The provisions of Section 2(20) of the Companies Act, 2013 define a company as a “Company incorporated under this act or any previous company law.” A company is an artificial person that is created by law and has a separate legal entity, perpetual succession, a common seal, and limited liability. As a company is one of the most popular forms of business arrangement among entrepreneurs, it goes through strict and statutory compliance. The compliance of a company is a complex activity that includes many formalities and strict procedures. The formation of a company takes place in stages and every stage involves a set of documents and pre-defined procedures. Among all the other documents, the Articles of Association and the Memorandum of Association are the most important documents for an organization.
Geeky Takeaways:
- A company is a separate legal entity that is formed by a group of individuals to engage in and operate a business organization in a commercial or industrial capacity.
- The Articles of Association and Memorandum of Association are the most important documents for an organization.
- The Articles of Association is also known as the user manual of the company. The AoA states its purpose and strategies for the fulfillment of its objectives, either long-term or short-term.
- AoA defines rules and regulations governing the internal management of the organization for the accomplishment of its goals.
- AoA is a subordinate document as compared to MoA.
Table of Content
What is Articles of Association (AoA)?
The Articles of Association (AoA) state the rules and regulations of a company’s internal affairs and dealings with its management. AoA also defines the purpose of a company and borders on the ways in which the company should accomplish its functions. The functions include the preparation of financial statements and the management of financial statements. An AoA is like a user manual for an organization, which contains its purpose and strategies for the fulfillment of its objectives, either long-term or short-term. The main focus of an AoA is to give its stakeholders information regarding the methods used by the organization to accomplish its objectives, either daily, quarterly, monthly, or yearly. AoA consists of the legal name of the company, address of the company, financial provisions of the company, purpose of the formation of the company, provisions related to the shareholders’ meetings, and equity capital of the company. AoA connects the members of a company with the company itself.
Section 2(5) of the Companies Act of 2013 defines Articles of Association (AoA) 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.”
Objectives of the Articles of Association
1. Governing Document: The Articles of Association act as a governing document, which establishes the framework of rules and regulations to govern the company’s management and operations. It sets out the rights, responsibilities, and obligations of the company’s directors, shareholders, and officers. The AoA is also a guiding document for internal management.
2. Legal Requirement: In line with the provisions established under the Companies Act 2013, it is mandatory for every company to possess its AoA. These articles must be duly filed with the Registrar of Companies during incorporation.
3. Clarity: The Articles of Association also help the stakeholders of the company, like shareholders, directors, and officers, regarding the established procedures, rules, and regulations which they must adhere to while entering into business with the company.
4. Protection: AoA helps to safeguard and protect the interests of shareholders by exclusively explaining their rights and providing procedures to address the situation in case of any disputes or conflicts.
5. Flexibility: The Articles of Association can be amended from time to time to accommodate any new, changing circumstances and to keep the AoA evolving as per the company’s needs, provided that such alterations or amendments adhere to the provisions as provided by the Companies Act, 2013.
6. Additional Matters: Articles of Association also contain other additional matters that are considered necessary by the company for its general administration and governance.
Contents of the Articles of Association
Being the rulebook of the company, the Articles of Association is a legally binding document that contains all the necessary rules and by-laws on all the matters prescribed by the Companies Act. Section 5 (2) of the Companies Act, 2013 provides the matters which are to be provided under AoA, some of the content as given below:
- The extent to which ‘Table A’ of the Companies Act is applicable
- Decisions which can be taken by the management
- Adoption of preliminary contracts and related clauses
- Different classes of shareholders
- Both rights and duties of shareholders as per their classes
- Appointment of Directors
- The rights and powers of Directors
- Borrowing powers of Directors
- The procedure of issuing share certificates and share warrants
- Voting of the Directors and Chairman
- Dividend policy of the company
- Process of creation of reserves
- Confidentiality of the trade secrets and trade know-how of the company
- Penalty over the unauthorized disclosure of trade secrets and know-how of the company
- Valuations of the intellectual property of the company
- Process of alteration of share capital
- Issue and transfer of shares
- Transmission clause
- Surrender and forfeiture of shares
- The procedure for special resolutions that can be passed and board meetings
- Arbitration clause in case of disputes
- Entrenchment clause
- Audit and accounts of a company
- Clause of the common seal of the company
- The winding-up procedure of a company
- Forms of the Articles of Association
Forms of Articles of Association
The forms for AoA are provided under Tables F, G, H, I, and J, whose applicability differs for different types of companies, as specified in Schedule I of the Companies Act, 2013.
|
Table Content |
Description of the Company |
|---|---|
| Table F | Article of Association for a company limited by shares |
| Table G | Article of Association for a company limited by guarantee having a share capital |
| Table H | Article of Association for a company limited by guarantee not having a share capital |
| Table I | Article of Association for an unlimited company and having a share capital |
| Table J | Article of Association for an unlimited company and not having a share capital |
Also, refer to Difference between Articles of Association (AOA) and memorandum of Association (MOA)
Conclusion
The Articles of Association of a company is one of the most essential and basic documents of a company. It provides the general rules, regulations, and laws according to which the internal affairs of the company are conducted. The AoA outlines the conduct of the business of an organization, and it is a document of paramount importance for a company. An AOA is also compared to the rulebook of a company since it regulates the internal affairs of the company. It also gives powers and obligations to its officers and employees. This includes regulations for several details of the company and its general workings, such as the rights of the shareholders, the qualifications of directors, the binding effect of contracts, etc. AoA marks the boundary within which the company can act. Furthermore, the Articles of Association even establish contracts between members of the company, and between members and the company. The Companies Act has also prescribed the contents of the AoA; some of them are process of alteration of share capital, issue and transfer of shares, appointment of directors, etc. The forms for AoA are provided under Tables F, G, H, I, and J.
Frequently Asked Questions (FAQs)
1. What are Articles of Association?
Answer:
The Articles of Association state the rules and regulations of a company’s internal affairs and dealings with its management. AoA also defines the purpose of a company and borders on the ways in which the company should accomplish its functions. The Articles of Association of a company are one of the most essential and basic documents of a company and are also called the ‘user’s manual’.
2. What are the forms of AoA?
Answer:
The forms for AoA are provided under Tables F, G, H, I, and J, whose applicability differs for different types of companies, as specified in Schedule I of the Companies Act, 2013.
3. Give an example of the contents of AoA.
Answer:
- Decisions that can be taken by the management.
- Adoption of preliminary contracts and related clauses.
- There are different classes of shareholders.
- Both the rights and duties of shareholders as per their classes.
- Appointment of Directors.
4. Is the AoA a governing document?
Answer:
Yes, the Articles of Association act as a governing document, which establishes the framework of rules and regulations to govern the company’s management and operations. It sets out the rights, responsibilities, and obligations of the company’s directors, shareholders, and officers. The AoA is also a guiding document for internal management.
5. What is the provision of entrenchment under the AoA?
Answer:
The provisions for entrenchment provide a specific provision in the AoA where certain clauses can only be altered if certain conditions are complied with. These conditions are usually more restrictive and strict than those applicable for a special resolution.