In this blog post, Kaushik Neogi,  a student pursuing his LL.B (4th year) from Delhi Metropolitan Education, affiliated to Guru Gobind Singh Indraprastha University and a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes about the companies that should essentially have articles of association.

Introduction, importance & contents of article of association[1]

For a new company where the founders of that company have selected the desired and most suitable business model, the first major step they take is the incorporation of the company with the Registrar of Companies. For this, Form INC-2 in the case of a one-person company and Form INC-7 for companies other than a one-person company shall be filed.[2][3]

The two most essential documents required in this step are –

• Memorandum of Association
  This is a public document containing the objective and purpose of the company and details about its office and the subscribers to the company.
• Articles of Association
  This is a document which contains provisions relating to the internal management of the company and is not a public document.

The articles are framed with the object of carrying out the aims and objects as set out in the Memorandum of Association. The articles should be carefully drafted at the time of incorporation of a company safeguarding the interest of its founders, members, and shareholders if the company has share capital to prevent future complications.

According to Section 2(5) of the Companies Act, 2013 ‘articles’ means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act (Corresponds to Section 2(2) of the 1956 Act).

The articles have much value attached to them as they regulate the management within the company including the rights and powers of the members.
“The registration of articles of association also establishes a contract between the company and the members and between the members inter-se. This contract governs the ordinary rights and obligations incidental to membership in the company”[4] which is provided under Section 10 of the Companies Act, 2013 as the ‘effect of memorandum and articles,’ (Corresponds to Section 36 of the 1956 Act).

Certain contents of articles-

Now as we have a brief introduction about the Articles of Association of Companies and its importance, we now take a look at the Companies which should essentially have Articles of Association.

According to Section 3(1) of the Companies Act, there can be three types of companies:
1. seven or more persons, where the company to be formed is to be a public company;

2. two or more persons, where the company to be formed is to be a private company; or
3. one person, where the company to be formed is to be One Person Company, that is to say, a private company. &According to Section 3(2) companies formed under 3(1) may be-
   1. a company limited by shares; or

   2. a company limited by guarantee; or

   3. an unlimited company

The following companies must have their articles[5]

1. Unlimited companies
2. Companies limited by guarantee
3. Private companies limited by shares

Unlimited Company

An unlimited company is defined under Section 2(92) as a company not having any limit on the liability of its members.
Unlimited companies are not found in India instead; their space is occupied by:

• The earlier used proprietary kind of businesses; and;
• The newly implemented provision of One Person Company.

Company Limited by Guarantee

A company limited by guarantee is defined under Section 2(21) as a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.

Company Limited by Shares

This kind of company is defined under Section 2(22) as a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.

Private Company

A private company is defined under Section 2(68) of the Companies Act, 2013 as a company which has a minimum paid-up share capital of Rs. 100000 or such higher capital as prescribed by the Companies Act.

Prescribed essential format and contents of the articles

Section 5 of the Companies Act, 2013 provides the ‘articles’ (Corresponds to Section 26, 27, 28 and 29 of the 1956 Act).

Format

As per Section 5(2), the articles of a company shall be in the format prescribed which is mentioned under Section 5(6) as per which the articles of a company shall be in the respective form specified in Table F, G, H, I and J gave in Schedule I to the Act as may apply to such company

Contents

Also Section 5(8) provides that any company, which is registered after the commencement of the Companies Act, 2013 in so far as the registered articles of such company do not exclude or modify the regulations contained in the model articles applicable to such company, those regulations shall apply by default to the articles of the company.

Note* the Proviso to Section 5(2) states that a company may add other matters to its articles which may be considered necessary for its management along with the specified matters in Schedule 1.

For a better understanding of the specific contents of articles which companies should have as per Section 5(2) and Rule 11 of the Companies (Incorporation) Rules, 2014 (Division Two) the tables below provide a brief of the tables given in Schedule 1 of the Companies Act, 2013[6].

For private company having a share capital, the articles shall specifically contain provisions-

• Restricting the right to transfer shares
• Limiting the number of its members to 50 (excluding employee-members), and
• Prohibiting any invitation to the public to subscribe for any shares in, or debentures of, the company.
• Restricting deposits from persons other than its members, directors, and relatives.

For companies limited by guarantee, the articles shall specifically state the number of members with which the company is to be registered and the amount of guarantee each member is bound by. Also if, the company limited by guarantee is having a share capital. Provisions related to the same shall be complied with & carefully drafted, to be included in the articles of association.

For unlimited companies, the articles shall state the number of members with which the company is to be registered and if the company has a share capital, the amount of share capital with which the company is to be registered.

Note: The Articles shall be signed by each subscriber of the memorandum of association who shall add his address, description and occupation, if any, in the presence of at least one witness who shall attest the signature and shall likewise add his address, description and occupation, if any, and such signatures as per the given format.

Conclusion

The articles play a very crucial role in the management of a company after incorporation. Thus, much care and consideration need to be put in while drafting them also for the three types of company which should essentially have articles, the format and clauses mentioned in Schedule 1 should have to be complied with utmost care.

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Footnotes:

[1] TAXMANN’S Companies Act, 2013 With Rules & Forms

[2]http://www.mca.gov.in/MCA21/dca/downloadeforms/eformTemplates/NCA/Form_INC-2_help.zip

[3]http://www.mca.gov.in/MCA21/dca/downloadeforms/eformTemplates/NCA/Form_INC-7_help.zip

[4] Naresh Chandra Sanyal vs. Calcutta Stock Exchange Association Ltd (AIR 1971 SC 422)

[5]http://www.gktoday.in/blog/types-of-companies-in-india/#Unlimited_Company

[6]http://www.mca.gov.in/SearchableActs/Schedule1.htm