This article has been written by Rishabh Tyagi pursuing the Diploma in US Contract Drafting and Paralegal Studies from LawSikho. This article has been edited by Prashant Baviskar (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho).
Change is inevitable, the recent era of covid 19 has made a lot of companies change their way of conducting business. However, changing the internal machinery of a company is not that easy as it seems to be, any change that would be made is to be under some guidelines so that it is not unjust to the individuals dealing with the company.
The Article of Association are the bylaws or internal regulations of a company, these articles entail the regulations for the working of a company, members of a company are bound to follow the article, in Naresh Chandra Sanyal vs Calcutta Stock Exchange Assn. Ltd. it was held that “members of a company are bound by the provisions that are there in the article of association, the articles help in regulating the internal management of the company and helps in determining the role and responsibility of the management of the company, they helps in establishing a contract between the company and its members”.
It may have regulation regulations that may be prescribed from time to time and additional matters that may be required according to the needs of the company. A person entering into a contract with a company is presumed to be aware of the company’s Article of Association and Memorandum of association that is the Doctrine of constructive notice.
Schedule 1 of the Companies Act , 2013 provides a table of model form for different companies. For example Table F is Applicable to a company limited by shares , companies have an option to either frame its own Article of Association or adopt it from the table, but why would a company adopt when they could frame their own articles? The primary advantage of adopting the table is that it is legal beyond all doubt.
Precautions to be taken while framing or amending the Articles
Articles must be printed, divided into paragraphs, each consisting of one regulation and numbered consecutively. Each subscriber of the memorandum has to sign the document in presence of at least one attesting witness, both of them should add their address and occupation. Anything that would be stated or amended in the articles shall be in accordance with the act, for example Section 272 of the companies act provides shareholders the right for petition of winding up of a company, in any circumstance this right cannot be limited by the articles. The articles shall not contain something that is contrary to the memorandum of the respective company as the memorandum comprises the purpose of a company and a company cannot alter its purpose in any way , if it does so such addition or amendment shall be void and incapable of ratification. In Hutton vs Scarborough Cliff Hotel Ltd, a resolution was passed at a general meeting of a company which altered the articles by inserting the power to issue new shares with preferential dividend but no such power existed in the Memorandum of association. The alteration was held to be inoperative.
A private company can be converted into a public company by simply altering the articles of a company. Where a private company changes its article in such a manner that they are no longer in sync with the limitations of the private company it will cease to be a private company as from the date of alteration. However, the same is not the case with a public company, it cannot be converted into a private company unless it is approved by a tribunal.
Section 15 of the Companies Act 2013 requires every alteration of memorandum and article to be noted on every respective document. The default in this respect is punishable, it requires the company and the defaulting officer may have to pay Rs 1000 for each copy issued without noting the alterations.
Alteration of articles
Section 14 of the Companies Act 2013 provides a company with the power to alter its own Article of Association by a special resolution and this right cannot be negatived in any way, the company cannot amend the articles in such a way or enter into a contract with other parties that deprives the company from the power of alteration.
These altered articles will be binding in the same way as were the original articles.
Can alterations of articles operate as a breach of contract ?
If a company has entered into an individual contract, alteration of articles won’t help a company to get rid of liabilities arising out of breach of contract, but if an individual enters into an agreement or accepts a job in a company on the terms of Articles of Association of a Company the company won’t be liable for any breach arising after altering the articles of the company. For example a Company Secretary accepted an appointment on terms and conditions of Article of association and a clause in the articles provided a monthly remuneration of Rs 50,000 for a company secretary, but subsequently, the article was amended and it reduced the pay of the company secretary to Rs 25,000. This amendment was held to be operative.
Can articles be amended that easily ?
Some articles of association may contain “provision of entrenchment” which means the provisions of those articles may be altered only if the condition is more restrictive than those applicable in the case of special resolution. These types of provisions can either be formed on the formation of the company or by a subsequent amendment.
Procedure for amending Article of Association of a company
- The first step is to issue a notice that is not less than seven (7) days along with the agenda of the board meeting , it needs to be delivered in writing to each and every director of the company at their respective residences and a board meeting has to be called to consider proposal for alteration of article of association of a company. All this has to be done according to the procedure prescribed for issuing and signing notice of board meeting . (In case of an urgent business the notice of not less than seven days can be replaced with a notice of shorter period )
- Second step is to hold a board meeting to consider the articles that are required to be amended and to pass a board resolution for approving this proposal , which is subject to approval of shareholders .
- Once the alteration is made the third step is to delegate the authority to one of the directors of the company to sign , certify and file the requisite forms with the registrar of the company or any other statutory authority to do all such acts , deeds that may be required .
- Fourth step is to circulate the summary of the meeting within 15 days from the date of conclusion of the board meeting , to all the directors for their comments , summary of the meeting or Board Minutes shall be according to the procedure prescribed for preparing ,circulating ,signing and compiling.
- Sixth step is to send notice of the general meeting proposing the aforementioned special resolution to all the shareholder , director ,auditor and other person entitled to receive it , by giving not less than 21 days’ notice or shorter notice ; If consent of shorter notice is given by a minimum of 95 percent of members entitled to vote at such a meeting .
- Seventh step is to hold a shareholder meeting and pass the special resolution for altering either by 3/4th majority or unanimously.
- After passing a special resolution , file a certified copy of resolution with the registrar in E – Form No. MGT.14 under S117 of the Act within 30 days of passing special resolution in general meeting along with following attachments:
- Copy of the special resolution accompanied with Explanatory Statements .
- Notice for Convening General Meeting.
- Altered articles including the provision of entrenchment.
- Shorter Notice consent letter.
- Miscellaneous attachments.
Every company has the power to amend its article of association which is granted by section fourteen (14) of the Companies Act 2013, and as mentioned previously it cannot be negated either by a contract or in any other way. However, this power may or may not be beneficial for the individuals associated with the company. Suppose there is an individual who has agreed to provide a service or to receive a service and he has accepted the appointment on the terms of the article of association of the company. By accepting this service on terms of article of association that individual takes the risk of those articles being altered, and this is what doctrine of constructive notice states that; the person dealing with the company is deemed to be aware of the company’s Article of association and Memorandum of Association, even though there are several exceptions to this doctrine, while on the other hand the creditors and shareholders of the company needs to be assured that the company is making itself compatible with the changing environment by amending their article of Association. However, the amendment or insertion that is being done needs to be in line with the Companies act 2013.
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