COMPANY LAW & PRACTICE

Article of Association LIMITATATIONS ON POWER TO ALTER ARTICLES:- No increase in the liability of members. No alteration may be made in either the memorandum or the articles compelling a person who is a member at the date of the alteration to take or subscribe for more shares or increase is liability to the company unless he aggress in writing before or after the alteration is made. Alteration by special resolution only. Alteration of articles will be made only by a special resolution as defined in the act. Articles can never by altered by an ordinary resolution even if they provide for such a procedure even clerical errors in the articles should be set right by a special resolution.

Should not cause breach of contract Should not cause breach of contract. A company cannot by altering its articles escape liability for breach of a contract into which it has entered. It cannot plead its altered articles as a defence in an action for a breach of contract. The rights which have already accrued under the accrued cannot be distributed by the alteration. Example: An agreement provided that so long as x company should should hold 5,000 shares in the Y company, it should have the right of nominating two directors on the board of the y company .A provision to the same effect was contained in the articles of the Y company.X company had nominated two persons as directors whom the Y company refused to accept . an accept. An attempt was made to alter the articles but an injunction was granted to restrain it as it would constitute a deliberate breach of contract with an outsider.[British murac Syndicate v. Alperton Rubber Co. Ltd. (1915) 2 Ch. 186.]

Must be for the benefit of the company Must be for the benefit of the company. The power to alter the articles must be exercised bonafide for the benefit of the company as a whole, if the alteration is bonafide for benefit of the company as a whole, the interest of the minority may be sacrificed. Companies. Companies enjoy wide powers as regards alteration of articles. But this power must be exercised not only in the manner required by laws but also bonafide for the benefits of the company as a whole. An alteration will not be restrained merely because in inflicts hardships on some members and not on others. Example: the articles gave the company lien on all shares ‘ not fully paid’ for calls due to the company. A was the only shareholders holding fully paid shares. He also owed money to the company or calls due on other shares. A die. The company altered its articles by deleting the words ‘ not fully paid up’ and thus gave it self the power to exercise lien on all of A’s shares. It was held that the alteration was good as it was done bonafide for the benefit of the company as a whole. (Allen v. Gold Reefs west Africa Ltd. (1900) 1. Ch. 657). The expression for the benefit of the company as a whole’ means for the benefit of the shareholders as general body. Its effect should not be such as to discriminate between the majority shareholders and minority shareholders so as to give the former as advantage of which the latter are deprived.

Fraud on the minority. The alteration must not constitute a’ fraud on the minority. The basic requirement is that the power of alteration must be exercised In good faith In the interest of the company. In a case of Brown vs. British Abrasive Wheel Co. [1919]1CH290 the majority which held 98% of shares passed a Special Resolution that upon request of holders of 9/10th of issued shares , a shareholders shall be bound to sell and transfer his share to the nominee of such holder at a fair value. Alternation was held to be invalid since it amounted to oppression of majority.

Restrospective alteration Restrospective alteration. Articles may be so altered as to have retrospective effect e.g. the insertion of a lien clause so as to give the company a lien on shares of members for debts incurred both before and after the insertion of the clause. But alterations should not be such as to throw an increased liability on members more than they contracted for when they became members. But in case of Pyara Lal Sharma Managing Director, J&K Industry Ltd. [1989]3 Comp. L.J.(SL)70 Memorandum and Articles Distinguished. Memorandum and articles are public documents. They are inter-linked and require to be registered for the formation of the company. Where there is any ambiguity or where the memorandum is silent on any point, he articles may serve to explain or supplement the memorandum. Beyond this he two documents have nothing in common and differ from one another in the following respects.

Memorandum of Association Articles of Association Particulars Memorandum of Association Articles of Association Meaning Memorandum of Association defines the relation of the company with the outside world Article of association deals with the rights pf the members of the company Inter se and also establishes the relationships of the company with the members. scope Memorandum of association is the charter of the company and defines the scope of its activities. Articles of Association of the company is a document which regulates the internal management of the company These are the Rules made by the company for carrying out the objects of the company as set out in the memorandum.

Contents Status Alteration Ultra vires Name Clause, Registered Office Clause, Objects Clause, liability Clause, Capital clause and Association Clause. Contains regulations for Company management and those that regulate relationship between members inter se. Status Memorandum is a supreme document of the company. Articles are subordinate to the memorandum. They cannot alter or control the Memorandum of Association. Alteration Can be altered only under certain situations and in the manner provided. Approval of central Government is required, besides approval of shareholders in a General Meeting by way of Ordinary or Special Resolution. Can be altered by the members by passing a Special Resolution only. Ultra vires A company cannot depart from the provisions contained in its Memorandum, and if it does, it would be ultra vires the company. Anything done against the provisions of Articles, But Which is Intra Vires the memorandum, can be ratified.

EFFECT OF MEMORANDUM AND ARTICLES The memorandum and the articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member and contained convenants by the company and each member to observe all the provisions of the memorandum and the articles, This section aims to impart contractual force to the memorandum and articles. The effect of these provisions is to constitute through the memorandum and the company. The effect and the implications of this section may be appreciated by considering how far the memorandum and the articles bind- (i) the members to the company, (ii) the company to the members, (iii) the members inter se, (iv) the company to the outsiders

(i) Members to the company (i) Members to the company. The memorandum and articles constitute contract between the company and each member. Each member of the company bound to observe the various provisions of the memorandum and the articles of associations as if he had actually signed the same. The company can therefore, enforce articles of association against any member. Example: the articles provided that the company shall have a first and paramount lien upon each share for debt due to the company by shareholders. One of the shareholders owing money to the company borrowed money from the bank on the security of shares. The bank gave notice of deposit of share to the company. It was held that the shares deposited with the bank were bound by the articles just as if the shareholders had contracted with the company, and therefore, the lien which the company acquired under the articles on those shares preclude the bank from getting priority in respect of the debts incurred by a shareholders before the notice was given But the alteration of the memorandum or articles which requires a member to take or subscribe for more shares or increases his liability to contribute to the share capital of the company shall not be binding on him unless he agrees in writing before or after the alteration.

(ii) Company to the members, The company is bound to the members by the various provisions contained in the memorandum and the articles of association in the same way as the member are bound to the company. The company can, therefore exercise its rights as against any members only in pursuance of and in accordance with the articles and the memorandum. Every member is entitled to sue the company to prevent any breach of the articles which would affect his right as a member of the company. Thus, where a right is conferred by the articles in a shareholders to record his vote at a company meeting, the chairman of the meeting cannot deprive him of this right. Similarly a shareholder can enforce hi right to recover dividend which has been declared or receive notice of any general meeting in pursuance to the articles, if he is denied any of these rights of the company (iii) Members Inter se. The articles and the memorandum do not constitute express agremment between the members of the company. Yet each member of the company is bound by the memorandum and articles on the basis of an implied contract to the other members. The articles regulate the rights of the members inter se but such right can be enforced only through the company or though the liquiator representing the company.

Example: The article of association of the company provided that members wishing to transfer shares must inform the directors of their intention and the directors must “ take the said shares equally between them at a fair value”. The directors refused to take the shares and argued that the articles did not impose an enforceable liability on them. It was held that the directors were obliged to take the shares. The articles imposed an obligation on the directors in their capacity as members as such this was a personal obligation enforceable by one member against another. When a member complains of a breach of the terms of articles by another member, the suit can be brought not by that member but by the company.