Articles of Association

Articles of Association
It is the companies laws or rules to govern the management of the company for its internal affairs and the conduct of its business. AOA defines the powers of its officers and also establishes a contract between the company and the members It can be originally framed and altered by the company under previous or existing provisions of law. Cont.

AOA
AOA plays a subsidiary part to the MOA Any thing done beyond the AOA will be considered to be irregular. The content of the AOA may differ from company to company as the Act has not specified any specific provisions Flexibility is allowed to the persons who form the company to adopt the AOA within the requirements of the company law

Contents of Articles of Association

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Contents. The items usually covered by the articles of association include: Powers, duties, rights and liabilities of directors Powers, duties, rights and liabilities of members Rules for meetings of the company; Dividends and reserves; Borrowing powers of the company; Share warrants; Alteration of capital; Calls on shares; Transfer & transmission of shares; Forfeiture of shares ; Surrender of shares; Voting powers of members; Accounts and audit; Winding-up, etc.

Contd.

AOA OF PRIVATE COMPANY

Restrict of transfer of share by Shareholders Limit the membership to 50 excluding past and present employee Prohibit any invitation to public to subscribe for any share or debenture Prohibit any invitation or acceptance of deposits from person other than member or director

.Articles of Association
Model form of articles. Normally, every company drafts its own articles. However, a company may adopt any one of the model forms of articles,

with or without modifications, specified in Tables A, C, D and E of Schedule

I to the Act, as applicable. If a company limited by shares does not have its own articles, the model set of 99 articles given in Table A can be adopted. Similarly, Table C is applicable to the companies limited by guarantee and not having a share capital, and Table D gives model form of articles to a company limited by guarantee and having a share capital. Whereas Table E is applicable to unlimited companies. However, a private company limited by shares, and a company limited by guarantee must have their own articles (Section 26 read with Section 27).

.Articles of Association
Alteration of Articles. A company can alter or amend any of the provisions of its articles subject to provisions of the Act and subject to the conditions contained in its Memorandum. A company by special resolution can alter its articles provided the said resolution is passed bona fide for the benefit of the company. An alteration of articles can be effected by a 3/4th majority of the shareholders but can be challenged on the ground that the alteration was not in the interest of the company. Furthermore, such alteration should not have the effect of converting a public co. into a private co. without the approval of the Central Government.

Doctrine of Indoor Management

The doctrine of indoor management or internal management of companys affairs is an exception to the rule of constructive notice and

imposes an important limitation on it. According to this doctrine persons

dealing with the company are entitled to presume that internal requirements prescribed in the Memorandum and Articles have been

properly observed. The Doctrine is partly dictated by practical necessity persons contracting with a company are not expected to spend their time checking that any required resolution has properly been passed, that meetings have been duly convened by directors whose appointments have been duly made. They can presume that all that is being done regularly and in keeping with the memorandum and articles
Cont.

Doctrine of Indoor Management

Implications of the Doctrine of Indoor Management: Recent Decisions . The Indian courts have been applying the doctrine of indoor management quite frequently and interpreting it according to cases in hand. The object being the same i.e., to protect the third party transacting with the company in good faith and being unaware of the complex internal management of the company. In Monark Enterprises vs Kishan Tulpule and Ors , the Company Law Board (now NCLT) held :- That the validity of the impugned transaction was not affected even if no resolution for entering into it was actually passed by the board of the company as the company had entered into and adopted the transaction throughout and implemented it after receiving consideration thereof. The doctrine of indoor management protected the transferee and the transferor.. Contd

Doctrine of Indoor Management

In Kirlampudi Sugar Mills Ltd vs G. Venkata Rao , the Madras High Court averred: It is pertinent to note that the making of entries or maintenance of account books by the company predominantly relate to indoor management or the internal

management of the affairs of the company with which a creditor is not concerned
with and the creditor will not have any control over the maintenance of the accounts and hence on that ground a creditor of the company cannot be nonsuited. The company will be in the custody of all the records and a third party creditor cannot be expected to know about the several internal affairs relating to the indoor management of the company as such, and hence the

respondent/plaintiff/third party creditor cannot be expected to produce such a

relevant material which would be in the custody of the opposite party and hence
in such a case, non-production of such records by the company should be taken serious note of and this was rightly done by the trial court.

.Exceptions to the Doctrine of Indoor Management The doctrine of indoor management is subject to the following exceptions: 1. Knowledge of irregularity If a person dealing with a company has actual or constructive notice of the irregularity as regards internal management, he cannot seek benefit under the doctrine. He may in some cases be himself a part of the internal procedure. 2. Negligence The protection under the doctrine is also not available when the circumstances surrounding the contract are so suspicious as to warrant inquiry, and the outsider dealing with the company does not make proper inquiry. 3. Forgery The doctrine does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery. A company can never be held bound for forgeries committed by its officers. Cont.

.Exceptions to the Doctrine of Indoor Management

Acts outside the scope of apparent authority If an officer of a company enters into a contract with a third party and if the act of the officer is beyond the scope of his authority, the company is not bound. The plaintiff can sue the company only if the power to act has in fact been delegated to the officer with whom he entered into the contract. cont

.Exceptions to the Doctrine of Indoor Management Thus, the doctrine of indoor management seeks to protect the interest of the shareholders who are in a minority, or who remain in dark about whether the working of the internal affairs of the company are being carried out in accordance with the memorandum and articles. It is important to note that the doctrine of constructive notice can be invoked by the company and it does not operate against the company. It operates against the person who has failed to inquire but does not operate in his favour. But the doctrine of indoor management can be invoked by the person dealing with the company and cannot be invoked by the company.

Thanks for your attention!

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