There is no particular definition in the Companies Act, 2013 providing specific definition for Articles of Association (‘Articles’). While in case of Naresh Chandra Sanyal vs Calcutta Stock Exchange Association Limited (1971), the Supreme Court of India stated that subject to the provisions of the Companies Act, a Company and its Members are bound by the provisions of company’s Articles. The Articles of Association regulates the internal management of the company and specifically defines the power of its officers. The Supreme Court further stated that Articles is a contract between the company and its members and between the members inter se which governs the ordinary rights and obligations incidental to membership of the company.
The Articles is a statutory contract of special nature which binds the company and its members and has nothing to do with the outsiders or external stakeholders. The Articles of Association forms the basis of a contract that regulates the company’s internal procedure and sets out the rights of the shareholders as conferred by their ownership. Although analogous to a constitution, it differs from both the normal constitutional and contractual analyses. Constitutionally it is subservient, both to its Memorandum, which sets the outer limits of its powers, and the regulation imposed by the legislature and the courts.
The importance of Articles of Association can only be properly construed when it is correlated with the Memorandum of Association. Both the Memorandum and Articles are closely connected although the latter is considered subordinate to the former because the Memorandum states the objective behind the establishment of the company and Articles provide the manner in which such objectives are to be achieved. When the Articles of the company are registered, it is deemed that the business decisions have to be dealt as per the covenants of Articles. The Articles determine how the powers conferred on the company shall be exercised. In fact Articles can be used to explain the ambiguities in the Memorandum but not so as to extend the objects.
The Articles are subordinate to the Memorandum and any clause in them which is inconsistent with the Memorandum is overruled. The Memorandum and Articles may, however, in certain circumstances be read together, at all events so far as may be necessary to explain any ambiguity appearing in the terms of the Memorandum or to supplement it upon any matter as to which it is silent.
In case of V.B. Rangaraj vs V.B. Gopalakrishnan and Ors. (1992), the main question that falls for consideration is whether the shareholders can among themselves enter into an agreement which is contrary to or inconsistent with the Articles of Association of the company. It was held that the Articles are the regulations of the company binding on the company and on its shareholders. The shareholders, therefore, cannot among themselves enter into an agreement which is contrary to or is inconsistence with the Articles of the company.
In case of Shuttleworth vs Cox Bros and Co (Maidenhead) (1927), it was held that the contract, if any, between the plaintiff and the company contained in the Articles in their original form was subject to the statutory power of alteration and if the alteration was bona fide for the benefit of the company, it was valid and there was no breach of that contract. There was no ground for saying that the alteration could not reasonably be considered for the benefit of the company, being no evidence of bad faith, there was no ground for questioning the decision of the shareholders about alteration of Articles.
In case of Eley vs Positive Government Life Assurance Co. Ltd. (1876), it was held that the Articles of Association were a matter between the shareholders inter se, or the shareholders and the directors, and did not create any contract between the plaintiff and the company and Articles is either a stipulation which would bind the members, or else a mandate to the directors. In either case it is a matter between the directors and shareholders, and not between them and the plaintiff. Thus the Articles did not constitute any contract between the company and the outsider and as such no action could lie.
In case of Ashbury Railway Carriage and Iron Co. vs Riche (1875), it was held that the contract, being of a nature not included in the Memorandum of Association, was ultra vires not only of the directors but of the whole company, so that even the subsequent assent of the whole body of shareholders would have no power to ratify it. The shareholders might have passed a resolution sanctioning altering the terms in the Articles of Association upon which alteration might be granted. If they had sanctioned what had been done without the formality of a resolution, that would have been perfectly sufficient. Thus, the contract entered into by the company was not a voidable contract merely, but being in violation of the prohibition contained in the Companies Act, was absolutely void. It is exactly in the same condition as if no contract at all had been made, and therefore a ratification of it is not possible.
In case of Welton vs Saffery (1897), it was held that it is quite true that the Articles constitute a contract between each member and the company and there is no contract in terms of between the individual members of the company but the Articles do not any the less, regulate their rights inter se, such rights can only be enforced by or against a member through the company or through the liquidators representing the company but no member has between himself and other members any right beyond that which the contract of the company gives.
In case of Ramakrishna Industries (P) Ltd. vs P. R. Ramakrishnan (1988), it was held that the Articles bind the members inter se (i.e. one to another), as far as rights and duties arising out of the Articles are concerned. It is well settled that the Articles of Association will have a contractual force between the company and its members as also between members inter se in relation to their rights as such members.
In case of Sidebottom vs Kershaw, Leese & Co Ltd (1920), it was held that the alteration was bona fide in the interests of the company and therefore it was valid since it would not be in the best interests of the company to have shareholders who are competing with the company.
Author: ACS Deep Vaghela
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