Law and You > Corporate Laws > Companies Act, 2013 > Alteration of Articles of Association
Under Section 14 of the Companies Act, 2013, by a special resolution a company has powers to alter its articles to suit its requirements from time to time, subject to (a) the provisions of the Act, and (b) the conditions contained in the company’s memorandum. Any alteration of Articles of Association so made shall be valid as if originally contained in the articles.
In Walker v. London Tramways Co. (1879) 12 Ch. D 705 case, the Court held that the power to alter articles cannot be taken away by any provision in the memorandum or articles”
In Allen v. Gold Reefs of West Africa (1900) I Ch 656 case, the Court held that alteration of articles with retrospective effect is valid provided it was bonafide and for the benefit of the company as a whole.
In Evans v. Chapman, (1902) 96 LT 381 case, the Court held that a mistake, whether clerical or any other, in the articles of a company can only be rectified by altering the articles by special resolution in accordance with this section. It cannot be set right by application to Court.
Methods of Alteration of Articles:
The Articles can be altered in the following ways –
- By adopting a new set of articles.
- By adding or inserting any new article.
- By deleting any article.
- By amending or substituting any specific rule
Check-List for Alteration of Articles:
- Is the alteration intra vires to the Companies Act, 2013?
- Is the alteration intra vires to the Memorandum of the Company?
- Is the alteration bonafide and for the benefit of the company as a whole?
- Is the alteration such that it sanctions anything which is illegal or against public policy?
Restrictions on Alteration of Articles:
There are certain restrictions on the nature and extent of alterations that can be made in the articles. There have been cases where an alteration of the articles of company amounts to a breach of contract between the contract between company and third party. Validity of such alteration depends on the nature of the contract. Some examples are as follows:
Alteration can neither be beyond the provisions of the Companies Act nor the memorandum of association.
In Andrews v. Gas Meter Co. Ltd. (1897) 1 Ch.361 case, the Court held that Articles may be altered to explain ambiguous portions or to supplement the memorandum with regard to those things upon which it is silent.
In Sidebottom v. Dershaw, Leese & Co. (1920) 1 Ch. 154 case, the Court held that alteration in articles should not sanction anything which is illegal or against public policy.
Alteration seeking to impose additional liability on a member of the company after the date on which he became a member, to take shares more than what he has already taken or to pay any money than what he is liable to pay on his share shall not be binding upon him unless he agrees in writing to such an alteration except in the case where the company is a club or any other association and the alteration provides for an increase in the rate of subscription by the members.
The alteration in Article must be bonafide and for the benefit of the company as a whole. Alteration made bonafide and in the interest of the company shall be valid even if they are likely to affect adversely the personal interests of some of the members of the company.
In Menier v. Hoopers Telegraph Works (1874) L.R. 9 Ch. App. 350 case, the Court held that the power to alter the articles must be exercised in good faith for the benefit of the company as a whole.
In British Murac Rubber Syndicate Ltd. v. Alperton Rubber Co. Ltd.(1915) 2 Ch. 186 case, the Court held that if a contract involves as one of its terms that an Article is not to be altered, then the Company is not at liberty to alter that Article so as to break that contract and thus a Company cannot alter its Articles to break a contract. Court also observed that alteration will not be valid if it has been made for the benefit of an aggressive, vindictive, or fraudulent majority.
In Hari Chandana Joga Deva v. Hindustan Co-operative Insurance Society Ltd. AIR 1925 Cal. 690 case, the Court held that a company cannot break its contract by altering its articles, but, when dealing with contracts referring to revocable Articles, and especially with contracts between a member of the company and the company respecting his shares, care must be taken not to assume that the contract involves as one of its terms in Article which is not to be altered.
In Chittambram Chettiar V. Krishna Aiyanger I.L.R. 33 Mad.36 case, it was held that a company may alter its articles even if it causes breach of contract with the outsider. It has the statutory power to do so. Where the contract with the outsider is wholly dependent on articles, the alteration would be operative, and, accordingly, the person accepting appointment purely on the terms of the articles takes the risk of those terms being altered, and will be bound by the altered articles. But the situation will be different if apart from the articles, there is an independent contract. This decision is in consonance with the principle that articles do not constitute any contract between the company and outsider.
In Southern Foundaries Ltd. V. Shirlaw, (1940) A.C. 701 case, S was appointed Managing Director in a company for ten years by an agreement. Subsequently, the company was amalgamated with another company and new articles were adopted. The latter gave power to the company to dismiss a director and accordingly S was removed from office as director and the company treated, him as having ceased to be one. S sued the company for wrongful repudiation of the contract. It was held that dismissal was a breach of contract and therefore the company was liable to pay damages to the plaintiff.
Certain provisions of the articles cannot be altered except with the prior approval of the Central Government. They are:
- any alteration which has the effect of converting a public company into a private company.
- any alteration relating to the appointment or reappointment of a managing or whole time director or a director not liable to retire by rotation in the case of a public company or private company which is a subsidiary of a public company, and
- any alteration resulting in an increase in the remuneration of any director including a managing director or whole time director in the case of a public company or a private company which is a subsidiary of a public company.
- where by an order of the Court on application under sections 397 or 398 (for relief in case of oppression or mismanagement) the company is required to alter its memorandum or articles, the company will then be precluded without the consent of the court from making any further alterations inconsistent with the order of the Court.
Conversion of Private Company into Public Company:
Legal Provisions related to Conversion of Private Company into Public Company are given in Section 18 and 14 of the Companies Act, 2013 read with Rule 33 of Companies (Incorporation) Rules, 2014. Conversion of Private Limited Company into Public Limited Company involves alteration of article of association of Private Company under Section 14 which cannot be done without passing special resolution of shareholders in the General Meeting.
Such alteration involves deletion of any restrictions and limitations required to be inserted in the articles of a private company. It ceases to be private company and becomes public company from the date of such alteration.
Conversion of Public Company into Private Company:
Legal Provisions related to Conversion of Public Company into Private Company are given in Section 18 and 14 of the Companies Act, 2013 read with Rule 33 of Companies (Incorporation) Rules, 2014. Conversion of Public Limited Company into Private Limited Company involves alteration of article of association of Public Company under Section 14 which cannot be done without passing special resolution of shareholders in the General Meeting and approval of the Tribunal.
Such alteration involves addition of any restrictions and limitations required to be inserted in the articles of a private company. It ceases to be public company and becomes public company from the date of the approval of the Tribunal.
Procedure for Alteration of Articles:
There are specific steps that needed to be followed for altering the AOA of a company –
- Convene a Board meeting under Section 173 (1) of the Companies Act, 2013 by giving Notice of at least 7 days.
- Pass the resolution under Section 173 (1) of the Companies Act, 2013, and also pass for arrangements to call an extraordinary general meeting (Section 101 of the Act) with the decision of its date, time, and venue for passing the alteration in articles by resolution with a special majority. A Company Secretary is authorized to issue the notice of the general meeting. Notice of EGM shall be given at least 21 days before the actual date of EGM. Notices are also to be sent to all stock exchanges on which the shares of the company are listed.
- Hold General Meeting under Section 101 of the Act and pass the resolutions related to the alteration of articles with a special majority.
- File Form MGT-14 (Filing of Resolutions and agreements to the Registrar under section 117) with the Registrar along with the requisite filing within 15 days of passing the special resolution, along with documents like certified true copies of the special resolutions along with explanatory statement; a copy of the Notice of meeting sent to members along with all the annexure; and a printed copy of the altered Article.
- Make changes in all the copies of the Articles.
Conclusion:
Looking to the above, it may be stated that power of a company to alter its articles is not an absolute power. The company has to take care of restriction imposed on the alteration of the Articles. The company must follow each and every step of the procedure as explained and mentioned in the Act failing which, the company shall be punishable with a hefty penalty.