute fraud by the majority on the minority. 
  7. By alteration, the provision of retrenchment can also be inserted into the articles which put the effect that several provisions of articles can be altered only when the condition or procedure for alteration has complied with the procedure followed in the case of a special resolution.
  8. The provisions for retrenchment can be inserted only when agreed by all the members in the case of a private company and in case of a public company by special resolution.
  9. No retrospective effect shall take place by alteration of articles. Articles come into operation only from the date of the amendment.
  10. Subject to the above conditions, the alteration of the articles of the company can be done and no clause which is not alterable can be included in the Articles. 

Alteration against memorandum of association

There are situations when changes in the articles of association influence the memorandum of associations. In the case of Hutton vs. Scarborough Cliff Hotel Co. [2], in the general meeting a resolution was passed by providing the power to issue new shares with preferential dividend but no such power was provided by the memorandum. This alteration was declared inoperative as the issuing of new shares with the preferential dividend was considered as a variation of the constitution of the company fixed by the memorandum. Memorandum was silent as it neither authorises nor it prohibited the issue of preference shares. The court said that either expressly or impliedly the power of alteration of the articles is only subject to what is clearly prohibited by the memorandum.

The court in the case of Andrews vs. Gas Meter Co. Ltd [3], held the issue of shares valid. According to the 5th clause of a company’s memorandum the nominal capital of the company was €60,000, and it can be divided into 600 shares of €100 each. There was no provision related to preference shares either in memorandum or articles of associations. After passing a special resolution directors issue share bearing preferential dividend. The court said that if this had been forbidden by the memorandum then such issue will be invalid. But there was no such clause so this issue was valid.

Alteration in breach of contract

Some alteration in the articles of association operates as a breach of contract with an outsider. In Chithambaram Chettiar vs. Krishna Aiyangar [4], a company secretary accepted the job on the remuneration of Rs. 50 per month. This provision was provided in the articles of association. after the alteration, the monthly remuneration reduces to Rs. 25 per month. The court held that if the contract totally depends upon the provision of the articles of association then the alteration will naturally be operative but if the company has entered into an independent agreement than the company may repudiate it by changing articles but will be answerable in damages for breach.

In Hari Chandana vs. Hindustan Insurance Society [5], the plaintiff has taken insurance from the defendant company and they promised the plaintiff to pay a certain amount of money on a specified date. The company altered its article of association and the fund that has to be paid was to be paid out of a special fund. When the date of payment arises the special fund was insolvent. The plaintiff then sued the company. The court, in this case, held that the effect of alteration leads to a fundamental breach of contract which the company has previously entered with the plaintiff and in respect of this new article has become inapplicable.

Increasing liability of members

Unless and until a member gives his consent in writing who is protected by limited liability he/she cannot be converted into a member with unlimited liability. Only with the consent of the respective member an alteration increase the liability or let the member purchase more shares.

Fraud on minority shareholders

The power of alteration must be exercised fairly that is it must not constitute a fraud on the minority. This power should be exercised in good faith and in the interest of the company.

Procedure for alteration of Articles of Association

According to the procedures laid down under Section 14 of the Companies Act, 2013, the following procedures are to be followed for the alteration of the articles of association:

Step 1: Not less than 7 days less notice is required to be issued along with the agenda of the board meeting and in case of urgent business, a shorter notice in writing should be sent to every director of the company on his registered address to call for a “Board Meeting” where the proposal for alteration of the articles of association will be presented.

STEP 2: The meeting of the Board of Directors will be held:

  1. For the consideration and decision that the alteration of the articles of association is required.
  2. To pass approval for the alteration of articles for the approval of shareholders.
  3. To authorise any director to sign, certify and fill the form for alteration in the registrar office or any statutory body required to do such act and to give effect to the procedure of alteration.
  4. For passing the special resolution as laid down under Section 14 of the Companies Act, 2013, fix a date, time, venue and date for the general meeting.
  5. The draft notice of the general meeting along with the statement of explanation is approved which is annexed with the notice as held under Section 102 of the Companies Act, 2013.
  6. A director or Company Secretary is authorised in order to issue and sign the notice for the general meeting.

STEP 3: The draft is prepared and circulated to all the directors for their comments within 15 days from the date when the Board meeting has been concluded by any means of communication like a post, by hand, email etc.

STEP 4: A shareholder’s meeting is also required to be conducted on the date which has been fixed for the alteration of articles with the 3/4th majority. In the case of a private company having provision for entrenchment Section 114(2) is required to be followed along with Section 5(4).

STEP 5: After the special resolution is passed, a certified copy of the special resolution is required to file before the registrar with 30 days of passing the resolution under Section 114 of the Companies Act, 2013. 

STEP 6: The alteration is then prepared, signed and compiled in the general meeting.

STEP 7: All the necessary amendments in all the copies of the articles of association is made.

As discussed in the case of Southern Foundries v. Shirlaw [6] the company can alter its article even it would lead to a breach of contract but in those cases, the damages due to breach must lie against the company.

Effect of Alteration of the Articles of Association

The alteration of articles has the same binding effect as that of the original articles. These altered articles are referred to as originally framed articles or may be altered from time to time. The articles shall have a binding effect on both the company and its members to the same extent as if it was signed by the company and by each member.

The government is of the view that when the amendment of the articles of association of the company leads to the expulsion of a member from the management then it is against the principle of the company jurisprudence and considered ultra vires. The alteration should not lead to any provision which is contrary to law and when the alteration made is in accordance with the law then such alteration is valid and effective as the articles which have been framed originally.

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Legal effects of articles of association

Following are the legal effects of the articles of association:

The members are bound to the company

The article creates a contract which binds the members as well as the company. Each member is bound to the company and they have to follow the articles as well as the memorandum.

The members are equally bound by the articles made originally as well as which are altered from time to time as held in the case of Malleson v. National Insurance Co. [7]

Member can bring legal action against the company

As the articles bind the company and the members, if a company infringes the articles, a member can bring an action against it. For example, if a company does an improper payment of dividend then even an individual member can sue the company for an injunction. Also, the company is bound to the individual members with respect to their rights.

Normally an action in case of a breach of articles can be brought only by the majority of members. The individual members or the minority of members cannot bring suit except when the suit is for the enforcement of personal rights or to abstain the company from doing any illegal or fraudulent act.

The members are bound to the other members

The members inter se are bound by the articles and each member is bound by the other members. But, this does not imply that the articles lead to the creation of an express contract among the members of the company. So, the member of the company does not have the right to bring a suit against other members for enforcement of articles.

The company is bound to the outsiders

The company is bound to the outsiders and by outsiders, it means any person who is not a member of the company. Between the outsiders and the company, the articles do not give any contractual rights against the company. Even if the name of outsiders are mentioned in those documents as the company have contemplated for carrying out business then also there lies no contractual obligation.

Articles of Association when compulsory

For the following classes of company, it is mandatory to have their own an article of association and also, it must be registered:

Unlimited company

An unlimited company has been defined under Section 2(92) of the Companies Act, 2013 as a company having no limit on its member’s liability.

Companies limited by guarantee

The company having its member’s liability limited by guarantee has been defined under Section 2(21) of the Companies Act, 2013.

Private companies limited by share

A private company has been defined under Section 2(68) of the Companies Act, 2013 and a company with its liability limited by share has been defined under Section 2(22) of the Companies Act,2013.

Articles of Association under English Law

The concept of Articles of Association under the English Law is very similar to that of India. In the U.K. the law governing articles of association is The Companies Act, 2006 of the U.K. According to the Act, every company is required to have an article of the association if it is formed in England and Wales. No company can be formed legally without the articles of association. Under English Law, even while the formation of the company a set of model articles are required.

In every registered office, a copy of the articles of association is required to be kept. Just like the provisions in Indian Law, the articles of association can also be altered under English Law. There is a provision for the amendment of the articles of association by way of special majority i.e., with the agreement of the 75% shareholders.

Under English law, the articles of association may override the articles of association. Generally, the articles should be in accordance with the Companies Act, but it is not possible that always the provisions of Company Law will be suitable for every company. So, the articles of the company can override the company law under the English Legal System. To vary or exclude some of the provisions are allowed under English Law.

But, under the Indian Legal System, the articles must be in accordance with the Companies Act, 2013.

MOA VS AOA

Sr. No.

MOA

AOA

1.

Fundamental data is contained in MOA which is required at the time of incorporation of the company.

Rules and regulations that govern the company are contained in the articles of association.

2.

It must be registered at the time of incorporation of the company.

It is not necessary to register the articles of association.

3.

It is the supreme document.

It is not the supreme document, it is subordinate to the memorandum.

4.

It does not provide the company with the power to do something against the provision of the Companies Act.

It cannot exceed the powers contained in the memorandum of association as it is a subsidiary document.

5.

It should have six clauses.

According to the decision of the company, it is drafted.

6.

It contains powers and objectives of the company.

It provides the rules by which these objectives are to be implemented.

7.

It is the dominant instrument and it controls the articles of association.

The provision which is invalid to the memorandum will be declared as invalid.

Forms and Signatures of Articles

The forms and signatures of articles are dealt with the provisions laid down under Section 398 of the Companies Act 2013. The articles of association according to this section requires to be in:

  1. The articles are required to be filed under this Act in the computer-readable format and should be authenticated.
  2. The articles should be delivered or served into electronic form in the prescribed manner.
  3. The articles should be available for inspection in electronic form.

The submission of the articles to the registrar in electronic form should be made through the official portal made by the central government. For filing of the document in addition to the electronic means when required the application made in physical means is also required. The document needs to be signed by each subscriber of the memorandum of association along with their registered address and such signature must be made in the presence of one witness who will attest the signature.

Articles in relation to memorandum of association

Memorandum of association is a supreme document and article of association is a subordinate document. The articles should not contain any such provision whose effect will alter the condition that is provided in the memorandum. This is because the object of the memorandum is to provide the purpose for which the company is established whereas the articles provide the manner in which the conduct of the company has to be carried out. Alteration in the articles of association is done by a special resolution whereas in case of memorandum some of the conditions of incorporation cannot be altered except with the sanction of the Company Law Board

Unless and until the rule of ultra vires is abolished the memorandum will differ with the articles of association in a principal aspect. If the company does something that is beyond the memorandum than it is completely void and incapable of ratification whereas if a company does anything in contravention of the articles of association then such provision will be held irregular and can always be confirmed by the shareholders.

It was suggested in Anderson Case [8], that if there is ambiguity in the memorandum then the articles registered at the same time may be used to explain it. 

Constructive notice of memorandum and articles of association

The two most important documents of every company that are a memorandum of association and articles of association are registered with the registrar of the company. These documents become public documents as these documents are registered at the office of the registrar which is also a public office. So they are open and accessible to the public. It is the duty of each and every person dealing with the company to read and inspect all the documents. It is presumed that he knows all the contents of the documents at the time of coming into a transaction of the company. Whether a person actually reads them or not he will be presumed in the same position that he has read them. This type of presumed notice is called constructive notice.

The practical effect of this rule is provided in the case of Kotla Venkataswamy vs. Rammurthy [9]. In this case, the plaintiff accepted a deed of mortgage that is executed by the secretary and working director only. But, the articles of association requires that all the deed needs to be duly signed by the working director, managing director and the secretary. The court held that if the plaintiff consulted the document carefully then she must have rejected the document rather than accepting it. So nevertheless the bond is invalid.

Another effect to rule of constructive notice is the person who is dealing with the company has not only read the documents but he/she has understood them completely. There is constructive notice not only for memorandum and article of association but also for all the documents like special resolutions etc.

Statutory reform of constructive notice

This is more or less an unreal doctrine because people know a company through its officers rather than its documents. Section 9 of the European Communities Act, 1972 has repeal this doctrine. Section 35 of the Companies Act, 1985 incorporate the provisions of Section 9. In the case of TCB Ltd vs. Gray, Financial Times [10], the company was held liable because the debenture issued by the company was duly signed the solicitor as attorney of a director of the company but it was mentioned in the article of association that all the documents need to be signed by the director directly.

But this was changed in the case of Dehradun Mussorie Electric Tramway Co. vs Jagmandardas [11], the articles of association provided that the directors can delegate their powers other than the power to borrow. So even an overdraft taken by the managing agents would be binding on the company.

Doctrine of indoor management

Various principles in the corporate world help to ensure the safety of stakeholders. The doctrine of indoor management is one such principle that was evolved 150 years ago. The doctrine of indoor management is exactly the opposite of the doctrine of constructive notice. It provides some protection to the outsiders against the company as it softened the hardships that are faced by the outsiders while dealing with the company.

According to Turquand’s rule which is also known as the doctrine of indoor management, it is not the responsibility of the person who is dealing with the company to enquire those internal proceedings related to the contract are followed if such person is satisfied that the transaction he/she enters into is in accordance with the memorandum and articles of association. This doctrine states that the people who are dealing with the company to presume that the internal proceedings are according to the document which is submitted to the Registrar.

Origin of doctrine of indoor management

Form Royal British Bank vs. Turquand [12], the doctrine of indoor management was originated. In this case, there was a provision in the articles of association which states that the borrowing of money can be done on bonds and for this, a special resolution needs to be passed in a general meeting. The company said that they are not bound to pay the money as no such resolution was passed in a general meeting. But it was held that the company is bound to pay back the money as the plaintiffs have a right to infer that a resolution was passed related to this in a general meeting as directors could borrow subjected to the resolution.

Basis of doctrine of indoor management

This doctrine came to be the fundamental principles of Corporate Law and it continued to be applied because of various reasons such as:

  1. Internal matters of a company are not meant for public knowledge. A third-party can only presume the intention of the company but can’t ascertain the information that they are privy to.
  2. If not for the doctrine, the company could escape creditors by denying the authority of officials to act on its behalf.

Exceptions to the Doctrine of indoor management

Following are the exceptions to the doctrine of indoor management:

  1. Knowledge of irregularity: if the person who is dealing with the company has knowledge about the fact that there is a lack of authority of the person who is acting on behalf of the company. The outsider is well known about the irregularity so this doctrine will not apply in this case.

In the case of Howard vs. Patent Ivory Co. [13], the directors of the company could not borrow more than 1000 pounds without the approval of the company’s general meeting but the director borrowed 3500 pounds from another director that too the consent of the company’s general meeting. So the court held that debentures up to 1000 pound are good as the was aware of the facts.

  1. Forgery: a company is never bound by the forgery done by its officers. So this rule doesn’t apply when a person relies on a forged document as nothing can validate forgery. In the case of forged transactions, illegal transactions or a transaction which are void-ab-initio there is a lack of consent.

In Rouben vs. Great Fingal Consolidated [14], the signature of two directors were forged by the secretary of the company and the certificate was issued without the authority. The signatures of the two directors were important as it was a clause in the articles of association. The court, in this case, held that the holder of the certificate cant take advantage of this doctrine as it was a forged document.

  1. Negligence: if the person dealing with the company behaves negligently then, in that case, this doctrine will not apply. Thus when an officer does something which he should not have done it and the person dealing with such officer rely on him rather than making proper enquiries than the person cannot take the help of the doctrine of indoor management.

Binding force of memorandum and articles

Section 36 of Companies Act states that when the memorandum and articles of association are registered it binds the company and the members the same way as if each member and the company have respectively signed the documents.

Binding on members in their relation to company

The provision of the articles of association bound the members to the company. Articles of association constitute a contract between a company and its every member.

Binding on company in its relation to members

The company is bound to the members the same way members are bound to the company and if there is a breach of articles on the part of the company then the member is entitled to an injunction in order to prevent the breach.

But no binding in relation to outsiders

In order to give effect to the articles, neither the company nor the member is bound to the outsiders. No contract can be constituted between the company and the outsider through the article of associations.

How far binding between members

The law has not yet finally decided that how far the articles bind one member. It depends on the articles of association that how far one member will be bound as it only defines the rights and liabilities of the members. 

Conclusion

The articles of association can be found in every company and it is a document containing the rules, regulations and bye-laws for the efficient and hustle free administration of the company. The articles of association are compulsory for a few classes of the company such as an unlimited company, a company whose shares are limited by guarantee and a private company. The articles of association have all the important subjects which are required for the management and administration of the companies. It can even be altered or amended when required by following the procedures laid down in the Companies Act, 2013.

The provisions regarding the article of association were different in many aspects under the Companies Act,1956 but after the 2013 Act, many provisions were amended. Like earlier the amendment could not lead to the conversion of the company to public to private and private to the public but after the Act of 2013, it is possible. Similarly, there was also no provision of retrenchment, but after the 2013 Act the provision of entrenchment was also introduced. The article of association holds a very important position in any company and all the major aspects of a company’s management are dealt with the articles of association.

References 

  1. (1875)
  2. [1865] 62 ER 717
  3. [1897] 1 Ch 361
  4. ILR 33 Mad 36
  5. AIR 1925 Cal 690
  6. [1940] AC 701
  7. Malleson v. National Insurance Co.
  8. [1876-77] 7 Ch D 75
  9. AIR 1934 Mad 579
  10. [Nov 27 1985]
  11. AIR 1932 All 141
  12. (1856) 6 E&B 327
  13. (1888) 38 Ch D 156
  14. (1906) AC 439

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