Articles of Association: Purpose, Features, and Essentials Explained
The Articles of Association serve as a fundamental document that defines a company’s purpose and lays out the framework for its daily operations. These articles typically cover essential details such as the company’s name, purpose, share structure, and organisational framework. Often referred to simply as "articles" in the U.S. and Canada, this document plays a crucial role in ensuring the company functions smoothly and in compliance with legal requirements.
What are Articles of Association?
When a company is formed, certain rules and regulations are laid down along with the objectives of the company’s operations and its purpose. These laws regulate the internal affairs of a company. There are two important sets of documents that define these objectives and govern the functioning of the company and its directors or internal affairs. These documents are Articles of Association (AOA) and Memorandum of Association (MOA). Here, we will discuss in detail the Articles of association.
Articles of Association contain the by-laws that regulate the operations and functioning of the company like the appointment of directors and handling of financial records to name a few. Let’s imagine the company as a machine. The articles of association then can be considered the user’s manual for this machine. It defines the operations that the machine is supposed to perform and how to do that on a day-to-day basis.
Definition of Articles of Association of a Company
As per Section 2 (5) of the Companies Act, 2013, Articles of Association have been defined 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
Sec 5 of the Companies Act, 2103 states that the Articles of Association:
Must include the regulations for the management of the company
Include matters that have been prescribed under the rules
They do not prevent a company from including additional matters in the AOA or from doing any alterations as may be considered necessary for the functioning of the company affairs.
Purposes of the Articles of Association (AoA)
The Articles of Association fulfil several critical roles under Indian Company Law, including:
Framework for Governance: The Articles of Association serve as the foundational document that outlines the rules and regulations governing a company’s management and operations. They define the rights, responsibilities, and obligations of directors, shareholders, and officers.
Legal Obligation: According to the Companies Act 2013, it is mandatory for every company to have its Articles of Association. These Articles must be submitted to the Registrar of Companies during the incorporation process.
Operational Clarity: The Articles provide clear guidelines for shareholders, directors, and officers, ensuring everyone understands the procedures and regulations for conducting business activities.
Shareholder Protection: They safeguard the interests of shareholders by outlining their rights and establishing procedures for resolving disputes or conflicts.
Adaptability: The Articles of Association offer flexibility, allowing for amendments to address changes in the company’s structure or needs, as long as such modifications comply with the provisions of the Companies Act 2013.
Contents of the Articles of Association
The AOA contains the rules and by-laws for the following;
Share Capital:
Rights of various shareholders, share certificates, payment of a commission, etc.
Lien of shares
Calls on shares
The process for the transfer of shares
Transmission of shares
Forfeiture of shares
Surrender of shares
Process for conversion of shares to stocks
Share warrants
Alteration of capital: Increase, decrease, or rearrangement of capital
General meetings and proceedings
Voting rights of members
The appointment, remuneration, qualifications, powers of directors, etc.
Proceedings of the boards of Directors’ meetings
Dividends and reserves
Accounts and Audits
Borrowing Powers of the company
Provisions relating to the winding up of the company
Forms of Articles of Association (AOA)
The forms for Articles of Association (AOA) in tables F, G, H, I, and J for different types of companies have been mentioned under Schedule I of the Companies Act, 2013. AOA must be in the respective form.
Table F- AOA of a company limited by shares
Table G- AOA of a company limited by guarantee and having a share capital
Table H- AOA of a company limited by guarantee and not having a share capital
Table I- AOA of an unlimited company and having a share capital
Table J- AOA of an unlimited company and not having a share capital
Difference Between Memorandum and Articles of Association
Features of Articles of Association
The Articles of Association (AOA) outline the key rules and regulations for a company's internal management. Key features include provisions for share capital, voting rights, director appointments, dividend distribution, and financial record handling. The AOA ensures smooth operations by defining the company’s structure, responsibilities, and procedures. It is a flexible document that can be amended as needed to adapt to changing business requirements.
Solved Questions on Articles of Association
1. What are the conditions for the provisions of entrenchment in the AOA?
Ans: The provisions for entrenchment provide specific provisions in the AOA that can be altered if certain conditions are complied with. These conditions are usually more restrictive than those applicable for a special resolution. The provisions for entrenchment can be added on the formation or after an amendment. However, in both cases, the company must give notice to the Registrar of the same.
The inclusion of the provisions for entrenchment can be done:
At the time of formation of the company
By amending the Articles with approval from all members of the company.
In the case of a public limited company, it can be done with a special resolution.
2. Can the AOA be altered?
Ans: Section 31 of the Companies Act states that the Articles of Association can be altered at any time by a special resolution. A copy of the same must be filed with the Registrar of Companies. However, this power of alteration is subject to two restrictions:
The alteration must be under the provisions of the Act
The alteration is subject to conditions stated in the MOA
Any alteration that converts a public company into a private company must be approved by the Central Government.
3. Can the AOA go beyond the scope of the MOA?
Ans: MOA and AOA are two key documents that come into being at the time of the company formation. The Articles of Association are subsidiaries not just to the company but also to the Memorandum of Association of a company. The MOA is a fundamental constitutional document of the company. Any articles that go beyond the Memorandum of Association are deemed ultra vires.
Conclusion
The Articles of Association are more than a legal formality; they are a strategic tool for effective corporate governance. By detailing operational protocols and stakeholder roles, the AOA fosters transparency, compliance, and long-term stability. Whether you’re drafting an AOA for a new venture or amending an existing one, prioritising clarity and legal compliance is key.
FAQs on Articles of Association: Definition, Features, and Importance
1. What is in an article of association?
An article of association is a key document for companies, outlining rules for internal management and governance. It contains essential information that defines how a company will operate and how its affairs will be handled. Typically, the articles of association include details about:
- Company name and registered office
- Share capital structure and shareholders' rights
- Appointment and powers of directors
- Procedures for conducting meetings and voting
- Dividend policies and handling of company records
2. What are articles of association for an LLC?
For a Limited Liability Company (LLC), articles of association serve as the foundational document that defines how the business is managed. In many jurisdictions, these are called operating agreements or certificates of formation, but they perform a similar function. The LLC's articles often include:
- Details of members and their contributions
- Allocation of profits, losses, and voting rights
- Rules for appointing managers or directors
- Procedures for admitting or removing members
3. What is the purpose of the articles of association?
The primary purpose of the articles of association is to set out the rules for governing a company’s internal affairs. This document provides a legal framework that guides company directors and shareholders in decision-making, ensuring transparency and consistency. By establishing clear procedures for management, voting, and profit distribution, the articles help reduce conflicts and protect the interests of all involved parties. Ultimately, articles of association foster trust among stakeholders by formalizing responsibilities and outlining procedures for company operations.
4. What were the articles of association in 1774?
In 1774, the Articles of Association referred to a significant agreement among American colonial representatives. Adopted by the First Continental Congress, these articles established a formal boycott of British goods in response to oppressive laws. The agreement called for:
- Halting imports from Britain
- Ceasing exports to Britain if demands were not met
- Enforcing the boycott through local committees
5. How do articles of association differ from memorandum of association?
Articles of association and memorandum of association are both vital company documents, but they serve different purposes. The memorandum of association defines the company’s fundamental structure and external relationships, such as its name, registered office, and main objectives. In contrast, the articles of association focus on internal management, detailing rules for board meetings, shareholder rights, and how decisions are made. While the memorandum acts as the company’s charter, articles function as its handbook for everyday governance. Companies must ensure both documents are aligned for lawful and smooth operation.
6. Can articles of association be amended?
Yes, articles of association can be amended to adapt to changing business needs or legal requirements. Amending the articles usually requires a formal procedure.
- A special resolution must be passed by a certain majority of shareholders.
- The proposed changes must comply with company law and regulations.
- The amendments are then filed with the relevant governmental authority.
7. Who prepares the articles of association?
The articles of association are generally prepared by the company’s founders or promoters at the time of company formation. Often, legal professionals or company secretaries assist in drafting the document to ensure compliance with corporate laws and that all necessary governance elements are covered. After initial preparation, the articles must be approved by the shareholders and filed with the relevant registration authority. Accurate and well-drafted articles help ensure smooth company operations from the start.
8. What happens if there is a conflict between articles of association and company law?
If the articles of association conflict with any applicable company law, the legal provisions always take precedence. Company law sets minimum standards and mandatory rules that cannot be overruled by internal company documents. As a result, any part of the articles that contradicts the law is considered invalid and unenforceable. Companies must ensure their articles of association are updated to comply with current regulations to avoid legal disputes and ensure continued legitimacy.
9. Why are articles of association important for shareholders?
Articles of association are crucial for shareholders because they clearly define rights, responsibilities, and processes within the company. These rules help protect shareholder interests by explaining how profits are distributed, how voting works, and how directors are appointed or removed. When shareholders understand and agree on governance rules, it reduces the risk of conflict and uncertainty. Well-drafted articles of association provide security and predictability for all shareholders, building trust and a stable investment environment.
