(v) AOA

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Articles of

Association

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Articles of Association

It is the companies laws or rules to governthe management of the company for itsinternal affairs and the conduct of itsbusiness.

AOA defines the powers of its officers andalso establishes a contract between thecompany and the members

It can be originally framed and altered bythe company under previous or existingprovisions of law.

Cont.

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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 fromcompany to company as the Act has notspecified any specific provisions

Flexibility is allowed to the persons who

form the company to adopt the AOAwithin the requirements of thecompany law

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Contents ofArticles of Association

Contents. The items usually covered by the articles of association include:

1. Powers, duties, rights and liabilities of directors2. Powers, duties, rights and liabilities of members

3. Rules for meetings of the company;

4. Dividends and reserves;

5. Borrowing powers of the company;

6. Share warrants;

7. Alteration of capital;

8. Calls on shares;

9. Transfer & transmission of shares;

10. Forfeiture of shares ;

11. Surrender of shares;

12. Voting powers of members;13. Accounts and audit;

14. Winding-up, etc. Contd.

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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 anyshare or debenture

Prohibit any invitation or acceptance of deposits

from person other than member or director

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.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).

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.Articles of Association

Alteration of Articles. A company can alter or amendany of the provisions of its articles subject to provisionsof the Act and subject to the conditions contained in itsMemorandum. A company by special resolution canalter its articles provided the said resolution is passedbona fide for the benefit of the company. An alterationof articles can be effected by a 3/4th majority of theshareholders but can be challenged on the ground thatthe alteration was not in the interest of the

company. Furthermore, such alteration should nothave the effect of converting a public co. into a privateco. without the approval of the Central Government.

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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.

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Implications of the Doctrine of Indoor Management:

Recent Decisions . The Indian courts have been applyingthe doctrine of indoor management quite frequently andinterpreting it according to cases in hand. The object beingthe same i.e., to protect the third party transacting with thecompany 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 ofthe impugned transaction was not affected even if noresolution for entering into it was actually passed by the

board of the company as the company had entered intoand adopted the transaction throughout and implementedit after receiving consideration thereof. The doctrine ofindoor management protected the transferee and thetransferor..

Contd

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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 non-

suited. 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 arelevant 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.

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.Exceptions to the Doctrine of Indoor Management

The doctrine of indoor management is subject to thefollowing exceptions:

1. Knowledge of irregularity If a person dealing with acompany has actual or constructive notice of theirregularity as regards internal management, he cannotseek 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 thecontract are so suspicious as to warrant inquiry, and theoutsider 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 sincenothing can validate forgery. A company can never be heldbound for forgeries committed by its officers. Cont.

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Acts outside the scope of apparentauthority If an officer of a companyenters into a contract with a third partyand if the act of the officer is beyond thescope of his authority, the company isnot bound. The plaintiff can sue thecompany only if the power to act has in

fact been delegated to the officer withwhom he entered into the contract.

cont

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Thus, the doctrine of indoor management seeks to

protect the interest of the shareholders who are in aminority, or who remain in dark about whether theworking of the internal affairs of the company arebeing carried out in accordance with thememorandum and articles. It is important to note

that the doctrine of constructive notice can beinvoked by the company and it does not operateagainst the company. It operates against the personwho has failed to inquire but does not operate in his

favour. But the doctrine ofindoormanagement canbe invoked by the person dealing with the companyand cannot be invoked by the company.

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