aoa
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corporate law projectTRANSCRIPT
CHANAKYA NATIONAL LAW UNIVERSITY
PROJECT REPORT – CORPORATE LAW-I
ASSIGNED TOPIC : ALTERATION OF A.O.A.
SUBMITTED BY
FARHAT YUNUS
ROLL NUMBER: 541
SUBMITTED TO
Mr. BRIJNATH
FACULTY OF CORPORATE LAW
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RESEARCH METHODOLOGY
Method of Research
The researcher has adopted a purely doctrinal method of research. The researcher has made
extensive use of the available resources at library of the Chanakya National Law University and
also the internet sources.
Aims and Objectives
The aim of the project is to present an overview of various aspects relating to ‘Alteration Of
A.O.A.’ through cases, decisions and suggestions and different writings and articles
Scope and Limitations
Though the study of the this topic is an immense project and pages can be written over the topic
but due to certain restrictions and limitations the researcher has not been able to deal with the
topic in great detail.
Sources of Data:
The following secondary sources of data have been used in the project: Cases, Books, Journals,
Articles, etc.
Method of Writing:
The method of writing followed in the course of this research paper is primarily analytical.
Mode of Citation
The researcher has followed the bluebook method of citation throughout the course of this
research paper.
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ACKNOWLEDGEMENT
I convey my deepest gratitude to my respected faculty of Corporate Law, Mr. Brijnath, who has
been a constant source of inspiration and guided me throughout the interval to complete this
project on ‘Alteration Of A.O.A.’ successfully.
I wish to record my gratitude to the librarian and other staffs of CNLU library as no academic
venture of mine can be complete without their assistance and co-operation. I owe sincere regards
to them for providing me valuable information through, journals, textbooks and other necessary
data.
Farhat Yunus
ROLL NO. 541
7th SEMESTER.
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TABLE OF CONTENTS
1. INTRODUCTION....................................................................................................................4
2. IMPORTANCE OF AOA........................................................................................................6
3. CONTENTS OF ARTICLES OF ASSOCIATION.................................................................7
4. NECESSITY FOR COMPANIES TO HAVE AOA...............................................................8
4.1. COMPANIES WHICH MUST HAVE ARTICLES (SECTION 26)....................................8
4.2. NO ARTICLE COMPANY.................................................................................................9
4.3. FORM AND SIGNATURE OF ARTICLES.....................................................................10
5. ALTERATION OF ARTICLES............................................................................................10
6. PROCEDURES FOR ALTERATION OF ARTICLES OF ASSOCIATION.......................11
7. EFFECT OF ARTICLES OF ASSOCIATION......................................................................13
8. BINDING EFFECT OF ARTICLES OF ASSOCIATION....................................................14
8.1. MEMBERS BOUND TO THE COMPANY.....................................................................14
8.2. COMPANY BOUND TO MEMBERS..............................................................................15
8.3. MEMBERS BOUND TO MEMBERS..............................................................................15
8.4. COMPANY AND THE OUTSIDERS..............................................................................16
8.5. INCONSISTENCIES BETWEEN THE ARTICLES AND THE MEMORANDUM..........16
9. ARTICLES OF ASSOCIATION UNDER ENGLISH LAW................................................17
10. CONCLUSION...................................................................................................................17
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1. INTRODUCTION
To obtain the registration of a company an application has to be filed with the Registrar of
Companies. The application must be accompanied by Memorandum of Association, Articles of
Association, if necessary and the agreement, if any, which the company proposes to enter into
with any individual for his appointment as its managing or whole-time director or manager.
The articles of association of a company are its by-laws or rules and regulations which govern
the management of its internal affairs and the conduct of its business. They are framed with the
object of carrying out the aims and objects as set out in the Memorandum of Association.
According to Section 2(2) of the Companies Act, 1956 (Section 2(5) of 2013 Act) ‘articles’
means the articles of association of a company as originally framed or as altered from time to
time in pursuance of any previous companies laws or of the present Act, i.e. the Act of 1956.
Articles are like the partnership deed in a partnership. They set out provisions for the manner in
which the company is to be administered. In particular, they provide for matters like the making
of calls, forfeiture of shares, directors’ qualifications, appointment, powers and duties of
auditors, procedure for transfer and transmission of shares and debentures.
Sec. 31 of the Companies Act, 1956, provides that a company may by passing a special
resolution, alter regulations contained in its Articles any time subject to the provisions of the
Companies Act and conditions contained in the Memorandum of Association.
Section 36 provides that the memorandum and articles, when registered, bind the company and
its members to the same extent as if they have been signed by the company and by each member
and contain covenants on its and his part to observe all the provisions of the memorandum and of
the articles. Thus the company is bound to its members, the members are bound to the company
and the members are bound to other members by whatever is contained in these documents. But
in relation to articles, neither a company nor its members are bound to outsiders.
The articles of association merely govern the internal management, business or administration of
a company. They may be binding between the members affected by them but do not have the
force of statute.
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2. IMPORTANCE OF AOA
The articles of association of a company are its by-laws or rules and regulations which govern
the management of its internal affairs and the conduct of its business. They are framed with the
object of carrying out the aims and objects as set out in the Memorandum of Association.
According to Section 2(2) of the Companies Act, 1956 ‘articles’ means the articles of association
of a company as originally framed or as altered from time to time in pursuance of any previous
companies laws or of the present Act, i.e. the Act of 1956.1
The Articles regulate the internal management of the company. They define the powers of its
officers. In Naresh Chandra Sanyal vs Calcutta Stock exchange association Ltd2, the SC said
that the articles of association also establish a contract between the company and the members
and between the members inter se. This contract governs the ordinary rights and obligations
incidental to membership in the company.3
Articles are like the partnership deed in a partnership. They set out provisions for the manner in
which the company is to be administered. In particular, they provide for matters like the making
of calls, forfeiture of shares, directors’ qualifications, appointment, powers and duties of
auditors, procedure for transfer and transmission of shares and debentures.
3. CONTENTS OF ARTICLES OF ASSOCIATION
Articles usually contain provisions relating to the following matters-
1. Share capital including sub division thereof, rights of various shareholders, the relationship of
these rights, payment of commission, share certificates,
2. Lien of shares
3. Calls on shares
4. Transfer of shares
1 Monappa, Arun and Mirza S.Saiyadain, Personnel Management, II edn., (1997), Tata McGraw-Hill Publishing Company Limited, p. 364.2 AIR 1971 SC 422.3 Goss, David, Principles Of Human Resource Management, (1994), Routledge, Pp 1-2.
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5. Transmission of shares
6. Forfeiture of shares
7. Surrender of shares
8. Conversion of shares into stock
9. Share warrant
10. Alteration of capital
11. General meetings and proceedings thereat
12. Voting rights of members, voting by poll, proxies
13. Directors, including first directors or directors for life, their appointment, remuneration,
qualifications, powers and proceedings of Board of directors’ meetings
14. Dividends and reserves
15. Accounts and audits
16. Borrowing powers
17. Winding up
Utmost care must be taken to prepare the articles of association of the proposed company. They
are certain matters in respect of which powers can be exercised by the company only if the
articles so provide and in the manner provided therein. Therefore, the articles must contain
provisions in respect of all matters which are required to be contained therein so as not to hamper
the working of the company later. At the same time, the articles of association should not provide
for matters in respect of which it has no powers to exercise. It cannot, for example, provide for
expulsion of a member, as such a power is opposed to the fundamental principal of company
jurisprudence and, therefore, ultra vires the company.4
4 Majumdar A.K. and Dr. Kapoor G.K., Company Law and Practice, Ed. 15th, Taxmann Publications pvt. Ltd.
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4. NECESSITY FOR COMPANIES TO HAVE AOA
4.1. COMPANIES WHICH MUST HAVE ARTICLES (SECTION 26)
The following companies must have their own articles, namely
1. Unlimited companies
2. Companies limited by guarantee
3. Private companies limited by shares
The articles shall be signed by the subscribers of the Memorandum and registered along with the
Memorandum. A public company may have its own Articles of association. If it does not have its
own Articles, it may adopt Table A given in Schedule I to the Act.
Section 275 provides that the regulations with respect to the aforesaid companies should provide
for the following:-
1. In case of unlimited companies, the articles shall state the number of members with which the
company is to be registered and if the company has a share capital, the amount of share capital
with which the company is to be registered.
2. In case of companies limited by guarantee, the articles shall state the number of members with
which the company is to be registered.
3. In case of private company having a share capital, the articles shall contain provisions which-
a) Restrict the right to transfer shares
b) Limit the number of its members to 50 (not including employee-members), and
c) Prohibit any invitation to the public to subscribe for any shares in, or debentures of, the
company.
4.2. NO ARTICLE COMPANY
5 The Companies Act of 1956.
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According to section 28(1), company limited by shares may either frame its own set of articles or
may adopt all of any of the regulations contained in Table A. but if it does not register any
Articles, Table A applies, if it does not have some regulations, for the rest, as far as applicable,
table A applies, insofar as its regulations are not excluded.6
Thus, in case of a limited liability company having share capital, if the articles do not expressly
exclude any or all provisions of table A, and at the same time not providing anything for them,
applicable clauses of Table A shall automatically apply to it.
4.3. FORM AND SIGNATURE OF ARTICLES
According to section 30 of the Companies act, 1956 the articles shall
a) be printed;
b) be divided into paragraphs numbered consecutively; and
c) be signed by each subscriber of the memorandum of association (who shall add his address,
description and occupation, if any,) in the presence of at least one witness who shall attest the
signature and shall likewise add his address, description and occupation, if any.
5. ALTERATION OF ARTICLES
Sec. 31 of the Companies Act, 1956, provides that a company may by passing a special
resolution, alter regulations contained in its Articles any time subject to
a) the provisions of the Companies Act and
b) Conditions contained in the Memorandum of Association.7
A copy of every special resolution altering the Articles shall be filed in Form no 23, with the
Registrar within 30 days its passing and attached to every copy of the Articles issued thereafter.
The fundamental right of a company to alter its articles is subject to the following limitations:
a) The alteration must not exceed the powers given by the Memorandum of Association of the
6The Companies Act,1956 section 28(2).7ibid Section 31(1).
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company or conflict with the provisions thereof.
b) It must not be inconsistent with any provisions of Companies Act or any other statute.
c) It must not be illegal or against public policies
d) The alteration must be bona fide for the benefit of the company as a whole.
e) It should not be a fraud on minority, or inflict a hardship on minority without any
corresponding benefits to the company as a whole.
f) The alternation must not be inconsistent with an order of the court. Any subsequent alteration
thereof which of inconsistent with such an order can be made by the company only with the
leave of the court.
g) The alteration cannot have retrospective effect. It can operate only from the date of
amendment.8
h) If a public company is converted into a private company, then the approval of the Central
Government is necessary. Printed copies of altered articles should be filed with the Registrar
within one month of the date of Central Government’s approval.9
i) An alteration that has the effect of increasing the liability of a member to contribute to the
company is not binding on a present member unless he has agreed thereto in writing.
j) A reserve liability once created cannot be undone but may be cancelled on a reduction of
capital.
k) An assumption by the Board of Directors of a company of any power to expel a member by
amending its Articles is illegal or void.
8Pyarelal Sharma v. Managing Director, J & K Industries Ltd. [1989] 3 comp. L.J. (SL) 70.
9ibid Section 31 (2A).
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6. PROCEDURES FOR ALTERATION OF ARTICLES OF ASSOCIATION
For effecting alteration to the articles of association, the following procedures is required to be
followed-
1. Take the necessary decision by convening a Board Meeting to change all or any of the existing
Articles of Association and fix up the day, time, place and agenda for a general meeting for
passing special resolution to effect the change.
2. See that any such change in the Articles of the company conforms to the provisions of the
companies Act, 1956 and the conditions contained in the Memorandum of Association of the
company.
3. See that any such change does not increase the liability of any member who has become so
before the alteration to contribute to the share capital of or otherwise to pay money to, the
company.
4. See that any such change does not have the effect of converting a public company into a
private company. If such is the case, then make an application to the Central Government for
such alteration.
5. See that any such change does not provide for expulsion of a member by the company.
6. Issue notices for the General Meeting proposing the Special resolution and explaining inter
alia, in the explanatory Statement the implication and reasons of the changes being proposed.
7. If the shares of the company are enlisted with any recognised Stock Exchange, then forward
copies of all notices sent to the shareholders with respect to change in the Articles of Association
to the Stock Exchange.
8. Hold the General Meeting and pass the special resolution.
9. File with the stock exchange with which your company is enlisted six copies of such
amendments as soon as the company adopts it in General Meeting. Out of the six copies, one
copy must be a certified true copy.
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10. Forward promptly to the Stock Exchange with which your company is enlisted three copies
of the notice and a copy of the proceedings of the General Meeting.
11. File the Special resolution with the concerned Registrar of companies with explanatory
statement in Form No.23 within thirty days of its passing after payment of the requisite filing fee
in cash as per Schedule X. If the Articles of Association have been completely or substantially
changed, file a new printed copy of the Articles after paying the requisite fee in cash prescribed
under Schedule X to the Companies Act, 1956. payments upto Rs.50/-
12. Effect the changes in all copies of the articles of association.
13. Any alteration so made be as valid as if originally contained in the Articles of Association
and be subject to alteration by Special Resolution as above.
14. If the articles are altered pursuant to an order of the Company law Board made under section
397 or 398 then see that such alterations is not inconsistent with the said and if it is so then
obtain first leave of the Company Law Board to make such alteration.10
7. EFFECT OF ARTICLES OF ASSOCIATION
Section 36 provides that the memorandum and articles, when registered, bind the company and
its members to the same extent as if they have been signed by the company and by each member
and contain covenants on its and his part to observe all the provisions of the memorandum and of
the articles. Thus the company is bound to its members, the members are bound to the company
and the members are bound to other members by whatever is contained in these documents. But
in relation to articles, neither a company nor its members are bound to outsiders.
The articles of association merely govern the internal management, business or administration of
a company. They may be binding between the members affected by them but do not have the
force of statute- Irrigation Development Employees’ Association vs Government of Andhra
Pradesh.11
When the memorandum and articles of association are registered, the company is bound to its
10 Singh, Dr. Avtar., Company Law, 14th Ed., Eastern Book Company, 2005, Pg-179.11 [2005]55 SCL 459 (AP).
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shareholders, as though those shareholders had individually signed and sealed it and also
contained covenants on the part of each member to observe all the provisions of the
memorandum and of the articles: Companies Act 1985, s.14(1). The articles of association
become a contract between the company and its shareholders; it is a statutory contract of a
special nature. Courts regarded these documents as a business documents and therefore
construed so as to give them business efficacy. As with a memorandum of association, how far
the articles constitute a binding contract between a company and its shareholders on the one hand
and between its shareholders inter se on the other hand, is not entirely unclear. It has been held
that the contractual force given to the articles is limited to provisions which apply to the
relationship of shareholders in their capacity as shareholders, not a private one.
8. BINDING EFFECT OF ARTICLES OF ASSOCIATION
Merely because in articles of association, the board of directors is empowered to refer any claim
or demand to arbitration, provisions of section 36 cannot be interpreted to mean that the
company or its directors shall be bound to incorporate a provision for arbitration in every
agreement that a company executes- Skypark builders & distributors Vs Kerala Police housing
& construction Corpn Ltd.12
The discussion on legal effect of memorandum and articles may be made under the following
heads-
1. Members bound to the company
2. Company bound to its members
3. Members bound to members
4. Company and the outsiders.13
8.1. MEMBERS BOUND TO THE COMPANY
Each member must observe the provisions of articles and memorandum. For instance, a company
12 [2004] 50 SCL 254.13 Supra note 10.
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has a right of lien on member’s shares or to forfeit the shares on non-payment of calls. Every
member is bound by whatever is contained in the memorandum and articles. In Borland’s
Trustee vs steel Bros. Co. Ltd [1901] 1 Ch. 279, the articles of a company contained a clause that
on the bankruptcy of a member, his share should be sold to the other persons and at a fixed price
by the directors. ‘B’ a shareholder was adjudicated bankrupt. His trustee in bankruptcy claimed
that he was not bound by these provisions and should be at liberty to sell the shares at the true
value. It was held that the trustee was bound by the articles as a share was purchased by B in
terms of the articles.
In Malleson vs National Insurance & Guarantee Corpn, it was held that each member is bound
by the covenants of memorandum and articles as originally framed or as altered form time to
time in accordance with the provisions of the companies Act.
In V.B Rangaraj vs V.B Gopalkrishnan [1992], 73 SC, it was held that the articles are the
regulations of the company binding on the company and on its shareholders. Shareholders,
therefore, cannot among themselves enter into an agreement which is contrary to or is
inconsistence with the articles of the company.
8.2. COMPANY BOUND TO MEMBERS
A company is bound to its members by whatever is contained in its articles and memorandum.
The company is bound not only to the “members as a body” but also to the individual members
as to their individual rights. The members can restrain the company from spending money on
ultra vires transaction. An individual can make the company fulfil its obligation to him such as to
send the notice for the meetings, to allow him to cast his vote in the meeting.
In Wood vs Odessa waterworks [1889] 42Ch. D. 636, the directors proposed to pay dividend in
kind by issuing debentures. The articles provided for the payment of dividend. The court held
that the payment means payment in cash and therefore the company could be compelled to pay
dividend in terms of the articles.14
8.3. MEMBERS BOUND TO MEMBERS
14Ramaiya A., Guide to the Companies Act, Ed. 16th, 2008, Vol. 1;2;3, Lexis Nexis Butterworth Wadhwa, Nagpur pg-234
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The articles bind the members inter se, i.e. one to another as far as rights and duties arising out of
the articles are concerned. It is well settled that the articles of association will have a contractual
force between the company and its members as also between members inter se in relation to their
rights as such members- Ramakrishna industries (P) Ltd vs P. R Ramakrishnan, 1988.
After the articles are registered, they not only constitute a contract between the association or
company on the one hand and its members on the other, but also they constitute a contract
between the members inter se- Shiv Omkar Maheshwari vs Bansidhar Jagannath, 1957.
8.4. COMPANY AND THE OUTSIDERS
The articles do not constitute any binding contract as between a company and an outsider. An
outsider cannot take advantage of the articles to found a claim against the company. This is
based on the general rule of law that a stranger to a contract cannot acquire any rights under the
contract. Thus if a right is conferred by the articles on a person in any capacity other than that of
the member, it cannot be enforced against the company.
In Eley vs Positive Govt. Security Life Ass. Co. 1876,1 Ex. D. 88, the articles of a company
provided that E should be the solicitor of the company for life and could be removed from office
only for misconduct. E took office and became a shareholder. After sometime the company
dismissed him without alleging misconduct. E sued the company for damages for breach of
contract. It was held that the articles did not constitute any contract between the company and the
outsider and as such no action could lie.15
8.5. INCONSISTENCIES BETWEEN THE ARTICLES AND THE MEMORANDUM
The articles are subordinate to the memorandum; any clause in them which is inconsistent with
the memorandum is overruled: Guinness v Land Corpn of Ireland Ltd (1882) 22 ChD 349 at 376.
The memorandum is the charter of the company which defines its powers. The articles of
association play a another role. They outline the duties, rights and powers of the governing body
as between themselves and the company at large, and the mode and form in which the business
of the company is to be carried on and in which changes in its internal regulations may be made.
15 Johari H.C., Commentaries on Companies Act, 2007 Ed., Vol. 1;2;3, Kamal Law House, Kolkatta.
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The memorandum and articles may, however, in certain circumstances be read together, at all
events so far as may be necessary to explain any ambiguity appearing in the terms of the
memorandum or to supplement it upon any matter as to which it is silent.
9. ARTICLES OF ASSOCIATION UNDER ENGLISH LAW
The articles of association (often just called 'articles') of a UK company contain the rules for its
internal regulation and management. The articles deal with such things as meeting procedure,
powers of directors, members' rights, procedure for paying dividends, winding up etc. The
articles can often be quite lengthy (for example they could typically comprise over 100
numbered paragraphs spanning, say 30 pages). However, the UK Companies Act 1985 contains a
mechanism intended to simplify the task of preparing articles of association - various standard
articles of association documents have been enacted. These are contained in regulations made
under the Act - The Companies (Tables A to F) Regulations 1985. The most commonly used of
these standard articles of association documents is known as 'Table A' (which is intended for use
in the case of companies limited by shares). Table A may, if desired by the person(s) forming the
company, be incorporated by reference (in whole or in part) into the company's own articles,
thereby reducing the length of the document to be prepared.16
Every UK company limited by shares (which is a far more common type of company than the
company limited by guarantee or the unlimited company) is deemed to have articles of
association in the form of Table A except in so far as articles are registered (i.e. lodged at
Companies House) which exclude or modify Table A - section 8 of the Companies Act 1985. It
is common for UK companies to adopt the provisions of Table A in a modified format as
experience has shown that Table A is rarely ideal in its unmodified form.
16 Ramaiya A., Guide to the Companies Act, Ed. 16th, 2008, Vol. 1;2;3, Lexis Nexis Butterworth Wadhwa, Nagpur, pg-297.
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10. CONCLUSION
The Articles of Association may be changed by the shareholders passing a special resolution in a
general meeting or by written resolution. A copy of the resolution and the new articles of
association must be sent to Companies House within 15 days. The changes to the Articles of
Association cannot be made in breach of other company law rules and there are protections
against such changes where they increase the liability of individual shareholders, vary the rights
of any class of shareholders or otherwise prejudice minority shareholders. Special resolutions
require the votes of 75% of members present in person or by proxy, who are entitled to vote and
do vote at the meeting. The meeting at which the resolution is proposed must have had at least 14
days’ notice, unless a shorter period was agreed by a majority in number of members holding at
least 90% of the shares (95% in the case of public companies). Alternatively, the written
resolution procedure can be used, and the special resolution will be passed if approved by
shareholders representing not less than 75% of the total voting rights of the shareholders entitled
to vote on the written resolution on the day it is circulated. This Special Resolution - Alteration
to Articles of Association is in open format. Either enter the requisite details in the highlighted
fields or adjust the wording to suit your purposes.
Any alteration must be made in good faith for the benefit of the company as a whole. This means
the company as an entity, or as the interest of ‘an individual hypothetical member'. It is for the
shareholders to determine whether or not the alteration is for the benefit of the company. The
alteration may affect the rights of a member as between himself and the company by
retrospective operation, since the shares are held subject to the statutory power of altering the
articles. If a contract whether with a member or an outsider is so drawn as by its terms or
implication to prohibit the company from altering its articles to the prejudice of the other
contracting party, then, although the company cannot be precluded from altering its articles,
thereby giving itself power to act upon the provisions of the altered articles, so to act may
nevertheless be a breach of the contract. The articles cannot be so altered as to increase the
liability of a member to contribute to share capital or otherwise to pay money to the company
without his consent; and a special resolution altering articles may be impeached if its effect is to
discriminate between the majority of shareholders and the minority shareholders so as to give the
former an advantage of which the latter are deprived. In a case where an order by the court by
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way of protection of a member of the company against unfair prejudice requires the company not
to make any, or any specified, alteration in its articles, the company has no power without leave
of the court to make any such alteration.
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BIBLIOGRAPHY
Bare Acts:
The Companies Act,1956.
Books:
Chandratre K.M.; Ghosh K.M., Company Law, 3th Ed., 2007, Vol. 1;2;3, Bharat Law
House.
Datta C.R., Company Law, 6th Ed., 2008, Vol. 1; 2; 3, Lexis Nexis Butterworth
Wadhwa, Nagpur.
Johari H.C., Commentaries on Companies Act, 2007 Ed., Vol. 1;2;3, Kamal Law House,
Kolkatta.
Kapoor, N.D.,Elements of Mercantile Law, 29th Rev. Ed., Sultan Chand & Sons, New
Delhi, 2008.
Majumdar A.K. and Dr. Kapoor G.K., Company Law and Practice, Ed. 15th, Taxmann
Publications pvt. Ltd. 2013.
Ramaiya A., Guide to the Companies Act, Ed. 16th, 2008, Vol. 1;2;3, Lexis Nexis
Butterworth Wadhwa, Nagpur.
Singh, Dr. Avtar., Company Law, 14th Ed., Eastern Book Company, 2005.
Sites:
www.open.gov.uk/ccta/cctapubs.htm
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