Articles Of Association

What is the 'Articles Of Association'

The articles of association is a document that specifies the regulations for a company's operations, and they define the company's purpose and lay out how tasks are to be accomplished within the organization, including the process for appointing directors and how financial records will be handled.

Articles of association often identify the manner in which a company will issue stock shares, pay dividends and audit financial records and power of voting rights. This set of rules can be considered a user's manual for the company because they outline the methodology for accomplishing the day-to-day tasks that must be completed.

BREAKING DOWN 'Articles Of Association'

While the content of the articles of association and the exact terms used vary from jurisdiction to jurisdiction, the document is quite similar everywhere, The articles of association generally contain provisions on the company name, the purpose of the company, the share capital, the organization of the company and provisions regarding shareholder meetings.

Company Name

As a legal entity, the company must have a name and it is 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 "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.

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, for example "management" while others require greater detail ("the operation of a wholesale bakery").

Share Capital

The number and type of shares that comprise the company's capital are listed in the articles of association. There will always be at least one form of common shares and there may be several types of preferred shares as well. 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.

Organization of the Company

The legal organization of the company, including its address, the number of directors and officers, the identity of the founders and original shareholders is 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.

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.

A company cannot ratify a pre-incorporation contract though it is open to it to enter into a fresh contract.

A pre-incorporation agreement is entered into by the corporate promoters, who form the company by filing its Articles of Incorporation. Since the corporation has not been formed yet, it cannot be a party to the agreement. If the corporation is not formed or if it fails to adopt the agreement, the promoters can be held personally liable for any breach of the agreement.

The promoter is obligated to bring the company in the legal existence and to ensure its successful running,; and in order to accomplish his obligation he may enter into some contract on behalf of prospective company. These types of contract are called ‘Pre-incorporation Contract’.

Nature of Pre-incorporation contract is slightly different to ordinary contract. Nature of such contract is bilateral, be it has the features of tripartite contract. In this type of contract, the promoter furnishes the contract with interested person; and it would be bilateral contract between them. But the remarkable part of this contract is that, this contract helps the perspective company, who is not a party to the contract.

One might question that ‘why is company not liable, even if it a beneficiary to contact’ or one might also question that ‘doesn’t promoter work under Principal-Agent relationship’.

Answer to all those question would be simple. The company does not in legal existence at time of pre-incorporation contract. If someone is not in legal existence, then he cannot be a party to contract, and ‘Privity to Contract’ doctrine excludes company from the liability. In Kelner v Baxter, Phonogram Limited v Lane

In pure common law sense, Pre-incorporation contract does not bind the company. But there are certain exceptions to this contract, and these exceptions were developed in USA, India and later in England.

Common seal can be used by any employee of the company irrespective of his designation.

 (b) Common seal can be used by any employee of the company irrespective of his designation.

Answer:-Common Seal means a metal stamp for stamping documents with the name of the company to show that they have been approved officially.

There is no definition prescribed under the Companies Act, 1956 and Companies Act, 2013. As per the Secretarial Standards issued by Institute of Company Secretaries of India, Common Seal means, the metallic seal of a company which can be affixed only with the approval of the Board of Directors of the Company. It is the signature of the company to any document on which It is affixed and binds the company for all obligations undertaken in the document.

In other words, Common Seal is the official signature of the company and each company shall have only one seal, on its incorporation. It is to be used in the manner prescribed in the Articles of Association and the Companies Act, 2013. Any document, on which the company’s seal is affixed and is duly signed by the authorized official of the company becomes binding on the company.

Approval- The Common Seal should be adopted by a resolution of the Board. The Common Seal is generally adopted at the first Board meeting. The impression of the Common Seal should be made part of the minutes of the meeting in which it is adopted.

Form and Content- Under the provisions of the Companies Act, 1956 the Common Seal should be made of metal and capable of being manually operated. On the other hand, there is no compulsion under the Companies Act, 2013 that the Common Seal should be made of metal or any other material. The Common Seal should have the name of the company and state in which the registered office is situated engraved in legible characters.

Affixing of Common Seal- Under the Companies Act, 1956, the following are the provisions and sections related to the Affixing of Common Seal:

a) As per Section 48, the deeds can be executed by the Company through its authorized representative under its Common Seal.  The affixing of Common Seal needs to be under the authority of the Board.

b) As per Section 54, a document or proceeding requiring authentication by a company may be signed by a director, the manager, the secretary or other authorized officer of the Company and need not be under its Common Seal.

The following are the provisions under the Companies Act, 2013 for the Affixing of Common Seal:

a) Article 2(ii) of TABLE F – Articles of Association of a Company Limited by Shares specifies that every certificate shall be issued under the seal of the Company.

b)  79. (i) & (ii) of TABLE F and 30(i) & (ii) of TABLE H – (Articles of Association of a Company Limited by Guarantee and not having Share Capital) provides that

(i) The Board shall provide for the safe custody of the seal.

(ii) The seal of the company shall not be affixed to any instrument except by     the authority of a resolution of the Board or of a committee of the Board authorized by it in that behalf, and except in the presence of at least two directors and of the secretary or such other person as the Board may appoint for the purpose; and those two directors and the secretary or other person aforesaid shall sign every instrument to which the seal of the company is so affixed in their presence.

Register of Common Seal – Every company should maintain a register containing particulars of documents on which the Common Seal of the company has been affixed and should be kept at the registered office of the Company.

Custody of Common Seal- The Common Seal should be kept at the registered office or at any other office of the company authorized by the Board. The Common Seal should be kept in the custody of a director of the company or the company secretary or any other official, as authorized by the Board.

Official Seal for use Outside India-

Section 50 of the Companies Act, 1956 states, regarding power of the Company to have official seal for use outside India, that to transact any business outside India, if authorized by its articles, a company can use a seal which shall be a facsimile of the Common Seal of the company, with the addition on its face of the name of the territory, district or place where it is to be used. A deed or other document to which an official seal is duly affixed shall bind the company as if it had been sealed with the Common Seal of the company.

Under the Companies Act, 2013, in this regard, Section 22(ii) states that a company may, by writing under its Common Seal, authorize any person, either generally or in respect of any specified matters, as its attorney to execute other deeds on its behalf in any place either in or outside India.

Documents on Which Common Seal is Mandatory- Under the Companies Act , 1956, the following documents are statutorily required to be affixed with a Common Seal:

a)A certificate of shares or stock;

b)A share warrant;

c) A power of attorney for execution of deeds;

d)A power of attorney authorizing a person to use its official seal at a place outside India;

e) An instrument of proxy executed by a body corporate.

NOTE : A certificate, under the Common Seal of the company, specifying any shares held by any member, shall be prima facie evidence of the title of the member to such shares [Section 84(1)].

Rule 6 of Companies (Issue of Share Certificates) Rules, 1960 regulates –

“Every share certificate shall be issued under the seal of the company, which shall be affixed in the presence of (i) two directors or persons acting on behalf of the directors under a duly registered power of attorney and (ii) the secretary or some other person appointed by the board for the purpose. The two directors or their attorneys and the secretary or other person shall sign the share certificate”.

Under the Companies Act, 2013, the following documents are statutorily required to be affixed with a Common Seal:

a) A certificate of shares or stock; (The share certificates issued by the company shall be sealed and signed in accordance with the provisions of the Share Certificate rules.)

b) A power of attorney for execution of deeds;

c) A power of attorney authorizing a person to use its official seal at a place outside India;

d) An instrument of proxy executed by a body corporate;

e) A report of the Inspector under Section 223 of the Companies Act 2013;

f) Any document as required by Liquidator in the event of winding up.

NOTE: A certificate, issued under the Common Seal of the company, specifying the shares held by any person, shall be prima facie evidence of the title of the person to such shares. [Section 46(1)].

Rule 5(3) of Companies (Share Capital and Debentures) Rules, 2014 regulates:

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Every share certificate shall be issued under the seal of the company, which shall be affixed in the presence of, and signed by-

(a) two directors duly authorized by the Board of Directors of the company for the purpose or the committee of the Board, if so authorized by the Board; and

(b) the secretary or any person authorized by the Board for the purpose:

Provided that, in companies wherein a Company Secretary is appointed under the provisions of the Act, he shall deemed to be authorized for the purpose of this rule:

Provided further that, if the composition of the Board permits of it, at least one of the aforesaid two directors shall be a person other than the managing or whole-time director:

Provided also that, in case of a One Person Company, every share certificate shall be issued under the seal of the company, which shall be affixed in the presence of and signed by one director or a person authorized by the Board of Directors of the company for the purpose and the Company Secretary, or any other person authorized by the Board for the purpose.

Explanation.- For the purposes of this sub-rule, a director shall be deemed to have signed the share certificate if his signature is printed thereon as a facsimile signature by means of any machine, equipment or other mechanical means such as engraving in metal or lithography, or digitally signed, but not by means of a rubber stamp, provided that the director shall be personally responsible for permitting the affixation of his signature thus and the safe custody of any machine, equipment or other material used for the purpose

Appointment of Proxies

Section 175(5)(b) of the Companies Act, 1956 and Section 105(6) of the Companies Act, 2013 in regard to sign the documents on which Common Seal is so affixed states that:

The instrument appointing a proxy shall—

(a) be in writing; and

(b) be signed by the appointer or his attorney duly authorized in writing or, if the appointer is a body corporate, be under its seal or be signed by an officer or a attorney duly authorized by it.

Every annual general meeting of the company must be held in each calendar year.

(a) Every annual general meeting of the company must be held in each calendar year.

Answer:- Annual General Meeting:-

As per Section 96 of the Companies Act , 2013,

·         Every Company other than One person Company must hold a general meeting in each year apart from other meetings as Annual General Meeting (AGM).

·         Every Company has to set up a managing Committee to run its smooth working of managerial works.

·         Every Company , apart from One person Company ( OPC ) must have to hold in addition to other meetings, by giving a notice about the meeting, not more than 15 months in between the date of AGM to the next. A Company may hold its first AGM within the period of 9 months from closing of its first financial year otherwise in other cases within the period of 6 months. [Section 96(1) of the Companies Act,2013]

As per the above , if a company hold its meeting, then it has no need to call an AGM in the year of its incorporation.

However , the registrar may extend the period within any AGM ( not being the first AGM) shall be held, not exceeding 3 months under section 96(1).

·         Every AGM shall be called during business hours ( i.e. 9 a.m. to 6 p.m.) on any day not a national day declared by the Central Government , and also held I the registered office or in any place within the city ,village, or town in which the registered office is situated.

·         According to Section 129(2), at every AGM board of directors of the company shall lay before the meeting financial statement for the financial year.

·         Moreover, Section 129(3) says, where the company has one or more subsidiaries, then they have to prepare in addition to the statement under section 129(2) a consolidated financial statement and of all subsidiaries in same format and also present before the AGM of the Company with the prescribed statement under section 129(2).

·         There is no provision for extension of 1st AGM but in other cases it can be extended for period of three months by ROC.[ Second proviso to Section 96 of the Companies Act,2013]. However , if such first AGM is not held, NCLT can order holding of General Meeting under section 97 of the Act. Application for extension of time should be submitted electronically in e-form no. 61.

·         After the ending of the financial year i.e. 31st March, all the auditing processes must be completed within three-four months. But the AGM must be held within six months from the closing date of financial year. A notice of 21 days has to be sent to all members. So, the audited accounts, directors report has to be closed on 31st March and been posted by first week of September.

·         Business to be transacted:-

As per section 102(2) of the Companies Act, 2013,the following business es may be transacted during AGM:-

1) Ordinary Business [Section 102(2)], i.e.

a. Consideration of financial Statements and reports of board of directors and Auditors.

b. Declaration of any Dividend

c. Appointment of directors in place of retiring one

d. Appointment of and Fixation of the remuneration of the auditors.

2) Special Business [Section 102(b)], : 

Apart from the above businesses , the rest are deemed to be a Special business , transacted during the AGM.

Annual General Meeting is compulsory if,

·         Business of the Company was taken over by Government.

·         Company did not function.

·         Accounts of the Company are not ready.

Defaulting in holding Annual General Meeting:

If a Company not holding an Annual General Meeting as per Section 166 , or not complying with any direction of the Central Government, then the Company and its every officer come in the Category under section 168 of the Company Act ,2013 and punishable with fine which may extend to Rs. 50000 and for regular basis it may extend to Rs.2500 for every day .[ Section 168]

Further , as per section 167 of The Companies Act ,1956 provides for the power of the Company Law Board (CLB) to call AGM in the following circumstances:

·         As per section 94, if Company fails to hold Annual General Meeting, any member of the company can request to NCLT (powered with CLB) for calling AGM.[ Section 97(1)]

·      

         The CLB can give any ancillary or consequential directions which are expedient in relation to the calling, holding and conducting the meeting. [ Section 167(1)]

·     

           Apart from the above, CLB also directs that one member of the company present in person or by proxy, which shall be deemed to constitute a meeting.

·         A general meeting held as per the direction of the CLB, deemed to a n annual general meeting of the company.

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