top of page
  • Writer's pictureVidhi Chouradia

ARTICLES OF ASSOCIATION AND ITS ALTERATION

Updated: Jan 16

Author: Vidhi Chouradia

GH Raisoni Law College

ABSTRACT

Articles of association are the by-laws or rules and regulations that govern a company's internal affairs as well as the performance of its operations. As stated in the Memorandum of Association, they are designed to achieve those goals. Thus according Section 2(2) of the Companies Act, 1956, the term "Articles" refers to a company's articles of organization as originally drafted or as changed from time to time in compliance with any earlier company’s legislation or the current Act, namely the Act of 1956.

Any company that needs to modify its Articles of Association (AOA) must follow the terms of Section 14 of the Companies Act, 2013, as well as every other relevant provisions of the Act & applicable rules. Only if the company wishes to, it can change its Article by adding, deleting, modifying, substituting, or in any other manner.


INTRODUCTION

Articles of incorporation are the bylaws, rules, as well as regulations that govern the internal affairs of a corporation as well as the company's day-to-day activities. The term "article" is defined under Section 2(5) of the Companies Act of 2013. A company's articles of incorporation, which may have been drafted initially or revised over time to meet the needs of the business or this Act, are referred to as by this term. Many of the regulations in Table A of Schedule I of the Act, as far as they apply to corporations, are incorporated in articles. Managing the company's operations has been made possible in large part due to the articles that have been published.


IMPORTANCE OF ARTICLES OF ASSOCIATION

As it comprises the rules, regulations, and bye-laws that regulate a company's internal administration and management, the articles of association are an essential document for a corporation. The articles are primarily for the benefit of the company's management.

All of the directors' and other officials' powers are laid forth in the articles. The rights and obligations of the members are laid out in the articles of association. Private firms' articles of incorporation put out all of the rules and regulations that govern them. All of the provisions relevant to the shares are included in the articles of organisation. When the question of internal strife is brought up, the article of association is being discussed.

There are a number of regulations, privileges, and conditions that contribute to the significance of an article of association, including:

1. According to the articles, the value of intellectual property and other assets has been established.

2. In accordance with the articles of formation, the board of directors and other essential members of the company are appointed.

3. It doesn't matter if the gathering is an annual or general meeting; it must follow the rules set forth in these articles.

4. The articles in this section deal with managerial tasks.

5. Voting rights and other shareholder rights are addressed in the articles of incorporation.

6. As part of the audit and accounting process, articles are employed

7. Appointment, termination, and compensation are all handled by the articles.

8. Borrowing power is determined by the articles.

9. According to Article 9, the company has been dissolved.

The dividend policy is determined by the certificate of association.


UNDERSTANDING ARTICLES OF ASSOCIATION

The articles of association, inter alia, deal with the rights of the company's members. The Memorandum of Association is secondary to the Articles of Association in terms of hierarchy.

The basic duties of articles were stated as follows in Ashbury Railway Carriage and Iron Co. Ltd v. Riche[i]:

“Articles serve as a supplement to the memorandum of association. The company's charter of incorporation is recognized as the memorandum of association. Following its ratification, the articles go on to outline the governing body's rights and responsibilities, as well as its powers, in relation to the corporation. Furthermore, the articles specify the manner and form in which the company's operations will be conducted, as well as any modifications to the company's internal regulations.”

The memorandum of association establishes the company's scope and powers, whilst the members choose how the company's objectives will be carried out, formulated, and changed:

1. The internal administration of the company's operations is governed by the articles, which define the rights of the company's officers and form contracts between the company's members and the company, as well as between the members inter se.

2. Ordinary rights are controlled by the contract mentioned above.


ALTERATION TO ARTICLES OF ASSOCIATION

Shareholders can alter the Articles of Association by passing a special resolution at a general meeting or by submitting a written resolution to the board of directors. A copy of the resolution as well as the altered articles of association must be given to Companies House for their documents within 15 days of the resolution being passed. Individual shareholder liability cannot be increased by amending the articles of association, nor may the rights of shareholders be altered in a way that is discriminatory against minority shareholders. In order to avoid this from happening, safeguards have been put in place. It is necessary for a special resolution to be passed if at least 75% of those attending in person or by proxy, who are eligible to vote and simply cast their ballots at the meeting, vote in favour of it. It is required that at least 14 days' notice be given for the gathering at which the resolution is to be tabled, unless a majority of the members holding at least 90 percent of the shares consented to a shorter notice period. It is also possible to use a written resolution technique in which 75 percent of the total voting rights of shareholders entitled to vote on the written resolution that day are authorized. Special Resolution - Articles of Association Alteration has been made available in an open-source manner. If necessary, update the wording in the highlighted areas to better fit your needs.

Sidebottom v Kershaw, Leese & Co[ii]; “Any change must be made in good faith for the benefit of the firm as a whole.” “This means the company as an entity, or as the interest of ‘an individual hypothetical member’” Greenhalgh v Arderne Cinemas Ltd [iii]

In the end, it is up to the company's shareholders to determine whether or not to implement the modification. Because the shares are held in accordance with the legislative authority to modify the articles, the modification may have a retrospective effect on a member's rights as for both himself and the company. The company. An agreement between an organization and its members, or an organization with an outsider that prohibits a company from making changes to its articles may constitute a breach if the company makes changes to its articles and takes action in accordance with those changes, even though the company can't be prevented from making such changes. Only with a member's permission can a member's obligation to pay the company be increased or reduced; and a special resolution amending these articles may be disbarred in the event that its effect is to give a majority shareholder an advantage over his or her minority counterparts, giving them an unfair advantage. Any amendments to the articles of incorporation must be approved by the court if a court ruling mandates that a company member be protected from undue harm by not making any or certain changes.

Articles means “the articles of association of a company as originally established or as revised from time to time or used in obedience of any prior company legislation or of this Act,” according to Section 2(5) of the Companies Act, 2013 (hereinafter referred to as "the Act"). Insofar as they relate to the corporation, it also includes the rules in Table A of Schedule I of the Act.

When a company's members own the articles, they can amend them as they see fit, as they are internal regulations. Articles must not, however, stray too far from the company's operations or they will be void.

The term “alter” or “alteration” is defined under Section 2(3) of the Act to encompass additions, deletions, and substitutes. As a result, a company's articles can be changed in the following way:

· By implementing a new set of guidelines,

· By introducing new clauses,

· By removing clauses,

· Certain clauses have been amended.

· By changing the wording of key sentences.


PROCEDURE

The following processes must be undertaken in order to make changes to the articles of association:

1. Decide whether or not the present Articles of Association must be modified, and then call a board meeting. Schedule a general meeting to pass a special motion to change the Articles of Association.

2. A company's Articles of Association must be amended in accordance with the Companies Act, 1956, and it’s Articles of Association.

3. A third consideration is to make sure that any change does not raise the financial burden of a member who had become a member before such a change to the company's share capital.

4. Make sure that any such change does not result in a public corporation becoming a private one. If this is the case, submit a request for such a change to the Central Government.

5. Make sure that any such modification does not result in a member's removal from the firm.

6. Send out notices to the General Meeting requesting the Special resolution and, in the explanatory statement, describing the implications and reasons for the proposed modifications.

7. If the company's shares are listed on any recognised Stock Exchange, the Stock Exchange should receive copies of any notices given to shareholders regarding changes to the Articles of Association.

8. Call a special meeting of the General Assembly to pass the special resolution.

9. As soon as the business accepts the adjustments in General Meeting, file six copies with the stock market with which your firm is listed. One copy, out of the six, must be a certified true copy.

10. Send three copies of the notice and a copy of the General Meeting proceedings to the Stock Exchange with which your firm is listed as soon as possible.

11. The Special resolution and an explanation in Form No.23 must be filed with the relevant Registrar of Companies within 30 days of its passage after payment of the filing fee in cash in accordance with Schedule X. Submit a fresh printed copy of the articles after paying the requisite fee in cash as stipulated in Schedule X of the Companies Act, 1956 if the articles of association have been materially or completely changed. up to Rs.50/- in payments As per Schedule X, submit a Form No.23 explaining the Special resolution to the relevant Registrar of Companies thirty days after it has been passed and paid for in cash. if the Articles of Association have been revised significantly or completely, submit a new printed copy of the Articles after having paid fee in cash as stipulated in Schedule X of the Companies Act, 1956. up to Rs.50/- in reimbursements.

12. Make the necessary adjustments to all copies of the bylaws.

13. Any such change will be as legitimate as if it were initially included in the Articles of Association, and will be subject to change by Special Resolution as described above.

14. If the articles are changed as a result of a Company Law Board order issued under section 397 or 398, make sure that the changes are not in conflict with the order, and if they are, seek first leave from the Company Law Board to make the changes.


IMPORTANT FACTORS

• A corporation may amend its articles to include provisions for entrenchment, which provide that certain parts of the articles may be changed if requirements or limits greater than those set forth in the Act are met. [Section 5(3) of the Act]

• Such entrenchment rules can only be included with the permission of all members of a private business or by a special resolution in the event of a public corporation.

• Every change made to the articles must be mentioned in every copy of the articles; otherwise, the firm and any officer who is in default would be fined Rs 1000 for each copy of the articles issued without integrating the change. [Section 15 of the Act]


IMPACT OF CHANGING THE ARTICLES OF ASSOCIATION

There is no difference in binding power between edited articles and original ones. Articles that have undergone several revisions are referred to as "altered articles," even if they were originally written under a different framework. As if signed by the company and each member individually, the articles bind the firm and its members.

According to the government, amending a company's articles of association in order to remove a member from management constitutes an act of extra vires, which breaches the company's jurisprudence principles. As long as there are no unconstitutional provisions as defined by law, the adjustment will be just as valid and effective as the original articles.


LIMITATIONS OF ARTICLES OF ASSOCIATION

The right of a corporation to change its articles is so important that it cannot be taken away from it in any way, whether by stated provisions in the articles or through an independent contract.

A firm can use its authority to change articles, but only under specified conditions. They are as follows:

1. Any change to the articles of incorporation cannot allow a business to exercise powers beyond those set forth in its memorandum. If the memorandum and the articles disagree, the memorandum will likely win.


In Hutton v Scarborough Cliff Hotel Co[iv], the company's memorandum of association stated that the company's capital would be split into a specific number of shares. The memorandum made no mention of the possibility that the shares may be of different classes. In a general meeting, a special resolution was approved altering the articles of incorporation to include the right to issue additional shares with preferential dividends. The court ruled that the change was ineffective because the memorandum meant that all shareholders would receive dividends on an equal basis, and that such an act amounted to changing the company's constitution as set down in the memorandum.


Following that, in the case of Andrews v. Gas Meter Co Ltd[v], the aforementioned view was reversed. The company's nominal capital was Rs 60,000, split into 600 shares of Rs 100 each, according to the company's memorandum. The company's articles gave it the authority to raise cash. However, neither the memorandum nor the articles permitted or anticipated the issuance of preference shares.


As a result, the firm approved a special resolution amending the articles of incorporation and approving the issuance of fully paid-up preference shares. The issuing of such preference shares was found to be permissible since the memorandum of association was quiet on the subject and did not directly or impliedly prohibit it.


As a result, it can be observed that the articles can be changed to clarify problematic sections or to complement the memorandum in areas where it is quiet.


2. The change must not be in conflict with the Act's or any other statute's provisions.

In the case of Madhava Ramachandra Kamath v. Canara Banking Corporation[vi], the company's articles provided that it might eject a member if he used the law unfairly or illegally in any issue relating to the business, and that after such expulsion, he would never be permitted into the company again. The corporation, in accordance with this clause, expelled the petitioner in this case during a general meeting. An expelled member could be forced by the business to sell his shares at a specified price set by the company's articles and authenticate a director's signature on the essential transfer instrument on behalf of the transferor, after an expulsion resolution.

The corporation authorized a director to register the transfer of the petitioner's shares without a formal instrument of transfer as a result of this addition. Consequently, the petitioner took his case to court, which ruled that the section in the articles dismissing a member and permitting the transfer of his shares was unconstitutional since it violated the Companies Act, 1956.

However, as previously stated, a corporation can always add clauses to its articles imposing criteria that are more stringent than those imposed by the Act. They may, for example, demand that an item be passed by a special resolution whereas the Act requires that it be approved by an ordinary resolution.

3. Provisions that are unlawful or contrary to public policy should not be added to the articles. As a result, terms in the articles that unfairly restrict commerce or establish interest forever on property transfers must be incorporated.

4. The change should be genuine and beneficial to the firm as a whole.

The question of whether the change to the articles was "bona fide for the advantage of the business as a whole" was employed in the case of Sidebottom versus Kershaw, Leese & Co Ltd.[vii] The majority shareholders were given the authority to expropriate the shares of any shareholder who was in direct rivalry with the firm as a result of the change to the articles in such scenario. The court determined that such a change was within the company's authority because it was for the company's overall advantage.

It is forbidden for the majority shareholders to deceive the minority shareholders. It is prohibited if the articles of incorporation are altered such that only the majority shareholders benefit and not the entire business. In the case of All India Railway Men's Benefit Fund v. Jamadar Basheswarnath Bali, the court decided that a revision to the articles of association must not differentiate between majority and minority shareholders in order to provide the former an advantage over the latter. In the case of Mathrubhumi Printing & Publishing Co. Ltd. v. Vardhaman Publishers Ltd.[viii], Some shareholders of Mathrubhumi Printing and Publishing Company Ltd. (also known as "the company"), who had their equity shares transferred, petitioned the court, claiming that there had been an unreasonable delay in certifying their status as members after the shares were transferred. A preliminary injunction was also requested, to prevent the company's board of directors from refusing to register any transfer of equity shares without providing an explanation at an extraordinary public meeting.

Kerala's High Court has ruled that a corporation cannot have a right of lien to prevent a share transfer by modifying an article after it has already been filed, such as when a shareholder transfers his or her shares to a different firm.

5. Unless an existing member consents in writing, the articles shall not be changed in a way that forces him to subscribe for additional shares or increases his duty to contribute to the share capital.

6. The corporation cannot change its articles in order to avoid its contractual obligations to anyone. In such a circumstance, the corporation will always be accountable. However, tampering with articles can sometimes be considered a violation of contract with a third party.

7. The court concluded in Chidambaram Chettiar vs. Krishna Aiyangar [ix]that “if the contract with a third party was solely based on the provisions of the articles, the corporation would not be responsible for damages and the change would be effective. On the other hand, if the contract is independent, the third party will be able to sue the corporation for damages if the contract is breached.”

As a result, in Southern Foundries Ltd v. Shirlaw[x], the claimant had been engaged for 10 years as a Managing Director of Southern Foundries Ltd ("the firm"). Federated Foundries then bought a controlling stake in the firm and changed the articles of incorporation to allow two people to remove directors. After that, the claimant was dismissed before the end of his tenure. The firm was found to be in violation of contract.

8. The Articles of Association cannot be changed in such a way that it has a retroactive impact. The articles are only effective as of the date of change.

9. Whenever a public company changes its status from public to private, the company must adhere to the procedures outlined in Sections 13, 14 and 18 of the Act and Rule 33 of the 2014 Companies (Incorporation) Rules.

10. Section 8 of the Act stipulates that a company's articles of incorporation can only be amended with the prior approval of the Central Government.


CONCLUSION

Articles of organization, a document containing the company's rules, regulations, and bye-laws, are required reading for any business hoping to run smoothly and efficiently. Articles of organization are necessary for a few types of organizations, such as an unlimited company, a corporation whose shares are limited by guarantee, and a private business. The articles of incorporation cover all of the major topics required for business management and administration. By following the procedures described in the Companies Act of 2013, it can also be modified or revised as necessary.

Many of the provisions governing articles of incorporation in the Companies Act of 1956 were revised in the wake of the 2013 Act. According to the Act of 2013, the modification of a corporation's status from public to private or private to public is now permitted. Similarly, there was no provision for retrenchment prior to the 2013 Act, but that provision was added afterward. The articles of incorporation are critical to every company since they incorporate all of the most important aspects of management, such as hiring and firing.

Because the Articles of Association contains rules, regulations, and bye-laws that ensure that the company's operations are managed correctly and also that the company's objectives are effectively carried out, it is a critical document for every business. In the end, articles are indeed subject to the company's charter and the provisions of the Act. It is possible for businesses to update their products legally, but this ability is limited by the restrictions stated in the preceding paragraphs. However, if the articles are altered, the members are once again bound together in the same way they were before.

BIBLIOGRAPHY

1. A.K. Majumdar and Dr. G.K. Kapoor, Taxmann Company Law And Practice, 12th Ed., Taxman Allied Services Pvt. Ltd., 2011

2. Dr. Avtar Singh, Company Law, 14th Ed., Eastern Book Company, 2005

3. N.D. Kapoor, Elements of Mercantile Law, 29th Rev. Ed., Sultan Chand & Sons, New Delhi, 2008

REFERENCES [i] (1875) LR 7 HL 653 [ii] [1920] 1 Ch 154, CA [iii] [1951] Ch 286 at 291 [iv] ENR, (1865) 2 Dr. & Sm. 514 [v] (1884) LR 25 Ch D 320 [vi] [1941] 11 Com Cases 78 (Mad) [vii] [1920] 1 Ch 154 [viii] [1992] 73 Comp Cas 80 (Ker) [ix] (1924) 46 MLJ 415 [x] [1939] 2 K.B. 206

19 views0 comments

Comments


bottom of page