Meaning of Articles of Association of a company:-

Article of association of a company is that document that contains and specifies the regulations of a company’s operations. In addition to this, it defines the purpose for which the company has been established and also the manner in which the various tasks of the company would be accomplished, including the manner of appointment of directors and the way in which the whole business of the organization would be managed.

Unlike the Memorandum of Association of a company which, in every case follows a strict format for its preparation as prescribed under the Companies Act, 2013, the Articles of Association of a company, irrespective of the fact that it slightly varies from one jurisdiction to another, this document incorporates many similarities than differences. In other words, the basic setup or the basic platform on which the Articles of Association is prepared is quite similar everywhere. Apart from including the procedure for appointment of directors and the manner in which the whole organization would be handled, the Articles also incorporate within itself, the manner in which an organization would be issuing securities to the general public, pay dividends, the manner in which a company would get its accounts audited and many more.

Following mentioned are the basic elements which any company should incorporate in its Articles of Association:-

1. Name of the Company-

A company has a legal identity distinct from its members is recognized in the market through its own name and this name should be clearly mentioned in the Articles of Association of the company. Usually affixes like “Inc.” or “Ltd.” or “Pvt. Ltd.” are used by the company to describe the nature of the company, that is, whether a company is a public company or a private company. Apart from this, the use of words that are confusing in nature or that may create a great difficulty for the general public to recognize the correct nature of the company, usage of such name by the company should be prohibited.

2. Purpose of the Company-

The purpose for which the company has been established, either to fulfill the short-term objectives or for the fulfillment of long-term objectives, should be clearly stated in the Articles of Association.

3. Share Capital-

The number and types of shares which comprise and form the overall share capital of the company are required to be listed in the company’s Articles of Association. With regard to the issue of share capital, whether the company is willing to make a private placement of securities or whether it wants to make a public issue and that if it wants to make a public issue then whether it is willing to issue equity share capital or preference share capital, needs to be mentioned in the Articles of Association.

4. Organization of the Company-

The organization of the company comprising of the address of the organization, the number of directors and other officers, the identity of the founders and original shareholders should be mentioned in the Articles of Association.

5. Shareholders meet-

As far as shareholders meet is concerned, then, the provisions concerning the first shareholders meet and the regulations that would govern the whole general meeting need to be mentioned in the Articles of Association. Apart from this, the manner in which voting is to be conducted in the organization also needs to be mentioned in the Articles of Association of the company.

Now, after knowing in brief about the meaning and concept of Articles of Association of a company and that, what all it contain, we are now going to understand the concept of Articles of Association by taking few examples:-

Example 1- Articles of Association of Energy Efficiency Services Limited (EESL).

Background of the company- Energy Efficiency Services Limited (EESL) being a joint venture of NTPC Ltd, Power Finance Corporation, Rural Electrification Corporation, and POWERGRID was set up under the Ministry of Power to facilitate the implementation of energy efficiency projects which seeks to make the energy consumption more efficient so that it can go parallel with the growing market needs. Now, we shall discuss the basic elements of the Articles of Association of Energy Efficiency Services Limited (EESL) to a certain extent, as follows:-

The primary element stated in the Articles of Association is the interpretation clause, which incorporates the various terms to be interpreted in accordance with the use of such terms in the organization. An organization gives such meaning to a term that would best suit its requirements. Say for example, by virtue of the Articles of Association of Energy Efficiency Services Limited (EESL), “Auditors” means, a firm or the firms of Chartered Accountants as may be appointed as the statutory auditors of the Company by the Comptroller and Auditor General of India (CAG).

Thereafter, comes the “Constitution” part of the Articles. Herein, the company enlists all, what it is to follow by virtue of its constitution. If we look at the case of EESL Ltd., then herein, it has been clearly stated that Table A in the first schedule to the Act, does not apply to the Company[1], except so far as the same has been incorporated in the Articles of Association of the Company. Thereafter, an issue of whether the company would be constituted as a private company or a public company is also addressed herein the Articles of a Company. For example- In the case of EESL Ltd., the company, by virtue of its Articles is a public company as per the Companies Act, 1956[2]. Then comes the share capital, which the company is authorized to issue during its complete tenure, issued share capital– which the company intends to issue to its shareholders, subscribed share capital– which after being issued, is subscribed by the shareholders and then comes the paid-up share capital which is indicative of those shareholders who have subscribed to the shares of the company and have paid the complete value of shares subscribed. Furthermore, in the Articles of Association of a company, whether the company is willing to accept the payments for shares in installments or in lump-sum, is also incorporated.

Forfeiture of shares and the process as to how such forfeiture is to be made is also an important element that needs to be included in the Articles of Association of the Company. Process of forfeiture of shares indicates towards the process as to how the shares allotted are to be canceled, also as to whether the Company would be adopting the policy of “Refund” of the Share money paid by the shareholders for the loss that they suffer due to cancellation of shares, also needs to be mentioned in the Articles of the Company.

There are many other elements that are to be put into the Articles of Association of a Company, but herein we have listed just a few of them.

Example 2- Articles of Association of National Hydropower Corporation Limited (NHPC Ltd).

Background of the Company- The National Hydropower Corporation Limited is a Government of India enterprise, which has been established with an objective to plan, promote and organize an integrated and efficient methodology to generate electricity by the force of water or in other words to bring into reality the hydroelectric power generation. NHPC Ltd. has now also expanded its working ambit to the generation of electricity by capturing the solar, wind, geothermal, and other energies so that the generation of electricity does not remain wholly dependent upon the power generation by water pressure but also so that the scope of power generation could be broadened and areas diversified.

By virtue of the Articles of Association of the Company[3], it forbids to be a Private Company. Although in the Articles of Association of Companies, we tend to notice certain changes as per the requirements of the companies, here, in the instances which we have picked up to understand the concept of “AOA of Government Companies” in a convenient way, we came across such AOA’s which are almost similar.

As was the case of The Energy Efficiency Services Limited (EESL Ltd.), wherein we observed that Table A of Schedule 1 of the Companies Act was not made applicable to the Company, similar is the case with NHPC Ltd, where the company also does not follow Table A except when it has been specifically mentioned in the Articles of Association of the company. It being an important point to note that, where certain companies do not have their Articles of Association, for example as is the case of Public Companies, they follow the provisions as having been stated in Table A of Schedule 1 of the Companies Act. Table A of the Companies Act; provide model articles to be followed by the companies in the absence of proper Articles of Association.

Apart from Table A, the Articles of Association consists of a lot more elements like the interest payable on non-payment of call money, what is the procedure for share transmission, the procedure for appointment of a nominee, and many more. These are the contents of the Articles of Association, now the questions that arise in our mind are- why at all do we incorporate such elements in the Articles of a company and what purposes do they fulfill for the organization.

Now, in order to answer such questions, we again have to refer to the very basic concept of the Articles of Association of a company. As we have already referred to the meaning of the Articles of Association in the very beginning of the write-up, we looked that Articles of Association of a company is that core document apart from the Memorandum of association, which incorporates within itself all the procedures/processes to accomplish a particular task. This document incorporates the minutest of every detail which holds utmost importance in governing and managing the organization in the best possible manner.

As far as the Articles of Association of National Hydropower Corporation Limited is concerned, it carries almost the similar quantum of details as were there in the case of Energy Efficiency Services Limited (EESL Ltd.), therefore such elements have not been repeated for the sake of brevity.

Conclusion-

In the end it is to state that both the Articles of Association and Memorandum of Association stand on the same pedestal as far as their importance is concerned. Where on the one hand, the Memorandum of Association details the five clauses that are- The Name Clause, The Registered Office Clause, The Objects Clause, The Liability Clause and The Capital Clause and therefore have a set format by virtue of which the Memorandum tends to discuss as to what all are the tasks to be performed by the organization, what are its objects or for what purposes the organization has been established, what would be the liability of the members working in the organization, i.e, whether the liability would be limited or unlimited and that what is the maximum amount of capital which can be raised by the company during the lifetime of the company, and on the other hand there is Articles of Association of a company, which details about the procedures of achieving the tasks and objects mentioned in the Memorandum of Association. Therefore we can say that both of these documents go hand in hand and hence hold equal importance for a company.

[1] “Company” herein refer to Energy Efficiency Services Limited (EESL Ltd.)

[2]The Articles of Association of the Energy Efficiency Services Limited (EESL Ltd.) has been prepared in accordance with the Companies Act, 1956.

[3] Herein, the term “Company” is indicative of The National Hydropower Corporation Limited (NHPC).

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