AOA
Articles of Association
Understanding a Company’s Internal Rules and a Third Party’s Protections
The Company’s Rulebook: Articles of Association (AoA)
The Articles of Association (AoA) is the primary document governing a company’s internal operations and management. It defines the roles, responsibilities, and procedures for directors, shareholders, and officers. Think of it as the company’s private instruction manual, subordinate to the public-facing Memorandum of Association.
The chart above illustrates the typical components governed by a company’s Articles of Association, showing how it covers everything from share management to the company’s dissolution.
The Outsider’s Dilemma
How can an outsider trust that a company is following its own internal rules? Company law balances two key principles to address this: the Doctrine of Constructive Notice, which places responsibility on the outsider, and the Doctrine of Indoor Management, which protects them.
Doctrine of Constructive Notice
Protects the Company. Outsiders are assumed to have read the public documents (AoA). Any transaction inconsistent with these documents is the outsider’s risk.
Doctrine of Indoor Management
Protects the Outsider. Outsiders can assume all internal procedures have been correctly followed, even if they can’t see them. This is the crucial exception.
The Turquand Rule: A Landmark Case
This protective doctrine was established in the 1856 case of Royal British Bank v Turquand. The court ruled that the bank was entitled to assume the company had followed its internal procedure (passing a shareholder resolution) before taking a loan. This set the precedent for protecting outsiders acting in good faith.
When the Shield Breaks: Exceptions to Indoor Management
The protection offered by the Doctrine of Indoor Management is not absolute. An outsider cannot claim its protection if their actions fall into specific exceptions, essentially where they should have been aware of a problem. The chart below highlights these key scenarios where the rule does not apply.
This chart shows the primary situations where an outsider loses the protection of the Indoor Management doctrine. Knowledge of an issue or suspicious circumstances are the most common reasons.
