ARTICLES OF ASSOCIATION AND THE ENTRENCHMENT CLAUSE

A company form of business in India is governed by Indian company law. There are various rules under the Indian company law applicable to different types of companies as per their characteristics, nature, and size which are to be complied with by them. A company not being a natural person has to have some way of describing itself i.e company’s name, capital, location of its registered office, the object of its formation, members’ liability, etc. Additionally, it also has to show the various rules internally framed by the company to govern its functioning. These disclosures can give a fair idea about the working of the company to all the outsiders proposing to deal with the company in the near future.

  The two documents which convey the aforesaid information about the company are the Memorandum and Articles of Association. Along with the provisions of company law, a company has to comply with the clauses of its MOA & AOA.

  MOA is a document that is like the constitution of a company. MOA is one of those documents which determine the company’s identity and. It lays down the reach and the areas over which a company shall have jurisdiction to act. It is a statute that is company-centric and cannot be the same for all companies.

Moving on, we shall look onto the AOA of the company and the other supporting provisions. All the points mentioned ahead shall be in conformity with the Companies Act of 2013.

ARTICLES OF ASSOCIATION:

Articles of Association are the bye-laws of a company. It helps in the management of the company’s internal affairs. It facilitates managing the company on all minute aspects since it contains all those provisions which are helpful for the day-to-day functioning of the company.

It must be noted that copies of both MOA & AOA are to be submitted to the Registrar of Companies (ROC) during the process of incorporation of a company. Those are documents that can be accessed by the public.

The AOA is a subordinate document to the MOA and its contents shall comply with that of the MOA.

FORMAT OF AOA:

Schedule I prescribes the format of AOA for companies of different types. They are;

TABLE F: For a company limited by shares.

TABLE G: For a guarantee company with share capital.

TABLE H: For a guarantee company without share capital.

TABLE I: For an unlimited company with a share capital

TABLE J: For an unlimited company without share capital.

CONTENTS OF AOA:

An AOA of a company must contain the matters relating to the following:

1) Share capital of the company.

2) Calls on shares and lien on shares.

3) Transfer and transmission of shares.

4) Forfeiture of shares.

5)  Matters concerning the buyback of shares.

6) Matters about AGM, EGM, adjournment of the meeting, voting rights, and proxy.

7)  Matters with respect to the Board of directors and the conducting of Board Meetings.

8) Dividends, books of accounts of the company, and winding up.

A company may prepare its own Articles as per its requirements provided it is not inconsistent with the MOA and the company law of India. A company’s AOA can be prepared in the same manner as that of the model articles.

ENTRENCHMENT CLAUSE OF AOA:

- The basic meaning of the word “entrenchment” means that which cannot be changed that easily. By adding a clause of entrenchment to its AOA, a company frames rules and imposes additional conditions to amend that clause which are strict in nature.

- Sub-section (3) (4) and (5) of Section 5 deals with the entrenchment clause in AOA. Having rigid conditions to alter the entrenchment clause means, such conditions to be fulfilled shall have a criterion that is over and above the criteria for passing a special resolution.

- It is not mandatory for all companies to insert an entrenchment clause in its AOA since the company law has made it optional thereby leaving it for the respective companies to decide.

- A clause of entrenchment can be added under the following circumstances:

(i) during the company’s formation or

(ii) by amending the AOA accordingly subject to the approval of all members is taken in case of private companies and the approval by way of special resolution is taken in case of a public company with respect to the amendment.

Once the clause of entrenchment is added, the company shall notify the same to the ROC about the same in the forms prescribed for newly formed and existing companies respectively.

CONCLUSION:

Since the Articles regulate the company’s internal affairs, it is essential that they are carried fairly. In short, all those responsible for decision making for the company shall be given a chance to voice their opinion through voting rights granted to them. The AOA having an entrenchment clause requires approval from such a number of members which shall be more than that required to pass a special resolution. This means that the viewpoint of every member or shareholder of that company shall be given the same value as that of the persons holding majority shares of the company. Limitations in a company’s functioning like abuse of dominance by majority shareholders can be done away with if the entrenchment clause is added. The end goal of the law for making such a provision was to uphold fair corporate governance practices in a company.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.