The Articles of Association
Chapter Twelve
Syllabus topic 1.2, label: "Articles of association"
Pages 66 to 70 of 830
In one line
The articles are the company's internal rulebook: how meetings are called, how directors are appointed, how shares are transferred and how the company runs itself day to day.
In exam wording: section 5(1) provides that the articles of a company shall contain the regulations for management of the company; section 5(3) to (5) permit entrenchment; section 5(6) to (8) deal with the model articles in Tables F to J of Schedule I; and section 10 gives the articles effect as a statutory contract between the company and its members.
Why the law has this at all
The memorandum tells the world what the company is and what it may do. It says nothing about how the company decides anything.
Somebody has to settle how many directors there are, how a Board meeting is called, who chairs a general meeting, what happens to a share when a member dies, and how a call on shares is made. Every company needs answers, most companies want the same answers, and no legislature wants to write them all into the Act, because different companies genuinely need different rules.
So the Act does three things at once. It requires each company to have articles. It supplies a default set in Schedule I, so a company that does not want to think about it need not. And it lets a company depart from the default, within the limits set by the Act and its own memorandum.
Some words this chapter uses
Regulations for management means the internal rules by which the company is run. Model articles are the standard sets printed in Schedule I. Entrenchment means making a provision harder to change than an ordinary special resolution would allow. A special resolution requires votes of not less than three times the votes cast against. Repugnant means inconsistent with. To modify the model articles means to change them; to exclude them means to keep them out altogether.
What the articles must contain: section 5(1) and (2)
Section 5(1). The articles shall contain the regulations for management of the company.
Section 5(2). The articles shall also contain such matters as may be prescribed, with a proviso: nothing so prescribed shall be deemed to prevent a company from including such additional matters in its articles as may be considered necessary for its management.
So there is a floor and no ceiling. The Act, through the rules, sets a minimum content; the company may add whatever else it needs. What it may not do is include anything repugnant to the Act, because of section 6, or anything beyond the memorandum, because the memorandum is the dominant document.
A private company's articles carry a compulsory content of their own. Under section 2(68) they must restrict the right to transfer shares, limit members to two hundred except in a One Person Company, and prohibit any invitation to the public to subscribe for securities. Those three are not optional and their absence costs the company its private status: see the first proviso to section 14(1).
The Articles of Association
Entrenchment: section 5(3), (4) and (5)
This is the newest idea in the section and it is short enough to learn word for word.
Section 5(3). The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures that are more restrictive than those applicable in the case of a special resolution are met or complied with.
The point. Ordinarily articles are altered by special resolution under section 14. Entrenchment lets a company say that a particular article can be altered only by something harder: unanimity, or the consent of a named class, or a higher majority.
Why anybody wants it. A minority investor who is promised a seat on the Board wants that promise in the articles, and wants to know it cannot be voted away by the majority who gave it. Entrenchment is how that promise is made secure.
Section 5(4): when it may be created. Entrenchment provisions shall only be made:
- either on formation of a company; or
- by an amendment in the articles agreed to by all the members in the case of a private company, and by a special resolution in the case of a public company.
Note the asymmetry and remember it, because it is counter-intuitive. To entrench later, a private company needs unanimity, while a public company needs only a special resolution. Students routinely get this the wrong way round on the assumption that public companies are always more heavily regulated.
Section 5(5): notice. Where the articles contain entrenchment provisions, whether made on formation or by amendment, the company shall give notice to the Registrar in the prescribed form and manner. That is what makes the entrenchment public, so an outsider can discover it.
The model articles: section 5(6), (7), (8) and (9)
Section 5(6). The articles shall be in the respective forms specified in Tables F, G, H, I and J in Schedule I as may be applicable. The memorandum uses Tables A to E under section 4(6); the articles use F to J.
Section 5(7). A company may adopt all or any of the regulations contained in the model articles applicable to it.
Section 5(8) is the default rule and the one worth quoting. For a company registered after the commencement of this Act, in so far as its registered articles do not exclude or modify the regulations in the applicable model articles, those regulations shall, so far as applicable, be the regulations of that company in the same manner and to the extent as if they were contained in the duly registered articles.
The Articles of Association
Read that as a gap filler. Silence in a company's own articles is not a gap; it is an adoption. If your articles say nothing about who chairs a general meeting, the model article on that subject is your article.
Section 5(9). Nothing in this section applies to the articles of a company registered under any previous company law, unless amended under this Act. So a company incorporated in 1978 keeps its own articles and the section 5(8) default does not silently rewrite them.
The effect of the articles: section 10
Set out in full in [The Memorandum of Association], and it applies to the articles in exactly the same way. The articles, when registered, bind the company and the members as if signed by each of them and containing covenants to observe all their provisions, and monies payable by a member under them are a debt due to the company.
Two limits, both examinable:
The articles bind members as members, not as outsiders. An article providing that a named person shall be the company's solicitor does not give him a contract, even if he happens also to be a member, because he is enforcing it in a capacity other than as a member.
The articles are subordinate to the memorandum and to the Act. Section 6 makes any provision repugnant to the Act void to that extent, and no article can widen the objects.
A worked example
Sahyadri Textiles Private Limited is being incorporated by four founders and one outside investor, Renuka, who is putting in three crore rupees for twenty per cent.
The basic articles. They adopt Table F with modifications, which is what section 5(7) permits. Anything they leave alone stays as Table F by force of section 5(8).
The compulsory private company content. Because it is a private company, section 2(68) requires the articles to restrict transfer of shares, cap members at two hundred and prohibit public invitations. They put those in.
Renuka's protection. She will not invest unless the article giving her the right to nominate one director is safe from the four founders, who between them can pass any special resolution. So the articles are drafted on formation with an entrenchment provision: the nomination article may be altered only with Renuka's written consent. That is permitted by section 5(3), it is made on formation so section 5(4) is satisfied without more, and the company gives notice to the Registrar under section 5(5).
The Articles of Association
Two years later the founders want to entrench a different article, about pre-emption on transfers. Now section 5(4) bites in its second limb, and because this is a private company the amendment must be agreed to by all the members, Renuka included. Had it been a public company a special resolution would have sufficed.
A member sues. One founder refuses to offer his shares to the others before selling outside, in breach of the pre-emption article. The others can enforce it, because by section 10 the articles bind the members to each other through the company as a statutory contract, in their capacity as members.
A different suit fails. Renuka's husband is named in the articles as the company's architect and is not paid. He cannot sue on the article. He is an outsider to the section 10 contract, whether or not he is a member, because he is enforcing a right in another capacity.
Distinctions that carry marks
| Memorandum | Articles | |
|---|---|---|
| Purpose | Defines the company to the outside world | Regulates the company internally |
| Required contents | Six clauses, section 4(1) | Regulations for management, section 5(1), plus prescribed matters |
| Schedule I tables | A to E, section 4(6) | F to J, section 5(6) |
| Default supplied by the Act | No | Yes, section 5(8) |
| Alteration | Section 13; some changes need Central Government approval | Section 14, special resolution; Central Government order for public to private conversion |
| Can it be entrenched | No | Yes, section 5(3) to (5) |
| Hierarchy | Dominant | Subordinate to the memorandum and the Act |
| Ordinary alteration of articles | Entrenched provision | |
|---|---|---|
| Requirement | Special resolution, section 14(1) | Whatever more restrictive condition or procedure the articles specify, section 5(3) |
| When it can be created | Not applicable | On formation, or later: all members in a private company, special resolution in a public company, section 5(4) |
| Registrar | Filed under section 14(2) | Notice under section 5(5) |
What this does NOT mean
It does not mean the articles can do anything the members agree on. Section 6 voids anything repugnant to the Act, and the articles cannot go beyond the memorandum.
It does not mean a company that says nothing has no rule. Section 5(8) supplies the model article for a company registered after the commencement of this Act.
It does not mean entrenchment makes a provision unalterable. It makes it alterable only on a more restrictive condition. An article that could never be changed at all would sit badly with section 14 and with section 6.
It does not mean an article can create rights for outsiders. Section 10 binds the company and the members as members.
Quick revision
- Section 5(1) and (2): regulations for management, plus prescribed matters; additional matters permitted.
- Private company: section 2(68) forces three articles: restrict transfer, cap two hundred members, prohibit public invitation.
- Entrenchment, section 5(3): specified provisions alterable only on conditions more restrictive than a special resolution.
- Section 5(4): on formation, or later by all the members in a private company and by special resolution in a public company.
- Section 5(5): notice to the Registrar.
- Section 5(6): Tables F to J of Schedule I. 5(7): may adopt all or any. 5(8): model articles apply so far as not excluded or modified, for companies registered after the commencement of this Act. 5(9): not for companies under previous company law unless amended under this Act.
- Section 10: statutory contract, binding on company and members as members; monies payable are a debt.
- Section 6: the Act overrides; repugnant provisions void.
The Articles of Association
Test yourself
1. What must the articles contain? The regulations for management of the company, section 5(1), and such matters as may be prescribed, section 5(2), with liberty to include any additional matters considered necessary for management.
2. What is entrenchment? A provision in the articles to the effect that specified provisions may be altered only if conditions or procedures more restrictive than those applicable to a special resolution are met: section 5(3).
3. A private company wants to add an entrenchment provision three years after incorporation. What does it need? The agreement of all the members: section 5(4). A public company in the same position would need only a special resolution.
4. A company's articles are silent on the appointment of a chairman of a general meeting. What is the rule? The applicable model article in Schedule I applies, because under section 5(8) the model regulations apply so far as the company's registered articles do not exclude or modify them, for a company registered after the commencement of this Act.
5. Which Tables of Schedule I contain the model articles? Tables F, G, H, I and J: section 5(6). Tables A to E hold the forms of memorandum under section 4(6).
6. Can a person named in the articles as the company's solicitor sue on that article? No. Section 10 binds the company and the members in their capacity as members. A person enforcing a right in another capacity is an outsider to the statutory contract, even if he is also a member.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.