The Vital Role of Articles of Association in legal Compliance, A guide for Entrepreneurs

By Adv Rishabh Kumar

Edited By Bharti Verma, Associate Editor at Law Insider

Published on: October 21, 2023 at 09:24 IST

The Articles of Association (AOA) in India play a pivotal role in shaping the framework of corporate governance and ensuring the smooth operation of companies within the country. These often-overlooked documents serve as the internal rulebook that guides the functioning of a company, laying down the foundations for its operations, governance structure, and the rights and responsibilities of its stakeholders. In this article we will be discussing the Vital Role of AOA,

What are Articles of Association?

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 companies law or of this Act.

The articles of a company are its bye-laws or rules and regulations that govern the management of its internal affairs and the conduct of its business. The articles of a company are sub-ordinate to and are controlled by the memorandum of association, The memorandum lays down the scope and powers of the company, and the articles govern the ways in which the objects of the company are to be carried out.

It may be noted that Companies Act, 2013 makes it compulsory for every company to have its own articles and file the same with ROC for registration.

Format of AOA

Section 5 of the Companies Act provides that the articles of association of a company should be in respective Forms specified in Tables F, G, H, I and J of Schedule I to the Act, as may be applicable to such company.

Table F is applicable to companies limited by shares.

Table G is applicable to companies limited by guarantee and having a share capital.

Table H is applicable to the companies limited by guarantee and not having a share capital.

Table I is applicable to unlimited companies and having a share capital.

Table J is applicable to unlimited companies and not having a share capital.

A company may adopt all or any of the regulations of the aforesaid Model Articles. If duly registered articles of a company do not expressly exclude or modify the regulations contained in applicable model articles, such regulations shall apply as if they were contained in the duty registered articles of a company.

Content of AOA

Articles of Association (AOA) are a critical document in the context of a company’s constitution and governance. They outline the rules, regulations, and internal management structure that the company will adhere to. While the specific content can vary depending on the company’s needs and structure,

here are some common elements typically found in AOA:

1. Name of the Company: The legal name under which the company operates.
2. Registered Office: The address of the company’s registered office.
3. Objective Clause: A statement describing the company’s primary objectives and activities.
4. Liability Clause: Information on the liability of the company’s members, whether it’s limited by shares, guarantee, or unlimited.
5. Share Capital: Details regarding the company’s share capital, including the types of shares, their nominal value, and any rights attached to them.
6. Shareholder Rights: Information on the rights and obligations of shareholders, including voting rights and dividend entitlements.
7. Transfer of Shares: Provisions related to the transfer of shares, including any restrictions or pre-emption rights.
8. Directors: The number of directors, their powers, appointment, and removal procedures.
9. Board Meetings: Rules for conducting board meetings, including notice, quorum, and decision-making procedures.
10. Officers: Appointment and powers of company officers, such as the company secretary and managing director.
11. Dividends: Rules for the distribution of dividends, including procedures and timing.
12. Accounts and Audits: Requirements for financial reporting, audits, and the appointment of auditors.
13. Alteration of AOA: Procedures for amending the articles, including shareholder approval and legal requirements.
14. Winding Up: Procedures for the dissolution or winding up of the company.
15. Indemnity and Insurance: Provisions for indemnifying directors and officers and obtaining insurance for them.
16. Seal: If applicable, details about the company seal and its use.
17. Miscellaneous Provisions: Any other clauses, rules, or provisions necessary for the company’s management and governance

Role of AOA

The Articles of Association (AOA) play a crucial role in the functioning of a company in India, and their importance is not limited to the Companies Act of 2013; it extends to the overall framework of company law in the country. Here are some key aspects of the importance of Articles of Association in Indian company law:

• Constitutional Document: Articles of Association, along with the Memorandum of Association, constitute the constitution of a company. They define the company’s purpose, internal rules, and the rights and obligations of its members.
• Internal Governance: The AOA sets out the rules and regulations that govern the internal management and operations of the company. It specifies how decisions are made, how directors are appointed, and how the company’s affairs are managed.
• Protection of Shareholders’ Rights: The AOA outlines the rights and responsibilities of shareholders. It provides safeguards for minority shareholders and helps ensure that their interests are protected.
• Limitation on Powers: The AOA can restrict the powers of the directors and the company as a whole. It sets limits on what the company can do and how it can do it. This can be important to prevent misuse of power.
• Alteration and Amendment: While the Memorandum of Association is relatively rigid and its alteration requires a more complex process, the AOA is more flexible. It can be altered, amended, or replaced by passing a special resolution, making it a more adaptable document for the company’s changing needs.
• Transparency and Clarity: A well-drafted AOA enhances transparency and clarity in a company’s operations. It ensures that all stakeholders understand the rules and procedures governing the company.
• Legal Basis for Actions: The AOA provides a legal basis for many actions taken by the company. For example, it may specify the process for issuing and transferring shares, which is crucial in share transactions and raising capital.
• Liability and Accountability: The AOA can outline the liability and accountability of directors and officers, which is essential for corporate governance and risk management.
• Contractual Nature: The AOA is considered a contract between the company and its members, and among the members themselves. This contractual nature can be crucial in settling disputes and enforcing the rights and obligations of parties involved.
• Compliance with Regulatory Framework: The AOA should be in compliance with the regulations and guidelines of the Companies Act of 2013. This ensures that the company operates within the legal framework.

Alteration of AOA

The beauty of AOA is its flexibility. While there are standard provisions recommended by regulatory bodies, AOA can be customized to fit the specific needs and circumstances of the company. During the incorporation process, a company’s AOA must be filed with the appropriate government authorities. Any subsequent changes to the AOA must also be officially recorded.

Section 14 of the Companies Act, 2013 provides that a company may, by passing a special resolution in the general meeting, alter its articles of association, However, where articles are altered in such a way that it has the effect of converting a public company into a private company (i.e., the three restrictions of a private company are being added in the articles of a public company), then approval of the Central Government (power delegated to Regional Director) is also required, in addition to special resolution.[Application shall be made in Form No. RD-1] Every alteration of the articles and a copy of the order of the Central Government (RD) proving the alteration shall be filed with the Registrar, in Form No. INC-28, together with a printed copy of the altered articles, within a period of 15 days.

Limitation on Alteration of Articles

Following are some of the limitation on power to alter Articles of association:-

1. The articles must not exceed the powers given by the memorandum or conflict with its provisions.

2. It must not be inconsistent with any of the provisions of the Companies Act, 2013 or any other Statue / Law.

3. The alteration must be bona fide for the benefit of the company as a whole.

4. The altered articles must not contain anything illegal or against public policy.

5. The articles cannot be altered in a way providing for expulsion of a member.

How AOA helps in legal Compliance?

AOA, or Articles of Association, play a crucial role in ensuring legal compliance within a company. Here are key pointers and paragraphs explaining how AOA assists in this aspect:

1. Defining Governance Structure: AOA outlines the internal governance structure of the company, including the roles and responsibilities of directors, which is essential for compliance with corporate governance laws and regulations. It sets the foundation for the company’s decision-making process, ensuring it adheres to legal requirements.
2. Shareholder Rights and Obligations: AOA specifies the rights and obligations of shareholders. This is vital for legal compliance as it ensures that the rights of minority shareholders are protected, and it defines the procedures for shareholder meetings and voting, aligning with corporate laws.
3. Capital and Shares Regulations: AOA provides rules on the issuance and transfer of shares, capital structure, and dividend distribution. This is crucial for compliance with company law as it ensures transparency in financial dealings and prevents unauthorized share transfers.
4. Borrowing and Lending Powers: AOA often details the company’s borrowing powers and lending regulations. This helps in legal compliance by setting limits and procedures for taking loans or lending funds, ensuring adherence to financial regulations and guidelines.
5. Conflict of Interest: AOA typically contains provisions regarding conflicts of interest and how they should be handled. This assists in complying with laws related to corporate ethics and the avoidance of conflicts, ultimately protecting the company’s reputation.
6. Amendment Procedures: AOA also outlines the process for amending its provisions. This is important for legal compliance as it ensures that any changes made are done in accordance with the law and approved by the relevant authorities or shareholders.
7. Alignment with Statutory Requirements: A well-drafted AOA should align with statutory requirements and regulations in the jurisdiction where the company operates. This alignment is essential to ensure that the company’s operations remain compliant with the law.

Difference Between MOA and AOA

The main points of distinction between the memorandum and articles are given below:

1. Memorandum of association is the charter of the company and defines the fundamental conditions and objects for which the company is granted incorporation. While Articles of association are the rules and regulations framed to govern this internal management of the company.

2. In MOA Clauses cannot be easily altered. They can only be altered in accordance with the mode prescribed by the Act. In some of the cases, alteration requires the permission of the Central Government or the Court. In the case of AOA, members have a right to alter the articles by a special resolution, Generally, there is no need to obtain the permission of the Court or the Central Government for alteration of the articles.

3. Memorandum of association cannot include any clause contrary to the provisions of the Companies Act. While The articles of association are subsidiary both to the Companies Act and the memorandum of association.

4. The memorandum generally defines the relation between the company and the outsider, while the articles regulate the relationship between the company and its members and between the members inter se.

5. Acts done by a company beyond the scope of the memorandum are absolutely void and ultra vires and cannot be ratified even by unanimous vote of all the shareholders. But the acts of the directors beyond the articles can be ratified by the shareholders.

Also Read: The Vital Role of MOA in Legal Compliance

Conclusion

In essence, the Articles of Association, as a cornerstone of corporate governance in India, stand as an invaluable document that provides the rules of the game for companies operating within the country. These articles, often overshadowed by the Memorandum of Association, define the company’s mission, modus operandi, and the intricate relationships between its stakeholders. In a landscape defined by stringent regulations and evolving business environments, the Articles of Association remain a critical element that ensures the efficient functioning of a company while upholding transparency and protecting the rights of its shareholders.