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Articles of Association Play Subordinate Role To Memorandum of Association: An Uncanny Synthesis

Section 2(5) of the Companies Act, 2013 envisages ‘articles’ which means the originally framed articles of association of a company or any alterations done to the articles of association from time to time or articles framed in connection with any previous law or act. Table A in Schedule I of the Companies Act, 2013 is also inclusive at the time of drafting an Articles of association of the company. In connection with section 5(1), the articles must contain rules and regulation for management of the company. The articles of association of a company are majorly its bye-laws or in other words rules and regulation that manages both internal affairs of the company and the way business should be conducted. The articles play a vital role in the affairs of the company. The articles of association mainly deal with the rights of members of the company and indirectly gives an indication towards duties of the directors. Articles are subordinate to memorandum of association.

The functions of the articles of association have been beautifully summarized in the case of, Ashbury Railway Carriage and Riche v. Iron Co. Ltd. (1875),the judges opined the articles showcase themselves which is subsidiary to the memorandum of association. The articles accept that memorandum of association as the constitution of incorporation of the company, and after accepting that nature of memorandum, the articles further define the rights, duties and powers of the company as a whole and between themselves. The articles further talk about the mode and form in which company has to run and in wat way the business has to be carried out. The business is in connection with the internal regulations of the company which changes from time to time. The judges also threw some light on memorandum, as it covers the functions and power of the company which cannot go beyond a certain limit and within that limit the shareholders have to make such regulation for the good governance of the company which they may think deem fit.

Further we can infer, memorandum lays down the powers and scope of the company, whereas, the articles lay down the rules and regulations, in what way a company has to function. It further states object of the company, in other words the main idea for which a company has been formed, in addition the object of the company can be altered by members from time to time. The alteration of articles should be within parameter laid down in the memorandum and the Companies Act. In the case of Naresh Chandra Sanyal v/s The Calcutta Stock Exchange Association Ltd., AIR 1971 SC 422,it was observed, the articles mainly cover internal regulation of the company and how the internal management should function, it does by way defining the rights of members and it establishes a kind of contract between the members of the company and company itself. The contract is mainly in relation to rights and duties of members of the company. In the case of Kinetic Engineering Ltd. v. Sadhana Gadia, (1992) 74 Com Cases 82: (1992) 1 Comp Lj 62 (CLB),it was held articles of association of a company is not stated law and it does not have a force of law. It was further held by Company Law Board, if any provision of memorandum of association or the articles of association is contrary to any sections of any law, the articles or memorandum will be invalid too.

Articles Subordinate To Memorandum:

The memorandum of a company is superior and articles of a company are subordinate, any clause in the articles of association goes beyond or supersedes memorandum will be ultra vires. On the other hand, articles are drafted only for the purpose of internal regulations and the members of the company have full control over the regulations and they may amend it any point of time, which they may think deem fit. The proper due diligence has to be done and proper care should be taken while drafting the articles, that it should not exceed the powers of the company laid down in the memorandum, if it does, then the articles will be ultra vires or invalid. Articles which cross the boundaries or company’s sphere of action, on those cases articles become inoperative. If the company continues to function with those articles, it becomes void and authority of such articles gets nullified and not capable of ratification. As there is a saying “Law is above all”, neither the articles nor the memorandum can give power to the company to carry out any function which is in contravention to any provisions of the Act.

The importance of articles of association can only be explained co-relating it with memorandum of association. But we must understand, when articles and memorandum converge and diverges with each other. Although, articles and memorandum are closely knitted with each other, but the articles are considered to be subordinate to the memorandum because memorandum only states the objective for which the company has been established and the articles states how the company will function to achieve those objectives. When the articles of association are registered, it is deemed that the company will function according to the rules laid down in the articles. The article is subordinate to the memorandum and any clause in the articles supersedes or inconsistent with memorandum is overruled. In the case of V.B. Rangaraj v. V.B. Gopalakrishnan and ors. (1992),the main question for decision was whether the shareholder can enter into any contract among themselves which is contrary to the provisions of articles of association. The court held that, the said moot issue which is not allowed in the memorandum of the company itself, how they can enter into contract among themselves. Therefore, the court held that they cannot enter into a contract which is not allowed or is inconsistence with both articles and memorandum of association. The articles of association of a company must always comply with the clauses of memorandum of association. In other words, the objects stated in the articles cannot be extended which is clearly mentioned in the memorandum of the company.

Memorandum of association is the constitution of the company and it lays down the basic conditions and objects for which the company is being formed or incorporated. On the contrary articles of association includes clauses regarding the rules and regulations for the internal governance of the company. The clauses in the memorandum of association cannot be easily altered, the company can do so, only by complying with the mode stated in the Act. In peculiar cases, the alteration of memorandum requires permission from the Central government or the court. But, in the case of articles of association, members of the company have the inherent right to alter the clause of the articles of association by way of special resolution. In case of alteration of articles there is no need for prior permission from the court or Central Government. Companies Act is like supreme when it comes to forming a company, so memorandum of association cannot include any clause which is contrary to the sections of Companies Act. The articles of association are subsidiary to the memorandum of association as well as companies Act. The memorandum of association majorly deals with the relationship between the company and the outsiders/stakeholders. On the other hand, the articles formulate the relationship between the company and its own members and between the members too. Acts committed beyond the parameters of memorandum are void in nature and ultra vires, they cannot be ratified even by the unanimous decisions of all the shareholders. But the acts done contrary to the clauses of articles of association can be ratified by the unanimous decisions of shareholders.

It is well settled principle of company law that clauses of articles of association of a company cannot supersede the provisions of Companies Act, 2013. Further extension to this, articles of association of a company should be drafted in consonance with memorandum of association, the company is also duty bound to comply with the clauses of memorandum of association. As the articles of association is subordinate to the constitution of the company, that is memorandum of association. Articles must be within the parameters of the memorandum as well as it has to cover only in the internal management of the organization, as stated above anything beyond the scope of memorandum cannot be ratified even by the unanimous decision of shareholders, but in case of articles acts beyond the purview of clauses of articles of association can be ratified by the shareholders. Thus, it is of paramount importance at the time of incorporation of a company, when the articles of association is being prepared which includes majorly the internal rules and regulation of the company, the same must be done in consonance with, the Companies Act, 2013 which is supreme in nature in relation to company formation, the articles must comply with memorandum of association and any other law related to company which is in force at the time of incorporation of company.

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