Lecture on the Definition of Articles of Association (AoA),

Relationship between Memorandum of Association and Article

of Association, Alteration of AoA, Doctrine of Constructive Notice
and Indoor management.

Course Code- LAW-3501

Course Title- Legal Environment of Business
LECTURE SHEET NO- 07
Muhammad Farhad Hossain (MFH)
Assistant Professor
Department of Law
International Islamic University Chittagong
Email: farhadlex@gmail.com
Phone- +8801818369741

Articles of Association
Articles of association is a document that specifies the regulations for a company's
operations and defines the company's purpose. The document lays out how tasks
are to be accomplished within the organization, including the process for appointing
directors and the handling of financial records.

KEY TAKEAWAYS

• Articles of association can be thought of as a user's manual for a company,

defining its purpose and outlining the methodology for accomplishing
necessary day-to-day tasks.
• While the content and terms may vary according to jurisdiction, articles of
association generally include provisions on the company name, its purpose,
the share capital, the company's organization, and provisions concerning
shareholder meetings.

The Articles of Association or AOA are the legal document that along with the
memorandum of association serves as the constitution of the company. It is
comprised of rules and regulations that govern the company’s internal affairs.
The articles of association are concerned with the internal management of the
company and aims at carrying out the objectives as mentioned in the memorandum.
These define the company’s purpose and lay out the guidelines of how the task is to
be carried out within the organization. The articles of association cover the
information related to the board of directors, general meetings, voting rights, board
proceedings, etc.

The articles of association are the contracts between the shareholders and the
organization and among the shareholder themselves. This document often defines
the manner in which the shares are to be issued, dividend to be paid, the financial
records to be audited and the power to be given to the shareholders with the voting
rights.

The articles of association can be considered as the user manual for the
organization that comprises of the methodology that can be used to accomplish the
company’s day to day operations. This document is a binding on the shareholders
and the organization and has nothing to do with the outsiders. Thus, the company is
not accountable for any claims made by any external party.

Contents of the Article of Association

 1. Company Name: As a legal entity, the company must have a name that
can be found in the articles of association. All jurisdictions will have rules
concerning company names. Usually, a suffix such as "Inc" or "Ltd" must be
used to show that the entity is a company. Also, some words that could
confuse the public, such as "government" or "church," cannot be used or must
be used only for specific types of entities. Words that are offensive or heinous
are also usually prohibited.
2. Purpose of the Company: The reason for the creation of the company
must also be stated in the articles of association. Some jurisdictions accept
very broad purposes—"management," for example—while others require
greater detail—e.g., "the operation of a wholesale bakery."

3. Share Capital: The number and type of shares that comprise a company's
capital are listed in the articles of association. There will always be at least
one form of common shares that makes up a company's capital. In addition,
there may be several types of preferred shares. The company may or may
not issue the shares, but if they are found in the articles of association, they
can be issued if and when the need presents itself.
A company may or may not issue shares, but if they are listed in the articles of
association, shares can be issued if and when needed.

4. Organization of the Company: The legal organization of the company,

including its address, the number of directors and officers, and the identity of
the founders and original shareholders, are found in this section. Depending
on the jurisdiction and type of business, auditors and legal advisors of the
company may also be in this section.

5. Shareholder Meetings: The provisions for the first general meeting of

shareholders and the rules that will govern subsequent annual shareholder
meetings—such as notices, resolutions, and votes—are laid out in detail in
this section.

Articles when compulsory [S. 26]

Articles of association is the second document which has, in the case of some companies, to be
registered along with the memorandum. Companies which must have articles of association are:
1. Unlimited companies;

2. Companies limited by guarantee; and

3. Private companies limited by shares.

Articles in relation to Memorandum

Articles have always been held to be subordinate to the memorandum. If, therefore,
the memorandum and articles are inconsistent, the articles must give way. In other
words, articles must not contain anything the effect of which is to alter a condition
contained in the memorandum or which is contrary to its provisions. "This is so
because the object of the memorandum is to state the purposes for which the
company has been established, while the articles provide the manner in which the
company is to be carried on and its proceedings disposed of. " This constitutes the
principal difference between the two documents.

In the words of Lord CAIRNS, the difference is this:

The memorandum is, as it were, the area beyond which the action of the
company cannot go; inside that area the shareholders may make such
regulations for their own government as they think fit.

In the words of BOWEN LJ:

There is an essential difference between the memorandum and the articles. The
memorandum contains the fundamental conditions upon which alone the company
is allowed to be incorporated. They are conditions introduced for the benefit of the
creditors, and the outside public, as well as of the shareholders. The articles of
association are internal regulations of the company.

ALTERATION OF ARTICLES [S. 31]

Every company has a clear power to alter its articles of association by a special
resolution. It is a statutory power given by Section 31, and, therefore, it cannot be
negative by contract. If, for example, there is a clause in the articles providing that
the company would not introduce any change in its original articles, it will be invalid
on the ground that it is contrary to the statute.

Similarly, a company cannot deprive itself of the power of alteration by a contract

with any one.

The altered articles will bind the members just in the same way as did the original
Articles-43 But that will not give the alteration a retrospective effect. A transfer of
shares when first presented was permissible within the company's articles, but it was
rejected because the stamps were not cancelled. Before it could be presented again,
the company changed articles excluding such transfers. The alteration was held to be
effective against the transfer.

The power of alteration of articles as conferred by Section 31 is almost absolute. It is

subject only to two restrictions. In the first place, the alteration must not be in
contravention of the provisions of the Act. It should not be an attempt to do
something which the Act forbids.46 Secondly, the power of alteration of articles is
subject to the conditions contained in the memorandum of association. The proviso
to sub-section (1) says that an alteration which has the effect of converting a public
company into a private company would not have any effect unless it is approved by
the Central Government.

Alteration against memorandum

Sometimes a change in the articles seems apparently to influence the memorandum.
To take, for example, Hutton v Scarborough Cliff Hotel Co.

A resolution passed at a general meeting of a company altered the articles of

association by inserting the power to issue new shares with preferential dividend. No
such power existed in the memorandum.

The alteration was held to be inoperative. The issuing of new shares with a
preferential dividend was considered to be a variation of the constitution of the
company as fixed by the memorandum. "The question is", said the Vice-Chancellor,
"whether the power given to the general meeting, by special resolution to modify
the regulations of the company is unlimited: clearly there must be some limit to the
power; otherwise they might alter not only such articles as relate to the
management of the company, but they might alter the very nature and constitution
of the company.

It must be noted that the memorandum was silent. It neither authorised nor
prohibited the issue of preference shares. The court inferred from its silence that it
intended equality of status of all the shareholders. But now the courts refuse to draw
this inference. The power of alteration of articles is subject only to what is clearly
prohibited by the memorandum, expressly or impliedly. This change was brought
about by the decision in Andrews v Gas Meter Co Ltd.

By the 5th clause of a company's memorandum it was stated that the nominal capital
of the company was £60,000 divided into 600 shares of £100 each. Neither in the
memorandum nor in the original articles was there any provision as to preference
shares. A special resolution was passed authorising the directors to issue shares
bearing a preferential dividend, which was accordingly done.

It was held that the issue was valid. "If this had been forbidden by the memorandum,
it could not have been done: but as it was not; it was immaterial that the change
quite altered the composition of the company.

Alteration of articles to provide for compulsory transfer of shares against the

shareholders' wishes was held to be permissible and binding on the shareholders.

Key Differences Between Memorandum of Association

and Articles of Association
The major differences between memorandum of association and articles of
association are given as under:

1. Memorandum of Association is a document that contains all the condition

which are required for the registration of the company. Articles
of Association is a document that contains the rules and regulation for the
administration of the company.
2. Memorandum of Association is defined in section 2 (56) while the Articles
of Association is defined in section 2 (5) of the Indian Companies Act 1994.
 3. Memorandum of Association is subsidiary to the Companies Act, whereas
Articles of Association is subsidiary to both Memorandum of Association as
well as the Act.
4. In any contradiction between the Memorandum and Articles regarding any
clause, Memorandum of Association will prevail over the Articles of
Association.
5. Memorandum of Association contains the information about the powers
and objects of the company. Conversely, Articles of Association contain the
information about the rules and regulations of the company.
6. Memorandum of Association must contain the six clauses. On the other
hand, Articles of Association is framed as per the discretion of the
company.
7. Memorandum of Association is obligatory to be registered with the ROC at
the time of registration of Company. As opposed to Articles of Association,
is not required to be filed with the registrar, although the company may file
it voluntarily.
8. Memorandum of association defines the relationship between company
and external party. On the contrary, articles of association govern the
relationship between the company and its members and also between the
members themselves.
9. When it comes to scope, the acts performed beyond the scope of
memorandum are absolutely null and void. In contrast, the acts done
beyond the scope of artciles can be ratified by unanimous voting of all
shareholders.

Comparison Chart

BASIS FOR MEMORANDUM OF ARTICLES OF

COMPARISON ASSOCIATION ASSOCIATION

Meaning Memorandum of Association is Articles of Association is a

a document that contains all document containing all the
the fundamental information rules and regulations that
which are required for the governs the company.
incorporation of the company.
 BASIS FOR MEMORANDUM OF ARTICLES OF
COMPARISON ASSOCIATION ASSOCIATION

Defined in Section 2 (56) Section 2 (5)

Type of Powers and objects of the Rules of the company.

Information company.
contained

Status It is subordinate to the It is subordinate to the

Companies Act. memorandum.

Retrospective The memorandum of The articles of association can

Effect association of the company be amended retrospectively.
cannot be amended
retrospectively.

Major contents A memorandum must contain The articles can be drafted as

six clauses. per the choice of the company.

Obligatory Yes, for all companies. A public company limited by

shares can adopt Table A in
place of articles.

Compulsory filing Required Not required at all.

at the time of
Registration
 BASIS FOR MEMORANDUM OF ARTICLES OF
COMPARISON ASSOCIATION ASSOCIATION

Alteration Alteration can be done, after Alteration can be done in the

passing Special Resolution (SR) Articles by passing Special
in Annual General Meeting Resolution (SR) at Annual
(AGM) and previous approval General Meeting (AGM)
of Central Government (CG) or
Company Law Board (CLB) is
required.

Relation Defines the relation between Regulates the relationship

company and outsider. between company and its
members and also between the
members inter se.

Acts done beyond Absolutely void Can be ratified by

the scope shareholders.

CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES OF ASSOCIATION

The memorandum and articles of association of every company are registered

with the Registrar of Companies. The office of the Registrar is a public office
and consequently the memorandum and articles become public documents.
They are open and accessible to all. It is, therefore, the duty of every person
dealing with a company to inspect its public documents and make sure that his
contract is in conformity with their provisions. But whether a person actually
reads them or not, "he is to be in the same position as if he had read them". He
will be presumed to know the contents of those documents. This kind of
presumed notice is called constructive notice. Kotla Venkataswamy v
Ramamurthy’s shows the practical effects of this rule.

Another effect of this rule is that a person dealing with the company is taken
not only to have read those documents but to have understood them according
to their proper meaning. He is presumed to have understood not merely the
company’s powers but also those of its officers. Further, there is a constructive
notice not merely of the memorandum and articles, but also of all the
documents, such as special resolutions [S. 117] and particulars of charges [S.
77] which are required by the Act to be registered with the Registrar. But there
is no notice of documents which are filed only for the sake of record, such as
returns and accounts. According to Palmer, the principle applies only to the
documents which affect the powers of the company.

The common law doctrine of constructive notice should apply to the form. To
reiterate the form is a public document which contains particulars of directors
who are the mind and will of a company, as well as managers and secretaries
who are responsible for the day to day running of the company. It is a
document which affects the powers of the company and its agents. Certainly,
its purpose must be more than just to provide information about the
company’s directors, managers and secretary. Therefore, persons dealing with
company should check with the Registrar of Companies who its directors,
mangers and secretaries are at given time.

Oakbank Oil Co. v. Crum (1882 8 A.C.65)-

-It has been held that anyone dealing with the Company is presumed not only
to have read the memorandum and Articles, but understood them properly.

-Thus, Memorandum and Articles of a company are presumed to be notice to

the public.

-Such a notice is called Constructive notice.

MOA and AOA become public documents after registration of a Company.

It is taken for granted that everyone who deals with the company knows of these
documents.

Legal effect: If a person’s deals with a company in a manner which is inconsistent

with the provisions contained in MOA and AOA – own risk and cost and shall have to
bear the consequences thereof.

Statutory reform of Constructive Notice

Constructive notice is more or less an unreal doctrine. It does not take notice
of the realities of business life. People know a company through its officers
and not through its documents. Section 9 of the European Communities Act,
1972 has abrogated this doctrine. The provisions of Section 9 are now
incorporated in Section 35 of the Companies Act, 1985 [English]. An example
of the impact of the new provisions has been provided by a case73 where a
debenture issued by a company was signed by a solicitor as attorney of a
director of the company, but not by the director personally. The articles of the
company provided that "every instrument to which the seal shall be affixed
shall be signed by a director". Even so the company was held liable. Stating the
effect of the new provision, the court said that before this enactment came into
force a person dealing with the company was required to look at the
memorandum and articles of the company to satisfy himself that the
transaction was within the corporate capacity but that Section 9(1) had
changed this. The sub-section says that good faith is to be presumed and that
the person dealing with the company is not bound to inquire. The courts in
India also do not seem to have taken the rule of constructive notice seriously.
For example, in Dehra Dun Mussoorie Electric Tramway Co v
Jagmandardas,74 the articles of a company expressly provided that the
directors could delegate all their powers except the power to borrow. Even so
an overdraft taken by the managing agents without approval or the board was
held to be binding, the court saying that such temporary loans must be kept
outside the purview of the relevant provision. Similarly, the Calcutta High
Court enforced a security which was not signed in accordance with the
company's articles.
 Doctrine of Indoor Management
Scope of operation

The role of the doctrine of indoor management is opposed to that of the rule of
constructive notice. The latter seeks to protect the company against the outsider, the
former operates to protect outsiders against the company. The rule of constructive
notice is confined to the external position of the company and, therefore, it follows
that there is no notice as to how the company's internal machinery is handled by its
officers. If the contract is consistent with the public documents, the person
contracting will not be prejudiced by irregularities that may beset the indoor working
of the company. The rule had its genesis in Royal British Bank v Turquand.

The role of the doctrine of indoor management is opposed to that of the rule of
constructive notice. The latter seeks to protect the company against the outsider; the
former operates to protect outsiders against the company. The rule of constructive
notice is confined to the external position of the company and, therefore, it follows
that there is no notice as to how the company’s internal machinery is handled by its
officers. If the contract is consistent with the public documents, the person
contracting will not be prejudiced by irregularities that may beset the indoor working
of the company.

Royal British Bank v. Turquand- Turquand, a company, had a clause in its

constitution that allowed the company to borrow money once it had been approved
and passed by resolution (decision) of the shareholders at a general meeting.
Turquand entered into a loan with the Royal British Bank and two of the co-directors
signed and attached the company seal to the loan agreement. Loan had not been
approved by the shareholders.

Company defaulted on their payments and the bank sought restitution. Company
refused to repay claiming that the directors had no right to enter into such an
arrangement.

It was held that– the Turquand was entitled to assume that the resolution was
passed.
The Company was therefore bound by the rule. Doctrine is also popularly known as
the Turquand rule’.

Exceptions to the Doctrine of Indoor Management

1. Knowledge of irregularity- The first and the most obvious restriction is that
the rule has no application where the party affected by an irregularity had
actual notice of it. Knowledge of irregularity may arise from the fact that the
person contracting was himself a party to the inside procedure.
Howard v Patent Ivory- The directors could not defend the issue of debentures
to themselves because they should have known that the extent to which they
were lending money to the company required the assent of the general
meeting which they had not obtained.

The principle is clear that a person who is himself a part of the internal
machinery cannot take advantage of irregularities.

2. Forgery- Doctrine of indoor management does not apply to forgery because

forgery is voidab- initio.
Ruben v. Great Fingall Consolidated- The plaintiff was the transferee of a share
certificate issued under the seal of the defendant company. The certificate was
issued by the company’s secretary, who had affixed the seal of the company
and forged the signatures of two directors.

The plaintiff contended that whether the signatures were genuine or forged
was a part of internal management and, therefore, the company should be
estopped from denying genuineness of document. But it was held that the rule
has never been extended to cover such a complete forgery.

Lord Loreburn said: It is quite true that persons dealing with limited liability
companies are not bound to inquire into their indoor management and will
not be affected by irregularities of which they have no notice. But this
doctrine, which is well established, applies to irregularities which otherwise
might affect a genuine transaction. It cannot apply to a forgery.
 3. Negligence on the part of the outsider- Anand Bihari Lal vs. Dinshaw and Co.-
In this case the plaintiff accepted transfer of Company’s property from its
accountant, the transfer was held void.

DOCTRINE OF INDOOR MANAGEMENT

The directors of a company borrowed a sum of money from the plaintiff. The company's articles provided
that the directors might borrow on bonds such sums as may from time to time be authorized by a resolution
passed at a general meeting of the company. The shareholders claimed that there had been no such
resolution authorizing the loan and, therefore, it was taken without their authority. The company was,
however, held bound by the loan. Once it was found that the directors could borrow subject to a resolution,
the plaintiff had the right to infer that the necessary resolution must have been passed.

In a subsequent case the rule is thus stated: "If the directors have power and authority to bind the company,
but certain preliminaries are required to be gone through on the part of the company before that power can
be duly exercised, then the person contracting with the directors is not bound to see that all these
preliminaries have been observed. He is entitled to presume that the directors are acting lawfully in what
they do."

The rule is based upon obvious reasons of convenience in business relations. Firstly, the memorandum and
articles of association are public documents, open to public inspection. But the details of internal procedure
are ot thus open to public inspection. Hence an outsider "is presumed to know the constitution of a
company; but not what may or may not have taken place Within the doors that are closed to him". The
wheels of commerce would not go round smoothly if persons dealing with companies were compelled to
inves- gale thoroughly "the internal machinery of a company to see if something is not wrong". People in
business would be very shy in dealing with such companies.

Yet another reason is explained by Gower in these words: "The lot of creditors of a limited company is not a
particularly happy one; it would be unhappier still of the company could escape liability by denying the
authority of the officials to act on its behalf.

The rule is of great practical utility. It has been applied in a great variety of cases involving rights and
liabilities. It has been used to cover acts done on behalf of a company by defacto directors who have never
been appointed, or whose appointed is defective, or who, having been regularly appointed, have exercised
an authority which could have been delegated to them under the company’s articles, but never has been so
delegated, or who have exercised an authority without proper quorum. Thus, where the directors of a
company having the power to allot shares only with the consent of the general meeting, allotted them
without any such consent. Where the managing director of a company granted a lease of the company’s
properties, something which he could do only with the approval of the board. Where the managing agents
having the power to borrow with the approval of directors borrowed without any such approval, the
company was held bound.