Introduction:
According to Section 2(5)[1] of the Companies Act, 2013 the Articles of Association refer to those articles as “originally framed” or “altered” from time to time or applied in pursuance of any previous company law or this Act.
However, this definition is vague and ambiguous.
A different, better way to define this concept is that these Articles form a document that set a format of the rules and by-laws of the general management of the company. It is a rather significant document as it contains the regulations for the internal administration of the company’s affairs.
The Articles are a rule book of the company and can be seen as a document similar to a partnership deed for a company.
In layman terms, these Articles set out how a company is run, governed and owned. These Articles puts restrictions on a company’s powers, especially in cases where shareholders might believe that directors have too much control, and they want to reduce that.
Difference Between Memorandum and Articles of Association
| Basis | Memorandum of Association | Articles of Association |
| Meaning | Charter of the company, i.e., it contains all the fundamental conditions upon which the company is allowed to incorporate. | Maintains the internal regulations of the company, i.e., it contains all the rules of the company. |
| Provision in Companies Act, 2013 | Section 2(56) | Section 2(5) |
| Purpose | A memorandum defines the scope of incorporation of a company. | Articles explain the rules for carrying out objectives of the company as set out in the Memorandum. |
| Status | Subordinate to the Companies Act | Subordinate to both the Companies Act and the Memorandum |
| Ratification | Any act that is ultra vires the company is void and cannot be ratified even by unanimous consent of shareholders. | Anything done by a company that is ultra vires to the Articles can be considered as an irregular act and should be confirmed by the shareholders. |
| Obligation | Must be created for all companies. | If the company is limited by shares, it can adopt Table A in place of Articles. |
| Contents | Every Memorandum must contain its six primary clauses. | It depends on every company. |
| Importance during registration | Required to be filed. | Optional for every company. |
| Alteration | Alteration of memorandum in certain cases requires approval of Tribunal. | Articles can be altered by passing a special resolution. |
Contents of Articles of Association
The contents of the Articles should be drafted in a way that they do not contradict the Companies Act, the Memorandum or any other law for the time being in force.
These articles are to be printed, be divided into paragraph numbers, and be signed by each subscriber of the Memorandum in the presence of at least one witness who will attest to the same.
These articles shall be in respective forms specified in Tables F, G, H, I and J in Schedule I[2] of Companies Act, 2013.
These contents are:
- Share capital and variation of rights.
- Lien on shares.
- Calls on shares and forfeiture of shares.
- Transfer and Transmission of shares.
- Alteration of share capital.
- Capitalization of profits.
- Buy-back of shares.
- General meetings, proceedings at general meetings and adjournment of meetings.
- Voting rights and proxy.
- Board of Directors and proceedings of the Board.
- Chief Executive Officer, Manager, Company Secretary, or Chief Financial Officer.
- The Seal (if any).
- Dividends, Reserve and Accounts.
- Winding up.
- Indemnity.
Powers of the Board of Directors
In a nutshell, a director of a company is a person who is responsible for maintaining the administration, implementation and executive work of a company.
According to Section 2(34) of the Companies Act, 2013, a director means “a director appointed to the Board of a company.”
Section 2(10) of the Act defines a Board of Directors as a “collective body of the directors of a company.”
Section 179(1)[3] of the Act provides that the Board of Directors of a company is entitled to exercise any and all powers and do all acts, provided they are exercised and committed in good faith and do not contravene the Act, the Memorandum or Articles.
Section 179(3)[4] confers powers upon the Board, which are as follows:
- To make calls on shareholders in respect of money unpaid on their shares;
- To authorize buy-back of securities under section 68;
- To issue securities, including debentures, whether in or outside India;
- To borrow monies;
- To invest funds of a company;
- To grant loans or give guarantee or provide security in respect of loans;
- To approve financial statement and the Board’s report;
- To diversify the business of a company;
- To approve amalgamation, merger or reconstruction;
- To take over a company or acquire a controlling or substantial stake in another company;
- Any other matter which may be prescribed.
Delegation of Powers by Board of Directors
The landmark judgment of A.K Roy and anr. v State of Punjab[5] brought a significant change in delegation in India by introducing the Latin maxim “delegatus non potest delegare”, which roughly translates to “a delegate cannot further delegate”.
This also brought out the agency theory, which states that due to shareholders and directors having a principal-agent relationship, it binds them together to act in good faith in the interest of the company.
Delegation refers to the process of passing on certain rights and duties of a superior to his subordinates, and it is important in any organization. It works wonders for any superior authority, be it a manager, or a Director. Its importance is as follows:
- A Director is able to divide the work and allocate it to his subordinates, which reduces the majority of the workload.
- Due to the reduction of workload, the Directors can focus more on the importance and critical issues of concern.
- Through delegation, the relationship between a Director and their subordinates becomes stronger and more meaningful.
- Delegation paves a way for subordinates to enhance their skills and get importance as well as feel motivated to work to their optimal potential.
However, this raises a question: What is the legislation behind this?
Due to no express provision for delegation, the Board of Directors is entitled as well as expected to exercise all the powers of the company. However, as the powers are not only important but are extensive, which cannot be handled just by the Directors, which is why delegation is needed.
In order to circumscribe the Directors’ powers of delegation, the authority of shareholders takes over, and that authority imposes restrictions as well as specifies the functions and duties which will be exercised by the Directors exclusively.
With the new changes in the current Act, the Indian scenario has become better, in the sense that instead of the shareholders taking full control over the Directors, the latter party now possesses an inherent power of delegation.
There are inklings of delegations mentioned in certain statutes, which are as follows:
Companies Act, 2013
While its predecessor statute did not confer any independent powers for delegation to the Directors, with the latest changes and amendments, the 2013 Act gave full powers to the Directors, however, failed to create an express provision for delegation.
In the Act, the proviso to Section 179(3)[6]states the following:
“Provided that the Board may, by a resolution passed at a meeting, delegate to any committee of directors, the managing director, the manager or any principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office, the powers specified in clauses (d) to (f) on such conditions as it may specify.”
Therefore, according to this proviso, only through a resolution passed in a general meeting, can a Director delegate his powers to a certain committee, be it sub-managers, managing director or a manager.
Even then, there is a restriction. Only the powers mentioned in Clauses (d) to (f) of Section 179(3) can be delegated.
Articles of Association
The situation of delegation is a bit better here; it has been mentioned, although not exclusively, in Clause 71 and 23 of Tables F and H respectively.
As both have the same language, the clauses state as follows:
“The Board may, subject to the provisions of the Act, delegate any of its powers to committees consisting of such member or members of its body as it thinks fit; any committee so formed shall, in the exercise of the powers so delegated, conform to any regulations that may be imposed on it by the Board.”
Therefore, the Clauses mention that only by adhering to the provisions of the Act, can the Board delegate any of its powers to committees consisting of members fit for the job. The members are, however, indemnified to conform to any and all regulations imposed by the Board and shall exercise these powers in good faith.
However, there is a slight difference between the provision mentioned in the Act, and the clause in the Articles.
While both allow delegation, in order to exercise these powers under the Act, the director has to pass a special resolution, while in the Articles, as long as the sub-director is adhering to the provisions of the Act, he/she does not need a special resolution.
The powers delegated via the Act are restricted, while the ones delegated via the Articles are unrestricted, as long as they are being exercised in good faith.
Judicial Pronouncements
In Re City Equitable Insurance Co.[7]
This case highlights the neglect of delegation by the Directors, and it was held that Directors can delegate all powers and responsibilities to their subordinates and remove their extensive workload.
Bhagwati Prasad v Shiromani Sugar Mills Co.[8]
In this case, it was held that Articles of Association of every company empowers the Board of Directors with the power to delegate, as they deem fit.
Conclusion
Articles of Association, defined under Section 2(5) of the Companies Act, 2013, form a document that regulates the company’s operations and defines the company’s purpose. That document enlists how tasks, illustrated in the Memorandum of Association, are to be accomplished for the betterment of the company.
They are a subsidiary of the Memorandum and is similar to a partnership deed of a partnership.
Directors, under the previous Companies Act of 1956, did not have any powers concerning delegation, but under the new Act of 2013, after various amendments, have implied provisions in Section 179(3), and under Tables F and H of the new Articles of Association.
The delegation, in a nutshell, refers to the act of assigning responsibility to a subordinate for more effective work, and optimal output. In a company, the Board of Directors should only delegate the non-vital powers and duties to his subordinates, and due to the changing times, the delegation has become more important for every company.
In some cases, the power is restricted, while the Articles provide unrestricted delegation power.
References:
Books/Acts
- B. K Goyal, Company Law, (Singhal Law Publications, Delhi, 14th edn. (2019))
- The Companies Act, 2013 (bare act).
Websites
- Shivani Kharai, Memorandum and Articles of Association, BLACK n’ WHITE JOURNAL, https://bnwjournal.com/2020/11/07/memorandum-and-article-of-association/
- Md. Sahabuddin Mondal, Articles of Association, LEGAL SERVICES INDIA, http://www.legalservicesindia.com/article/2313/Articles-of-Association.html
- Articles of Association, CORPORATE FINANCE INSTITUTE, https://corporatefinanceinstitute.com/resources/knowledge/other/articles-of-association/
- James Chen, Articles of Association, INVESTOPEDIA, https://www.investopedia.com/terms/a/articles-of-association.asp
- Surbhi S, Difference between Memorandum and Articles of Association, KEY DIFFERENCES, https://keydifferences.com/difference-between-memorandum-of-association-and-articles-of-association.html
- Diva Rai, Articles of Association, IPLEADERS, https://blog.ipleaders.in/articles-of-association/
- Powers of Board of Directors, TOPPR, https://www.toppr.com/guides/business-law-cs/elements-of-company-law-ii/powers-board-directors/
- Delegation of Power by the Board of Directors, IPLEADERS, https://blog.ipleaders.in/delegation-of-powers-by-the-board-of-directors/
- CS Divesh Goyal, Delegation of Power under Companies Act, COMPANIES ACT, 2013, http://www.csdiveshgoyal.info/2016/12/delegation-of-power-under-companies-act.html
Other Sources:
[1]Section 2 of Companies Act, 2013-Definitions, CORPORATE LAW REPORTER, (last accessed on 17 July 2021), http://corporatelawreporter.com/companies_act/section-2-of-companies-act-2013-definitions/
[2]Schedule 1 of Companies Act, 2013: Memorandum of Association of a company limited by shares, CORPORATE LAW REPORTER, (last accessed on 17th July 2021), http://corporatelawreporter.com/companies_act/schedule-1-of-companies-act-2013-memorandum-of-association-of-a-company-limited-by-shares/
[3]Sheetal Shukla, Power of Boards (Section 179 of Companies Act, 2013)-Discussed!, TAXGURU, https://taxguru.in/company-law/power-boards-section-179-companies-act-2013-discussed.html
[4] Ibid.
[5] 1986 AIR 2160: 1986 SCR (3) 961
[6]Sheetal Shukla, Power of Boards (Section 179 of Companies Act, 2013)-Discussed!, TAXGURU,https://taxguru.in/company-law/power-boards-section-179-companies-act-2013-discussed.html
[7] (1925) 1 Ch. 407
[8] (1949) All. 195
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