Articles of Association is another document of paramount significance in the life of a company. It contains regulations for the internal administration of a company’s affairs. Articles of association may well be compared with the ‘Partnership Deed’ in a partnership. The prescribe rules and bye-laws for the general management of the company and for the attainment of its objects as given in its memorandum.
The general functions of articles of association were clearly stated by Lord Cairns in Ashbury Railway Carriage Co. vs. Riche where he observed that “The articles play a part subsidiary to the memorandum of association. They accept the memorandum as the charter of incorporation of the company, and so accepting it, the articles proceed to define the duties, the rights and the powers of the governing body as between themselves and the company at large, and the mode and form in which the business of the company is to be carried on, and the mode and form in which changes in the internal regulations of the company may from time to time be made.” Being subordinate to the memorandum, they cannot extend the objects as defined in the memorandum.
Distinguishing between the functions of the memorandum and the articles of association, Lord Justice Bowen observed in Guineness vs. Land Corporation of Ireland. “The memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated. They are conditions introduced for the benefit of the creditors, and the outside public, as well as of the shareholders. The articles of association are the internal regulations of the company and are for the benefits of shareholders.” To quote Lord Cairns again, “The memorandum is, as it were, the area beyond which the actions of the company cannot go; inside that area the shareholders may make such regulations for their own management as they think fit in the form of the articles of association.”
Contents of Articles :
Articles usually contain rules and bye-laws on matters like:
- The extent to which “Table A” is applicable.
- Different classes of shares and their rights.
- Procedure of making an issue of share capital and allotment thereof.
- Procedure of issuing share certificates.
- Lien on shares.
- Forfeiture of shares and the procedure of their re-issue.
- Procedure for transfer and transmission of shares.
- The time lag in between calls on shares.
- Conversion of shares into stock.
- Payment of commission on shares and debentures to underwriters.
- Rules for adoption of preliminary contracts, if any.
- Re-organisation and consolidation of share capital.
- Alteration of share capital.
- Borrowing powers of directors.
- Procedure for convening, holding and conducting different kinds of general meetings.
- Voting rights of members, proxies and polls,
- Payment of dividends and creation of reserves.
- Appointment, powers, duties, qualifications, remuneration etc., of directors.
- Use of the Common Seal of the company.
- Keeping of books of accounts and their audit.
- Appointment and remuneration etc., of auditors.
- Capitalization of profits.
- Board meetings and proceedings thereof.
- Rules as to resolutions.
- Appointment, powers, duties, qualifications, remuneration etc., of managing director, manager and secretary, if any.
- Arbitration provision, if any.
- Provision for such powers which cannot be exercised without the authority of articles, for example, the issue of redeemable preference shares; issuing share warrant to bearer; refusing to register the transfer of shares; reducing share capital of the company.
- Winding up.