Articles of Association (AOA)

Introduction:

Articles of Association is a document which prescribes the rules and bye-laws for the general
management of the company and for the attainment of its object as given in the memorandum
It is a document of paramount significance in the life of a company as it contains the
regulations for the internal administration of the company’s affairs.

The articles of association are a subsidiary to the memorandum of association of the company.
They define the rights, duties, powers of the management of a company as between themselves
and the company at large. Further, they also prescribe the mode and form in which changes in
the internal regulation of a company may be made from time to time. The articles of
association of a company must always be in consonance with the memorandum of that
company and being subordinate to the memorandum; they cannot extend the objects of a
company as specified in the memorandum of the company.

In the case of Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd, the
Supreme Court provided that the articles of association of a company also establish a contract
between the company and its members as well as between the members. This contract governs
the ordinary rights and obligations incidental to the membership in the company.

Articles of association are like the partnership deed in a partnership. They particularly provide
for matters such as the making of calls, forfeiture of shares, directors qualifications, the
procedure for transfer and transmission of shares and debentures, powers, duties and
appointment of auditors.

Meaning of Articles of Association

As per Section 2 (5) of the Companies Act, 2013, Articles of Association have been defined as
“The Articles of Association (AOA) of a company originally framed or altered or applied
in pursuance of any previous company law or this Act.”
The Articles of Association can be seen as a rule book within a company. This is in a
document form and is a part of the company’s constitution alongside the memorandum. This
document contains internal detailed governing aspects of the company’s organisation. These
include shares, (issue and rights attached to them) the conduct of the company meetings and
the role and powers of the directors. The Articles detail rules which govern the conduct of
directors, the rights of the shareholders and the relationship between the two.
The articles of association set out how the company is run, governed and owned. The articles
can put restrictions on the company’s powers – which may be useful if shareholders want
comfort that the directors will not pursue certain courses of action, at least without shareholder
approval.

In addition to the articles, which is a public document, the shareholders may enter into a
shareholders’ agreement to augment the articles in relation to the running, governance and
ownership of the company that they want to keep out of the public domain.

Importance of Articles of Association

Under the Companies Act 2013, the memorandum and the articles when registered, shall bind
the company and its members to the same extent as if it had been signed by them and had
contained a covenant on their part that the memorandum and the articles shall be observed.

The importance of articles of association can be summed up as follows:

1) Binding on members in their relation to the company- the members are bound to the
company by the provisions of the articles just as much as if they had all put their seals to them.

2) Binding on company in relation to its members- just as members are bound to the
company, the company is bound to the members to observe and follow the articles.

3) Neither company, nor members bound to outsiders- articles bind the members to the
company and company too the members but neither of them is bound to an outsider to give
effect to the articles.

4) Binding between members inter se- the articles define rights and liabilities of the
members. As between members inter se the articles constitute a contract between them and are
also binding on each member as against the other or others. Such contract can be enforced only
through the medium of the company.
Contents of the Articles of Association:-

Sec 5 of the Companies Act, 2103 states that the Articles of association:
Must include the regulations for the management of the company
Include matters that have been prescribed under the rules
They do not prevent a company from including additional matter in the AOA or from
doing any alterations as may be considered necessary for the functioning of the company
affairs.
Each limited liability company must have articles of association. They are the company’s
internal regulations, which bind the company, its administrative bodies, management and
auditors. The articles of association must be complied with in the same manner as the Limited
Liability Companies Act.

The formulation of the articles of association is of great importance from the point of view of
the company’s activities. Articles of association that are not suitable for the company’s
purposes may decrease the benefits, which the shareholders can obtain from the company. It is
recommendable to pay due attention to the contents of the articles of association already during
the company's founding phase, because the amendments thereof always require at least two-
thirds (a qualified majority) of the votes and of the shares represented at the general meeting of
shareholders. In practice, significant amendments always need to be agreed between the
shareholders.

The Articles of Association of a company should usually contain rules

and regulations relating to the following matters:

i) Share capital-shares and their value and its

division into equity and preference shares, if
any.
ii) Rights of each class of shareholders and the procedure for
variation of their rights.
iii) Procedure relating to the allotment of shares, making of calls and
forfeiture of shares.
iv) Increase, alteration and reduction of share capital.
v) Transfer and transmission of shares.
vi) Lien of the company on shares allotted to the members for the
amount unpaid in respect of such shares.
vii) Appointment, power, duties etc. of the directors and
officers of the company

viii) Conversion of shares into stock.

ix) Notice of the meetings, voting rights of members, quorum, poll,
 proxy, etc.

x) Audit of Accounts, transfer of amount to the Reserves, declaration

of dividend,
xi) Borrowing Powers of the company
and the mode of borrowing.
xii) Adoption of preliminary contracts, if any.
xiv) Issue of share certificates.
xv) Issue of share warrants.
xvi) Keeping of different Registers.
Regarding winding up of the company.

The Articles of Association must be prepared carefully and it must contain rules in regard to all
such matters which are required be contained therein and which are necessary for the smooth
functioning of the company.
But you remember that the articles must not contain anything is against the provisions of the
Companies Act or the Memorandum of Association, for example, the Articles must not contain a
rule permitting the payment of dividend out of capital, because according to Companies Act
dividend can paid only out of profits.
 Difference between Memorandum and Articles of Association

Parameters of
Difference
MOA AOA
Between MOA
and AOA

It defines the rules and

The purpose of the Memorandum of
regulations that govern the
Association is to define the
The Purpose internal management of the
objectives of a company and the
company for achieving its
conditions for its incorporation.
objectives.

It defines the relationship

It defines the relationship of the between the members of the
Parties Concerned
company with the external parties company amongst themselves
and with the company

MOA can be altered only under AOA can be altered by passing a

Alteration
special conditions special resolution

MOA must contain all the six

clauses of the Memorandum of AOA can be framed as per the
Contents
Association as specified under the discretion of the company
companies act

Any acts beyond the scope of the

Acts that are ultra vires the AOA
MOA are considered ultra-vires and
company but are not ultra-vires
Ratification void. Such acts cannot be ratified by
MOA can be ratified by a special
the unanimous votes of the
resolution of the shareholders.
shareholders.

It is mandatory to register the MOA The filing of the AOA is not

Registration with the registrar of companies at the mandatory. The company may or
time of the company registration may not file it.

AOA is subsidiary to both the

MOA is subsidiary to the Companies
Subsidiary Companies Act as well as the
Act
MOA
 A public company limited by
It is obligatory for every company to
Obligatory shares can opt to have Table A in
have an MOA
place of AOA

Memorandum of Association Articles of Association meaning

Section Under the
meaning has been stated under Sec has been stated under Sec 2(5) of
Companies Act
2(56) of the Companies Act the Companies Act