Articles of Association: Definition, Features, and Importance

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.