Prospectus under Company Law

Table of Contents

 Introduction
 Meaning and purpose of a prospectus under Company Law
o From the perspective of the issuer
 Golden Rule by VC Kinderseley
 Essentials for a document to be called as a prospectus
 Advertisement for a prospectus under Company Law
 Types of prospectus under Company Law
o Shelf prospectus
o Red Herring prospectus
o Abridged prospectus
o Deemed Prospectus
 Process for filing and issuing a prospectus under Company Law
o Contents
o Delivery of a copy of the prospectus to the registrar
o Registration of a prospectus
o The invalidity of a prospectus
 Contravention of Section 26
 Liability for misstatements in a prospectus under Company Law
o Civil Liability
o Criminal Liability
 Important judicial pronouncements
o Kiran Mehta v. Universal Luggage Manufacturing Co. Ltd. (1988)
o Vijay Kumar Gupta v. Eagle Paint & Pigment Industries Ltd. (1997)
o Mohandas Shenoy Adige v. Securities and Exchange Board of India (2021)
 Conclusion
 Frequently Asked Questions (FAQs)
o Whether a document circulated in an envelope marked “confidential” for the sale
of securities of a company be deemed as a prospectus?
o Upon whom would the criminal liability fall for misstatements made in a
prospectus?
o What is the ‘Golden Rule’ of issuing a prospectus?
 References

Introduction
One of the major reasons why businesses choose the company form of business
is because it allows greater accessibility to funds. A public company that has
been incorporated under the Companies Act, 2013 is allowed to raise
investments from the general public through different modes. Since a company
raises funds from the public, it also becomes necessary that such a company be
accountable to the public. Accordingly, to secure the interests of the investors in
the company, the Companies Act, 2013 mandates the filing of a prospectus with
the Registrar prior to raising funds.
A prospectus is a document issued by a company to invite deposits or
subscriptions from the public by way of issuing securities of the company. It can
be understood as a document or a booklet containing crucial information about
the company and its securities for potential investors. Section 2(70) of the
Companies Act, 2013 defines a prospectus as “prospectus means any document
described or issued as a prospectus and includes a red herring prospectus referred
to in section 32 or shelf prospectus referred to in section 31 or any notice, circular,
advertisement or other document inviting offers from the public for the subscription
or purchase of any securities of body corporate”

Meaning and purpose of a prospectus under Company Law

From the perspective of the issuer

A prospectus is a document that provides all the essential information about the
company at the time of raising an investment from the public. It can be
understood as an invitation to offer the securities of the company. The public
intending to invest in the company can make an offer above the offered price but
within the price band. It is upon the company to allot shares to the public in the
manner it deems fit. Every time a company has to raise an investment from the
public, it is the duty of the company to inform the public about its financial
position and the purpose of the investment. A prospectus is the first document
through which a company publicises or discloses its financial and other relevant
information.

Section 28(2) of the Companies Act, 2013 provides that any document through
which an offer for sale is made to the public shall be deemed a prospectus. It is
pertinent to note that the document has to be issued to the public and not a
particular set of persons. Even if an advertisement is made in a newspaper
regarding certain shares left for purchase by the company, it shall constitute a
prospectus, as has been held by the Hon’ble Calcutta High Court in Pramatha
Nath Sanyal v. Kali Kumar Dutt (1924).

From the perspective of the Investor

In order to be able to make an informed decision regarding an investment, an

investor must have access to all the information about a company before
investing in it. Institutional investors might receive such information without
much trouble. However, it is the retail investors whose interest might be
compromised if such information is not provided in due course. Thus, a
prospectus becomes the most crucial document for any investor intending to
invest in a company. This is also the reason why the company law mandates the
filing of a prospectus every time before raising a public investment. It can also be
safe to infer here that issuing a prospectus is one of the means of ensuring good
corporate governance practices in a company as it encourages transparency,
accountability and responsibility.
Golden Rule by VC Kinderseley
The ‘Golden Rule’ of the prospectus was propounded by Judge VC Kinderseley in
the landmark judgement of The New Brunswick Railway Company v. Muggeridge
(1859). In this case, it was held that “Prospectus is one of the means by which the
investor is informed about the soundness of the company’s venture.” The essence
of the rule is that it is mandatory on part of the company to issue a prospectus; it
is not only required to accurately put forth all the relevant facts and information
but also ensure that it does not hide any information which might affect the
decision of an investor. The rule is also known as the ‘Golden Legacy’ as has been
described by Judge Pagewood in Henderson v. Lacon (1865).

This aforementioned rule has been reflected under various provisions of the
Companies Act, 2013 which seeks to protect the interests of investors by
providing comprehensive and elaborative guidelines and requiring relevant
disclosure of material facts to ascertain the financial soundness of a company.

Essentials for a document to be called as a prospectus

The essential conditions required to be fulfilled for a document to be considered
as a prospectus under the Indian company law are as follows:

1. Invitation to the Public – One of the most important points that one must
remember is that a prospectus is an invitation to offer rather than an offer
itself. This means that a company makes an open declaration to the public
at large that some of its securities are available for subscription. A
document shall be deemed to be an invitation to the public only if it is open
for any person to subscribe, though there may be a possibility that
ultimately the securities may not be issued to him owing to
oversubscription or any other disqualification.
2. Invitation by the company – The prospectus must be issued by the
company itself that wishes to raise the funds. Even if all the requisite
disclosures are made available by the public by some other authority, that
would not satisfy the criteria for making the invitation. However, an entity,
on behalf of the company or on the authorisation of the company, may
follow the stipulated process in order to make an invitation to offer to the
public. Hence, an invitation to offer must be made by the company itself or
on behalf of the company by some other authority authorised by the
company.
3. Nature of document and particulars therein – A prospectus shall be in
the nature of an invitation to offer, allowing subscription to the securities of
the company. Any document merely disclosing the details of the securities
shall not be considered a prospectus. It must fulfil all the required
stipulations that have been provided under the Companies Act, which have
been discussed in the later section of the article.
4. Information regarding securities of the company – A prospectus is
required to contain all the details regarding the securities. The prospectus
 must specify the nature of securities, whether equity-based or debt-based.
It must also specify the category as to whether it is an equity or preference
share, debenture, bond, warrant, etc. It must specify the number of
securities available for subscription. It must also provide for other
particulars, such as redemption, rate of interest, etc., as may be applicable
to the category of securities.

Advertisement for a prospectus under Company Law

Section 30 of the Act provides for certain particulars to be mentioned whenever a
prospectus is being advertised in any manner for call for subscription to
securities. These particulars include specifying the contents of the memorandum
regarding the primary object for raising funds, liability of the members, amount
of total share capital, names of the signatories and the number of shares
subscribed by each of them, and the capital structure of the company.

Types of prospectus under Company Law

The definition of prospectus under Section 2(70) is an inclusive definition. It

provides that a prospectus shall include a Shelf Prospectus (as mentioned
under Section 31), a Red Herring Prospectus (as mentioned under Section 32), or
any other document inviting applications for subscription/purchase of securities
of the company. The various categories of prospectus under the Companies Act,
2013 have been discussed hereafter.

Shelf prospectus

Drafting a prospectus is a cumbersome process as it requires a number of

disclosures and information to be passed on to the investor. It may also be
possible that a company makes multiple public offers in one financial year itself.
In such a case, it will become nearly impossible for the company to draft an
entirely new prospectus every time. Yet, it is also crucial to note that significant
changes may take place in the financial status of the company. To balance the
interests of the company as well as that of investors, the law provides for the
concept of shelf prospectus.

Explanation to Section 31 of the Companies Act, 2013 provides that “the

expression “shelf prospectus” means a prospectus in respect of which the
securities or class of securities included therein are issued for subscription in one
or more issues over a certain period without the issue of a further prospectus.” A
company issues a shelf prospectus when it has to offer for subscription by the
public, more than one round of issue. Shelf prospectus is a single prospectus
that can hold good for multiple public offers.

The Securities Exchange Board of India (SEBI) shall have the power to prescribe
the class or classes of listed companies that may be allowed to file a shelf
prospectus. The validity of a shelf prospectus shall not exceed one year from the
date of the first offer. The provision also provides a more stringent rule for
disclosures by the company issuing a shelf prospectus.

An information memorandum has to be filed by the company while filing a shelf

prospectus, containing the following material facts:

 new charges created;

 all the changes in the financial position that have occurred after the first
offer of securities or the previous offer of securities and before the
succeeding offer of securities; and
 such other changes as may be prescribed.
Such an information memorandum must be filed with the Registrar within the
prescribed time period (three months) prior to the issue of the second or
subsequent offer made under the shelf prospectus.

Further, it is also the obligation of the company to inform an investor about the
changes if they have been allotted the securities in advance before the
adjustments. Further, based on such information, an investor has also given the
right to withdraw their application and they will be refunded their money within
fifteen days thereof.

Red Herring prospectus

Though most of us imagine big companies when talking about investments and
funding, mid-size and small companies also require investments and they also
make public offers. To safeguard their rights and enable them to have better
access to finance, the law provides for red herring prospectus. Explanation to
Section 32 of the Companies Act, 2013 provides the definition of a red herring
prospectus as “the expression “red herring prospectus” means a prospectus which
does not include complete particulars of the quantum or price of the securities
included therein.” A red herring prospectus is a prospectus wherein information
regarding either the quantity of securities or the price of securities is not
disclosed by the company. Rather, the company only provides a price band. This
enables a company to gauge the worth of its securities and enables them to
achieve the requisite minimum subscription, which may not otherwise be
possible had they already supplied the entire information .

A red herring prospectus is subjected to same regulations as a prospectus. It has

to be filed before the Registrar of Companies at least three days before the issue
has to be made public. Further, the company must file the complete details of the
issue with the Registrar and the SEBI after the securities has been duly
subscribed to.

Abridged prospectus

A prospectus could run into hundreds of pages in a single issue, which may
prove to be a hectic task for retail investors. Retail investors, having limited
access to financial knowledge as well as resources, might not be competent
enough to understand the intricate details mentioned in the prospectus. A
solution to this problem is an abridged prospectus.

Section 2(1) of the Companies Act, 2013 defines an abridged prospectus as a

memorandum containing the salient features of an issue. The features to be
included in an abridged prospectus are to be provided by SEBI. Further, Section
33 of the Act mandates for annexing an abridged prospectus along with form for
application of purchase of securities. However, the proviso to sub-section (1)
provides that this requirement may be dispensed with where the form of
application was issued for:

 “in connection with a bona fide invitation to a person to enter into an

underwriting agreement with respect to such securities; or
 in relation to securities which were not offered to the public.”
Section 33(3) of the Act provides that if the company fails to comply with the
provisions of abridged prospectus as discussed above, it shall be subjected to a
penalty of up to Rs.50,000 for every default.

Deemed Prospectus

When a company wishes to issue its securities through an intermediary, the

document containing the details of such securities is considered a deemed
prospectus. Section 25(1) of the Companies Act, 2013 governs the deemed
prospectus. The document shall be a deemed prospectus for the company whose
securities are being offered to the public.

Process for filing and issuing a prospectus under Company Law

Contents

For filing and issuing the prospectus of a public company, it must be signed and
dated and contain all the necessary information as stated under Section 26 of the
Companies Act, 2013:

1. Name and other crucial information, such as the registered address of the
office, its secretary, auditor, etc.;
2. The dates of issue, including the opening date and the closing date;
3. Undertakings of the Board of Directors regarding separate bank accounts
for the purpose of keeping receipts of the issue;
4. Undertakings of the Board of Directors regarding the details of utilisation
and non-utilisation of receipts of previous issues;
5. Consent of the directors, auditors, and bankers to the issue, and expert
opinions;
 6. The details of the resolution passed for the issue;
7. Procedure and time scheduled for the allotment of securities;
8. The capital structure of the company;
9. The objective of the issue;
10.The objective of the business and its location;
11.Particulars related to risk factors of the specific project, gestation period of
the project, any pending legal action and other important details related to
the project;
12.The amount is payable on the premium;
13.Details of directors, their remuneration and the extent of their interest in
the company;
14.Reports for financial information such as auditor’s report, report of profit
and loss of the five financial years, business and transaction reports,
statement of compliance with the provisions of the Act and any other
report.
As per Section 26(4) of the Companies Act, 2013, the company issuing the
prospectus has to deliver a copy of the prospectus, signed by every person whose
name has been mentioned in the prospectus as a director of the company or the
attorney of the director, to the Registrar on or before the date of publication.

Delivery of a copy of the prospectus to the registrar

As per Section 26(6) of the Companies Act 2013, the prospectus shall duly state
that a copy of the prospectus has been served to the registrar. It should also
mention the documents submitted to the registrar along with the prospectus.

Registration of a prospectus

Section 26(7) states when the registrar can register a prospectus when:

1. It fulfils the requirements of the provision; and

2. It contains the written consent of all the persons named in the prospectus.

The invalidity of a prospectus

The prospectus is considered invalid if it is not issued within 90 days from the
date of delivery to the Registrar.

Contravention of Section 26
The punishment for contravention of the mandatory provisions is provided under
Section 26(9) of the Act, which includes a fine of not less than Rs. 50,000
extending up to Rs. 3,00,000.
Any person knowingly participating in the issue of prospectus even after knowing
that it is in contravention of the provisions shall be punished with imprisonment
up to a term of 3 years, or a fine of more than Rs. 50,000 not exceeding Rs.
3,00,000.

Liability for misstatements in a prospectus under Company Law

A prospectus is used by potential investors to gather information about the
company. Thus, it is the duty of the company and its authorised persons to make
true and correct statements in the prospectus. Generally, when false or incorrect
information is added to the prospectus, it becomes a misstatement. Even an
omission of important information amounts to a misstatement in a prospectus.
Making a false or misleading statement thus entails certain liabilities. Under the
Companies Act, 2013, there are two types of liability for misstatements in the
prospectus.

Civil Liability

Civil liability under the Companies Act, 2013 is provided under Section 35. It
provides that where a person has subscribed to the securities of the company
acting on any misstatement included in the prospectus and has consequently
suffered any loss, the company and the persons authorising the issue of such
prospectus are liable for such loss, provided that certain conditions are fulfilled.
These conditions include:

1. Subscription to the securities acting upon the misstatement

2. Loss or damages due to such misstatement
3. Knowledge of the Defendant must be proved by the Plaintiff
4. Such misstatement must be material to the facts
If the above conditions are met, the Plaintiff can claim remedies against the
company as well as against the authorised personnel. The remedies include
rescission of the contract, damages, and damages for the non-disclosure of
material facts.

Criminal Liability

Apart from the civil liability in case of misstatements, Section 34 of the Act also
provides the liability of the authorised personnel for the misstatements in the
prospectus. Criminal liability has been provided under Section 447 of the Act. In
case of fraud on the Plaintiff (investor of the company), a criminal suit can be
filed against the following persons:

1. All the directors authorising the issue of the prospectus

2. All the proposed directors of the company
3. Each promoter
 4. Any expert involved in the issue
Section 447 of the Act prescribes a minimum imprisonment of six months but
not more than ten years, along with a fine which shall not be less than the
amount of damages suffered but not more than three times of such amount. The
proviso to the provision provides that in case the issue involves a public interest,
the minimum term of imprisonment of the aforesaid persons shall be three
years.

Important judicial pronouncements

Kiran Mehta v. Universal Luggage Manufacturing Co. Ltd. (1988)

In this case, the Plaintiff filed a PIL against a company alleging that the company
had issued a prospectus containing false statements. It was stated that the
Plaintiff himself did not have any interest in the matter but filed the case as the
statements were likely to confuse or mislead the general public. The Hon’ble
Bombay High Court dismissed the case stating that a locus standi of the Plaintiff
was required to file such a case.

Vijay Kumar Gupta v. Eagle Paint & Pigment Industries Ltd. (1997)

In this case, the question before the Company Law Board (now replaced by the
National Company Law Tribunal) was whether a private company could issue
advertisements for inviting deposits from the public. It was held by the Board
that a private company cannot do so as per the provisions of the Act. Moreover,
when the company accepts deposits from its members or directors, it has to
obtain a declaration stating that the deposits are not a debt to the company.

Mohandas Shenoy Adige v. Securities and Exchange Board of India (2021)

In this case, the question raised by the complainant was whether the non-
compliance with the statements made in the prospectus amounted to
misstatement in the prospectus. The allegations included that the company
raised public funds only to syphon funds to the group of companies. The
Securities Appellate Board held that no case of misstatement was found as the
complainant was unable to establish that the funds were actually being
syphoned. In case of no fact-based finding, the non-adherence with the
statements in the prospectus cannot be held to be misstatements. It was further
held that “If a statement made in the prospectus is not adhered to by the Company
it does not become a misstatement. At best it can be a case of the Company
violating the terms and conditions of the prospectus”.

Conclusion
A prospectus is an official document containing crucial information about the
company and the investment round for the perusal by the public at large so that
they can invest in the securities of the company. Every company that wants to
raise investments from the public has to file a prospectus with the Registrar of
Companies and circulate it for the information of the potential investors. Under
the Companies Act, 2013, there are various kinds of prospectus. Each of these
types serves a distinct purpose, as has been elaborated in the article. However,
each of them has to fulfil the basic criteria of a prospectus. The conditions for a
valid prospectus are to be complied with irrespective of the kind of prospectus
being issued by the company.

Based on the kind of investment round that the company wishes to raise, it can
adopt the type of prospectus that has to be issued. The regulation of each kind of
prospectus is provided under the provisions of the Companies Act, 2013 as well
as various Regulations issued by the Securities Exchange Board of India (SEBI).
Compliance with all the regulations is mandatory for raising investment from the
public. Moreover, such information provided under the prospectus shall be
carefully added as the provisions of the Companies Act provide punishment in
the form of a fine for misrepresentation by the company under the prospectus.
 Articles of Association (AOA) under Company Law
February 15, 2024
Table of Contents

 Introduction
 What is Article of Association (AOA)
 Difference between Memorandum of Association (MOA) and Articles of Association (AOA)
 Objective of Articles of Association (AOA)
 Forms of Article of Association (AOA)
 Nature of Articles of Association (AOA)
o Compliance of Articles of Association (AOA) with the law
o Formalities of Articles of Association
o Articles of Association must be signed
o Registration of Article of Association (AOA)
 Contents of Articles of Association (AOA)
o Provisions for Entrenchment
 Notice to Registrar
 Scope of Articles of Association (AOA)
 Importance of Articles of Association (AOA)
 Alteration of Articles of Association (AOA)
o
 Other changes
 Other changes
o Procedure for Alteration of Articles of Association (AOA)
o Filing alteration for registration
o Limitations on power to alter Articles of Association (AOA)
 Binding effect of Memorandum of Association (MOA) and Articles of Association (AOA)
o Binding the company to its members
o Members bound to the company
o Binding between members
o No binding in relation to outsiders
 Doctrine of constructive notice
 Doctrine of indoor management
o Exceptions to the Doctrine of Indoor Management
 Where the outsider is aware of the irregularity
 Lack of knowledge of the AOA
 Negligence
 Forgery
 Relevant cases
o Eley v. Positive Government Security Life Assurance Co Ltd (1876)
o Sidebottom v. Kershaw, Leese & Co Ltd (1920)
o Southern Foundries (1926) Ltd v. Shirlaw, (1939)
o Economy Hotels India Services Pvt Ltd v. Registrar of Companies (2020)
o S.P. Velumani v. Magnum Spinning Mills India Pvt. Ltd (2020)
o Brillio Technologies Pvt. Ltd v. Registrar Of Companies (2021)
 Conclusion
 Frequently Asked Questions (FAQs)
o Is AOA the Constitution of the company?
 o Who can enforce the Articles of Association?
o Where to find a company’s AOA?
o Is the MOA easier to alter than the AOA?
 References

Introduction
The Articles of Association (hereinafter also referred to as AOA) of a company is one of the
most essential documents of a company. It prescribes the rules, regulations and by-laws
according to which the internal matters of the company are conducted. In simpler terms, it
specifies the conduct of the business of a company and is a document of paramount
significance for a company.

An AOA is often compared to a rulebook of a company since it regulates the internal

management of a company while also giving powers and obligations to its officers and
employees. This includes regulations for several details of the company and its workings,
such as rights of the shareholders, qualifications of directors, binding effect of contracts,
etc. Moreover, the Articles of Association even establishes contracts between, firstly,
members of the company, and secondly, members and the company.

However, it must be noted that while the AOA establishes the regulations of the company,
it is still subordinate to the Memorandum of Association (hereinafter also referred to as
MOA). MOA acts as a constitutional document of the company that supersedes all other
documents within the company. If the AOA exceeds the scope laid down in the provisions
of the MOA, then it would be considered ultra vires, as laid down by the Calcutta High
Court in the landmark judgement of Shyam Chand v. Calcutta Stock Exchange (1945).
Thus, in the event of a conflict between the two, the provisions laid down in the
Memorandum of Association would prevail. Further, in case of any uncertainty of such
provision in the MOA, it shall be read along with the AOA for a more harmonious
interpretation and understanding.

What is Article of Association (AOA)

Under the Companies Act of 2013, Section 2(5) covers the definition of Articles of
Association. According to the aforesaid Section, AOA or ‘Articles’ contain all the rules and
regulations framed by the Directors of the company to govern the internal management
and governance, which can also be altered from time to time. In a nutshell, as mentioned
earlier, it is a rulebook that regulates the inner workings of the company while binding the
company to its workers and vice versa.

Difference between Memorandum of Association (MOA) and Articles of Association (AOA)

The major differences between the Memorandum of Association (MOA) and the AOA are
given below:

S.N Basis of Memorandum of Articles of Association

o Differentiation Association (MOA) (AOA)
 Lays down the provisions for
Lays down the fundamental internal regulations of the
On the basis of
1 principles upon which the company, including the rights
Content
company is incorporated. and obligations of its
members.

Acts as a rulebook that

Acts as an informative
regulates the relationship
document for the benefit and
2 Objective between the company and its
clarity of the public, the
members, as well as amongst
creditors, and the shareholders.
the members themselves.

Establishes the rules,

Establishes the scope beyond
regulations and by-laws based
3 Functions which the company’s conduct
on which the company
becomes void.
conducts its workings.

Lays down the scope or the Prescribes rules and other

4 Jurisdiction parameters within which the details within the parameters
AOA is to function. set by the MOA.

MOA has a very rigid procedure

for alteration and can only be
Can be altered in an easier
altered in specific
5 Alteration manner than MOA, by
circumstances. Permission of
passing a special resolution.
the Central Government is also
required in certain cases.

AOA cannot include

The MOA cannot be in
provisions contrary to the
contravention of the Companies
6 Position or status MOA. It is subsidiary to both
Act. It is only a subsidiary of the
the Companies Act and the
Companies Act.
MOA.

Any conduct or actions

Any conduct or actions beyond
beyond the provisions of the
the scope of the MOA will be
Ratification when AOA can be ratified by the
7 considered ultra vires and
breached shareholders as long as such
cannot be ratified even by the
conduct/action is not in
shareholders.
contravention of the MOA.
Objective of Articles of Association (AOA)
While the Memorandum of Association contains the fundamental elements based upon
which the company is incorporated, the Articles of Association acts as a complementary
document to the Memorandum that fulfils the following objectives:

 To act as a governing document that regulates the internal affairs and operations of
the company with the rules and regulations framed in its articles;
 To provide clarity in regards to the procedures and rules that the company must
follow, which should also be accessible by the shareholders of the company;
 To regulate the relationship between the company and its members (shareholders,
directors, employees, etc.) along with the relationship among the members;
 To clarify the legal rights and obligations of the different classes of shareholders as
well as the directors and other members;
 To cover any additional matters that the Company considers necessary for its
governance and management.
In simple terms, the Articles of Association play a vital role in the workings of the company
by ensuring that the internal affairs of the company are being conducted lawfully. It
further ensures that the aforesaid affairs of the company align with the interests and
objectives of the business of the company.

Forms of Article of Association (AOA)

As per the Companies Act of 2013, AOA of different types of companies need to be framed
in specific, prescribed forms as given under Section 5(6) of the aforesaid Act. It is
prescribed for companies such as companies limited by shares, companies limited by
guarantee having a share capital, companies limited by guarantee not having a share
capital, etc. As per Section 5(7), such companies may adopt the model articles in these
forms.

The exception to this lies under Section 5 (9), which states that companies that have
registered before the commencement of the Companies Act, 2013 shall not need to follow
these forms. However, if they amend their AOA anew, then these provisions shall be
applicable. Meanwhile, Section 5 (8) clarifies that if the companies follow the models given
under the forms to the dot, without any modifications, then such AOA will be treated the
same as any other registered Articles of the Company.

Schedule I of the Companies Act, 2013 contains the model Articles under the forms in
Tables F, G, H, I and J. The required Companies, as mentioned earlier, are obligated to
register the Articles of Association using these forms:

Tables in
Details of the Forms
Schedule I

Form for the Articles of Association for a company limited by shares (as
Table F
per Section 2 (22) of the Companies Act, 2013)

Table G Form for the Articles of Association for a company limited by guarantee
 and having a share capital (as per Section 2 (21) of the Companies Act
2013)

Form for the Articles of Association for a company limited by guarantee

Table H
and not having a share capital

Form for the Articles of Association for an unlimited company and

Table I
having share capital [as per Section 2 (92) of the Companies Act 2013]

Form for the Articles of Association for an unlimited company and not
Table J
having a share capital

Nature of Articles of Association (AOA)

As mentioned earlier, the Articles of Association is the rulebook of the company that acts
as the bedrock upon which all the internal affairs of the company are conducted. The
internal management and governance depend completely on the AOA. However, while it is
an essential document for the company, the Memorandum of Association still supersedes
its authority as a sort of ‘Constitution’ of the Company.

Compliance of Articles of Association (AOA) with the law

In addition to the Memorandum of Association, which the Articles of Association cannot

contravene or go outside the jurisdiction of, there are also other laws that the provisions in
the Articles of Association must not be against:

 The Constitution of India;

 The Public Policy;
 The laws of the land; and
 The Companies Act.
For better understanding, let us explore some relevant case laws. In the case of Hutton v.
The Scarborough Cliff Hotel Company Ltd (1865), a resolution dealing with the issue of
new shares with preferential dividends was passed in the general meeting of shareholders
of the company, resulting in the alteration of the Articles of Association. However, the
Memorandum of Association of the company provided no such power of alteration in the
aforesaid matter; thus, making the altered clause void and inoperative. The High Court of
Chancery held that the purview of alteration of the Articles, either expressly or impliedly,
depends directly on what is stated in the Memorandum.

Meanwhile, in the case of Hari Chandana Joga Deva v. Hindustan Co-Operative

Insurance Society Ltd. (1923), the Defendant company had issued insurance to the
Plaintiff, promising the payment of the prescribed amount on the specified date. However,
the Defendant company altered their AOA on a later date, because of which the fund the
insurance was based on, changed. The premise of the fund changed into a special one,
which was declared insolvent by the time the date of the payment approached. The
Calcutta High Court held the case in the favour of the plaintiff, stating that the alteration
was clearly breaching the provisions of the contract by suddenly changing the type of fund
the payment had to be given without consulting the other party. Thus, the altered clause
was declared to be inoperative and void. The Defendant company was further ordered to
compensate Plaintiff for the breach of contract.

Formalities of Articles of Association

There are some formalities to be adhered to in regard to the Articles of Association. These
formalities include how the AOA should be framed, which is by dividing the provisions
into respective paragraphs. These paragraphs then shall be numbered properly and
consecutively. Furthermore, the Articles of Association should be printed and provided to
every member or subscriber of the Memorandum of Association as well.

Articles of Association must be signed

Rule 13 of the Companies (Incorporation) Rules, 2014 prescribes both the MOA and the
AOA of a company to be signed in a specific manner. Furthermore, it is to be signed by
each signatory or member of the Memorandum, in the presence of one or more witnesses,
explained as below:

 Both the MOA and AOA of a company, as mentioned above, are required to be
signed by all the subscribers of the MOA and required to have their personal details
mentioned. These details include their name, occupation, address, etc. The singing
must be done in the presence of one or more attesting witnesses, who must then
sign as well and add their own personal details as required.
 In case of a subscriber being illiterate, the subscriber’s thumb impression can be
taken instead of their signature. Any person authorised/appointed shall be present
during such procedure to authenticate and witness the ‘signing’ and the addition of
the subscriber’s details. Furthermore, this authorised person should also help the
illiterate subscriber in reading or understanding the AOA wherever required.
 Where a subscriber is a body corporate, the memorandum and articles must be
signed by any director of the said body corporate who is duly authorised to do so by
the mutual consent or resolution of the board of directors of that corporation.
 In case the subscriber is a Limited Liability Partnership (LLP), then the partner of
the Partnership firm shall be authorised to sign, given that all the other partners of
the LLP agree.

Registration of Article of Association (AOA)

Once the above-mentioned conditions are fulfilled, the Articles of Association shall be
registered alongside the Memorandum of Association. Without the filing to the Registrar
of Companies, the Article of Association nor the company itself will gain any legitimacy.
Thus, to avoid such a scenario, the Articles of Association along with the Memorandum is
registered while filing for the incorporation of the company as per the provision of Section
7 of the Companies Act. In case of any amendment or alteration, as per Clause (2)
of Section 14, a printed version of the altered Articles along with the Tribunal order of
approval (in case of any conversion in the class of the company), shall be filed for
registration to the Registrar within fifteen days of the alteration and its approval.
Contents of Articles of Association (AOA)

As the rulebook of the company, the Articles of Association is framed as a legally binding
document that has the necessary rules and by-laws on matters prescribed. Section 5 (2) of
the Act briefly mentions such matters, some of which include the content as given below:

 The extent to which ‘Table A’ of the Companies Act is applicable

 Management decisions
 Clause relating to adoption of preliminary contracts
 The different classes of shareholders
 The rights and duties of different classes of shareholders
 Appointment of Directors
 The powers and rights of Directors
 Borrowing powers of Directors
 The procedure of issuing share certificates and share warrants
 The voting of the Directors and Chairman
 The Dividend policy of the company
 The creation of reserves
 Confidentiality of the trade secrets and trade know-how of the company and penalty
over their unauthorised disclosure
 The intellectual property valuations of the company
 The alteration of share capital
 Issue and transfer of shares
 Transmission clause relating to the transfer of title of share by insolvency,
succession, death, etc.
 Forfeiture and surrender of shares
 The procedure for board meetings and for special resolutions that can be passed
 Arbitration clause in case of disputes
 Accounts and audits of a company
 Clause relating to the common seal of the company
 The winding up procedure of a company, including the conditions required and the
period of notice given to the members of the company
These are some of the details that are usually included in the Articles of Association. The
company can also give other additional information, which may include the restrictions
given in the Memorandum of Association, specifically its objects clause.

Provisions for Entrenchment

In the contents of the Articles of Association given above, certain contents or provisions
are made as such to be harder to change, amend or alter, making them ‘entrenched’ in
nature. The literal definition of the word ‘entrench’ can be defined as a firm belief, attitude
or habit that is quite difficult or hard to change. In simpler terms, entrenchment clauses
can be referred to as clauses or provisions of AOA that are very hard to bring changes to or
amend.

Section 5(3) of the Companies Act, 2013 explicitly talks about entrenchment clauses in
AOA, stating that certain provisions in the Articles of Association cannot be altered or
amended by simply passing a special resolution but also require additional procedures,
which would be covered later in the article. Section 5(4) further mentions that such
entrenchment clauses can be introduced in the AOA only during:

1. The incorporation;
2. By bringing an amendment later to the provisions of the AOA through:

 An agreement between all the members in case it is a private company.

 Special resolution if it is a public company.

Notice to Registrar
Section 5(5) of the Act further provides for the requirement of giving notice to the
Registrar of Company if any Articles in the Articles of Association contain the
entrenchment provision, let it be framed even before the registration of the Articles or
added later by amendment or alteration. This is done so as to avoid unnecessarily hard
alteration laws for the provisions where such an elaborate process is not particularly
needed.

Scope of Articles of Association (AOA)

While the Articles of Association play a vital role in the running of the company, it is still
bound by the Memorandum of Association, which acts as the ‘supreme law’ within the
company. Due to this, the Articles of Association cannot exceed or be in contravention of
the scope of the Memorandum.

Beyond that, the Articles of Association act as a legally binding document that not only
clarifies the power and rights of the members and directors but also sets the obligations
that can be accessed and have to be agreed upon by all the future members who are to join.
Every contract the company has with its future hires, members or even legal
representatives is based upon the clauses of these Articles.

It acts as the base legal system of the company, highlighting the duties and rights of the
company towards its members and vice versa. The company can also add rules as per their
own requirements but even those need to be signed and approved by every shareholder
prior to its enactment.

The alteration of Articles of Association, while possible, is quite a lengthy and tedious
procedure since the process needs to be approved by all the shareholders and Directors of
the company as well as be filed to the Registrar of the Companies, who is appointed by the
Ministry of Corporate Affairs.
All this is done to avoid any arbitrary or mischievous clauses that can lead to the company
exploiting its members unfairly.

Importance of Articles of Association (AOA)

Both Articles of Association and Memorandum of Association are considered the most
important statutory documents of a company. In the case of the Articles of Association,
any new company would find it to be of utmost importance; even more so than a
Memorandum in some cases since the Articles dictate the internal governance of a
company.

Since many countries have a necessary requirement for both documents, they hold
immeasurable power in the context of the legitimacy of a company and its foundation. In
addition to that, it also acts as a vital document for shareholders who read and follow it for
their due diligence before investing in the company through stocks and shares or to learn
more about their rights and obligations in the company.

The Articles of Association also act as a good first step in regulating plans to achieve the
company objectives mentioned in the Memorandum of Association. Beyond that, it can
also be used to learn more about the internal workings of a company and what it stands
for.

Moreover, in many countries, the Articles of Association are also needed while setting up
an official bank account for the company or while taking loans from the bank in the name
of the company, which is an artificial personality.

Alteration of Articles of Association (AOA)

Section 14 of the Companies Act, 2013, states the power of a company to alter its AOA,
given that such alteration is within the bounds of the MOA and is passed by the prescribed
procedure of passing a special resolution. This is one of the essential powers of a company
since its effect can turn:

 A private company into a public company

A company can be converted from a private company to a public one by altering its
clauses. This alteration is done in the form of omitting or removing the three clauses
mentioned under Section 2 (68) which states the characteristics of a private company.
Once such alteration is made, a copy of the resolution and the altered AOA shall be filed
with the Registrar within 15 days of passing such a resolution for alteration.

Other changes
In addition to the obvious change of the shares of the company also being available to the
public, as per Section 14 (1) of the Companies Act, any restrictions on the previously
private company, such as the limit on the number of members of the company to two
hundred and the limit in numbers of directors to two, shall be removed after its conversion
to a public company.

The newly converted public company, as per Section 149, would now need to have three
directors at minimum for such conversion as well as have more than the two hundred limit
of members. Furthermore, the company shall update every copy of the Articles of
Association, physical or online, to include the newly updated clauses as per Section 15 of
the Act.

 A public company into a private company

For a public company to be converted to a private one, passing a mere special resolution is
not enough. The approval of the Tribunal is needed for such alteration and conversion. In
addition to that, a copy of the special resolution needs to be filed with the Registrar within
30 days of passing the resolution. Once the altered AOA is approved by the Tribunal, the
new, altered Articles of Association and the order of approval of the Tribunal shall also be
filed with the Registrar within 15 days of such order being passed.

Other changes
In addition to the above, in case of such newly converted private companies, the Articles of
Association must contain the three restrictions mentioned in the aforesaid section, which
include the restriction on the right of members to transfer shares, restriction on the
number of employees or members of the company to two hundred and the restriction of
invitation to the public for the subscription of its securities.

Due to such restrictions, the special resolution to be passed by the shareholders becomes
even more crucial along with the approval of the Tribunal. If either one of them is not
acquired, such conversion will not go through. In certain cases, if the public company is
acquired or has shares held by the Government, then such conversion may also require the
approval of the Central Government.

Procedure for Alteration of Articles of Association (AOA)

As mentioned earlier, Section 14 of the Companies Act, 2013 states the requirements for
the alteration of Articles of Association, which may include addition, deletion, substitution
or modification of the clauses in the aforesaid document.

To alter the Articles, there are four types of procedures that the company can follow:

 As per the steps prescribed in the Articles of Association: If the company

has provided special steps to be followed for alteration in the Articles of Association
itself, then they shall be followed.
 As per the procedure of special resolution: This step of alteration includes
the passing of a resolution of at least 75% of the votes in favour of the alterations in
the general meeting of shareholders, as per Section 114(2) of the Companies Act,
2013.
 As per the votes of the Board of Directors: The Directors also have the power
to alter the Articles of Association as per the clauses given in the AOA. However,
such alteration needs to be ratified by the shareholders in the next general meeting
or else the alteration will lose its legitimacy.
 As per the Order of the Tribunal: The Articles of Association can also be
altered by the National Company Law Tribunal (NCLT), given that the alteration is
either subtraction or declaration of a clause as void due to any contravention with
the Memorandum of Associations of the company or any legislation of the country.
 The main power of alteration is mostly only in the hands of the shareholders and
Directors of the company and the Tribunal can only do so if there are any
contraventions of the clauses with law or if the alteration is necessary for the
functioning of the company or to protect the interests of the shareholders from
unfair exploitation. Even in case of any mistake in the Articles of Association, be it
clerical or otherwise, it can only be rectified by the shareholders.
Before the initiation of any procedure of alteration in the Articles of Association, a notice
of at least 7 days is required to be given for the Board meeting of Directors as per Section
173 of the Companies Act.

Once the Board meeting of the Directors is held and recommendations for alterations as
well as approval are granted, the notice is issued for the general meeting in accordance
with Section 101 of the said Act, which may extend to however much is mentioned in the
clauses in the Articles of Association itself.

Filing alteration for registration

After the general meeting of the shareholders is held a special resolution is passed for the
approval of the alteration. If the resolution fails to reach the required amount of 75%, then
the alteration will not proceed any further. But if it does pass successfully, then the
company has to file form MGT-14 with the Registrar of Companies (ROC) within 30 days
of passing of such resolution with the required documents, consisting of certified copies of
passing of the special resolution as per Section 117, a copy of the notice of the general
meeting as well as a printed copy of the new and altered AOA.

The printed version of altered Articles of Association must also be provided to every
shareholder of the company once it is approved by the Registrar of Companies.

Limitations on power to alter Articles of Association (AOA)

 As mentioned earlier, the alteration made to the Articles of Association shall not be
in contravention of the Memorandum of Association or the Companies Act, given
that the AOA is subordinate to both of them.
 The alteration made to the Articles cannot have a retrospective effect. In simpler
terms, the alteration made in the Articles of Association changing any of the rules
shall not be applicable to the time or situation before its alteration to avoid unfair
treatment or arbitrary actions.
 The alteration cannot be in contravention with the order, alterations or suggestions
of the Tribunal, as per Section 242 of the Act. If the Tribunal decrees for certain
actions or rules, The Articles of Association cannot have any provisions acting
against such order or decree.
 The alteration made shall not be in contravention of morality, public policy or any of
the laws of the State. In addition to that, such alteration to the AOA should be made
for the benefit of the company and not to solely fraud or suppress the minority
shareholder.
 In the case of the conversion of a public company to a private one, no such
alteration can be made until consent from the Tribunal is obtained.
  The alteration in the AOA should not be used by the company to breach any
contract or escape from the liability of a pre-existing contract.

Binding effect of Memorandum of Association (MOA) and Articles of Association (AOA)

Once the Memorandum and the Articles of Association of a company are registered with
the Registrar, both documents legally bind the company with its members. This binding
effect is almost akin to a contract since it has much less force than a statute. This effect is
explained in further detail as follows:

Binding the company to its members

The first binding effect both the MOA and the AOA have is between the company and its
members. The members have the obligation to act and conduct their corporate affairs
within the scope of the MOA and the AOA. Meanwhile, the members can restrict the
company from doing any actions in contravention of either the MOA or the AOA as an
injunction. The members can also enforce their own rights mentioned within the Articles
of Association, such as the right to their declared dividends and shares in the company.

However, only a member or a shareholder of the company can restrict the company by
enforcing the clauses under the AOA. As seen in the case of Wood v. Odessa Waterworks
Co. (1889), The AOA of the Defendant company stated the Directors can declare the
payment of the dividends to its members and shareholders, with the official approval of
the company at a general meeting. However, a resolution was passed that permitted the
payment of dividends through debenture bonds instead of cash. The Court held that the
term ‘payment’ referred to the payment in cash and thus, such resolution was held void. In
simple terms, the Directors were restricted from executing the resolution since it went
against the provisions of the AOA.

Members bound to the company

As mentioned earlier, the first binding effect is always between the company and its
members. It is like a contractual relationship with both parties having their rights and
obligations mentioned in the provisions of the AOA. Each member or shareholder of the
company shall abide by the provisions of the MOA and the AOA. This includes when any
member has any amount payable to the company, which shall be considered a debt due.

In the case of Borland’s Trustee v. Steel Bros. & Co. Ltd. (1901), the AOA stated that in
case any member of the company went bankrupt, their share would be sold at the price
decided by the Directors of the company. Thus, when the member Borland declared
bankruptcy, Borland’s Trustee (the plaintiff, in this case) asked to sell Borland’s shares at
their original value. The trustee further contended that since he was not a member, he was
not restricted by the AOA.

It was, however, held that while the trustee may not be bound by the AOA, the shares that
were bought were bound by its provisions. In simpler terms, the sale of the shares was to
follow as per the provisions given under the Articles.

Binding between members

The second binding effect that the Articles of Association have is on the members of the
company with each other. Such powers or rights can only be applied by and against a
member of the company. However, it is often noticed that the Courts tend to extend the
scope of such binding effect even to the individual members who are not exactly members
of the company.

As seen in Rayfield v Hands (1960), the plaintiff was a shareholder of a company. The
AOA of the company stated that if any shareholder wanted to transfer their shares, the
Directors of the company would have to buy such shares at a reasonable and fair value.
Following this provision, the plaintiff informed the Directors, who refused to pay for his
shares and argued that it was not within their obligations.

However, the judgement was given in favour of the plaintiff as the High Court stated that
the plaintiff was not required to join the company as a member to bring a suit against it.
The Directors were ordered to buy the shares of the plaintiff at a fair rate.

No binding in relation to outsiders

Any third party or individual not connected to the company shall not be bound by the AOA
or the MOA of the company. Neither the company nor its members are bound to such
third parties within the scope of the Memorandum and the Articles. As seen in the case
of Browne v. La Trinidad (1887), the AOA of the company contained a clause that implied
the plaintiff may be a Director that should not be removable. However, he was still
removed later and proceeded to sue the company for the contravention of the Articles.

It was held by the House of Lords that since the plaintiff was an outsider to the company,
he could not restrict the company since he would not have any rights to enforce as a
member. In simple terms, an outsider to the company cannot take undue advantage of the
AOA to restrict or enforce any claims against the company.

Doctrine of constructive notice

According to Section 399 of the Act, after the registration of the MOA and the AOA of any
company with the Registrar, it becomes a public document that can be easily accessible by
any member of the public at a prescribed fee for accession. Once such a request is made to
any company, as per Section 17 read with Rule 34 of Company (Incorporation) Rules,
2014, the company has the obligation to send that individual a copy of its MOA, AOA and
all the other agreements mentioned under Section 117(1) of the Act. However, if the
prescribed fee is not paid with such a request, the company has no obligation to send
anything.

Thus, since both the MOA and the AOA become public documents, they are easily
accessible to all the members of the company as well as anyone outside the company. In
such a case, the doctrine of Constructive notice states that the company shall deem the
party dealing or contracting with the company to have read such public documents or, at
least, be aware of its provisions. This knowledge is important since the AOA can directly
affect the contractual obligation of the company.

The individuals or third parties dealing with the company can request to access the MOA
and the AOA just as any other member of the public. If the company fails to provide copies
of the aforesaid documents, then every defaulting ‘officer’ of the company who fails to do
so may be liable to a fine of Rs. 1000 for each day of default until it is resolved. Or it can be
extended to one lakh rupees, given whichever is less.

In the end, it is the duty of every person planning to interact or contract with the company
to inspect these aforementioned documents which are easily accessible to the general
public. Their knowledge of the workings of the company and its objectives would be
assumed since the conducting of such due diligence is their responsibility.

Whether the individual has actually read the document would not matter since it would be
assumed still that they are familiar at least with the relevant provisions in the
Memorandum and the Articles of Association of the company. In this context, the MOA
and the AOA act as a ‘constructive notice’ to the public and interested parties for the
workings of the company.

As seen in the case of Kotla Venkataswamy v. Chinta Ramamurthy (1934), the Article of
the Association of the company of the Defendant stated that if any property of the
company is mortgaged, then such mortgage deed would require the signatures of the
Company’s Secretary, Managing Director and the Working Director. Without all three
signatures, the deed would not be held valid.

In the present case, the plaintiff had filed the suit to enforce her tenancy rights but it was
later found that the mortgage deed only had the signatures of the working Director and
Company Secretary. Without the signature of the Managing Director, the deed was
accepted by the plaintiff. The Madras High Court held the mortgage deed invalid, stating
that the plaintiff should have practised due diligence and had knowledge of the provisions
of the AOA of the company, which is publicly available.

Doctrine of indoor management

The Doctrine of Indoor Management was first laid down in the case of Royal British Bank
v. Turquand (1856), due to which it is also commonly referred to as the ‘Turquand Rule.’

In this case, the Articles of Association of the Appellant company permitted the Directors
of the company to borrow bonds by passing a resolution in the general meeting. However,
the Directors had given a bond without the passing of such a resolution, resulting in the
present suit. The issue that arose was whether the company would be still liable for such a
bond or would the transfer be invalid due to the conduct going against the AOA of the
company. The (then) Chief Justice, Sir John Jervis held the company liable, stating that
the individual receiving the bond was entitled to assume that the prescribed procedure in
the AOA was followed and the bond was given in good faith.

This judgement was held quite ahead of its times and was not fully accepted or
incorporated into the common law until the case of Mahony v. East Holyford Mining Co.
(1875).

The House of Lords, in the present case, endorsed the Turquand case and explored the
concept of indoor management, which is quite opposite to the the doctrine of constructive
notice. Simply put, while the Doctrine of Constructive Notice protects the company from
the actions of an outside party, the Doctrine of Indoor Management protects the third
parties not connected to the company from the company. It is so since the Constructive
Notice is solely restricted to matters outside of the company, which has an external
position and does not regard the internal mechanism of the company.

Meanwhile, the Doctrine of Indoor Management protects the third party from any default
in the inner workings or mechanisms of the company that any outsiders would not be
aware of despite practising proper due diligence. If the contract between the company and
any third party is consistent with the public documents of the company, then it shall not be
prejudiced due to any irregularities arising on the part of the inner workings or ‘indoor’
operations of the company.

From the common law, this doctrine has also been adopted into Indian Law, as seen in the
cases of Official Liquidator, Manabe & Co. Pvt. Ltd. v. Commissioner of Police
(1967) and M. Rajendra Naidu v. Sterling Holiday Resorts (India) Ltd. (2008), where it
was held that while the individuals or third parties lending to the company should be
familiar with the MOA and the AOA of the aforesaid company, they should not be expected
to know every single inner working of the company. In simpler terms, third parties dealing
with the Companies are not obligated to be acquainted either each and every internal
action and proceedings occurring in the company.

Exceptions to the Doctrine of Indoor Management

Where the outsider is aware of the irregularity

While third parties are not expected to be aware of the internal workings or actions of a
company, if the knowledge of such irregularity is with the party, then they shall not have
the protection of the Doctrine of Indoor Management. In simpler terms, if the third party
gets to know about the irregularity in the internal procedure, even in an implied manner
through their observation of lack of proper process or authority followed, then it is their
duty to not go through with the transaction. If the third party still decides to go with the
transaction, they would not be protected under the scope of this doctrine.

As seen in the case of Howard v. Patent Ivory Co. (1888), the AOA of the Defendant
company allowed the Directors of the company to borrow up to one thousand pounds and
not beyond that. To exceed that amount, they need to pass a resolution in the general
meeting, which was not followed through by the Directors before they borrowed 3500
pounds in exchange for debentures from the plaintiff, who was one of the Directors
present on the Board.

The present suit came to be when the company refused to pay back such an amount and
the judgement was held in the favour of the company, stating that the debentures would
only be paid up to the amount of 1000 pounds since the plaintiff had full knowledge of the
irregularity of internal procedure as a Director.

Lack of knowledge of the AOA

As mentioned earlier, this Doctrine cannot protect anyone who has not acquainted
themselves with the AOA and the MOA of the company despite both being available in
public records. As seen in Rama Corporation v. Proved Tin & General Investment Co.
(1952), the plaintiff Corporation did not acquaint themselves with the Articles of
Association of the Defendant company while doing a transaction with them.

Negligence
The Doctrine of Indoor Management does not protect third parties who have not practised
proper due diligence. In simpler terms, if the irregularity could have been noticed with
proper due diligence or observation on the side of the third parties, then this doctrine does
not protect such parties as a consequence of their blatant negligence.

As seen in the case of Al Underwood v. Bank of Liverpool (1924), the officer of the
Defendant company had taken actions which were not within their scope of duties.
However, the plaintiff did not ensure if the officer contracting with them as the
representative of the company was duly authorised, resulting in negligence on their end
due to which they were not protected under this doctrine.

Forgery
Any illegal transactions or transactions involving forgery are not protected under this
doctrine. In simpler terms, if there is any forgery that results in a fraudulent transaction
where the company had no idea or will would not be protected by the Doctrine of Indoor
Management.

As seen in the Ruben v. Great Fingall Consolidated (1906) case, the secretary of the
Defendant company had forged the signatures of the Directors on a certificate to issue
shares of the company. It was held that since the Directors had no hand or idea of such
forgery, they could not be held liable for the fraudulent transaction happening due to it.
Furthermore, the forged share certificate was held to be void and hence, would not invoke
the Doctrine of Indoor Management. The unauthorised use of the company seal can also
be included within the scope of this exception along with the cases of Oppression.

This exception of the doctrine also includes situations where a third agency was involved
in the transaction, as seen in Varkey Souriar v. Keraleeya Banking Co. Ltd. (1956) case,
where agents of the company had acted on their own without the authorisation of the
Defendant company.

Relevant cases

Eley v. Positive Government Security Life Assurance Co Ltd (1876)

In this case, the Articles of Association of the Defendant company provided that the
Petitioner would be hired as the company’s legal representative for his lifetime. However,
despite such a clause, the company dismissed him after some while, resulting in the
Petitioner suing the company for damages for the breach of contract based on the
provisions of the Articles of Association. The Court held that the Petitioner did not have
any right of action since the Articles do not bind the company with any third party or
outsider; thus, not constituting such a contract between the Defendant and the Petitioner.
Sidebottom v. Kershaw, Leese & Co Ltd (1920)

In the present case, the Defendant company had altered the provision in its Article of
Association to authorise its Directors to order any shareholder of the company to transfer
their shares at a reasonable value to the person nominated by the Board of Directors. The
shareholders sued the company for arbitrariness. However, the Court held the alteration in
the Articles of Association valid, stating that such a clause was made to benefit the
company with a bonafide intention. In simpler terms, even if the interests of a few
individuals were to be affected, the alteration in AOA shall stand valid if it helps in the
development of the company. However, since the alteration caused the benefit of the
company as a whole, it was not void.

Southern Foundries (1926) Ltd v. Shirlaw, (1939)

In the present case, the Articles of Association of the Appellant company provided that the
Managing Director of the company had to be a Director, and any early ceasement would
result in the inability to function as a Director. The Respondent was a Director of the
company for three years, with a contract period of ten years. However, he was removed
from the directorship once the company was taken over by another parent company.
Grieved by such removal, the case was brought in front of the Court which held that such
alteration had enabled the company to commit such a breach of contract and thus, the
company was liable to pay damages for such breach to the Respondent due to his early
dismissal before the term of his contract was over.

Economy Hotels India Services Pvt Ltd v. Registrar of Companies (2020)

In this case, the Appellant Company had filed a petition to the NCLAT, stating that the
special resolution passed had a few typographical errors due to which the NCLT had
rejected its application confirming the amendment for reduction of share capital. The
Court observed that the resolution passed under Section 66 was not only unanimous in its
voting but also had only one typographical error in the extract of the Minutes of the
Meeting characterising the ‘special resolution’ as ‘unanimous ordinary resolution’.
However, since the resolution was also registered to the Registrar, all the required
conditions were met and the resolution was sound despite such clerical errors. Thus, the
appeal was allowed.

S.P. Velumani v. Magnum Spinning Mills India Pvt. Ltd (2020)

In the above-mentioned case, the Appellant had filed a case in the Tribunal against the
Respondent company, contending that the company had made several fraudulent
transactions that were bogus and allocated the funds in a misappropriate manner. The
Tribunal, however, dismissed the case, stating that the conduct showcased did not fall
within the purview of Oppression and mismanagement. The case was then appealed to the
NCLAT, where the Appellate Tribunal upheld the decision made by NCLT since the
decision to write off bad debt was a power conferred to the Directors of the Respondent
company by the Articles of Association of the company and was not in contravention of
any law.
Brillio Technologies Pvt. Ltd v. Registrar Of Companies (2021)

In the above-mentioned case, the Directors of the Appellant company had resolved to
reduce the share capital selectively, by reducing a portion of the equity share capital from
non-promoter shareholders with considerable consideration to compensate for it. This
decision was then approved by a special resolution passed under Section 66 (1) and
Section 114, where the consensus was unanimous; thus, making the Appellant company a
wholly-owned subsidiary company under its holding company.

However, this arrangement was not approved by the Tribunal, stating that such
arrangement is not covered under Section 66 of the Act and since no reason as such was
given for such reduction of share capital, the selective reduction would go against the
provisions of the Articles of Association of the company. The National Company Law
Appellate Tribunal (NCLAT) reversed the judgement of the National Company Law
Tribunal (NCLT), holding that such reduction can be covered within the purview of
Section 66. Furthermore, the non-promoter shareholders requested such a decision since
they were looking for an opportunity to dispose off their shares in the Appellant company;
thus, making the decision itself sound and not against the Articles of Association of the
company since the majority of the shareholders approved of it.

Conclusion
Articles of Association is an essential document in the scope of corporate governance,
without which the regulation of internal matters and management can be challenging, to
say the least. The Memorandum and the Articles of Association form the core constitution
of the company along with setting the rules and regulations by which the company and its
members may abide by.

In the end, both the AOA and the MOA are crucial documents of the company which are
also available in the public record for anyone to access with a prescribed fee. Without their
presence, no company can even attain their legitimacy, let alone function with proper
corporate governance.

Frequently Asked Questions (FAQs)

Is AOA the Constitution of the company?

No, the Articles of Association is not the Constitution of the company, it is the
Memorandum of Association. AOA, instead, acts as a rulebook of the company that sets
the regulations and by-laws of the company as per the scope set by the MOA since it
supersedes the Articles.

Who can enforce the Articles of Association?

The members of a company can enforce the clauses under the Articles of Association since
it legally binds the members with the company as well as with the other members of the
company. Thus, the members have the right to enforce the AOA in respect of their rights
and obligations as well as restrict the company in case of any breach of the provisions
given under the AOA.
Where to find a company’s AOA?

As mentioned earlier, both the AOA and the MOA of a company are in public records after
their registration and they can be accessed through the following:

 In the Company Public Document Section of the Ministry of Corporate

Affairs website;
 In several private platforms that also have company public documents available,
such as InstaFinancials, etc.

Is the MOA easier to alter than the AOA?

No, the Articles of Association are much easier to alter than the Memorandum of
Association since to alter the AOA, one needs to pass a simple special resolution in the
general meeting of shareholders, as mentioned earlier. However, MOA can only be altered
in specific circumstances and with the explicit permission of the Central Government in
some cases. The alteration procedure of MOA also needs to follow the provisions of the
Companies Act, 2013 strictly.