This article has been written by Anjali Yadav, pursuing a Diploma in US Corporate Law and Paralegal Studies from LawSikho and edited by Shashwat Kaushik. In this article, we are going to talk about the role of the article of association in company affairs, how it is different from a memorandum of association and the two doctrines given for the same.

It has been published by Rachit Garg.

Introduction 

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

Basically, an Article of Association is an important document of a company that tells about the rules, regulations and bye- laws according to which the company runs, how it will function in the future and the purpose for which the company is established. The Article of Association is not made only by keeping the present situation in mind but also the future expecting/necessary situations. A proper AOA document should be made with different paragraphs and consecutive numberings and must be signed by all the subscribers of the company.

Contents of articles

Anything contained in the Article of Association shall be in accordance with the Companies Act, 2013 and it must not conflict with the provisions of the Act. On the contrary, such a clause will become null and void or inoperative. This may contain :

1. Such regulations are deemed fit and expedient by the subscribers of the company.
2. Stipulations made between members and company and between members themselves
3. It cannot sanction anything that is prohibited by the act.
4. The company can pay dividends only out of profit, not otherwise.
5. Signed by all the subscribers.

Articles and memorandum

1. The memorandum states the purpose for which the company is established,while the article states the manner in which the company functions and its proceedings are disposed of. This is the main difference between the two.
2. Articles are subordinate to memorandum as a result, if there is any conflict between the two, the contents of the memorandum will prevail and the article must give way.
3. Some clauses of memorandum require authoritative sanction for their alteration, while the articles can be altered by a special resolution.
4. According to Bowen LJ, a memorandum contains fundamental conditions that include the benefit of creditors, public, and shareholders as well. But the article of association only deals with internal regulations of the company.
5. If a company does something contrary to the provisions of its memorandum, it becomes void and ratification shall not be allowed. But if the same happens with articles, this can be confirmed by the shareholders.

Effects of articles

Section 10 of the Companies Act says, “the memorandum and articles, once registered, will legally bind the company and its members to comply with their provisions.”

This means that once the memorandum or article is registered,it legally binds the company and its members, like signed agreements.

These effects may be as follows:

1. Binding on members regarding their relation with the company as the article constitutes a contract between each member and the company.
2. Binding on company pertaining to its relations with its members. It is the right of members that there should not be any breach of the article and it is the duty of the company to not breach the article.
3. Neither the company nor the members are bound to outsiders. There is no clause that constitutes a contract between the company and a third party. An outsider can be anyone who is not a member of the company but a member can be an outsider too.
4. How far the article is binding on members depends upon what is mentioned in the article.

Alteration of articles

A statutory power under Section 14 of the Companies Act is given to the company for altering its article and it cannot be cancelled by any contract.

The altered article will be binding on members in the same way as it was binding in the original article but this cannot give the alteration a retrospective effect. The power under Section 14 is absolute, with two conditions that the alteration must be in accordance with the Act and that it must also be subject to the conditions contained in the memorandum. Proviso to Section 14(1) says alteration pertaining to the conversion of a public company into a private company will take place only after it is approved by the tribunal. Any changes to the memorandum or articles must be noted in all copies. Failure to do so may result in a penalty of ₹1000 per copy issued without alteration. Any alteration cannot be such that it increases the liability of any member without his consent in writing, e.g. purchase of more shares, etc. The alterations must not be constituted in such a way that they are committing fraud against minorities.

Constructive notice

A constructive notice is also known as a fabricated notice. The article is registered with the Registrar of Companies and the offices of the same are public offices, so the document, i.e., the article of association, is a public document. So, before dealing with the company, the party can inspect the document, article and memorandum, as they are open to all. But whether the person has read the document or not, he will be in the same position as if he had read it, as it is a public document accessible to all. This is known as constructive notice or presumed notice.

By inspecting these documents, the person can know who the director, manager and secretaries of the company are for the time being. 

Doctrine of indoor management

Indoor management is just opposite to that of constructive notice or we can say it is an exception to the doctrine of constructive notice. The constructive notice is for the protection of the company from outsiders, while the indoor management doctrine is for the protection of outsiders from the company.

As the rule came about 150 years ago from Royal British Bank vs. Turquand (1856), it is also known as the Turquand rule.

The doctrine of indoor management states that an outsider who acts in good faith and enters into a transaction with a company can presume that all internal procedures have been followed. This provides protection for the outsider. However, it is important for the outsider to be familiar with the company’s memorandum and articles of association to seek remedies if needed.

Exceptions to the doctrine of indoor management

1. Knowledge of Irregularities

If an outsider is aware of an irregularity in a company’s internal management, they cannot seek remedy under the doctrine of indoor management. This also applies if the outsider is part of the internal procedure. In the case of T.R. Pratt (Bombay) Ltd. vs. E.D. Sassoon and Co. Ltd. and Anr. (1936), the lender’s awareness of the irregularity made the transaction non-binding.

2.  Suspicion of irregularities

If an outsider could have discovered irregularities in a company’s management through proper inquiries, they could not seek remedy under the doctrine of indoor management. The doctrine does not apply when the circumstances surrounding the contract are suspicious and invite inquiry, but the outsider fails to make efficient inquiries. In the case of Anand Bihari Lal vs. Dinshaw and Co. (1945), the Bombay High Court ruled that the transfer of the company’s property by the accountant was void since it was beyond their authority. The plaintiff should have checked the power of attorney executed in favour of the accountant by the company.

3. Forgery

When an outsider relies on a forged document from a company, the doctrine of indoor management does not apply. The company is not liable for the forgeries committed by its officers. In the case of Ruben and Ladenberg vs. Great Fingall Consolidated and Co. (1906), the United Kingdom House of Lords held that the doctrine does not cover forgery. Outsiders dealing with companies are not obligated to inquire about internal management and are not affected by unknown irregularities.

4. Representation through Articles

This exception is the most confusing kind of exception. In the case of Lakshmi Ratan Cotton Mills and Co. … vs. J.K. Jute Mills Co. Ltd. (1956), Director B borrowed money based on the authority granted in the Articles of Association, even without a specific resolution to delegate the borrowing power. The Allahabad High Court held that the company was bound by the loan.

5.  Acts outside apparent authority

If an officer of a company acts beyond their apparent authority, the company would not be held responsible for any defaults caused by the officer. The outsider can only sue the company under the doctrine of indoor management if the officer has delegated power. In the case of Kreditbank Cassel vs. Schenkers Ltd. (1927), the Court of Appeal ruled that the company wasn’t bound when the branch manager endorsed bills of exchange without proper authority. However, if the officer commits fraud under their apparent authority, the company will be held liable for the fraudulent act.

Conclusion

An article of association is an important document of a company that tells about the rules , regulations and bye-laws of a company . Tables of different model forms of different articles are provided under Schedule 1 of the Companies Act, 2013. The article may contain rules, regulations, and stipulations made between the members and the company. And it should also contain the signatures of all the subscribers. It is different from a memorandum of association. The memorandum states the purpose for which the company is established and the article states the manner in which the company functions. The article is binding on members and the company both regarding their relationship with each other. But it is not binding in relation to a third party or outsider. An article can be altered by passing a special resolution. There are two doctrines that exist, i.e., constructive notice and indoor management. Constructive protection protects the company from outsiders and indoor management protects the outsider from the company.

References

• https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://blog.ipleaders.in/doctrine-indoor-management-2/&ved=2ahUKEwiLyMjywoWBAxWR4jgGHcFnB5gQFnoECCAQAQ&usg=AOvVaw2dgQpjYb9dsyHiTOBL9mR7
• https://www.mca.gov.in/content/mca/global/en/home.html
• https://vakilsearch.com/blog/difference-between-memorandum-of-association-and-article-of-association/
•  https://indiankanoon.org/
• https://www.investopedia.com/terms/a/articles-of-association.asp
• https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-are-articles-of-association/