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Published : March 01, 2012 | Author : kaushikdhar@legalserviceindia.com
Category : Company Law | Total Views : 17061 | Rating :

  
kaushikdhar@legalserviceindia.com
Kaushik Dhar B.A.(Law) & LL.B.(Hons), LL.M. (Corporate law and Governance), NALSAR University of Law Hyderabad
 

Articles of Association And Alteration of Articles

To obtain the registration of a company an application has to be filed with the Registrar of Companies. The application must be accompanied by the following documents,

1. Memorandum of Association
2. Articles of Association, if necessary and
3. 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 ‘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.

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 Ltd (AIR 1971 SC 422), 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.

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.

1.2. 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
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.

1.3. 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 27 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.

1.4. No Article Company
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 [(section 28(2)].

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.

1.5. 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.

1.6. 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 [Section 31(1)].

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 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. [Pyarelal Sharma v. Managing Director, J & K Industries Ltd. [1989] 3 comp. L.J. (SL) 70].

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. [Section 31 (2A)].

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.

1.7.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.

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.

1.8. 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 [2005]55 SCL 459 (AP).

1.9. 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. [2004] 50 SCL 254.

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

1.10. Members bound to the company

Each member must observe the provisions of articles and memorandum. For instance, a company 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.

1.11. 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 courl held that the payment means payment in cash and therefore the company could be compelled to pay dividend in terms of the articles.

1.12. Members bound to members
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.

1.13. 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.

2. 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. 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.

Effect of the Articles
When the memorandum and articles of association are registered, the company is bound to its 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.

2.1. 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. 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.

2.2. Alteration of articles
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: Sidebottom v Kershaw, Leese & Co [1920] 1 Ch 154, CA. This means the company as an entity, or as the interest of ‘an individual hypothetical member’: Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 at 291, [1950] 2 All ER 1120.

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 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.

3. 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

Authors contact info - articles The  author can be reached at: kaushikdhar@legalserviceindia.com




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Article Comments

Posted by swati on March 13, 2012
i have a query. In the acse of private ltd company, if the land is is
the name of one of the directors of the company, can he gives land to
the company for construction of bilding in the name of company without
any agreement or resoultion?

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