Articles of Association
Articles of Association:
Articles of Association is the second document which has, in the case of some companies, to be registered with the memorandum. It is the charter of the company, which contains rules, regulations and bye-laws of the company. These are rules to carry out the object of the Memorandum. In Ashbury Railway Carriage and Iron Co. V. Richie (1857), Articles were defined as
The articles define the duties, the rights, and the powers of the governing body as between themselves and the company at large, and the mode and the 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..
Form and Signature of articles:
If articles are proposed to be registered they must be printed. They should be divided into paragraphs, each consisting generally of one regulation and numbered consecutively. Each subscriber of the memorandum has to sign the document in the presence of at least one attesting witness, both of them adding their addresses and occupation.
Contents of Articles:
Articles of association may prescribe such regulations for the company as the subscribers to the memorandum deem expedient. The Ordinance gives the subscribers a free hand. Any stipulations as to the relations between the company and its members, and between members inter se may be inserted in the articles. But every thing stated therein is subject to the Companies Ordinance.
The document must not conflict with the provisions of the Ordinance. Any clause which is contrary to the provisions of the Ordinance is simply inoperative or void. Section 310 Of the Companies Ordinance, for example, confers the right on a shareholder to petition for winding up of the company in certain circumstances. This right cannot be excluded or limited by the Articles. Similarly, section 249, of the companies Ordinance declares that no dividend shall be paid by a company except out of profits. This force of section cannot be undone by any provision in the articles of association.
Articles in relation to Memorandum:
Articles have always been held in subordinate to the memorandum. If, therefore, the memorandum and articles are inconsistent, the articles must give way. In order words, articles must not contain anything the effect of which is to alter a condition contained in the memorandum or which is contrary to its provisions. “This is so because the object of the memorandum is to state the purposes for which the company has been established, whilst the articles provide the manner in which the company is to be carried and its proceedings disposed of”.
This constitutes the principal difference between the two documents. In the words of Lord CAIRNS, the difference is this:
The memorandum is, as it were, the area beyond which the action of the company cannot go; inside that area the shareholders may make such regulations for their own government as they think fit.
BOWEN LJ Observes in Guinness V Land Corporation of Ireland, (1882)
There is an essential difference between the memorandum and the articles. The memorandum contains the fundamental conditions upon which alon the company is allowed to be incorporated. They are conditions introduced for the benefits of the creditors, and the outside public, as well as of the shareholders. The articles of association are internal regulations of the company.
Alteration of Articles:
- 28 grants power to the company, subject to the provisions of the Ordinance and to the conditions contained in the memorandum, to alter its articles by special resolution. Such an alteration or addition is deemed valid and presumed to have existed in the original articles. Section 34, 35 and 36 provide for the recording and communication of copies of the resolution to members. These wide powers are subject to the following restrictions:
- The alteration must not be in contravention of the provisions of the Companies Ordinance.
- The alteration must not be in contravention of the provisions of the memorandum of association.
- The alteration must not legalise something that is illegal.
- The alteration must not operate against the substantive right of minority shareholders.
- The alteration must not increase the liability of the existing shareholders.
- The alteration must not amount to a breach of contract with an outsider.
- The alteration must be made in good faith and for the good of the company.
- The alteration must be approved by special resolution.