by Asok Nadhani,
4.4
Articles of Association
a.
The Articles of Association is a document
containing the rules and regulations for the internal management of the
company, to achieve the objects as set out in the Memorandum of Association.
b.
The Articles define the duties, rights and powers
of the governing body as between themselves and the company at large.
c.
The Articles are subordinate to Memorandum. No
right inconsistent to the memorandum can be conferred by the Articles.
d.
The Articles shall be printed (may also be neatly
laser printed in computer but not photocopy), divided into paragraphs and
signed by each subscribers of the Memorandum in the presence of at least one
witness attesting the signature. The witness shall also state his address &
occupation, if any (s. 30).
e.
A company may have its own Articles or may adopt
Table A given in Schedule I to the Act.
f.
However, the following types of companies must have
their own Articles of Association: (s.26)
i) unlimited
companies,
ii) companies
limited by guarantee,
iii) private
companies limited by shares.
4.4.1 Contents
of Articles
Some of the
important contents of the Articles of Association are as follows:
a.
Types, number, denominations and rights of
different types of shares,
b.
Conversion of shares into stock, lien of shares,
etc.,
c.
Alteration of share capital,
d.
Voting powers of the shareholders and poll, proxies,
e.
Transfer and transmission of shares,
f.
Company meetings,
g.
Calls and allotment of shares,
h.
Share certificate and share warrants,
i.
Appointment, re-appointment, remuneration, reward,
etc., of Directors,
j.
Appointment of Manager, Secretary & other
managerial personnels,
k.
Dividends and Reserves,
l.
Accounts, audit and borrowing powers,
m.
Capitalisation of profits,
n.
Winding Up.
4.4.2
Regulations regarding Articles
The Company’s
own Articles must state about the following: (Sec. 27)
a. Unlimited
company. The Articles shall state :
-
the number of members with which the company is to
be registered.
-
for Companies having a share capital, the amount of
share capital with which the company is to be registered.
b. Company limited
by guarantee: The Articles shall state the number of
members with which the company is to be registered.
c. Private company
:
-
restriction of transfer of shares, limitation of number of its
members to 50 (not including employee-members),
-
prohibition of any invitation to the public to
subscribe for any shares in, or debentures of, the company.
4.4.3
Adoption of Articles
a.
Public Company Limited by shares Company may adopt
Articles in any of the following form (Sec. 28)
i.
Adopt Table A in full.
ii.
Wholly exclude Table A and set out its own Articles
in full.
iii.
Frame its own Articles and adopt part of Table A.
So, unless the Articles of
a public company expressly exclude any or all provisions of Table A. Table A
shall automatically apply to it.
b.
Companies other than limited by shares, shall adopt
Articles in one of the Forms in Tables C, D & E (as applicable) or in a
Form as near thereto as circumstances admit. (S. 29)
Such a company may also
include additional matters, not inconsistent of any provisions set in Tables C.
D. and E, as applicable to the Company.
4.5 Alteration of Articles
A company can alter its articles
at any time subject to some conditions. It cannot alter the Articles to deprive
this power to alter its Articles. [Andrews Vs Gas Meters Co.]
a.
Procedure of alteration (Sec. 31)
i.
A company may, by special resolution alter its Articles
subject to the provisions of the Act and the memorandum.
ii.
A printed copy of the
Articles as altered shall be filed by the company with the Registrar within 30
days of passing the special resolution.
b.
Rules regarding to Alteration of Articles
The alteration can be made
only by special resolution, subject to following conditions
- Not
inconsistent with the Act or the Memorandum: The alteration of the Articles must not be
inconsistent with (or go beyond) the provisions of the Companies Act, or
the powers given by the Memorandum.
- For the benefit of the Company: The alteration must be for the benefit of the company as a whole.
[Brown v. British Abrasive Wheel Co. Ltd.]
- No increase in liability of members (Sec. 38): The alteration shall not increase the liability of the members,
to contribute to the share capital or to pay money to the company.
- Approval by
Central Government: Certain alterations (like, Conversion of
public company into a private company) require approval by the Central
Government.
- No Breach
of contract: It must not result any breach of contract
with an outsider.
- Alteration
with retrospective effect: The Articles may be altered with
retrospective effect (though it may be detriment to the interest of some
members), if it is otherwise valid.
- Must not
sanction anything illegal: The
alteration must not purport to sanction anything which is illegal.
- An alteration must not be oppressive on any
member. [Bajaj Auto Ltd. v. N. K. Firodia]
- An alteration must not be inconsistent with
any order of the Court.
- An alteration should not be inconsistent with
an order by Tribunal u/s 397 or 398 (s. 404)
4.6 Distinction
between Memorandum and Articles
|
Basis
of Difference
|
Memorandum
|
Articles
|
|
Nature
|
Memorandum is
the fundamental charter of the company. The company functions within
the limits laid in the memorandum.
|
Articles are
subsidiary to the charter. Articles contain by - laws and rules regarding day
-to -day internal working of the company.
|
|
Scope
|
Memorandum
states the relationship between the company and outsider.
|
Articles contain
provisions for internal management of the company.
|
|
Objectives
|
Memorandum
defines the objects of the company.
|
An article
defines the rules for carrying out the objects of the company.
|
|
Alteration
|
Alteration
requires court confirmation.
|
Can be altered
by a special resolution.
|
|
Violation
|
Company cannot
violate the clauses of the Memorandum. There is no remedy for ultra –
vires acts.
|
Any act of the
company which is ultra vires the Articles (but is intra vires
the Memorandum) can be ratified by the shareholders.
|
|
Necessity
|
Each company
must have its own form of memorandum.
|
Public
companies may adopt Table-A of Companies Act instead of having its
Articles.
|
|
Application of Rules
|
It is based on doctrine
of constructive notice.
|
It is based on doctrine
of indoor management.
|
4.6.1 Relationship between Memorandum and Articles
i.
Memorandum and Articles are complement to each
other. Memorandum contains the power of the company whereas the Articles
contain the rules and regulations prescribing the restrictions and conditions
on exercise of these powers.
ii.
If memorandum is silent or ambiguous in certain
matter, the Articles can be referred to resolve such ambiguity.
iii.
If any conflict a rises, the Memorandum shall
prevail over the Articles.
4.6.2 Act to override Memorandum & Articles (Sec.9)
a.
The provisions of Companies
Act shall prevail over anything to the contrary contained in the Memorandum or
Articles of a company, or in any agreement executed or resolution
passed by the company (in general meeting or by its Board of directors).
b.
Any provision contained in the
Memorandum, Articles, agreement or resolution shall be void to the extent to
which it is repugnant to the provisions of Companies Act.
4.7
Legal effect of Memorandum and Articles (Sec. 36)
A. Relationship between the Company & its Members
The Memorandum and the
Articles, when registered, creates a legal relationship between the Company,
its Members as a body and the Individual members, as follows:
i. Members as a body. The Memorandum
and the Articles, constitute a binding contract between the members as a whole and
the company, as if each member has actually signed the Memorandum and the
Articles. [Borland's Trustee v. Steel
Bros. & Co. Ltd.]
ii. Individual members. A company is
bound to the individual members in terms of their ordinary rights as members (e.g.
the right to receive notice of general meetings, the right to receive
dividend, etc). In the same way, company can exercise its rights as against any
member in accordance with the provisions in the Memorandum and the Articles
(e.g. make calls on shares). [Wood v. Odessa Waterworks Co.]
iii. Members inter
se. The Articles & the Memorandum constitute a contract between the
members inter se (among themselves) and are binding on each member
against the other. Such contract can be enforced through the company. Ex.4.4
B. Relationship between the Company & Outsiders
i.
The Articles & Memorandum do not constitute any
binding contract as between a company and an outsider, on the premise that a
stranger to a contract cannot acquire any rights under the contract.
ii.
A right even conferred by the Articles on a person
in any capacity other than that of the member is not enforceable against the
company. [Eley v. Positive Govt.
Security Life Ass. Co. ]
4.8 Doctrine of
Constructive Notice
i.
Every person, dealing with a company is deemed to
have notice of the contents of Memorandum and the Articles of Association.
ii.
These documents, on registration become open and
accessible to all. It is deemed that everyone has notice of their contents and
have read the contents of these documents. Any person dealing with a company
may inspect these documents (at the Office of Registrar, which is a public
office) to see whether the Company is within the powers to enter into the
proposed contract. [Kotla Venkataswamy Vs Ramamurthy], [Rama Corporation vs. Proved Tin &
General Investment Co.]
iii.
The person dealing with the company cannot plead
ignorance of the provisions contained in the memorandum and the articles.
4.9 Doctrine of
Indoor Management
i.
Doctrine of indoor management is based on principal
that outsiders have notice to the Memorandum, Articles and some public documents.
But, it is not always practicable for any outsider to see whether the internal
proceedings of the Company are regular.
ii.
Doctrine of indoor management is based on principal
that outsiders have the privilege to presume that the company’s internal
proceedings are regular and they need not enquire about it further.
iii.
A contract, entered into on behalf of the company
by any director or officer of the company, is enforceable against the company,
if provisions contained in the memorandum and articles have been complied with,
even though some internal irregularity in entering into the Contract had arisen
of which the outsider was unaware.
iv.
So, the Doctrine of Constructive Notice is
aimed to protect the Company as against outsiders, where as, the Doctrine
of Indoor Management is aimed to protect the Outsiders as Against the
Company. The doctrine of
indoor management thus operates in favour of the outsiders and acts like as an
exception to the doctrine of constructive notice. [Royal British Bank v. Thrquund.], [Royal British
Bank Vs
Turquand]
4.9.1 Exceptions to the
doctrine of Indoor Management
In following cases, the
members can not take advantage of the Doctrine of Indoor Management.
a. Knowledge of
irregularity: A person cannot claim the benefit if he has actual or constructive notice
of the irregularity as regards to function of the internal management. [T.R.
Pratt (Bombay
b. Negligence. Where a person
dealing with a company could discover the irregularity if he had made proper
inquiries, he cannot claim the benefit of the rule of indoor management. Where
the circumstances surrounding the contract are so suspicious as to invite
inquiry, the outsider dealing with the company is liable to make proper inquiry.
[Anand
Bihari Lal v. Dinshaw &
Co.], [A.L Underwood Vs Bank of Liverpool ]
c. Forgery. If a person
relies upon a document that turns out to be forged, the company can not be held
bound for forgeries committed by its officers (as nothing can validate forgery).
[Ruben
v. Great Fingall Consolidated Co. ]
d. Acts beyond
authority. The company is not bound for any act of its officer beyond his
authority. [Kreditbank Cassel v. Schenkers
Ltd.]
e. No Knowledge of articles. Where a party who has not read the articles
enters into a contract with an officer of the company who acts beyond his
authority to enter into such a contract, the third party cannot take the
benefit of doctrine of indoor management.
f. Illegal transactions. The benefit of doctrine of indoor management
cannot be enforced against any of the parties to an ultra vires or illegal
transaction.
g. No implication of agency. If a person represents that he is an agent of
the company the third party must make full inquiry to satisfy itself that the
person is in fact an agent of the company. The third party cannot claim the
benefit of doctrine of indoor management, to enforce contract against the
company.
4.10 Doctrine of
ultra vires
i. A company has
the power to do all such things which are
a.
authorised to be done by the Act
b.
essential to the attainment of its objects
specified in the Memorandum
c.
reasonably and fairly incidental to its objects
Everything else
is ultra vires (beyond the powers) the company. [A. Lakshmanaswamy Mudaliar and others Vs LlC]
ii.
Any ultra vires act is void and could not be
enforced by anyone, neither by the company nor by the third party. Even the
whole body of shareholders cannot ratify it. [Ashbury Rly. Carriage & 'Iron
Co. Ltd. v. Riche], Ex.4.5
iii.
An ultra vires act does not create any legal
relationship. The purpose of these restrictions is to protect :
ú investors in the
company so that they may know the objects in which their money is to be
employed
ú creditors by
ensuring that the company's funds are not spent in unauthorised activities.
iv. Where the
company exceeds its authority, the act is good to the extent of the authority
and bad as to the excess. But if the excess cannot be separated from the
authority conferred on the company by the Memorandum, the whole transaction
would be affected by the doctrine of ultra vires and would be void. But
there is nothing to prevent a company from protecting its property. [National
Telephone Co. v. St. Peter Port Constables]
a.
Ultra vires the directors: If an act or transaction is ultra vires the
directors, the shareholders can ratify it by resolution in a general meeting.
b.
Ultra vires the Articles: If an act or
transaction is ultra vires the Articles, the company can ratify it by
altering the Articles by a special resolution.
4.10.1 Purpose and benefits of doctrine of ultra
vires
a. Protection of investors: The doctrine
protects the investors and lenders since the investors get an assurance that
the money invested by them shall not be diverted to any unauthorized projects
or ultra vires purpose. The investors come to know the sphere of the activities
of the company, enabling them to assess the risk to which their investments may
be exposed.
b. Guide to directors: The doctrine guides the
directors regarding nature of contracts in which the directors can enter into
on behalf of the company, restraining them from entering into ultra vires
contracts.
c. Public interest: As per the doctrine of
ultra vires, the directors are liable to indemnify the company for ultra vires
acts, thus preventing waste of resources of the company and of public money.
4.10.2 Effects of ultra vires transactions
i. Injunction against the company: Any member of
the company can apply to the Court to grant an injunction restraining the
company from entering into an ultra vires contract. [London
ii. Liability of directors towards the company: The directors
shall be liable to the company for breach of trust or breach of warranty of authority
and may be compelled to indemnify the company for any loss caused to the
company for such Act.
iii. Ultra vires contracts are void: An ultra vires contract is void ab initio and has no legal effect.
Therefore none of the parties to an ultra vires contract shall derive any right
arising under an ultra vires contract. So, the company cannot sue the other
party to the ultra vires contract. Similarly, the other party cannot sue the
company under an ultra vires contract.
iv. No ratification or estoppel: An ultra contract cannot become valid by estoppel, lapse of time or
ratification.
v. Ultra vires lending of money: If a person
borrows money from a company under a contract which is ultra vires the company, the company can
sue him for the recovery of the money.
vi.
Ultra
vires property: If the money of the company is used in purchase of
property under an ultra vires transaction, the company
shall have a right to hold such property and protect it against damage by other
parties.
vii. No retrospective
alteration of object clause: An ultra vires transaction cannot be made intra
vires the company by retrospective alteration of object clause, because, an
alteration of object clause becomes effective only when the special resolution
passed for alteration of object clause along with the memorandum as altered is
filed with the Registrar, and the Registrar registers the same.
viii. Ultra vires borrowings: If a company
borrows money under an ultra vires transaction, the Court may, in the
interest of justice, grant the following remedies to the lender: Ex.4.6
a.
Injunction.
If
the money is identifiable, (i.e. in original form) the lender can obtain a
tracing order from the Court restraining the company
from parting with the money. When traced, the company shall be liable to repay
such money.
b. Subrogation. If the company pays any
debt by using such money, the lender shall be substituted in the place of such
creditor. However, the lender shall not be entitled to the securities to which
the creditor was entitled.
c.
Charge on property. If the company purchases
any property out of such money, the lender shall have a first charge on such
property.
d.
Liability of directors for breach of warranty of authority. The lender may sue the
directors for exceeding the authority granted by the company to them. The
directors shall be personally liable for breach of warranty of authority.
ix.
Services
under an ultra vires contract: Where a company renders
services under an ultra vires contract, it can recover the payment due
from the other party.
x.
Liability
of company for ultra vires torts: Where an officer of the
company commits a tort acting under an ultra vires transaction, the
company shall not be liable for it.
i.
In case any transaction is ultra vires the articles
or the directors, following rules apply:
|
Nature
of ultra vires transaction
|
Effect
|
|
Ultra
vires the directors but vires the company
|
The
shareholders may ratify such a transaction. On such ratification, the company
shall be bound by such act.
|
|
Ultra
vires the articles but intra vires the company
|
Articles
may be amended. Thereafter, the company shall become bound by such act.
|
|
Ultra
vires or ultra vires the memorandum or ultra vires the object clause or ultra
vires the company
|
The
transaction is void ab initio and wholly inoperative, i.e. the company is not
bound by such act and cannot be ratified even by the whole of shareholders.
|
ii.
If a part of an act falls within the object clause
and the other part falls outside the object clause, only the latter part be
ultra-vires.
4.11 Documents in name of Company
The various provisions regarding execution and
form of documents in name of company are given below:
a. Execution of Deeds (Sec. 48)
i. A company may, by writing under its common seal, empower any person, either
generally or in respect of any specified matters, as its attorney, to execute
deeds on its behalf in any place either in or outside India
ii. A deed singed by such an attorney on behalf of the company and under his
seal (where sealing is required) shall bind the company and have the same
effect as if it were under its common seal.
b. Authentication of documents and proceedings (Sec.
54)
Save
as otherwise expressly provided in this Act, a document or proceeding requiring
authentication by a company may be signed by a director, the manager, the secretary or other
authorised officer of the company, and need not be under its common seal.
c. Form of Contracts (Sec. 46)
Contracts
made on behalf of a company, which are required to be in writing, may be made
as follows :
i. A contract which, if made between private persons, would by law be required
to be in writing and should be signed, varied or discharged by person acting
under its authority, express or implied.
ii. A contract which, if made between private persons, although not reduced
into writing, by any person acting under its authority, would be valid.
iii. A contract made according to s.46 shall bind the company.
d. Bills of Exchange and Promissory Notes (Sec. 47)
Any Bill of exchange, hundi or
promissory note drawn accepted,
made, or endorsed in the name of or on behalf or on account of, the company by
any person acting under express or implied authority, shall be deemed to have
been done so on behalf of the Company.
Examples:
Alteration of Objects
Ex.4.1
A company carrying on
business in jute is empowered by the objects clause of its Memorandum of
Association to do any other business connected with jute. By a resolution
passed unanimously, the company resolved to alter the objects clause to include
the power to carry on additional business in rubber.
The alteration is not covered by Sec. 17. [Ref.
4.3.3{i(d)}]
Ex.4.2
A company started with the
object of building ‘a hall with shops’. The building was destroyed by fire and
the company wanted to alter the objects clause in the Memorandum by
substituting the words ‘a hall with shops’ with the words ‘shops, dwelling
houses and warehouses for letting purposes.’
The alteration is covered by Sec. 17. [Ref.
4.3.3{i(f)}]
Ex.4.3
A company altered the
objects clause of its Memorandum of Association according to the procedure laid
down by law. A copy of the resolution was filed with the Registrar 4 months
after the passing of the resolution.
The Registrar can not register the
alteration. (s. 18) [Ref. 4.3.3{ii(b)}]
Relationship of Articles between Company
and Members
Ex.4.4
The Articles of a company
provided for the reference of disputes between the members and the company to
arbitration. H, a member, brought an action against the company which applied
to the Court for a stay of the proceedings.
The action of the company is valid as the
articles bind the members with the company and members inter se. (Hickman v.
Kent Romney Marsh Sheep Breeders’ Assn.) [Ref. 4.7{A(iii)}]
Ultra vires
Contract
Ex.4.5 X Ltd., a cotton textile
company, enters into a contract with A Ltd., an adjacent cotton textile mill,
to supply electricity from their power generation plant. After supplies have
been made for 3 months, it is discovered that this activity is beyond the scope
of the objects clause of the Memorandum of Association of X Ltd. Shareholders
of X Ltd. ratify the contract in their general
meeting.
A Ltd. refuses
to make payment for the supplies to X Ltd.
Held, A Ltd.
cannot be legally compelled to make payment to X Ltd. as the transaction is
ultra vires X Ltd. [Ref. 4.10(ii)]
Ultra vires Borrowings
Ex.4.6
The Articles of a company
provide that the Managing Director may, with the previous sanction of the Board
of directors, take a loan of Rs.1 lakh. The Managing Director, without such
sanction, takes a loan of Rs.2 lakhs and misappropriates the amount.
Held, the creditor cannot sue the company
for the recovery of the loan as the borrowing is ultra vires the company. [Ref.
4.10.2 (viii)]
For
more details, refer to Business & Corporate Laws, by Asok Nadhani, BPB
Publications, www.bpbonline.com,
bpbpublications@gmail.com
