This article is written by Ankit Rao, pursuing Diploma in General Corporate Practice: Transactions, Governance and Disputes from Lawsikho.

Introduction 

There is no provision under the Companies Act, 2013 under which a member can be expelled by the board of directors or the management. And, if there exists a provision in the Article of Association or Memorandum of Association that empowers the Board of directors to carry out the said unlawful activity, it will be deemed void as per Section 6 of the Companies Act, 2013. Section 6 of the Companies Act stipulates that the Act overrides the Memorandum and Article of Association and any provision contained thereto repugnant to the provision of the Companies Act, is void. The only exception to the said rule is provided under Section 235 whereby power is provided to acquire shares of shareholders dissenting from scheme or contract approved by the majority. This article will talk about the legal provision and case laws discussing the expulsion of a member from a company.

Who is a member?

As per Section 2(55) of the Companies Act, 2013, ‘member’ in relation to a company means;

1. The subscriber to the memorandum of the company who shall be deemed to have agreed to become a member of the company, and on its registration, shall be entered as member in its register of members.
2. Every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company.
3. Every person holding shares of the company and whose name is entered as beneficial in the records of a depository.

Public company v. company limited by guarantee

The concept of the expulsion of members stands different with regard to public limited company and company limited by guarantee. In the former, expulsion by alteration of the articles is not allowed and such has been clarified by Circular No. 32/75 issued by the Ministry of Company Affairs. It can be further supported by judgment laid down by the Supreme Court in the case of Bajaj Auto Ltd. v. N.K. Firodia, whereby it was stated that assumption by the board of directors of a company of any power to expel a member by amending its articles of association is illegal and void. Thus, there exists an absolute bar on the expulsion of members from the membership of a public limited company.
However, as far as the company limited by guarantee is concerned, the bar is not in place which was clarified in K. Leela Kumar v. Government of India, the Hon’ble Court stipulated that the respective circular does not apply to clubs, associations, etc. and its usage is only applicable to public limited companies. The Delhi High Court in the case of Siddharth v. The Delhi Golf Club Ltd. & Anr. elaborated the power of expulsion in case of a company limited by guarantee. It was held that even though such companies like social clubs, professional and cultural, etc. are empowered to expel members, that must be done keeping in mind the procedure laid down in the Article of Association. A member can only be removed after following the due process of law along with the terms and conditions incorporated in the Article of Association. A person does not stand disqualified unless he is removed respecting the terms stipulated in the Article of Association and such a person can continue to avail the benefits. 

Is alteration of Article of Association to remove members allowed or not?

When the clauses inserted or which form part of the Article of Association violate or infringe the provision of statutory law which is Companies Act, 2013. In such cases as per Section 6 of the Act, provision contained under the respective legislation will supersede the clauses forming part of Memorandum and Article of Association to the extent to which it is void.
The authority established under the Companies Act, 2013 is vested with ample power to deal with such contravention, whereby if the Article of Association of the company or the resolution adopted at the meeting or by directors is in contravention to the legislative language inserted under Section 111, then the authority can outrightly deny the registration of the articles of association or the resolution. 

Not long ago, a case was filed which grabbed the Central Government’s attention. The facts of the case were such that public limited company had amended or altered its article of association by passing the special resolution at the extraordinary meeting thereby empowering the directors of a company with such powers so as to remove or expel a member in case activities are conducted by such individuals are prejudicial to the future of the company. The question that arose for contemplation of the department, in this case, was whether such an amendment of the Article of Association of a company is valid. The Department of Company Affairs vide circular no. 32/75 herein was of the view that alteration of the Article of Association and the resulting expulsion of the member of management was in contravention with the fundamental principles of the company’s jurisprudence and ultra vires the company. Such a provision is in direct contravention to numerous provisions incorporated in the Companies Act which empowers members of a public limited company. If such alteration is allowed, it will have a nullifying effect on the powers vested with the Central Government under Section 107 and 395 of the Act.  Therefore, in order to conserve the power allotted to the Central Government and for the protection of investors, such provisions would be void by the operation of the provision of Section 9 of the Act. Moreover, Section 23 of the Indian Contract Act, 1872 stipulates that an agreement that is repugnant to any law, act or opposed to the public would be deemed to be unlawful and void.
Hon’ble Supreme Court in Bajaj Auto Ltd. v. N.K.Firodia stipulated the conditions in the assistance of which directors could refuse to admit a person as a member. The observation made in K. Leela Kumar v. Government of India provides that the principle laid down by the court in the Bajaj Auto case, even though it relates to the refusal of admission of a person as a member in the corporation, is germane even to the case of expulsion of a member. The position was further clarified in the case by stipulating that the assumption by the board of directors of a company of any power to expel a member by altering its articles of association is illegal and void. 

The exception to the established principle

Where a scheme or contract involves the transfer of shares or any class of shares in a company to another company, which has been approved by holders of not less than nine-tenths in value of shares whose transfer is involved, it shall give notice to any dissenting shareholders that it desires to acquire his shares. In such cases, the shares of dissenting shareholders can be acquired, in exchange for a sum or any other consideration. So, if a shareholder is not assenting to the scheme or contract, his shares can be acquired and the said person will be removed from the company in exchange for reasonable consideration.  

Position under Companies Act, 1956

The Court of Appeals in the case Sidebottom established that a corporation had the power to amend its articles, the only condition attached is that such an amendment must be carried for the welfare and interest of the company. However, if that is not the case and the amendment is carried for the benefit of shareholders even if they form the majority of the shareholders, alteration of the article cannot take place. The principle established in this case was further taken the assistance of, in Gowthami case, wherein the Articles of a corporation was altered to incorporate a provision providing for cancellation of membership by passing of the special resolution. Consequent to the passing of such a resolution, the member was expelled. Hence the controversy which arose before the Hon’ble Court was whether Articles could be framed in such a way so as to empower the corporation to expel members. The court also referred to Sidebottom’s case and provided that the mandatory transfer must be for the welfare of the corporation and not for shareholder’s benefit. Considering this view, the court stated that the expulsion of the member was not in any way beneficial for the company, therefore the appeal was dismissed and the expulsion was reversed.

Conclusion

The directors or the board of directors are thereby not entitled to expel or remove a shareholder by inserting a new clause in the articles. This can be established by relying upon the departmental Circular no. 31 of 1975, which provides that insertion of the article providing for the expulsion of a member is ultra vires the powers of the company. In furtherance, Supreme Court held in the case of Bajaj Auto that the assumption by the Board of Directors of a Company of any power to expel a member by amending its articles of association is illegal and void. Therefore, articles cannot contain any provision which provides for expulsion or removal of the members of the company which outrightly strikes at the very core of the Company Act, which was enacted for the protection of shareholders of a corporation.  

References

• https://www.shareyouressays.com/knowledge/useful-notes-on-expulsion-of-a-member-in-a-company-indian-companies-act-1956/112306
• https://djordjevic-lawyer.co.rs/en/expulsion-of-a-company-member/
• https://www.legalwiz.in/blog/who-can-become-a-shareholder-in-a-company
• http://ralein.blogspot.com/2016/08/expulsion-of-member.html
• https://indiankanoon.org/search/?formInput=expulsion%20of%20a%20shareholder

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