Definition of Order: According to ARTICLE OF ASSOCIATION
Article of association is the second important document which some companies must register along with Memorandum of association. This document contains rules, regulation and bylaws for the general administration of the company. It provides regulation for internal management and how to achieve the object of the company as per its memorandum. Articles have always been subordinate to the memorandum. If therefore, the memorandum and articles are inconsistent, the Articles must give way. Section 17(1) of the Companies Act, provides that following companies must have Article of association—
- Unlimited Companies
- Companies limited by guarantee
- Companies limited by share
The document contains rules, regulations and bye-laws for general administrations of a company. According to Section 18, private companies limited by shares may adopt Schedule 1 (Table A) for its regulation in stead of Article of Association. Public companies may or may not have Article of association.
Form of Article:
Private Company limited by share, if keeps Article they must register it with the Registrar of Companies. Unlimited Companies or companies limited guarantee must register their articles (Section 17).
Articles must be printed, divided into paragraphs each containing generally on regulation and numbered consecutively. Each subscriber of the memorandum must sign it in presence of at least one attesting witness, both of them adding their addresses and occupation.
Contents of Article:
Article may prescribe such regulations for the company as the subscribers may deem expedient. The relations between company and members and between members inter se may be inserted in the article. But nothing shall be in conflict with the provisions of Companies Act and anything contrary to Companies Act shall be void.
Any condition regarding the relations between the company and its members, and members inter se may be inserted in the articles. The document must not contain anything which is inconsistent with the provision of Companies Act. Similarly the article must not contain anything which is forbidden by the Act. Section 17(2) of the Act prescribes that it may adopt all or any of the regulations contained in schedule 1 provided that it shall not include regulations 78, 79, 80, 81 and 82 in the article of any private company except it is a subsidiary company of a public company. In the case of unlimited company or a company limited by guarantee has any share capital than that must be mentioned in the article or of they don’t have any share capital then the number of the member must be stated.
Registration of Articles:
On the basis of the share capital and number of the members the registrar shall determine the fees payable on registration (Section 17(4)). If all the requirement of registration is fulfilled then the registrar shall register the memorandum and articles with in 30 days of their receipt. But if the requirements are not fulfilled than he can refuse to register the documents and the ground of refusal must be communicated with in 10 days after the expiry of 30 days.
Section 23 of the Act provides that, if any person is aggrieved then he can make an appeal to the government with in 30 days of the receipt of the refusal. The petition must be filed along with treasury chalan showing of fee of taka two hundred and fifty to be credited under the head of account specified in this behalf and the decision of the Government regarding this matter shall be final.
Effect of registration:
After registration the registrar shall certify that the company is incorporated and give a certificate of incorporation which shall be the conclusive evidence that all the requirements of registration have been complied with and the company is an authorized company and duly registered.
Articles in Relation to Memorandum:
- Articles have always been held to be subordinate to the memorandum. In case of inconsistency, memorandum will prevail.
- Memorandum states the purposes for which the company is formed whereas articles provide the manner in which the company is to carry out such purposes.
- Memorandum states the objects and thus serves the creditors, outsiders and shareholders. But Article serves the members of the company in its regulation.
- Some contents of memorandum need confirmation from High Court with special resolution for their amendment. But article may be altered with special resolution only.
- If anything is done by the company beyond the scope of memorandum that will be void. But anything done in contravention of article may be ratified and confirmed by the shareholders being a mere irregular act.
- In case of ambiguity in the article, that must be interpreted in the light of memorandum.
Binding force of Memorandum & Article of Association:
According to section 20 of the Companies Act 1994, memorandum and article binds the company and its members in a contract. The legal effects of the documents are given below—
- Binding on members in relation to the Company:
Article of association constitutes a contract between the Company and its members and therefore members will be refrained from doing anything in violation of article of association.
Case Reference: Borland’s Trustee vs. Steel Brothers & Co. Ltd. – 1901
- Binding on Company in relation to its members:
Just as members are bound to the company, company is to observe and follow the articles. Each member is entitled to say that there shall be no breach of articles and he is entitled to an injunction to prevent such breach.
Case Reference: Wood vs. Odessa Waterworks Co. 1889
- Not binding in relation to outsiders:
Article of association does not constitute a contract between the company and a third party or between a member of a company and a third party.
Case Reference: Browne vs. La Trinidad – 1887
Even a member may be an outsider when he wants to enforce the article in some capacity other than a member.
Case Reference: Eley vs. Positive Govt. Security Life Assurance Co. – 1876
- Whether binding between members inter se:
Companies Act does not intend to bind the members inter se by the Article of association though the law o this point is still unsettled.
Lord Herschell said in “Welton vs. Saffery”- 1897, it is quite true that articles constitute a contract between each member and the company and that there is no contract between individual members of the company. Articles create rights in favour of the members but those can be enforced only by the Company, not by any other member.
Alteration of Article:
Every company has a clear power to alter its article by a special resolution (Section 20). But the power of the alteration must be exercised keeping in mind the following restrictions—
- Alteration cannot be in contravention of the Companies Act.
- Alteration must not be contradictory to the memorandum.
- Alteration must be for the benefit of the company.
- Alteration cannot be allowed where it operates as a breach of contract with an outsider. (Southern Foundries Ltd. vs. Shirlaw -1940)
- The alteration can, in no way, increase the liability of the members.
- A company is entitled to alter its article but that must be bonafide and for the interest of the company. Alteration must not constitute fraud on minority. (Brown vs. British Abrasive Wheel Co. – 1919)