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Articles of Association

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Presentation on theme: "Articles of Association"— Presentation transcript:

1 Articles of Association
Contents of Articles Different classes of shares and frights of shareholders Procedure for making an issue of share capital and allotment thereof. Procedure for issue of share certificates and share warrants. Forfeiture of shares and the procedure for their reissue. Procedure for transfer and transmission of shares.

2 Articles of Association
The time lag between calls on shares, conversion of shares into stock. Directors, their appointment, remuneration , qualification etc. Accounts and Audit. Lien on shares. Payment on commission of shares and debentures to underwriters. Rules for adoption of preliminary contracts, if any. Re-organisation and consolidation of share capital.

3 Articles of Association
13. Alteration of share capital and buy back of shares. 14.Borrowing powers of Directors. 15. General Meetings, proxies and polls. 16. Voting rights of members. 17. Dividends and reserves. 18. Winding up.

4 Articles of Association
Alteration of Articles Every company has the power to alter its Articles by a special resolution. (sec 31) Procedure for Alteration of Articles By passing a special resolution. Copy of Special Resolution to be sent to ROC within 30 days. Copy of altered Articles to be submitted to ROC within 3 months of passing resolution.

5 Articles of Association
Limitations to Alteration of Articles Alterations should not be inconsistent with the provisions of the Act or any other statute, and conditions contained in the Memorandum. Case: M.R.Kamath vs Canara Banking Corporation Ltd. A Company passed a resolution expelling a member and authorising the directors to register the transfer of his shares without the transfer deed. Held the resolution was in violation of provision relating to the transfer under the act

6 Articles of Association
2. Must not sanction anything illegal Case : Andrew vs Gas meter co. Ltd. The Memorandum of the Company provided that the Nominal Capital of the company was 60,000 pounds divided into 600 shares of 100 pounds each. The Memorandum and Articles did not contain any express provisions as to issue of preference shares. The company by a special resolution, altered its Articles so as to give itself power to issue preference shares, and then issued them. Held the issue was valid.

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3.Must be bonafide for the benefit of the company as a whole. Case: Shuttleworth vs Cox Bros.& Co. The Articles of a company provided that S and 4 others should be permanent directors of the company. They could however be disqualified by any of the 6 specific event. S failed to account for company’s money on 22 occasions within 12 months. The Articles were accordingly altered and a 7th event disqualifying a director was added. The event added was that if a Director was so requested in writing by all other Directors he should resign. S was so requested to resign. Held the alteration was bonafide for the benefit of the company as whole, and was valid.

8 Articles of Association
4.Must not deprive any person of his rights under a contract. 5.Must not be contrary to the order of the National Company Law Tribunal. 6. Alteration in Articles which has an effect of converting a public company into a private company can be made only if it is approved by the central government.

9 Articles of Association
Binding force of Memorandum and Articles The company is bound to its members. Each member is bound to the company Each member is bound to the other member in so far as rights and duties arising out of the articles are concerned. Neither the members nor the company is bound to the outsiders.

10 Articles of Association
Difference between Articles and Memorandum of Association Memorandum is the charter of the company while Articles are the regulations for the internal management of the company. Memorandum defines the scope of activity of the company whereas Articles contain the rules for carrying out the objectives of the company.

11 Articles of Association
3. Memorandum is a supreme and primary document where as Articles are subordinate to the Memorandum. 4. Memorandum is a must for every company where as for Articles , it is not a must for companies limited by shares which may simply adopt Table A of the schedule. 5. Memorandum is subject to strict restrictions and some alterations must be subject to the Central Government approval where as articles can be Altered by just passing a special resolution.

12 Articles of Association
6. Acts Ultra vires the memorandum are wholly void and cannot be ratified where as acts ultra vires the Articles but intra vires the memorandum can be ratified

13 Articles of Association
Doctrine of Constructive Notice Memorandum and Articles on registration with ROC assume the character of Public documents. Every outsider dealing with the company is deemed to have notice of the contents of the same. This is known as Doctrine of Constructive Notice

14 Articles of Association
Doctrine of Constructive Notice Case : The Articles of Association of the company contained a clause that all deeds and documents shall be signed by the Managing Director, the secretary and the working Director on behalf of the company. A deed of mortgage was signed by the secretary and the working director only.

15 Articles of Association
Doctrine of Constructive Notice Decision It was held that the Mortgage was invalid in spite of the fact that the plaintiff acted in good faith and the money was utilised for the company. The mortgagee should have consulted the Articles of Association before executing the mortgage deed.

16 Articles of Association
Lord Hatherley observed in this regard in a case of Mahony vs East Holyford Mining Co. Whether actually the outsider reads the Articles or the Memorandum or not, it will be presumed that he has read them. Every Joint stock company has its Memorandum and Articles of Association open to all and every person who deals with the company must be affected with the notice of all that is contained in these two documents

17 Articles of Association
Doctrine of Indoor Management There is one limitation to the doctrine of Constructive Notice. The outsiders dealing with the company are entitled to assume that so far as the internal proceedings of the company are concerned, everything has been regularly done. They need not inquire about the regularity of the internal proceedings as required by the Memorandum and Articles. They can presume that all is being done regularly.

18 Articles of Association
Case: Royal British Bank vs Turquand The Directors of the company had issued a bond to T. They had the power under the Articles to issue such a bond provided they were authorised by a resolution passed by the shareholders at the General Meetings of the Company. No such resolution was passed by the company.

19 Articles of Association
Decision T could recover the amount of the bond from the company on the ground that he was entitled to assume that the resolution had been passed.

20 Articles of Association
Exceptions to the Doctrine of Indoor Management 1. Where the outsider has the knowledge of irregularity. Case: T.R.Pratt Company A lent money to company B on a mortgage of its assets. The procedure laid down in the Articles for such transactions were not complied with. The Directors of the companies were the same. Held the lender had notice of irregularity and hence the mortgage was not binding.

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2. Negligence on the part of the outsider Case : Anand Bihari Lal vs Dinshaw and Co. The plaintiff in this case accepted a transfer of company’s property from its accountant. Held the transfer was void as such a transaction was beyond the scope of Accountant’s authority. The plaintiff should have seen the Power of Attorney executed in favour of the accountant by the company.

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3. In case of a forgery Case: Ruben vs Great Fingall consolidated Co. The secretary of the company issued a share certificate under the company’s seal with his own signature and the signature of a Director forged by him. Held the share certificate was not binding on the company. The person who advanced money on the strength of this certificate was not entitled to be registered as holder of shares.

23 Articles of Association
4. Acts outside the scope of apparent authority. Case: Kredit Bank Cassel vs Schenkers Ltd. A branch manager of a company drew and endorsed bills of exchange on behalf of the company in favour of a payee to whom he was personally indebted. He had no authority from the company to do so . Held the company was not bound.

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