This article is written by Sharanya Ramakrishnan, pursuing Diploma in General Corporate Practice: Transactions, Governance and Disputes from Lawsikho. The article has been edited by Tanmaya Sharma (Associate, LawSikho) and Indrasish Majumder (Intern at LawSikho).

This article has been published by Abanti Bose.

Introduction

The Articles of Association (Articles) of a company is one of the most important documents for the formation of a company and for its functioning thereafter. It enables the company to conduct its business smoothly and governs the management of its internal affairs. It essentially contains the company’s bye-laws, rules and regulations that define the rights, duties and powers of the company’s officers and establishes a contract between the company and the members and between the members inter-se. It also provides the mode in which the company’s business should be carried on and thus plays a significant role in regulating the affairs of a company.

As per Section 2(5) of the Companies Act, 2013 (hereinafter referred to as “the Act”), ’articles’ means “the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act.” It also includes the regulations contained in Table A in Schedule I of the Act, in so far as they apply to the company.

It can therefore be seen that the articles, being only internal regulations, the members of a company have control over it and may alter them in the manner they consider fit. However, care must be taken to ensure that the articles do not go beyond the company’s sphere of action so as to render them void and inoperative.

This article endeavours to explain the manner of alteration of articles, the procedure for alteration and the limitations subject to which the alteration can occur.

Manner of alteration of articles

As per Section 2(3) of the Act, “alter” or “alteration” includes the making of additions, omissions and substitutions. Thus, the articles of a company can be altered in the following manner:

• By adopting a new set of articles,
• By the addition of new clauses,
• By deletion of clauses,
• By the amendment of certain clauses,
• By substitution of certain clauses.

Procedure for alteration of articles

A company possesses a statutory right to alter its articles. This right has been provided under Section 14 of the Act which states that the power of a company to alter its articles is subject to the provisions of the Act and the conditions contained in its memorandum of association. A company must observe the following procedure in order to alter its articles:

1. Sending notice to call a board meeting: The company must issue not less than 7 days’ notice and agenda of the board meeting, or shorter notice in case of urgent business in writing to every director of the company at his registered address.
2. Conducting board meeting: the company must hold a meeting of its directors for the purpose of:

• deciding the articles sought to be altered.
• passing the necessary board resolution for approving the proposal to alter the articles subject to shareholders’ approval.
• empowering a director of a company to sign, certify and file the necessary forms with the Registrar of Companies (ROC) and do all such acts, deeds as may be required to give effect to the proposed alteration.
• fixing the day, date, time and venue to hold the general meeting of the company and passing a special resolution.
• Approving the draft notice and explanatory statement of the general meeting and authorising a director or company secretary to sign and issue a notice of the general meeting.

3. Sending notice of general meeting: Notice of general meeting should be sent to all shareholders, directors, auditors and other persons permitted to receive it at least 21 clear days prior to the date of holding the general meeting. Shorter notice may be sent on receiving the consent of at least 95% of members entitled to vote at such meeting, either in writing or through electronic mode in terms of Section 101 of the Act.
4. Conducting general meeting: A general meeting should be held on the date fixed, and a special resolution needs to be passed for altering the articles.
5. Filing with ROC: A certified copy of the special resolution passed must be filed with the ROC in e-Form No. MGT- 14 under Section 117 of the Act within 30 days of passing the resolution.

Section 14 of the Act read with Rule 33 of the Companies (Incorporation) Rules, 2014 also provides that, in case of alteration of articles by a private company wherein the restrictions and limitations pertaining to it are no longer included, such a company ceases to be a private company. Moreover, if a public company seeks to convert itself into a private company by virtue of alteration of its articles, it can do so only after taking prior approval of the Central Government by filing an application in Form No. INC 27 along with necessary fees.

Key considerations in altering the articles

• By amending the articles, a company may insert provisions for entrenchment to the effect that certain provisions of the articles may be altered if conditions or restrictions greater than those prescribed in the Act are complied with. [Section 5(3) of the Act]
• Such provisions of entrenchment can be embedded only if consented by all the members of a private company or by way of a special resolution in the case of a public company.
• Every alteration made in the articles shall be noted in every copy of such articles failing which, the company and every officer who is in default shall be liable to a penalty of Rs 1000 for every copy of such articles issued without incorporating such alteration. [Section 15 of the Act]

Limitations on alteration of articles of a company 

A company’s right to alter articles is so significant that a company cannot in any manner, either by way of inserting express provisions in the articles or by virtue of an independent contract, deprive itself of the power to alter its articles.

A company can wield its power to alter articles subject to certain limitations or restrictions. They are as under:

1. Any alteration in the articles cannot result in the exercise of powers by a company in excess of what is contained in its memorandum.  In the event of any conflict between the memorandum and the articles, the memorandum will undoubtedly prevail.

In the case of Hutton v Scarborough Cliff Hotel Co, the company’s memorandum of association expressly provided that the capital of the company was divided into a certain number of shares. There was no provision in the memorandum indicating that the shares might be of different classes. A special resolution was passed in a general meeting whereby the articles were altered by inserting a power to issue new shares with preferential dividends. The court held that the alteration was inoperative as there was an implied stipulation in the memorandum that all the shareholders would stand on an equal footing as to the receipt of dividends and such an act amounted to altering the constitution of the company fixed by the memorandum.

Subsequently, the aforesaid view was changed in the case of Andrews v. Gas Meter Co Ltd In this case, the memorandum of the company stated that the company’s nominal capital was Rs 60,000, divided into 600 shares of  Rs 100 each. The articles of the company contained the power to increase the capital. The issue of preference shares, however, was not authorized or contemplated either in the memorandum or the articles. 

Consequently, the company passed a special resolution altering the articles and authorising the issue of fully paid-up preference shares. It was held that the issue of such preference shares is valid as the memorandum of association was silent on the point and did not expressly or impliedly prohibit such an issue. 

Therefore, it can be seen that the articles may be altered to explain ambiguous portions or to supplement the memorandum with regard to those things upon which it is silent.

2. The alteration must not be inconsistent with the provisions of the Act or any other statute.

In the case of, Madhava Ramachandra Kamath v. Canara Banking Corporation the company contained a clause in its articles empowering it to expel a member if he unjustly or unlawfully has recourse to law in any matter whatsoever connected with the company and on such expulsion, he shall never again be admitted into the company. Acting under such provision, the company at a general meeting expelled the petitioner herein. Subsequent to the passing of the resolution of expulsion, the company altered its articles by making an addition to the aforesaid clause which allowed the company to force an expelled member to sell his shares to any person at a price fixed under the provisions of the articles and authorise a director to sign the necessary transfer instrument on behalf of such transferor if he fails to do so.

The company by virtue of such addition, authorised a director to register the transfer of the shares of the petitioner without a valid instrument of transfer. Aggrieved by the same, the petitioner approached the court which held that the provision contained in the articles expelling a member and authorising the transfer of his shares is invalid as it is against the provisions of the Companies Act, 1956.

However, as already mentioned above, it is always open for a company to add provisions in the articles imposing conditions stricter than those provided by the Act. For instance, they may provide that a matter should be passed by a special resolution when the Act requires it to be passed by an ordinary resolution. 

3. The articles should not be altered so as to include provisions that are illegal or opposed to public policy. Therefore, clauses that unreasonably restrain trade or create interest perpetuity on property transfer shall be included in the articles.
4. The alteration should be bona fide for the benefit of the company as a whole.

In the case of Sidebottom vs Kershaw, Leese & Co Ltd, the criterion of whether the alteration to the articles was “bona fide for the benefit of the company as a whole” was applied. In that case, the alteration to the articles gave the majority shareholders the right to expropriate the shares of any shareholder who was in business in direct competition with the company. The court held that such an alteration was within the competence of the company as it was for the benefit of the company as a whole.

5. The alteration must not constitute a fraud on the minority shareholders by the majority. If the articles are altered in such a manner as to only benefit the majority shareholders and not the company as a whole, such alteration would be bad in law. This principle has been illustrated in the case of All India Railway Men’s Benefit Fund v. Jamadar Basheshwarnath Bali, wherein the court opined that an alteration to the articles must not discriminate between the majority and the minority shareholders’ so as to give the former an advantage over the latter.

Also, in the case of Mathrubhumi Printing & Publishing Co. Ltd. v. Vardhaman Publishers Ltd., the petitions were filed at the instance of certain transferors and transferees of the equity shares of Mathrubhumi Printing and Publishing Company Ltd. (for short, “the company”) in the court seeking rectification of share register mainly on the ground of unnecessary delay in entering in the register the fact of the transferees having become members. They also filed an application seeking an injunction to restrain the company from holding an extraordinary general meeting to amend its articles by inserting a provision that allowed the board of the company to decline registration of transfer of any equity share without assigning any reasons whatsoever. 

The Hon’ble Kerala High Court held that no majority of shareholders can, by altering the article retrospectively, affect, the prejudice of the consenting owners of shares, the right already existing under a contract nor take away the right accrued, e.g., after a transfer of share is lodged, the company cannot have a right of lien so as to defeat the transfer.

6. The articles should not be altered in such a manner as to compel an existing member to subscribe for more shares or enhance his liability to contribute to the share capital unless he signifies consent in writing.
7. The company cannot alter its articles so as to escape from its contractual obligation with any person. The company will always be liable in such a case. However, sometimes alteration of articles may constitute a breach of contract with an outsider.

In Chidambaram Chettiar vs. Krishna Aiyangar, the court held that If the contract with a third party was purely on the terms contained in the articles, the company would not be liable for damages and the alteration will be effective. On the other hand, if the contract is an independent one, the third party will have a remedy against the company in terms of damages for breach of contract.

Consequently, in the case of Southern Foundries Ltd v. Shirlaw, the claimant had been employed as a Managing Director Southern Foundries Ltd (“the company”) for a term of ten years. Subsequently, Federated Foundries acquired a controlling interest in the company and altered the articles to empower two to remove directors. The claimant was thereafter dismissed prior to the completion of his term. The company was held liable for breach of contract.

8. The Articles of Association cannot be altered so as to have retrospective effects. The articles only operate from the date of the amendment.
9. When an alteration results in the conversion of a public company to a private company or vice-versa, then the company needs to follow the procedure as prescribed in Sections 13, 14 and 18  of the Act along with Rule 33 of the Companies (Incorporation) Rules, 2014.
10. A company registered under Section 8 of the Act cannot alter its articles except with the previous approval of the Central Government.

Conclusion

The Articles of Association is a document of great importance as it contains rules, regulations and bye-laws which ensure that the affairs of the company are conducted in an appropriate manner, and the objects of the company are carried out effectively. However, it is crucial not to lose sight of the fact that the articles are still subordinate to the memorandum of the company and the provisions of the Act. A company may have a statutory right to alter its articles, but the power to alter is subject to certain limitations as specified above. Nevertheless, once the articles are altered, they bind the members the same way as the original ones.

References 

• https://www.geektonight.com/articles-of-association/
• https://www.shareyouressays.com/knowledge/8-limitations-and-powers-of-a-company-to-alter-its-article-of-association-companies-act-1956/112312

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