This article is written by Vyoma Mehta and has been further updated by Trisha Prasad. This article outlines the key elements and contents of Articles of Association, emphasising its importance and structure. It provides an in-depth analysis of essential contents of Articles of Association, such as share capital, internal management, profit allocation, and amendments.

Introduction

Ever wondered how a company operates smoothly behind the scenes, irrespective of whether it is a small company or a large multinational company? The AoA is the answer! As stipulated in Section 5 of the Companies Act 2013, the AoA governs the internal administration and complements the MoA, ensuring that the company operates smoothly and in compliance with its stated objectives. 

The Memorandum of Association (MoA) and Articles of Association (AoA), forming the foundational documents of a company are essential for the incorporation and governance of the company. While the contents of the MoA outline the company’s scope and objectives, the AoA provides the internal rules and regulations necessary for managing the company’s affairs. 

Before delving into the details of the contents of a standard AoA, it is necessary for us to understand what an AoA is.

What is Articles of Association

The AoA of a company primarily governs the internal management and daily affairs of that company. This document supplements the MoA and sets out the relationship between shareholders and directors as well as members of the company. It establishes the powers, roles, and responsibilities of shareholders and directors, provides procedures for decision-making, and ensures compliance with regulatory requirements. 

The  AoA provides an operational framework for pursuing these objectives. Ultimately, the AoA is crucial for ensuring transparency within a company in relation to the working of the company. All internal stakeholders, i.e, the shareholders and directors of the company function on the basis of the AoA and the overall management of the company is outlined in this document which is accessible to everyone within the company.

Let us now discuss the contents of an AoA in detail.

Contents of Articles of Association

All types of companies including private limited companies, public limited companies, unlimited companies, holding companies, charitable companies, etc. must have their own AoA. Section 5(1) and Section 5(2) of the Companies Act, 2013 provide for the contents of the AoA. The articles must contain the regulations for the management of the company along with the matters prescribed by the Central Government. Schedule I of the Act which contains sample drafts of AoAs provide a clearer insight into the required contents of an AoA. 

The AoA is a vital document for all companies and is crucial for the formation and overall management of the company. It is crucial for us to note that  the Articles of Association must contain specific details on the following:

1. Interpretation
2. Name and registered office of the company
3. Shares capital and shares
   1. Classes of shares
   2. Variation of rights
   3. Allotment of shares and share certificate
   4. Transfer and transmission of shares
   5. Call on shares
   6. Lien on shares
   7.  forfeiture of shares
4. Alteration of capital
5. Buyback of shares
6. Management of the company
   1. Board of directors
   2. Board meetings
   3. Independent directors
   4. Additional directors
   5. Other key officials
7. General Meetings
   1. Procedure of general meetings
   2. Voting rights
   3. Proxy
   4. Quorum
   5. Adjournment of meetings
8. Borrowing powers
9. Profit and dividends
10. Capitalisation of profits
11. Book of accounts and audits
12. Secrecy and confidentiality
13. Indemnity
14. Winding up
15. Dispute resolution
16. Amendment to AoA

Let us now delve into the key clauses that should be included in every AoA.

Company details

The AoA generally contains company details including the name of the company and the location of its registered office in the introductory portion of the document. The name of the company is mentioned as it appears in the certificate of incorporation and must align with the name as registered with the Registrar. This also applies to the inclusion of the location of the registered office which is included primarily for the purpose of determining the jurisdiction of the company’s operations and the relevant registrar of companies. This clause can be drafted in the following manner:

“The company’s name is XYZ Private Limited with its registered office located in Bangalore, Karnataka.”

Share capital and shares

The AoA plays a crucial role in defining the relationship between the company and its members. It defines shareholder rights, issuing of shares, transfer of shares and forfeiture of shares. The AoA outlines all aspects of shares and shareholding in the company.

Share Capital refers to the funds raised by a company by way of issuance of shares to investors, each of which represents a percentage of ownership and related rights in the company. Shares are essential individual units of ownership that entitle shareholders to a portion of certain rights in the company. The contents of the AoA delve into the following aspects of share capital and share holding:

• Allotment of shares and share certificate: Upon issuance of shares, the board allots the shares to subscribers or investors and a formal documentation referred to as a Share Certificate certifying this allotment is issued. This certificate is the proof of the shareholders ownership over the concerned shares and generally includes details of the shareholder, number of shares allotted and the distinct number that corresponds to each allotted share.This can be mentioned as follows:

“The company shall have the power to issue and allot shares at its discretion, subject to the provisions of the Companies Act, 2013, the Articles of Association and the Memorandum of Association. The allotment of shares shall be determined by the of the company”

“Every person whose name is entered as a member in the register of members shall be entitled to receive, within a period of two months, one certificate of all his shares without the payment of any extra fee and several copies of certificates at the cost of Rupees 20 per copy. ) Every certificate shall specify the shares to which it relates and the amount paid-up thereon and shall be signed by two directors or by a director and the company secretary, as applicable”

The above clauses shall also include details regarding shares held jointly by two or more persons,consequence and remedy in case of  destruction, wear and tear or misplacement of a share certificate.

• Lien on shares: If a shareholder owes a debt to the company, the company has lien or claim over the shares held by the concerned shareholder. Lien of shares means to retain possession of shares in case the member is unable to pay his debt to the company. In accordance with Schedule I, This clause for example may be included as follows: 

“ The company shall have a first and paramount lien— 

(a) on every share (not being a fully paid share), for all monies (whether presently payable or not) called, or payable at a fixed time, in respect of that share; and

 (b) on all shares (not being fully paid shares) standing registered in the name of a single person, for all monies presently payable by him or his estate to the company: 

Provided that the Board of directors may at any time declare any share to be wholly or in part exempt from the provisions of this clause. 

(ii) The company’s lien, if any, on a share shall extend to all dividends payable and bonuses declared from time to time in respect of such shares.”

“If a shareholder of a particular class of shares fails to respond to a call on shares or has unpaid debt towards the company, the company shall have the right of lien over the shares until the unpaid amount is cleared.”

The contents of this clause in the AoA may also address the manner in which the shares may be treated or disposed of in case the outstanding debt in lieu of which the right of lien is exercised is not cleared by the shareholder.

• Variation of rights: The rights associated to each type or class of share by the company can be varied and altered. This is generally done by way of a special resolution by the class of shareholders that are going to be affected by the alteration or by any other manner as mentioned in the AoA.This clause can be included in the following manner:

“If the share capital is divided into different classes of shares, the rights attached to any class of shares can be varied with the consent of at least two-third of the shareholders holding that specific class of shares or by way of a resolution passed in a general meeting held by shareholders of that class”

• Calls on shares: The board may from time to time call upon the shareholders to pay the remaining unpaid portions of their shares.The company may make calls in instalments as and when the company requires funds.The whole or part of any remaining unpaid shares shall be included in the calls on shares and must be paid by the shareholders on demand.This clause can be included in the following manner:

“The Board of Directors may from time to time make such calls as they think fit upon the members in respect of any money unpaid on the shares held, and such shareholders shall pay such amount to the company at the time or times as specified.”

• Transfer and transmission of shares: The shares can be transferred by any shareholder to any other person or entity of his choice. This is done through a procedure contained in the AoA, generally by filing a transfer form, obtaining approval from the company, and updating the register of members. The AoA includes the procedure for the transfer of shares by the shareholder to the transferee. The AoA can authorise the means of transferring shares in the following manner”

“The instrument of transfer of any share in the company shall be executed by or on behalf of both the transferor and transferee and the Transferor shall remain the owner of the share until the name of the Transferee is entered in the register of members of the company.”

Additionally, the AoA shall also contain details as to situations when the company may refuse to recognise the instrument of transfer or decline to register the name of the transferee in the register of members.The procedure or conditions of appealing such decisions by the transferor or transferee shall also be included in the contents of this clause.

On the other hand, if the shareholder dies, becomes bankrupt, or is suffering from mental incapacity, then his shares are transmitted to his respective legal representative, heirs, or administrators. It does not involve a direct and willful act on the part of the shareholder but instead forms the basis of a legal succession.

• Nomination: The inclusion of a nomination of shares clause in the AoA allows a shareholder to name a nominee who will receive the shares in the event of death of the shareholder.This clause is especially mandatory in case of a one person company (OPC).
• Forfeiture of shares: The AoA generally also contains details on penalties and consequences of failing to respond to the calls on shares. Forfeiture generally results in the shareholder losing ownership over the shares and these shares can be reissued and sold by the company. In simple terms, the AoA provides for the forfeiture of shares if the purchase requirements such as paying any allotment or call money, are not met with.

“If a shareholder of a particular class of shares fails to respond to a call on shares or has unpaid debt towards the company, the company shall at any time serve a notice on the shareholder naming a further date on which the unpaid amount shall be due. The notice shall additionally specify that in the event of non-payment on or before the day so named, the shares in respect of which the call was made shall be liable to be forfeited.”

Alteration of capital

Alteration of capital refers to a process by which a company may increase, decrease or rearrange their capital. The AoA specifies the procedures and provides guidelines on planning and executing various schemes and methods of alteration of share capital.

The methods of alteration of shares available to the company, subject to Section 61 of the Act, are also included in the AoA. A company may alter its shares in the following ways:

• Increase share capital by issuing new shares
• Convert all fully paid up shares into stock and then reconvert them into shares of different valuation
• Consolidate shares capital into shares of larger denomination or value. In such a situation, while the total share capital remains the same, the number of shares reduces.
• Sb-divide shares capital into shares of smaller denomination or value. In this case, while the total share capital remains unchanged, the number of shares will increase.
• Diminishing Share capital can be done by cancelling shares that have not been taken up or subscribed to or have been forfeited

This clause, as per Schedule I of the Act, may be drafted in the following manner:

“The company may, from time to time, by ordinary resolution increase the share capital by such sum, to be divided into shares of such amount, as may be specified in the resolution. 

The company may, by ordinary resolution,— 

(a) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; 

(b) convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination; 

(c) sub-divide its existing shares or any of them into shares of smaller amount than is fixed by the memorandum; 

(d) cancel any shares which, at the date of the passing of the resolution, have-not been taken or agreed to be taken by any person.” 

Buyback of shares

Buyback of shares is an action of a company repurchasing its own shares from shareholders or the share market.his process reduces the number of outstanding shares in the market, impacting ownership structure, shareholder value, and financial ratios.The AoA outlines the specific conditions, procedures and implications of buyback of shares by the company. 

The contents of the AoA can define the purpose or strategy behind repurchasing shares and lay down specific conditions which have to be fulfilled for buyback of shares to be permitted or restricted.This clause can be included in the following manner:

“The company may purchase its own shares in accordance with the provisions of Section 68 of the Companies Act 2013 subject to the approval of the shareholders by way of a special resolution in a general meeting”

Defining internal management structure

The AoA outlines the overall framework for internal management by specifying the powers, roles and responsibilities of shareholders and directors. It defines the manner of appointment of directors, the meeting requirements for the Board of Directors and annual general meeting, decision making mechanisms and scope of authority at different levels of the company’s internal organisation.

The AoA defines the roles, responsibilities and powers of directors. The procedure for appointing directors, outlining the powers conferred on directors, remuneration of directors and qualification of directors are some of aspects that are included in an AoA.

Board of directors

The AoA, as a document that defines the internal functioning of a company contains key provisions related to the company’s leadership which includes the managerial and other directors of the company and decision making process. 

For example, the AoA may contain the following clause:

“The company shall appoint a minimum of two directors and a maximum of five directors. The appointment of the directors shall be done in accordance with the provisions of the Companies Act and the Articles of Association ”

In this regard, the following contents can be found in every AoA:

• Board of directors: The AoA specifies the number of directors that the company may have and that the first director may be appointed by the subscribers once a company is incorporated. The directors are responsible for managing the day-to-day functions of the company. The AoA further specifies the qualifications, tenure, remuneration and procedure of appointment of directors who together form the Board of directors.
• Additional directors: Additional Directors are appointed by the Board to bring in specific skills or temporarily fill a board vacancy. The AoA may lay down requirements for an additional director, the procedure of appointment, tenure and authority of the additional director.
• Nominee director: A nominee director is generally appointed to the board to represent the interest of a stakeholder, whether it is an individual or an entity. The AoA generally ensures their presence on the board as per contractual requirements, protecting the rights and interests of the stakeholders they represent.The AoA may specifically outline the responsibilities, obligations and rights of the nominee director apart from representing the interest of the individual or the body that appointed them. Most requirements and conditions of a nominee director are subject to contractual requirements and the same is reflected in the contents of the AoA.
• Other key officials: The AoA also provides details on the role of managing directors and other key officials including the Chief Executive Officer (CEO), Chief Operating officer (COO), Chief Financial Officer (CFO), etc. The responsibilities, tenure, remuneration, qualifications and authorities of these officers in the functioning of the company as well as their powers to delegate and represent the company are outlined in the AoA.
• Meetings of the board: The Board of directors must meet regularly to take strategic decisions and undertake day-to-day functioning of the company. The quorum of these meetings is decided in accordance with the provisions of the Companies Act. The AoA may also specify details on voting, maintaining minutes of the meetings and other record requirements for each meeting of the board.

General meeting and voting

The AoA provides the structure for all levels of decision making within the company covering both shareholder decisions in general meetings and decisions by the board of directors. It details the voting rights of shareholders or members in the meetings and the decision making procedures. 

General meetings are official meetings of the shareholders of a company where key decisions regarding the operations of the company are discussed and voted upon. There are two types of general meetings: Annual General Meeting (AGM) and Extraordinary General Meeting (EGM).  All the provisions relating to the general meetings and the manner in which they are to be conducted are to be contained in the articles of association. The AoA generally provides detailed information on the following aspects of a general meeting:

• Procedure for general meetings: All AGM and EGM must be convened in accordance with both the AOA and the Companies Act. An AGM is held annually to discuss key aspects including financial statements, declaration of dividends and appointment of directors. An EGM can be called by the Board or, under certain circumstances, by shareholders, to discuss urgent matters that cannot wait until the AGM. Furthermore, the quorum for General Meetings are also decided as per the AoA and the Companies Act.
• Voting rights:The members’ right to vote on certain company matters and the manner in which voting can be done is provided in the AoA. In general, voting at a meeting can happen either by way of show of hands or poll. The method and procedure may be further elaborated in the AoA. The AoA may also permit electronic voting, enabling shareholders to cast their vote remotely. This clause is generally provided as follows:

“Each member shall have the right to vote in proportion to the number of shares held by them in the company and each share shall carry one vote. This is subject to the rights attached to different classes of shares by the company. ”

• Proxy: Shareholders who cannot attend a general meeting may appoint a proxy to attend the meeting on their behalf. The proxy must submit the proxy form within the time limit specified by the AoA.This clause is generally provided as follows:

“The instrument appointing a proxy, in accordance with Section 105, shall be deposited at the registered office of the company not less than 48 hours before the time for holding the meeting or adjourned meeting at which the person named in the instrument proposes to vote, or, in the case of a poll, not less than 24 hours before the time appointed for the taking of the pol”

• Quorum and adjournment of meetings: If the quorum is not met in a meeting, the meeting will be adjourned for the day and called again on a different date, usually on the same day in the following week.

“No business shall be continued at a general meeting if the quorum is not met. Save as otherwise provided, the Quorum for a general meeting shall be as provided under Section 103 of the Act ”

“Adjournment of meeting: 

(i)The Chairperson may, with the consent of any meeting at which a quorum is present, and shall, if so directed by the meeting, adjourn the meeting from time to time and from place to place. 

(ii) No business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. (iii) When a meeting is adjourned for thirty days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. 

(iv) Save as aforesaid, and as provided in Section 103 of the Act, it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned meeting.”

Borrowing powers

The borrowing powers clause in an AoA generally defines the authority of the Board of Directors to borrow any funds. It sets limitations and conditions on these borrowing, providing specific procedures to be followed for such borrowings to be permitted.The contents typically specify who has the authority to borrow, the limitations on borrowing which may include procedures for permissions and special resolutions for borrowings that exceed a set limit.

Profits and dividends

The AoA of a company also provides for the distribution of dividend to the shareholders. The profits of the company can be distributed to shareholders through dividends. The dividends are declared at the AGM after being determined by the board of directors. The dividends are paid in proportion to the individual shareholding of each shareholder.The AoA outlines the process by which dividends are declared. Dividends are declared out of profits earned and can be distributed annually, quarterly, or at intervals as specified in the AoA. The AoA also sets out the right of shareholders to dividends and may also authorise interim dividends.

“The Board of Directors are entitled to recommend dividends on the company’s profits. The Company can at any general meeting declare dividends provided that it does not exceed the amount recommended by the board.  Subject to the provisions of Section 123, the Board may from time to time pay to the members such interim dividends as appear to it to be justified by the profits of the company ”

The AoA may further permit for the Board to set aside a certain amount of profit as reserves before recommending the amount to be paid as divided. This is generally included in the AoA as follows:

“The Board may, before recommending any dividend, set aside out of the profits of the company such sums as it thinks fit as a reserve or reserves which shall, at the discretion of the Board, be applicable for any purpose to which the profits of the company may be properly applied”

In terms of dividends and reserves, the AoA may also include provisions that specify that the dividend is payable in proportion to the shares held by the member, in exclusion to any outstanding dues. The mode and manner of payment shall also be specifically included in the AoA.

Capitalisation of profits

The capitalization of profits clause is generally included in an AoA to allow a company to convert its profits and/or reserves share capital.This is often done by issuing fully paid up bonus shares. The clause generally includes details on how the board will recommend the capitalisation, the shareholder approval process, and how shares will be issued proportionately to the members’ existing holdings. An AoA may authorise the capitalisation of profits of the company in the following manner:

“The company may, on the recommendation of the board and subject to approval of the shareholders, capitalise any part of its profits by issuing fully paid-up shares to existing shareholders in proportion to their current holdings.”

Book of accounts and records

The AoA specifies the manner in which a company must maintain its books of accounts and the manner in which it can be inspected. AoA plays a crucial role in ensuring that the company complies with the required legal and regulatory compliance requirements, tailored to the identity of the company including filing annual returns, specifying the reporting requirements of the company as well as various sector-specific regulations.This may be included as follows:

“The company shall maintain proper books of accounts at its registered office. The books shall be kept open for inspection by directors during business hours and made available for annual audit by the company’s appointed auditors.”

The AoA may also include details and requirements for audits and preparing of financial statements in accordance with the established standards.

Secrecy and confidentiality

The AoA of a company may include confidentiality clauses to protect the trade secrets, know how and other confidential information of the company. These provisions may also contain the specific requirements of each key officer, director or member of the company in ensuring that confidentiality of the company’s information is maintained as well as penalties for contravention of these provisions. Post-termination or employment requirements in terms of confidentiality and non solicitation may also be included in the contents of this clause.For example:

“Directors, officials and employees of the company shall be bound to strict confidentiality with regard to any information concerning the company’s business, finances, internal processes, intellectual property and any other proprietary information deemed to be confidential. Except as required by law, no member, director, or employee shall disclose any confidential information to third parties without prior written consent from the Board. Breach of this provision of this document shall lead to disciplinary action against the concerned person(s) ”

Indemnity 

In an AoA, an indemnity clause is generally included to protect directors, key officers and employees of the company from liabilities incurred while performing their official duties in good faith.According to the Schedule I of the Act, this clause may be drafted as follows:

“Every officer of the company shall be indemnified out of the assets of the company against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgement is given in his favour or in which he is acquitted or in which relief is granted to him by the court or the Tribunal. This shall be restricted to any liabilities incurred by him in the course of performance of his official duties in good faith.”

Winding up

The AoA details the process for winding up of the company in line with the requirements of the provisions of the Companies Act. It also outlines how the company’s assets will be distributed among the shareholders of the company in the event of a winding up.This clause may be drafted in the following manner:

“Winding up of the company shall be undertaken in accordance with Chapter XX of the Act or the provisions of the Insolvency and Bankruptcy Code, 2016,and any rules made thereunder, as applicable.

Subject to these provisions, if the company shall be wound up, the liquidator may, with the sanction of a special resolution of the company, divide amongst the members, the whole or any part of the assets of the company”

Dispute resolution

Dispute resolution provisions in the AoA are crucial for addressing potential conflicts between the company, directors and shareholders. The AoA typically outlines mechanisms for resolving disputes internally before resorting to traditional legal practices like litigation. The AoA may also specify the applicable jurisdiction and governing law for any disputes that arise.These dispute resolution clauses help minimise conflicts, offering clarity on the process and protecting the interests of all stakeholders involved.The contents of a dispute resolution clause in an AoA is similar to that of any agreement between parties and can be drafted as follows:

“In the event of any dispute or claim arising out of these articles or in relation to the rights and obligations of any member or the company, the parties shall first attempt to resolve the dispute through mutual consultations. If unresolved, the dispute shall be referred to arbitration, subject to the Arbitration and Conciliation Act,1996. The place of Arbitration shall be Bangalore, India and the arbitral award shall be final and binding on all parties.”

Amendments to AoA

Now that we have elaborated on the contents of the AoA that deal with the internal management and activities of the company, the question arises as to whether these provisions once drafted and issued can be amended. The AoA sets out procedures for amendment of the AoA. Generally, the AoA outlines that any modification, addition, or deletion to its provisions requires the approval of shareholders through a special resolution. The amended AoA must then be filed with the Registrar within the prescribed time period. It is essential for all procedures of amendment of AoA to comply with statutory requirements of the Companies Act, 2013. Additionally, it must be ensured that proposed changes as well as procedures established in the AoA are in line with the company’s business plan, strategy and objectives. 

For example, the AoA clause related to amendment of the AoA can be drafted in the following manner:

“Changes made to the AoA require shareholder approval through a special resolution in accordance with the provisions of the Companies Act 2013.”

Entrenchment provisions

The AoA may include entrenchment provisions. The concept of entrenchment was first introduced in the Companies Act, 2013. According to the Oxford Dictionary, the word “entrench” means to establish an attitude, habit, or belief so firmly that change is very difficult or unlikely. An entrenchment clause refers to a provision which makes it difficult or even impossible to amend certain provisions of the AoA. 

The company has the discretion to include entrenchment provisions in its AoA. Such provision may relate to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with. An entrenchment provision can be made at the time of incorporation of the company, or after the incorporation of the company by way of an amendment to the AoA of the company.

The format for the articles of association of a company must be in the manner prescribed by the form provided in Schedule I of the Companies Act, 2013.

Generally, the AoA of a public limited company is prepared under the guidance of experts and professional advice from the outset. Private limited companies that frame their own AoA must be vigilant and keep a check on the following while drafting the AoA:

• Model Articles are provided under the Companies Act, 2013. It is important to  note that “preparation of articles” at the stage of incorporation of a company essentially means adopting those model articles, maybe in some modified form suggested by the promoters. 
• Promoters are highly recommended to not add, alter, or delete any provisions in the model articles. In fact Schedule I of the Companies Act, 2013 has specified standard articles for different types of companies, so that the model articles should contain basic provisions. 
• The modification should be made only when it is absolutely required either to implement any new legislation or to assist the purpose of any company. 
• Any additions or alterations made to the model article must be done with careful scrutiny of the provisions of the Companies Act, 2013.

Now that we have understood the essential contents of an AoA which are necessary to efficiently manage the internal functioning of a company, it is clear that the AoA plays a crucial role as a foundational document of a company.The authority of the AoA is however not absolute. So, what happens when there’s a conflict between the AoA and the MoA?

Overriding effect of MoA over the contents of AoA

As you must have noticed earlier in the article, the AoA must always be read together with the MoA of any company and in case of any conflict between the two, the contents of the MoA prevails over the AoA. This is premised on the fact that the MoA defines the core powers and scope of the company’s activities, and the AoA outlines how the company will be managed within those defined powers.

For example, if the MoA has defined the object of the company as carrying out activities in the manufacturing sector, the AoA cannot authorise the company or any of its officers and directors to carry on financial activities.

The relationship between the contents of the MoA and AoA can be understood through these key doctrines:

• Doctrine of ultra vires: This doctrine means that if anything is done by a company beyond the purview of its MoA, it will be termed as ultra vires or beyond the powers of the company, and is therefore void. The AoA of a company cannot sanction any action that the MoA forbids, thus reiterating the overriding effect of the MoA over the AoA. 

This doctrine was established in the case of Ashbury Railway Carriage and Iron Co vs. Riche (1875) in which  the company made an agreement to provide funding for building railways, a task that was not part of the objectives stated in the Memorandum of Association (MOA). The court ruled that the contract was beyond the company’s powers and therefore invalid.

• Doctrine of constructive notice : MoA is a public document, and whoever deals with the company is deemed to be aware of its contents. Thus, if the AoA of a company authorises something beyond the powers set by the MoA, it is not enforceable against the company, since third parties are assumed to know the contents of the MoA.
• Doctrine of indoor management: This is a doctrine that essentially protects third parties from being affected by irregularities in the internal management of a company defined by the content of the AoA. Third parties are presumed to be aware of the MoA of the company, but not of the details of the inner management as provided in the AoA. If third parties enter into a contract in good faith, they may assume that the company has complied with internal rules as laid out in the contents of the AoA. For example, if a director signs a contract on behalf of the company, a third party is not duty-bound to inquire whether the director’s authority was properly delegated under the AoA.

This doctrine was established in the case of the Royal British Bank vs. Turquand (1856), where the court specifically ruled that any third party dealing with a  company in good faith can assume that all internal procedures as outlined in the contents of the AoA have been followed. Third parties are protected as per this doctrine provided that the act is not ultra vires in itself.

Conclusion

The AoA serves as the backbone of the internal management of a company, providing a detailed framework for its governance and operations. It complements the MoA by regulating the internal affairs including the role of directors, shareholders and decision making processes.  It ensures that companies operate transparently, efficiently, and in compliance with legal requirements. It is a well established principle of law that the AoA of a company cannot contradict or override the contents of the MoA or the provisions of the Companies Act, 2013. Additionally, the AoA must be in conformity with the MoA. 

Therefore, it is crucial for us to understand that when a company is being incorporated and the AoA is drafted, the contents of that AoA must align with the MoA in accordance with the provisions of the Companies Act, 2013 and any other relevant laws in force at that time. 

Frequently Asked Questions (FAQs)

Can the contents of the AoA override the statutory provisions of the Companies Act 2013?

No, the contents of an AoA cannot override any statutory provision under the Companies Act, 2013. As per Section 6 of the Companies Act, if a provision of the AoA is contradicting any statutory provision of the Companies Act, the latter will prevail over the former. 

For example, the Companies Act specifies that a general meeting conducted by a public company with 1000 or lesser members requires a quorum of at least 5 members. In such a situation, if the AoA of that public company states that the required quorum for a general meeting is 2 members, it will not be a valid clause. 

How does the AoA regulate the issuance of different classes of shares?

The AoA outlines rules to regulate the creation and issuance of different classes of shares including equity shares and preference shares. It also specifies the rights attached to each of these classes of shares, such as voting rights, divided rights and rights related to winding up and dissolution. Any change in these rights, like altering preference share dividends, must comply with the procedures for varying class rights as prescribed in the AoA and relevant provisions of the Companies Act.

How can the AoA address indemnification of directors and other officers of the company?

AoA can contain indemnification provisions. These provisions may deal with indemnification of directors, officers and other key employees against any liabilities that arise from their official duties, provided that such indemnification is in line with the law.

Can the AoA of a company regulate the borrowing powers of that company and its members?

AoA may include provisions that govern the borrowing limits and powers of the company, giving the Board of Directors the authority to raise capital, issue bonds or debentures, and obtain loans. It may also set certain thresholds and restrict the company from borrowing beyond the threshold without shareholder approval.

References

• https://blog.ipleaders.in/articles-of-association/ 
• https://blog.ipleaders.in/role-of-an-article-of-association-in-company-affairs-an-insight/
• https://blog.ipleaders.in/decoding-entrenchment-clause-provided-companies-act-2013/#:~:text=Types%20of%20Entrenchment,is%20a%20court%2Ftribunal%20order. 

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