ARTICLE OF ASSOCIATION

1.0 Articles of Association

The Articles of Association is a crucial document for a Joint Stock Company, outlining the
rules, regulations, and by-laws that govern the company's internal management and
operations. It plays a significant role in defining the rights and responsibilities of the
company's members in relation to one another. The provisions within the Articles of
Association must align with the Companies Act and the Memorandum of Association (MOA).
If any clause contradicts these legal frameworks, it will be deemed invalid and inoperative.
For private companies (whether limited by shares, limited by guarantee, or unlimited),
having their own Articles of Association is mandatory. Public companies, however, have the
option to either draft their own articles or adopt the Model Articles provided in Table A of
Schedule I under the Companies Act, 1956. If a public company formulates only a few of its
own articles, the remaining provisions from Table A will automatically apply. To ensure
clarity and compliance, the Articles must be printed, well-structured, and arranged in a
sequential order. Each subscriber to the Memorandum of Association (MOA) must sign the
Articles in the presence of at least one witness for validation.

2.0 Contents of Articles of Association

The Articles of Association typically outline the following key aspects of a company's internal
governance: a)
Classes of Shares – Specifies the different classes of shares, their values, and the rights
associated with each type.
b) Share Management – Covers calls on shares, transfer procedures, forfeiture, conversion,
and capital alterations.
c) Board of Directors – Details the appointment process, powers, responsibilities, and duties
of directors.
d) Meetings and Records – Governs the conduct of meetings, issuance of notices, and
maintenance of minutes.
e) Financial Reporting – Establishes guidelines for accounts and audits.
f) Auditors – Defines the appointment process and remuneration of auditors.
g) Voting Rights – Outlines rules regarding voting procedures, polling, and proxy
representation.
h) Dividends and Reserves – Specifies policies for declaring dividends and maintaining
reserves.
i) Winding Up – Describes the procedure for dissolving the company.
j) Borrowing Powers – Defines the borrowing authority of the Board of Directors and
management.
k) Minimum Subscription – Specifies the minimum capital required before commencing
business.
l) Common Seal Regulations – Establishes rules for the use and custody of the company's
common seal.
m) Conversion of Shares into Stock – Governs the process of converting fully paid shares

1
into stock.
n) Lien on Shares – Details the company's right to retain possession of shares until
outstanding dues are cleared.

3.0 Alteration of Article of Association

The Articles of Association can be altered, but any modifications must adhere to legal
provisions and serve the best interests of the company. The changes must not violate
contractual obligations with third parties or introduce anything unlawful.
Regulations for Altering the Articles:
1. Compliance with the Law – Any proposed alteration must align with the provisions of the
Companies Act and should not contradict legal requirements.
2.Consistency with the Memorandum of Association – The amendments must not conflict
with the Memorandum of Association, which outlines the company's fundamental
objectives and scope.
3.Legality of Alteration – The modifications should not introduce provisions that are illegal
or unenforceable.
4.Benefit to the Company – Any alteration must be made in good faith and should be
beneficial to the company as a whole.
5.Protection of Members' Rights – The changes should not impose additional liabilities on
existing members without their consent.
6.Special Resolution Requirement – Alterations can only be made through the passing of a
special resolution by the company's members.
7.Retrospective Effect – Amendments can be applied retrospectively, provided they comply
with the legal framework.
8.No Judicial Intervention – Courts do not have the authority to order an alteration of the
Articles of Association.

4.0Binding Effects of the Memorandum and Articles of Association

According to the Companies Act, once the Memorandum and Articles of Association are
registered, they become legally binding on both the company and its members. It is as if
each member and the company have personally signed these documents, agreeing to abide
by their provisions. The Articles of Association establish a contractual relationship in three
key ways:
1.Between the company and its members – The company is obligated to adhere to the
terms outlined in the Articles, ensuring compliance with internal governance rules.
2.Among the members themselves – Members must observe the rights and responsibilities
set forth in the Articles, fostering fair and transparent dealings within the organization.
3.Between members and the company – Members can enforce their rights or challenge any
violations by the company, just as the company can take action against members who fail to
comply with the Articles.

4.1Company’s Obligation Toward Its Members

The company is legally required to follow the Articles and act within their framework. If the
company violates any provision, members have the right to seek legal remedies, such as
filing an injunction to prevent the breach. This ensures that the company's governance
2
remains transparent, accountable, and aligned with its foundational principles. The
company has the legal standing to bring such a lawsuit. Members can challenge actions that
go beyond the company's legal authority (ultra vires acts), any illegal conduct, or resolutions
that were fraudulently obtained or conflict with the Articles of Association.

Additionally, members have the right to sue the company to enforce their personal rights as
outlined in the Articles. For instance, if a dividend has been officially declared but not
distributed, a shareholder can take legal action to claim their rightful payment. However,
only an existing shareholder or member of the company can initiate such proceedings,
ensuring that enforcement rights remain exclusive to those directly affected.

This principle was illustrated in the case of Wood v. Odessa Waterworks Co., where the
court reinforced that a company's Articles of Association are binding on both the company
and its members.

In this case, the Articles of the Waterworks Company stated that the directors could, with
the approval of a general meeting, declare a dividend to be paid to shareholders. However,
instead of paying the dividend in cash, the directors passed a resolution to issue debenture
bonds to the shareholders.

A shareholder challenged this decision, arguing that it violated the company's Articles. The
court ruled in favor of the shareholder, stating that the phrase "dividend to be paid"
naturally implied payment in cash, not in the form of debenture bonds. As a result, the
directors were prohibited from implementing the resolution, reaffirming that the Articles of
Association are legally binding and must be followed as written.

4.2. Binding on Members in Their Relationship with the Company

The Articles of Association serve as a contract of utmost significance between the company
and each member, legally binding members to the company under a statutory covenant.

Any amount owed by a member to the company, as stipulated in the Memorandum or

Articles, is considered a debt due to the company. By becoming a member, an individual is
deemed to have agreed to abide by the Articles, just as if they had personally signed a
contract to follow them. Consequently, the company has the legal right to enforce
compliance with its Articles and take action against members who violate them.

A notable case illustrating this principle is:

The Articles of Association of a company stated that if a member declared bankruptcy, their
shares must be sold at a price set by the directors. When a member, Borland, went
bankrupt, his trustee in bankruptcy attempted to sell the shares at their actual market
value, arguing that he was not bound by the Articles. However, the court ruled that he was
legally required to adhere to the company’s Articles, reinforcing the principle that members
must comply with the terms laid out in the Articles of Association.

4.3. Binding Between Members

3
The Articles of Association establish a contractual relationship between members only in
their capacity as members and in matters relating to the company. However, they do not
regulate personal dealings between members outside of this relationship.

Generally, any rights under the Articles must be enforced through the company, rather than
directly between members. However, there are exceptions where courts have recognized
direct contractual obligations between members under the Articles, without requiring the
company to be a party to the dispute.

A case illustrating this principle is Rayfield v Hands (1960):

- Rayfield, a shareholder, was obligated under the Articles to inform the directors if he
intended to transfer his shares.
- The directors were, in turn, required to purchase the shares at a fair value.
- When Rayfield informed them of his intention, the directors refused, arguing that
the Articles did not impose a binding obligation on them.
- The court ruled against the directors, treating them as members bound by the
Articles, and compelled them to purchase Rayfield’s shares at a fair price.
- Importantly, the court also held that Rayfield was not required to involve the
company in the lawsuit, reinforcing the principle that Articles may, in certain cases,
create enforceable rights between individual members.

Thus, while the Articles primarily govern the relationship between the company and its
members, there are circumstances where courts may recognize obligations between
members themselves, provided the dispute arises from their rights as shareholders and is
within the scope of the Articles.

4.4. No Binding Effect on Outsiders

The Memorandum and Articles of Association do not create a contractual relationship

between the company and third parties. Neither the company nor its members are
obligated to outsiders based on the provisions of these documents.

1. Browne v La Trinidad: The Articles of the company included a clause stating that
Browne should be a director and could not be removed .Despite this, he was
removed and sought an injunction to prevent the company from excluding him. The
Articles did not constitute a binding contract between Browne and the company. As
an outsider in this context, he had no enforceable rights under the Articles.
2. Eley v Positive Government Security Life Assurance Co.: The Articles stated that Eley
would be the company’s solicitor and could not be removed except for misconduct.
Later, he became a member of the company, but was still removed as a solicitor. He
sued the company for breach of the Articles, claiming his right to remain as solicitor
was protected. Court's Ruling: The Articles did not create a binding contract between
the company and Eley in his capacity as a solicitor. Since his right as a solicitor did
not arise from his status as a member, he was considered an outsider and could not
enforce the Articles against the company.

4
Thus , The Articles bind the company and its members only in their capacity as members.
Third parties (outsiders) cannot rely on the Articles to assert contractual rights against the
company. Even a member acting in another capacity (e.g., employee, solicitor, director)
cannot enforce rights under the Articles unrelated to their membership status.

His suit was dismissed. The Court held, “An outsider to whom rights purport to be given by
the Articles in his capacity as such outsider, whether he is or subsequently becomes as
member, cannot sue on those articles to enforce those rights”

5.1 Introduction

Companies frequently require funds to finance their various projects, making borrowing an
essential aspect of their operations. It is almost impossible for a company to function
without securing loans or credit at some point. A review of corporate balance sheets often
reveals borrowings listed as liabilities. However, borrowing is subject to certain legal
restrictions. If a company exceeds its authorized borrowing powers, such transactions may
be deemed ultra vires—beyond its legal authority—and therefore invalid.

5.2 What is the Doctrine of Ultra Vires?

Meaning of Ultra Vires : The term "ultra vires" originates from Latin, where "ultra" means
beyond, and "vires" means power or authority. In corporate law, an act is considered ultra
vires if it exceeds the legal powers granted to the company or its directors.

Doctrine of Ultra Vires :The Memorandum of Association serves as the foundation of a

company's legal identity, defining its objectives, powers, and scope of operations. A
company is only permitted to act within the powers explicitly granted by theMemorandum
of Association. Any action that goes beyond these specified objectives is considered ultra
vires and is therefore unenforceable by law.However, companies can engage in activities
incidental or necessary to achieve their main objectives. The ultra vires doctrine ensures
that companies do not misuse their legal status or mislead stakeholders by engaging in
unauthorized activities.

5.3 Origin of the Doctrine of Ultra Vires

The doctrine of ultra vires originated in corporate law to restrict companies from exceeding
their legally defined powers. It was first established in the landmark case of Ashbury Railway
Carriage and Iron Co. Ltd. v. Riche (1875).

Ashbury Railway Carriage & Iron Co. Ltd. v. Riche (1875)

The company’s Memorandum of Association stated that its purpose was manufacturing and
selling railway carriages and wagons.The directors entered into a contract for financing the
construction of a railway in Belgium, which was beyond the company’s stated objects.Later,
the company refused to honor the contract, arguing that it was ultra vires (beyond its
powers).
The House of Lords held that the contract was ultra vires and therefore void.Since the
contract was outside the scope of the Memorandum of Association, it was unenforceable
even if all shareholders approved it.This case established the principle that a company’s

5
actions must be within the limits of its Memorandum, ensuring that companies do not act
beyond their legally defined powers.This decision formed the foundation of the doctrine of
ultra vires, protecting investors, creditors, and the public by ensuring that companies
remain within their legally authorized scope of business.

When the case was brought before the House of Lords, it was ruled that the contract in
question was ultra vires—beyond the scope of the company's Memorandum of Association
—and therefore null and void. The court interpreted the term "general contracts" in relation
to the preceding words "mechanical engineers", concluding that the phrase referred only to
contracts directly related to mechanical engineering and not to every type of
contract.Moreover, the court emphasized that even if all shareholders had agreed to ratify
the act, it would still be void since an ultra vires action cannot be legalized through
ratification. Additionally, a company's Memorandum of Association cannot be amended
retrospectively, meaning any action taken beyond its scope remains invalid.

5.4 Purpose and Importance of the Doctrine of Ultra Vires

The doctrine of ultra vires plays a crucial role in safeguarding the interests of creditors,
shareholders, and investors by ensuring that a company’s funds are used strictly for the
purposes outlined in its Memorandum of Association. The doctrine serves the following
purposes:

It assures investors that their funds will be used only for the purposes disclosed at the time
of investment, preventing any misuse. It prevents a company from using its assets for
unauthorized activities, reducing the risk of insolvency and ensuring that creditors get
repaid. It sets clear legal boundaries within which the company’s directors and officers must
operate, preventing them from diverting from the company’s core objectives. It acts as a
legal safeguard against fraudulent or reckless business decisions that could endanger the
financial stability of the company.

5.5 Difference between an Ultra-Vires and an Illegal act:

An ultra-vires act is entirely different from an illegal act. People often mistakenly use them
as a synonym to each other, while they are not. Anything which is beyond the objectives of
the company as specified in the memorandum of the company is ultravires. However,
anything which is an offense or draws civil liabilities or is prohibited by law is illegal.
Anything which is ultra-vires, may or may not be illegal, but both of such acts are void-ab-
initio.

5.6 The Doctrine of Ultra Vires in the Companies Act, 2013

The Companies Act, 2013 recognizes the importance of the doctrine of ultra vires by
defining the scope of a company's objectives and providing legal safeguards against
unauthorized actions.

Section 4(1)(c) – This section mandates that the objects for which a company is
incorporated, along with any necessary provisions for furthering those objectives, must be
explicitly stated in the company's Memorandum of Association. This ensures that companies

6
operate within their defined scope and do not undertake activities beyond their authorized
powers.

Section 245(1)(b) – This provision grants members and depositors the right to file an
application before the National Company Law Tribunal (NCLT) if they believe that the
company's affairs are being conducted in a manner that is prejudicial to their interests. The
tribunal has the authority to restrain the company from committing any act that would
violate the provisions of its Memorandum of Association or Articles of Association. This
serves as a legal remedy for stakeholders to prevent ultra vires transactions before they
take effect.

The doctrine is guided by the following fundamental principles:

a) Shareholders cannot ratify an ultra-vires transaction or act even if they wish to do so.
b) Where one party has entirely performed his part of the contract, reliance on the defense
of the ultra-vires was usually precluded in the doctrine of estoppel.
c) Where both the parties have entirely performed the contract, then it cannot be attacked
on the basis of this doctrine.
d) Any of the parties can raise the defense of ultra-vires.
e) If a contract has been partially performed but the performance was insufficient to bring
the doctrine of estoppel into the action, a suit can be brought for the recovery of the
benefits conferred. f) If an agent of the corporation commits any default or tort within the
scope of his employment, the company cannot defend it from its consequences by saying
that the act was ultra-vires.

5.7 Exceptions to the doctrine

a) Any act which is done irregularly, but otherwise it is intra-vires the company, can be
validated by the shareholders of the company by giving their consent.
b) Any act which is outside the authority of the directors of the company but otherwise it is
intravires the company can be ratified by the shareholder of the company.
c) If the company acquires property in a manner which is ultra-vires of the contract, the
right of the company over such property will still be secured.
d) Any incidental or consequential effect of the ultra-vires act will not be invalid unless the
Companies Act expressly prohibits it.
e) If any act is deemed to be within the authority of the company by the Company’s Act,
then they will not be considered as ultra-vires even if they are not expressly stated in the
memorandum.
f) Articles of association can be altered with retrospective effect to validate an act which is
ultravires of articles.

5.8 Types of ultra-vires acts and when can an ultra-vires act be

ratified?

Ultra-vires acts can be generally of four types:

a) Acts which are ultra-vires to the Companies Act.
b) Acts which are ultra-vires to the Memorandum of the company.

7
c) Acts which are ultra-vires to the Articles of the company but intra-vires the company.
d) Acts which are ultra-vires to the directors of the company but intra-vires the company.

5.8.1 Acts which are ultra-vires to the Companies Act Any act or contract which is entered
by the company which is ultra-vires the Companies Act, is voidab-initio, even if
memorandum or articles of the company authorized it. Such act cannot be ratified in any
situation. Similarly, some acts are deemed to be intra-vires for the company even if they are
not mentioned in the memorandum or articles because the Companies Act authorizes them.

5.8.2 Acts which are ultra-vires to the memorandum of the company An act is called ultra-
vires the memorandum of the company if, it is done beyond the powers provided by the
memorandum to the company. If a part of the act or contract is within the authority
provided by the memorandum and remaining part is beyond the authority, and both the
parts can be separated. Then only that part which is beyond the powers is considered as
ultra-vires, and the part which is within the authority is considered as intra-vires. However,
if they cannot be separated then whole contract or act will be considered as ultra-vires and
hence, void. Such acts cannot be ratified even by shareholders as they are void-ab-initio.

5.8.3 Acts which are ultra-vires to the Articles but intra-vires to the memorandum All the
acts or contracts which are made or done beyond the powers provided by the articles but
are within the powers and authority given by the memorandum are called ultra-vires the
articles but intravires the memorandum. Such acts and contracts can be ratified by the
shareholders (even retrospectively) by making alterations in the articles to that effect.

5.8.4 Acts which are ultra-vires to the directors but intra-vires to the company All the acts or
contracts which are made by the directors beyond the powers provided to them are called
acts ultra-vires the directors but intra-vires the company. The company can ratify such acts
and then they will be binding.

5.9 Development of the Doctrine of Ultra Vires

Over time, the doctrine of ultra vires has evolved through various landmark judicial
decisions, shaping its interpretation and application in corporate law. The following cases
illustrate its development:

1. Eley v The Positive Government Security Life Assurance Company, Ltd. (1876) L.R. 1 Ex.
D. 88: The court held that the articles of association do not establish a contractual
relationship between an outsider and the company. They bind the members and govern the
directors, but they do not serve as an enforceable contract between the company and an
external party. This case reinforced the principle that third parties cannot claim rights based
solely on the articles of association.

2. Ashbury Railway Carriage and Iron Co. Ltd. v Hector Riche (1875) L.R. 7 H.L. 653: The
company’s Memorandum of Association allowed it to sell materials for railway construction,
but the directors entered into a contract to construct railways, which was beyond the
company’s stated objectives. The House of Lords held that since the contract was ultra vires

8
the memorandum, it was null and void from the outset. Even if all shareholders had
unanimously approved the contract, it could not be ratified.
A company cannot act beyond its memorandum, and even unanimous shareholder approval
cannot validate an ultra vires act.
If the contract had been approved beforehand through a resolution, it would have been intra
vires and valid. However, retrospective approval is not possible once an act is ultra vires.

3. Shuttleworth v Cox Brothers and Co. (Maidenhead) Ltd. [1927] 2 K.B. 9: A company
altered its articles of association, affecting a pre-existing contract. The alteration was made in
good faith and in the company's best interest.The court ruled that if a contractual term is
subject to statutory powers of alteration in the articles, and the amendment is made in good
faith for the company’s benefit, it is valid and does not amount to a breach of contract.
Articles of association can be altered as long as the changes are made in good faith and serve
the company’s best interest. A contract that depends on unaltered articles is always subject to
potential accordance with company law.

4. Rayfield v Hands and Others, [1957 R. No. 603.] : Field-Davis Ltd. was a private company
carrying on business as builders and contractors, The plaintiff, Frank Leslie Rayfield, was the
registered holder of 725 of those shares, and the defendants, Gordon Wyndham Hands,
Alfred William Scales and Donald Davies were at all material times the sole directors of the
company. THere was a provision in the Articles of association of the company where it was
required that if he wants to sell his shares, he will inform the directors, who will buy them
equally at a fair valuation. However, when he informed the directors, they refused to buy
them by saying that there is no such liability imposed by the articles upon them. The plaintiff
claimed that fair value of the shares must be determined and directors must be ordered to
purchase them at a fair value. It was held that articles of the company required the directors
to buy the shares at a fair price, but the relationship between them was not as a member
and director but as a member and a member.

5.10 Effects of ultra vires Transactions –

1. Void ab initio: The ultra vires acts are null and void ab initio. These acts are not binding on
the company. Neither the company can sue, nor it can be sued for such acts.[Ashbury
Railway Carriage and Iron Company v. Riche ].
2. Estoppel or ratification cannot convert an ultra-vires act into an intra-vires act.
3. Injunction: when there is a possibility that company has taken or is about to undertake an
ultravires act, the members can restrain it from doing so by getting an injunction from the
court. [Attorney General v. Gr. Eastern Rly. Co., (1880) 5 A.C. 473].
4. Personal liability of Directors: The directors have a duty to ensure that all corporate
capital of the company is used for a legitimate purpose only. If such funds are diverted for a
purpose which is not authorized by the memorandum of the company, it will attract a
personal liability for the directors.

In Jehangir R. Modi v. Shamji Ladha, [(1866-67) 4 Bom. HCR (1855)], the Bombay High Court
held, “A shareholder can maintain an action against the directors to compel them to restore
to the company the funds of the company that have by them been employed in transactions
that they have no authority to enter into, without making the company a party to the suit”.
Criminal action can also be taken in case of a deliberate misapplication or fraud. However,
there is a small line between an act which is ultra-vires the directors and acts which are

9
ultra-vires the memorandum. If the company has authority to do anything as per the
memorandum of the company, then an act which is done by the directors beyond their
powers can also be ratified by the shareholders, but not otherwise.

2. Relationship of a debtor and creditor is not created in an ultra-vires borrowing. [In Re.
Madras Native Permanent Fund Ltd., (1931) 1 Com Cases 256 (Mad.)].

5.11 Effects of an Ultra Vires Act on Borrowings

Any borrowing which is made by an act which is ultra-vires will be void-ab-initio. It will not
bind the company and company and outsiders cannot get them enforced in a court.
Members of the company have power and right to prevent the company from making such
ultra-vires borrowings by bringing injunctions against the company. If the borrowed funds of
the company are used for any ultra-vires purpose, then directors of the company will be
personally liable to make good such act. If the company acquires any property from such
funds, the company will have full right to such property. No estoppel or ratification can
convert an ultra-vires borrowings into an intra-vires borrowings, as such acts are void from
the very beginning. As no debtor and creditor relationship is created in ultravires borrowings
only a remedy in rem and not in personam is available.

5.12 Doctrine likely to lose sanctity

It is proposed in the Companies Amendment Bill,2016 that instead of adopting a universal
memorandum, business will be free to adopt a model memorandum of association. So now
the new companies will be enjoying the benefit of having a single object clause which states
that they will be engaged in any lawful act or business. In this situation, it would be
challenging to trace out that which act is ultra-vires and which act is intra-vires. The only
case where it will be possible will be when a company specifies the exact business instead of
just a general clause.

6.0 Conclusion
No company can be imagined to run without borrowings. However, at the same time, it is
necessary to protect the interest of the creditors and investors. Any irregular and
irresponsible act may result in insolvency or winding up of the company. This may cause
considerable losses to them. So to protect the interest of the investors and the creditors,
specific provisions are made in the memorandum of the company which defines the
objectives of the company. Directors of the company can act only within the purview of the
authority provided to them under these objectives. If any borrowing is made beyond the
authority provided by these objective mentioned in the memorandum, it will be considered
as ultra-vires. Any borrowing which is made through an ultra-vires act is void-ab-initio, and
hence, directors are personally responsible for these acts.
However, if such borrowings are ultra-vires only to the articles of the company or ultra-vires
directors, then they can be ratified by the shareholders. Then after such ratification, they
will be considered valid. Thus, directors must be very cautious while borrowing funds, as it
may not only make them personally liable for the consequences of such acts but also may
result in considerable losses to investors and creditors.

10
11