For a company there are two documents which form its constitution and its main body, which are- Memorandum of Association (MoA) and Articles of Association (AoA). 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. AoA is the document which regulates the internal management of the company. It lays down the powers of its officers. They 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 provide for the matters like the making of calls; forfeiture of shares; directors qualifications, appointment, powers and duties of auditors; procedure for the transfer and transmission of shares and debentures. AoA and MoA are closely related as AoA is supplementary to the MoA. MoA lay down companies objects and various powers it possesses; while AoA determine how those objects shall be achieved and those powers exercised. In Ashbury v. Watson it has been laid down that the articles are subordinate and controlled by the memorandum of association which constitutes the general constitution of the company. Thus it is always taken into consideration that while drafting the articles; it is kept in mind that it in no way exceeds the clauses of memorandum of association. Therefore the Articles going beyond the Memorandum are ultra vires. Thus the simplest way to explain the relation between Articles of Association and Memorandum of Association is that Memorandum is to relate it to the Constitution of India. Memorandum of Association is the constitution, while the Articles of Association for that matter are the other laws of the land which are in no way can surpass the constitution. The memorandum and the articles can be read together in order to remove an ambiguity or uncertainty. For that matter if the memorandum is completely clear, then a doubt as to its meaning cannot be raised by referring to the articles. One thing should be kept in mind that articles in no way can surpass the memorandum. For better understanding, the Duncan Gilmour & Co. Ltd., Re is a classic example, where the memorandum had exhaustively defined the rights of preference shareholders, and the articles provided that at the time of winding up, the company’s surplus assets, after paying all its debts and repaying share capital, should be distributed among all its shareholders. It was held that preference shareholders were not entitled to share any surplus assets, because there rights were to be determined from the memorandum alone as it did not confer the right to participate on them and not in respect of the articles.
The relationship between memorandum and articles has been precisely expressed by Lord Cairns, L.C. in Ashbury Railway Carriage & Iron Co. Ltd. v. Riche which is as follows,
“The articles play a part subsidiary to a memorandum of association. They accept the memorandum of association as a charter of incorporation of the company, and so accepting it, the articles proceed to define the duties, rights and powers of governing body as between themselves and the company at large, and the mode and form in which business of the is carried on, and the mode and form in which changes in the internal regulations of the company may from time to time be made… The memorandum as it were…, the area beyond which the actions of the company cannot go; inside that area, the shareholders may make such regulations for their own government as they think fit.”
The Articles of Association and Memorandum of Association do seem to be similar on the terms and clauses they carry but they differ in the following context:
- The memorandum lays down the fundamental conditions on which the company alone is allowed to be incorporated. They are the conditions which form the basis for the benefit of the creditors, and outside public as well as the shareholders. On the other hand articles of association are the internal regulations of the company which regulates the relationship between company and the members and the members inter se.
- Memorandum lays down the boundary line beyond which the activities of the companies cannot go. While the articles lays down the regulations to b carried out with the set boundary line. For example, in a cricket match players can play within the boundary line which is depicted as the Memorandum as setting the boundary line to carry out their roles, while how and in what manner they play is depicted by the Articles like how to setup the field, which side to bowl etc.
- Memorandum of association can be altered only under certain circumstances and in the manner provided in the Act. In most of the cases permission of the central government, or the Company Law Board, or the Courts is required, besides the approval of the shareholders in a general body meeting either by way of an ordinary resolution or special resolution. While in the case of articles, it can be altered by members by passing special resolution only.
- Memorandum of association cannot include any clause contrary to the provisions of the Companies Act. The articles of association are subject to both the Companies Act and the memorandum of association.
- Acts carried out by the company beyond the memorandum of association are ultra vires and absolutely void. In no circumstances there is any scope for the ratification. But such is not the case with the articles of association, as the act beyond it can be ratified by the shareholders provided the relevant provisions are not beyond the memorandum and the Companies act.
Section 26 of the Companies Act, 1956 lays down the following companies which must have their own articles:
- Unlimited Companies.
- Companies limited by the guarantee.
- Private companies limited by the shares.
Whereas Section 27 provides for the regulations with respect to the companies mentioned above to provide following:
- In case of an unlimited company, 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.
- In case of a company limited by guarantee, the articles shall state the number of members with which the company is to be registered.
- In case of a private company having a share capital, the articles shall contain provisions relating to the matters specified in sub-clauses (a), (b) and (c) of clause (iii) of sub-section (1) of section 3; and in the case of any other private company, the article shall contain provisions relating to the matters specified in the said sub-clauses (b) and (c).
On the other hand the company limited by shares may either frame its own set of articles or may adopt all or any of the regulations contained in Table ‘A’. But if it does not register any Articles, Table ‘A’ applies; if it does have some regulations for the rest, as far as applicable, Table ‘A’ applies in so far as its regulations are not excluded.
Section 31 of the Companies Act, provides that subject to the provisions of the said Act and to the conditions laid down in the memorandum, a company may by a special resolution alter or add to its articles. Such alterations are permissible because of the very basic fact that each and every situation cannot be inculcated in the articles or for that matter in the memorandum at the time of drafting it. So in order to cope up with the future circumstances the Act has provided every company the power to alter its articles or the memorandum as the case may be. The right to alter just by passing special resolution is so important that a company cannot in any manner, deprive itself of this power. The procedure lay down under the law for the alteration of the articles of association which is required to be followed is as follows:
- The proposal has to be approved by the Board of directors, who will then fix the date and time of the general meeting. They will also approve the draft notice of the meeting, the special resolution and explanatory statement. If there is any secretary, then he shall be authorised to convene the general body meeting.
- Where the alteration proposes to take or subscribe for more shares than the number held by the members on the date of alteration or if the alteration proposes to increase the liability of the members, then in that case the consent of the members should be in writing either before or after any such alteration is made. In contrary, if the company is a club or any other association and the alteration requires the members to pay recurring or periodical subscriptions or charges at a higher rate, then in that case the member shall be bound by such alteration despite the fact that the consent to such alteration was not obtained in writing.
- Meeting has to be convened by the secretary on the appointed day and the necessary special resolution causing the alteration in the articles of association shall be passed. In accordance with Section 581- I(1) of the Companies Act, 1956, that any amendment of the articles shall be proposed by not less than two-third of the elected directors or by not less than one-third of the members of the Producer Company, and adopted by the members by a special resolution.
- Within 30 days of the passing of such resolution, a certified copy thereof shall be filed with the Registrar of Companies along with the Form No. 23.
- If the alteration of the articles has the effect of converting a public company into a private company, the company shall, within three months from the date of passing of the special resolution, make an application in Form No. 1B to the Regional Director concerned for his approval of the alteration.
- After getting the approval of the Central Government, i.e., the Registrar of Companies, the printed copy of the articles, as altered, should be filed by the company with the registrar of companies within one month of the date of receipt of the order of approval.
- Six copies of the amendments (one of which shall be certified) should be sent to the stock exchange(s) on which the shares of the company are listed, as soon as they have been adopted by the company in the general meeting.
- Alteration should be noted in every copy of the articles of association, and the articles issued after the date of alteration should be in accordance with the altered articles. Failing which the company as well as every officer will be penalised with a penalty as provided under the section as a fine upto Rs. 100 for each copy so issued.
The alteration so issued and implemented has to be within the limitations as imposed on such power of the company seeking the alteration. The limitations in this regard are as follows:
- The alteration must not exceed the powers given by the memorandum or be in conflict with any provisions of the memorandum. If there is any conflict between the memorandum and the articles, then in that case the memorandum would prevail.
- The alteration so must not be inconsistent with any of the provisions of the Companies Act or any other statute. For example, where a resolution was passed expelling a member and authorising the director to register the transfer of his shares without the instrument of transfer, the resolution was held to be invalid as being against the provisions of the act.
- The alteration must not be inconsistent with an order of the Company Law Tribunal under section 397 or 398 of the Companies Act, 1956. Therefore if the Company Law Tribunal has made an amendment in the articles, then the company cannot make an alteration which is inconsistent with such an order.
- The altered articles must not include anything which is illegal or opposed to the public policy or unlawful. For example, an alteration to the articles inserted the clause that the Director of the company has the power to terminate the employment of the qualified employees at their will, will be considered against the public policy.
- The alteration must be bona fide and for the benefit of the company as a whole. If the situation arises such that it inflicts hardship on an individual shareholder will not be outside the ambit of the benefit of the company. In a famous case , Allen v. Gold Reefs of West Africa Limited, where a company had a lien on all shares ‘not fully paid-up’ for calls due to company. There was only one shareholder ‘A’ who owned fully paid-up shares. He in addition held partly paid shares in the company. ‘A’ died. After which the company altered its articles deleting the provision “fully paid-up” and thus giving itself a lien on all shares whether fully paid-up or not. Such alteration was challenged on the grounds that it had retrospective effect. It was held that the alteration was bona fide and for the benefit of the company as a whole, despite the fact that it had a retrospective effect.
Thus it must be understood that the a person when becomes a member of a company, then he is not entitled to assume that the articles will always remain in a particular form, as long as the proposed alteration does not unfairly discriminate. Thus a bona fide resolution so passed cannot be open to objections.
- The alteration must not constitute a fraud on the minority by the majority. If it is found that the alteration was not for the benefit of the company as a whole but for the majority shareholders, then such an alteration would be bad. Thus the alteration must not give rise to such discrimination between the majority and minority shareholders in order to give the former undue advantage over the latter.
In Mathrubhumi Printing & Publishing Co. Ltd. v. Vardhaman Publishing Ltd. , where it was held by the Kerala High Court that the power conferred on the company under section 31 to alter the articles by special resolution is not to be abused by the majority of shareholders so as to oppress the minority. It was further observed by the court that no majority of shareholders can, by altering the articles retrospectively, affect to the prejudice of the consenting owners of the shares.
- Unless in accordance to Section 38 of the Companies Act, 1956, there cannot be alteration of the articles so as to oblige an existing member to take or subscribe for more shares or in any way increase his liability to contribute to the share capital. On contrary, if the company is a club or any other association and the alteration requires a member to pay recurring or periodical subscriptions or charges at a higher rate, then the written consent of the member is not necessary.
- Approval of the Central Government is necessary if the alteration of articles is to the effect that a public company is to be converted into a private company.
- A company cannot justify breach of contract with third parties or avoid a contractual liability by altering articles. It must also be noted that an alteration cannot be made to avoid the rigours of a contract validly undertaken. It must also be taken into consideration that where the damage is capable of being measured in terms of money, the company may alter its articles to that effect, but it must be subjected to being answerable in damages in breach. It has been observed in Mathrubhumi Printing & Publishing Co. Ltd. v. Vardhaman Publishers Ltd. that by altering its articles, a company cannot defeat or escape from its contractual obligation with any person. Whatsoever it may be, the company will always be liable for damages in case the alteration results in a breach of the contract the company had entered into with any person.
In a famous case Southern Foundries (1926) Ltd. v. Shrlaw, where the articles of the company provided that a managing director had to be a director and if he ceased to be a director, he could not function as managing director. In this very case, in December, 1933 an agreement was entered into between ‘S’ and the company, by which ‘S’ was appointed as managing director for 10 years, and he could not resign his office during this period nor was the power to remove him to be exercised. Within three years of the agreement the company became a fully owned subsidiary of another company ‘F’ and its articles were then altered giving the power to ‘F’ to remove any director of the company, and in 1937 ‘S’ was removed from the directorship with the consequence that he also ceased to be the managing director. The question was whether the company exercising this statutory right of altering the articles, committed a breach of an implied obligation to ‘S’. It was held that the altered articles had provided for dismissal of the managing director and the said dismissal would be intra vires the company, but would, nevertheless expose the company to an action for damages as the appointment had been made for a term of 10 years and he was dismissed before the term was over.
- The amended articles of association cannot operate retrospectively, but only from the date of amendment.
- The statutory power of a company to alter its articles cannot be limited by way of provision of contractual obligation in articles of association of a company. In State of Karnataka v. Mysore Coffee Curing Works Ltd., the State Government held shares in company ‘M’ and the articles of the company provided that the State Government could nominate three directors and also the chairman of the Board in consideration of having subscribed to the capital of the company. Later, the company issued right shares in the ratio of 1:1 which the State Government did not take and consequently its shareholding dwindled to 19.6 percent. The company proposed to alter the relevant articles affecting State Government’s right to nominate directors and the chairman. It was held that it could do so. The Karnataka High Court observed that the only restriction on the unfettered power under section 31(1) is the restriction imposed by the provision to that section, and it is, that a public company cannot convert itself into a private company by merely carrying out an amendment to the articles of association of such a company.
- Amendments of articles to empower Board of Directors to expel a member is opposed to the fundamental principles of company jurisprudence and is ultra vires of the company.
After forming of the articles of association, keeping in mind the limitations to be applied, Section 36 talks about the binding effect of the Articles of Association and the Memorandum of Association. Section 36 provides that the 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 the provisions of the articles. Therefore the company and its members are bound by whatever is contained in the articles. One thing is to be kept in mind that neither the company nor its members are bound to the outsiders in relation to the articles as it is totally for the internal working. For relation with the outside world, they are bound by the memorandum. The articles of association are framed with respect to the internal management, business or administration of a company. Thus they may be binding between the persons affected by them but it does not have the same binding force as that of statute. The following are the internal group link as to how the people are legally affected by the Articles of Association:
- Members bound to the company.
- Company bound to the members.
- Members bound to members.
In Halsbury’s Laws of England it is stated, “Any alteration must be made in good faith for the benefit of the company as a whole that is of the corporators as a general body. Subject to this, the articles can be freely altered. It is for the shareholder and not the court to determine whether or not the alteration is for the benefit of the company, and the court will not readily interfere with an alteration made in good faith unless it is of such a character that no reasonable man could have regarded it as made 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 shares are held subject to the statutory power of altering the articles.”
After going through various legal aspects of the altering of articles of association above, let’s look into various landmark cases the practical aspect as to the articles of association involved.
In Andrews v. Gas Meter Co., the question which came before the court was whether a company, which had no power to create preference shares, could alter its articles by special resolution so as to authorise the issue of such shares. The Court of Appeal in this case held that a company cannot contract itself out of the power to alter its articles. The same issue again popped before the court in British Equitable Assurance Co. Ltd. v. Bailey, where the Andrews case was observed and it was held that although under the provisions of the Act the memorandum is to state the amount of the original capital and the number of shares into which it is to be divided, yet in other respects the rights of the shareholders in respect of their shares and the terms on which additional capital may be raised are matters to be regulated by the articles of association rather than by the memorandum, and are, therefore, matters (unless provided for by the memorandum) may be determined by the company from time to time by special resolution.
In another case in Sidebottom v. Kershaw, Leese & Co.where the articles provided the power of expulsion of any member; the articles were to empower the director to require any member to transfer his shares (who carried on a competing business) at their fair value to the nominees of the directors. The alteration was held by the Court of appeal to be bonafide for the benefit of the company.
There have been large debates and doubts with regard to whether an alteration of the articles of association resulting in a breach of contract would be permissible or not. It is observed that various judicial authorities could not come up to a clear position. The discussion over this mainly rest on the following considerations:
- Retrospective alteration.
- Contractual rights of the injured party.
- Personal right of action.
The bottom line in this regard is that bonafide for the benefit of the company as a whole must be established; else the granting of the injunction would become a regular affair. Here it must be stated that an appeal on the ground of breach of contract is secondary and not primary. It has been held that alteration could be done retrospectively alsoand that retrospective alteration of the articles affecting a person or class of persons, and not generally, should be carefully scrutinized and guarded. In such a case the onus is very much on the company itself to prove that the alteration intended is for the benefit of the company as a whole. For example, articles may be altered to reduce the preference dividend from 9% to 7%, but articles may not be so altered in case a particular shareholder holding block of shares is asked to return a substantial part of his holding as the policy decision of the company. The next point of discussion is that the injured party or parties would not only include shareholders, but also debenture- holders, creditors, and other persons dealing with the company. Thus it is held that the corporate decisions cannot deprive a person of his remedies provided under other statutes (the articles cannot override the provisions of the Act, Section 9, Companies Act, 1956). Therefore the injured party besides injunction may also claim damages and specific performance of the contract provided under other Acts. Now the final issue of consideration is that how far is the alteration of the articles, “bonafide for the interest of the company” should be carried so as not to affect and deprive the minority shareholders. This issue was very well settled in a landmark case Greenhalgh v. Arderne Cinemas Ltd.where the articles of the company provided, inter alia, that no shares were to be transferred to a person not a member of the company so long as a member of the company was willing to purchase them at a fair value. Certain majority shareholders wanted to sell their shares to an outsider. A special resolution was passed altering the articles so as to permit a member to transfer his shares to non-members with the sanction of the company in general meeting, without first offering them to the other members. The resolution was challenged on the ground that interests of the minority of the shareholders had been sacrificed to those of the majority. The Court of Appeal held valid the resolution.
In case of a company comprising two equally balanced groups of shareholders, the articles provided (article 38) that in the event of disagreement, or on failure to resolve the deadlock the company would be wound up by a special resolution for which every member was to vote. The contention that that resolution derogated from the provisions of section 433 and was void insofar as it enabled the company to be wound up on a ground which was not specified under section 433 was not justified.
The next point of consideration was that if an amendment to articles, though irregular, has been operative and acted upon for a long time. The Court on this point has lay down in Joseph Michael v. Travancore Rubber & Tea Co. Ltd. that the courts may not after a long time interfere to declare it void.
In another latest judgement in Sunil Dang v. Indian newspaper Society, where there was no provision in the articles of the company to that effect, the company was not allowed to deprive a person of his membership just only because he had defaulted in paying his subscription money particularly when the member claimed that he had made the payment and that if there was default, he was ready and willing to make it good.
In Crompton Greaves Ltd. v. Sky Cell Communication Ltd. where a joint venture agreement provided restrictions on the rights of the members of the company created by the joint ventures on transferability of their shares. But the restriction as to transferability was not carried into the articles of the company. The Court said that restriction had not acquired its binding force on the members of the company though it was binding on the parties to the joint venture. The transfer was therefore valid and it was validly registered.
In another recent case, Citco Banking Corp. NY v. Pusser Ltd.where an alteration of articles, about voting rights attached to shares, vested voting control in the chairman of the company, thus giving him unqualified control of the company. The reason for doing so was that the company was in need of more working capital. The company’s bank agreed to provide more loans provided that the chairman took over control of the company and personally guaranteed repayments. The court held that in these circumstances that the alteration was in the best interest of the company. The court said that the proper test is whether in the opinion of the shareholders the alteration is for the benefit of the company and whether there were grounds on which reasonable man would come to the same conclusion. The court felt that both these requirements were satisfied in the present case.
In the last it is the Companies Act 2013, which was a mini-act in itself coming into force and bringing many amendments to the various provisions of the Companies Act, 1956. This 2013 Act has not brought many changes to the Articles of Association, just for the fact that it has inserted the provisions for entrenchment. The provisions for entrenchment provide more restrictive conditions or procedures than that applicable to passing a special resolution for altering certain provisions in the articles. For example, the articles could mandate that certain provisions in it can be altered only if agreed to by all members of the company in writing. Further the entrenchment provision shall only be made either on formation of a company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company. Further the company shall give notice to the Registrar of entrenchment provisions. [Section 5(3)/ (4)/ (5)].
 Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. , AIR 1971 SC 422
  30 Ch. D 376 CA
 Shyam Chand v. Calcutta Stock Exchange, AIR 1947 Cal. 337
  All ER 871
  L.R. 7 H.L. 653
 Section 28(1)
 Section 28(2)
 Walker v. London Tramway Company,  12 Ch. D. 705
 Section 38
 Section 38(b)
 Section 192(1) of the Companies Act
 Section 31 of the Companies Act
 Section 40
 Madhava Ramchandra Kamath v. Canara Banking Corporation,  11 Comp. Cas. 78 (Mad.)
  1 Ch. 656
 Greenhalgh v. Anderne Cinemas,  2 All ER 1120 (CA0
  73 Comp. Cas. 80 (Ker)
 Supra 16
  10 Comp. Cas. 255 (HL)
 Pyare Lal Sharma v. Managing Director, J & K Industries Ltd.,  3 Comp. L. J. (SL)0 70
  55 Comp. Cas. 70 (Kar.)
 Irrigation Development Employees’ Association v. Government of Andhra Pradesh  55 SCL 459 (AP)
 4th Edn., Vol. 7, para 454, p. 257
 (1897) 1 Ch. 361
 (1906) A.C. 35, (HL)
 (1920) 1 Ch. 154
 Last v. Buller & Co. Ltd., (1919) 36 T.L.R. 35
 (1951) Ch. 286; 2 All E.R. 1120
 Ramakrishna Industries (P.) Ltd. V. P.R. Ramakrishnan,  64 Comp. Cas. 425 (Mad.)
  59 Comp. Cas. 898 (Ker.)
 (2009) 149 Com Cases 563 (Del)
 (2002) 39 SCL 704 (Mad- DB)
 (2007) 2 BCLC 483 (PC)