ARTICLES OF ASSOCIATION

Definition Article means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous companies laws or of this Act

Sec.2 (2)

ARTICLES OF ASSOCIATION

. The articles proceed to define the duties, the right and the powers of the governing body as between themselves and the company at large and the mode and form in which the business of the company is to be carried on and the mode and form in which changes in the internal regulations of the company may from time to time be made. - Lord Cairns

 The

articles regulate the manner in which the company affairs will be managed. The memorandum defines the company's objects and various powers it possesses. The articles determine how the objects shall be achieved and those powers exercised.

 Subject

to the rule that the memorandum prevails in the event of a conflict, the memorandum and articles of association must be read together and ambiguity or uncertainty in the one may be removed by reference to the other. Thus where the memorandum was silent as to whether the companys shares where to be all of one class or might be of different classes, it was held that the power given by the articles to issue shares of different classes resolved the uncertainty and enabled the company to do so. (south Durham Brewery Company)

CONTENTS OF ARTICLES

1. The extent to which Table A is applicable 2. Different classes of shares and their rights 3. Procedure of making an issue of share capital and allotment thereof 4. Procedure of issuing share certificates and share warrants 5. Forfeiture of shares and the procedure of their re-issue 6. Procedure for transfer and transmission of shares

CONTENTS OF ARTICLES

7. The time lag in between calls on shares conversion of shares into stock 8. Directors, their appointment, remuneration, qualifications, etc. 9. Account and audit 10. Lien of shares 11. Payment of commission on shares and debentures to underwriters 12. Rules for adoption for preliminary contracts if any

CONTENTS OF ARTICLES

13. Re-organization and consolidation of shares capital 14. Alteration of share capital & Buyback of shares 15. Borrowing power of directors 16. General meeting, proxies and polls 17. Voting rights of members 18. Winding up

 Schedule

I to the act gives various model forms of memorandum of association and articles of association of various types of companies. The schedule is divided into several tables. Each table serves as a model for one kind of company.

 Table

A deals with regulation (articles)for management of a company limited by shares. Table B contains a model form of memorandum of association of a company limited by shares. Table C gives model form of memorandum and articles of association of a company limited by guarantee and not having a share capital.

 Table

D gives model form of memorandum and articles of association of a company limited by guarantee and having a share capital. Table E contains the model form of memorandum and articles of association of an unlimited company.

 Unlimited

companies Companies limited by guarantee. Private companies limited by shares.

ALTERATION OF ARTICLES (SEC 31)

Procedure : Alteration by passing a special resolution. Copy of resolution to be sent to registrar within 30 days. Copy of altered articles to be registered within 3 months of passing of resolution.

LIMITATIONS REGARDING ALTERATION OF ARTICLES

1. Alteration should not be inconsistent with a. Provisions of Company Act or any other statute b. Conditions contained in memorandum 2. Approval of govt. to be obtained in certain cases 3. Alteration must not deprive any person of his rights under a contract 4. Alteration must not constitute a fraud on the minority 5. Alteration must be bonafide for the benefit of the company as a whole

company was empowered by an alteration in the articles, to expropriate shares held by any member who was in business in competition with the company. At the time of alteration, there was only one member doing business in competition with the company. He challenged the alteration. It was held that the alteration was valid, as the alteration was bona fide for the benefit of the company.

 The

altered articles must not include anything which is illegal or opposed to public policy or unlawful. There cannot be alteration of the articles so as to compel an existing member to take or subscribe for more shares or in any way increase his liability to contribute to the share capital.

BINDING FORCE OF MEMORANDUM AND ARTICLES (SEC 36)

The following are the legal implications:

Company is bound to its members Each member is bound to the company Each member is bound to other members in exceptional case only Neither the company nor the members are bound to outsiders

 In

borlands trustee vs steel Bros Co Ltd the articles of a company contained a clause that on the bankruptcy of a member, his shares should be sold to other person and at a price fixed by the directors. B a shareholder became bankrupt. His trustee in bankruptcy claimed that he was not bound by these provision and should be at liberty to sell the shares at the true value.

 In

Wood v Odessa waterworks, the directors proposed to pay dividend in kind by issuing debentures. The articles provided for payment of dividends. The court held that payment means payment in cash and therefore the company could be compelled to pay dividend in terms of the articles.

 The

articles of a company provided that E should be a solicitor for life to the company and should not be removed from office except for misconduct. But after employing him for number of years, the company discontinued his services. He sued the company. His case was dismissed on the ground that he as a solicitor was no party to the articles.

Memorandum of Association
Charter of Company Defines the scope of the activities

Articles of Association
Regulations for interal management Rules for carrying out the objects of company. Subordinate to the memorandum. Company limited by shares need not have it (Table A applies) Can be altered by special resolution.

Supreme document Must for every company

Strict restrictions, alteration only with sanction of central govt./ tribunal. Act, Ultra Vires is wholly void & cannot be ratified.

Act Ultra Vires (but intra vires the memorandum) can be ratified.

 Every

person dealing with the company is treated as having the knowledge of the contents of the memorandum. (Public documents of the company). It seeks to protect the company against the outsider. Imputation of knowledge whether the party concerned has actual knowledge or not.

 Persons

dealing with the company are assumed to have read the public documents of the company and to have ascertained that the proposed transactions are not inconsistent there with, they are not required to know more , they need not inquire into the regularity of the internal proceedings and may assume that all is being done regularly.

 It

operates to protect outsiders against the company. The rule is beneficial for convenience in business relations. An outsider is presumed to know the constitution of a company, but not what may or may not have taken place within the doors that are closed to him.

 Suppose

if you desire to buy a bond or debenture issued by a company, you are not going to ask directors of the company to produce shareholders resolution authorizing them to issue such bond before you subscribe the same.

The facts of Turquands case were that the directors of a company were authorized by the articles to borrow on bonds such sums of money as should from time to time, by a resolution of the company in the general meeting, be authorized to be borrowed. The directors gave a bond to T without the authority of any such resolution. The question arouse whether the company was liable on the bond. It was held that, the company was liable on the bond, as T was entitled to assume that the resolution of the company in general meeting has been passed.

 Persons No

having knowledge of irregularity

knowledge of articles

Forgery Negligence Others

In Howard v Patent Ivory Co. the articles of the company empowered the directors to borrow up to 1000 pounds only. They could, however exceed the limit, of 1000 pounds with the consent of the company in general meeting. Without such consent having been obtained, they borrowed 3,500 pounds from one of the directors who took debentures. The company refused to pay amount. It was held, that the debenture were good to the extent of 1000 ponds only because the director had notice or was deemed to have the notice of the internal irregularity. The director being an insider, the doors of the company are not closed to him.

Forgery: Example of secretary issuing share certificate.

A bill of exchange signed by the manager of a company with his own signature under words stating that he signed on behalf of the company, was held to be forgery when the bill was drawn in favour of the payee to whom the manager was personally indebted. The bill in this case was held to be forged because it purported to be a different document from what it was in fact; it purported to be issued on behalf of the company in payment of its debt when in fact it was issued in payment of the managers own debt.

 An

accountant of a company transferred some property of a company in favour of Anand Behari. On an action brought by him for breach of contract, the court held the transfer to be void. It was observed that the power of transferring immovable property of the company could not be considered within the apparent authority of an accountant .