On incorporation, a private limited company must file its Articles of Association for registration with the Registrar of Companies. The Articles of Association must be filed electronically as eAoA (INC-34) along with Simplified Proforma for Incorporating Company electronically (SPICe) INC-32. SPICe was introduced in 2016 to facilitate incorporation of a company by way of a single application. As per section 7 (a) of Companies Act 2013 (“Companies Act”), all private limited companies must have articles of association to form a duly registered company. The Articles of Association is a constitutional document of a company. It regulates the relationship between the shareholders, the directors and the company.
A few examples of provisions in the articles of association of a company include:
the number of directors required to transact business;
the method of appointment of directors;
the powers of directors;
how board meetings are to be conducted;
different classes of shares;
any special rights attached to any class of shares;
how shareholder meetings are to be conducted; and
how and to whom shareholders may transfer their shares.
A company’s articles of association regulate its day- to- day affairs and contain regulations and procedures which a company must follow as and when needed. The articles of association of a company are therefore effectively its rule book which facilitates smooth running of the company. A company’s articles of association must be interpreted in light of the relevant legislation. There is considerable scope for overlap between the procedures set out in Companies Act and those that may also be contained in the company’s articles. A company may, in certain circumstances, provide a procedure in its articles which is more onerous than that contained in Companies Act. Despite this, there
are some legislative provisions which override matters contained in a company’s articles.
An example of this would be section 109 Companies Act which gives the right to
demand a poll vote at a general meeting; this cannot be excluded or varied by the
company in its articles.
It is necessary to check both the procedures set out in the relevant legislation and in the company’s articles to ensure that the company complies with the correct provisions. A company effectively has two choices as to the form of its article: either the standard form of model articles provided under Table F of section 5(6) Companies Act or tailor-made articles. A number of provisions contained in Table F are quite cumbersome and may not be suitable for all types of companies. Many private limited companies therefore choose to adopt Table F as their articles, but elect
to exclude or modify the effect of some of its provisions. Some companies may choose to adopt tailor-made articles tailoring to the specific needs of that company. This requires careful drafting and may not be very effective in terms of time and cost for the company, hence, it is a less favoured option by the company. Most of the start-ups and smaller companies usually prefer to adopt Table F, subject to certain amendments. Once a private limited company has adopted its articles of association, it is able to alter them at any future date by special resolution (section 14(1) Companies Act). Section 5(3) Companies Act permits the entrenchment of certain articles, providing that specified provisions of the articles can only be amended or repealed if specific conditions are met or procedures are complied with. Provisions can only be entrenched at the time of formation of the company or with the agreement of all the members (section 5(4) Companies Act). The basic rule is that, to be valid, any alteration must be made bona fide in the interests of the company as a whole.
Articles of association of a company are binding on all its existing and future members. Each member, acting in his capacity as a member, is under an obligation to the company to comply with the articles. Articles of association are a contract between the company and its member and amongst the members themselves as well. Members of a company cannot enter into separate agreements, such as Shareholders’ Agreement, amongst themselves which are contrary and inconsistent with the provisions of the articles of that company. The nature of the contract established by the articles of a company is set out in section 10(1) Companies Act, which provides that the provisions in the company’s articles bind the company and its members to the same extent as if there were covenants on the part of the company and each member to observe those provisions.