OP. ED.Practical Lawyer Archives

The articles of association (articles) of the company are often termed as the “bye-laws”. The articles contain regulations for the overall internal management of the company. It contains basic rules for calling and conducting Board meetings, voting at Board meeting, transfer and transmission of securities, voting rights of shares, calling and conducting of general meetings, etc. The article may have a detailed provision for appointment, role and responsibilities of Managing Director, whole-time Director, Executive Directors, etc. Certain provisions of the Companies Act, 2013 (Companies Act) are not applicable to private companies, Section 8 companies if there are certain provisions in its articles. The articles regulate the day-to-day functioning of the company. A shareholder of the company is expected to be familiar with the contents.  A company is expected to act within the contours of its article of association. In Naresh Chandra Sanyal v. Calcutta Stock Exchange Assn. Ltd.[1]1, it has been held,

“14. Subject to the provisions of the Companies Act, the company and the members are bound by the provisions contained in the articles of association. The articles regulate the internal management of the company and define the powers of its officers. They also establish a contract between the company and the members and between the members inter se. The contract governs the ordinary rights and obligations incidental to membership in the company.”

The “articles of association” have been defined under Section 2(5) of the Companies Act as “it means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act”. “Previous company law” has also been defined in Section 2(67) of the Companies Act. According to Section 5 of the Act, the articles of a company shall contain the regulations for management of the company.

This article relates to procedure and checklist for amending the articles of companies of private companies and unlisted public companies. For listed companies, it shall be necessary to comply with the provisions of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as well.

1.Contents of AOA.—The articles shall also contain such matters, as may be prescribed i.e. in accordance with Rule 11 of the Companies (Incorporation) Rules, 2014. The model articles as prescribed in Tables F, G, H, I and J of Schedule I to the Companies Act may be adopted by a company as may be applicable to the case of the company, either in totality or otherwise.

(i) Table F relates to AOA of company limited by shares.

(ii) Table G relates to AOA of company limited by guarantee and having a share capital.

(iii) Table H relates to AOA of company limited by guarantee and not having a share capital.

(iv) Table I relates to AOA of unlimited company and having a share capital.

(v) Table J relates to AOA of unlimited company and not having a share capital.

Nothing prevents a company from including such additional matters in its articles as may be considered necessary for its management. Such inclusion of additional matters can be done at the time of incorporation of the company or by amending the articles of the company.

2. Entrenchment Related Provisions in AOA of Company.—The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with.

3. Manner of Inclusion of Entrenchment Related Provisions in AOA of Company.—The inclusion can be made at the time of incorporation of the company or subsequently by amending the articles of the company. Such provisions for entrenchment 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.

4. Notice to Registrar of Companies.—Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed i.e. e-Form INC-7 or e-Form INC-32 Simplified Proforma for Incorporating Company Electronically (SPICe) of the Companies (Incorporation) Rules, 2014 and e-Form MGT-14 of the Companies (Management and Administration) Rules, 2014 in case of subsequent amendment.

4. Occasions for Amending AOA of the Company.—The articles of the company may be amended for ensuring proper compliance of the Companies Act, 2013, availing certain exemptions under the Ministry of Corporate Affairs (MCA) notifications for private company, Section 8 companies, etc., or specifying roles and responsibilities of the directors and key managerial personnel (KMP), or inclusion of certain points of shareholders agreement or investment agreement in the articles of the company, etc. In recent years, companies have adopted an entire new set of articles under the Companies Act, 2013 for the articles of Companies Act, 1956. The amendment of articles would also be required for conversion of a company from private to public or vice versa.

5. Conversion of Companies.— According to Section 14 of the Act, subject to the provisions of the Act and the conditions contained in its memorandum of association, if any, a company may, by a special resolution, alter its articles by including alterations having the effect of conversion of: (i) private company into a public company; or (ii) public company into a private company. However, where a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under Companies Act, the company shall, as from the date of such alteration, cease to be a private company. Any alteration having the effect of conversion of a public company into a private company shall not be valid unless it is approved by an order of the Central Government (powers delegated to Regional Director) on an application made in such form and manner as may be prescribed (i.e. e-Form RD-1). The company shall ensure compliance of Rule 41 of the Companies (Incorporation) Rules, 2014.

6. Section 8 Companies.—A company registered under Section 8 of the Act shall not alter the provisions of its memorandum of association or articles of association of the company, except with the previous approval of the Central Government (powers have been delegated to the Registrar of Companies). Such application for altering the articles of association of Section 8 company may be filed by e-Form GNL-1. Such application to the Central Government [i.e. Registrar of Companies (ROC)] can be made by obtaining the approval of Board of Directors. After the approval of Central Government (i.e. ROC), the amendment to the articles of association shall be placed before shareholders for their approval. The company shall then file e-Form MGT-14 with the Registrar of Companies under Section 117 of the Act.

7. Approval of the Board of Directors.—The directors of the company shall primarily approve the proposal for altering the articles of the company. Such approval shall be subject to the approval of the shareholders and Central Government (in some cases, discussed above). The resolution passed in the meeting of Board of Directors shall be accordingly drafted. The necessary authorities shall also be specified in the resolution.

8. Approval of Shareholders.— The resolution for amending the articles of the company shall be placed before the shareholders of the company. Such approval can be obtained in general meeting or electronic voting or both, as the case may be. The approval of shareholders by passing a resolution by postal ballot may be obtained for alteration of articles of association in relation to insertion or removal of provisions which, under sub-section (68) of Section 2 of the Act, are required to be included in the articles of a company in order to constitute it a private company [Rule 22 of the Companies (Management and Administration) Rules, 2014].

9. Explanatory Statement.—A statement setting out the following material facts concerning each item of special business (i.e. amendment to articles of association) to be transacted at a general meeting, shall be annexed to the notice calling such meeting, namely: (i) nature of concern or interest, financial or otherwise, if any, in respect of each items of every director and the manager, every other key managerial personnel; and relatives of the said persons; and (ii) any other information and facts that may enable members to understand the meaning, scope and implications of the items of business and to take decision thereon. Where any item of business refers to any document (i.e. articles of association, in this case), which is to be considered at the meeting, the time and place where such document can be inspected shall be specified in the explanatory statement.

10. Registration of Alteration.— Every alteration of the articles under Section 14 of the Act and a copy of the order of the Central Government approving the alteration (i.e. in case of conversion of public company into private company) shall be filed with the Registrar of Companies, together with a printed copy of the altered articles of association, within a period of 15 days, who shall register the same. The company shall then file e-Form MGT-14 with the Registrar of Companies under Section 117 of the Act.

11. Validity of Registration.— Any alteration of the articles of association registered shall, subject to the provisions of the Companies Act, be valid as if it were originally in the articles.

Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.

[1]  (1971) 1 SCC 50, 56 : (1971) 41 Comp Cas 51.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal (SAT): A Division Bench of Justice Tarun Agarwala, (Presiding Officer) and Dr C. K. G. Nair (Member), affirmed the order passed by BSE, where they held that the forfeiture of shares made by the appellant-Company was not in accordance with the provisions of the Articles of Association of the Company.

The appellant entered into a Business Transfer Agreement (BTA) with Primus Retail Private Limited wherein they agreed to transfer their business undertaking including the assets and liabilities as well as the trademarks and licenses to the appellant for a total consideration of Rs 100 crore. However, Primus failed to perform its obligation under the BTA and the creditors of Primus filed a Company Petition before the High Court of Karnataka. The High Court passed an order of winding up and appointed an Official Liquidator. The appellant too intimated Primus that the BTA had been rendered void and they forfeited the shares allotted to them and further directed to reissue them to other parties in due course subject to statutory approvals and compliances. Based on this resolution the appellant had filed an application before the BSE for recognizing the forfeiture of the shares by the appellant-Company.

However, BSE stated that there was no request received from the Official Liquidator with regard to the cancellation of shares or if the Official Liquidator was aware of the forfeiture of the shares and the subsequent application made by the appellant to BSE at all. BSE informed that the delisting cannot be done through forfeiture of the shares and can only be done in accordance with the Companies Act. There was also no provision in the BTA for forfeiture of shares allotted to Primus on account of non-performance of the obligation by Primus, but the Articles of Association of the appellant-Company provided for forfeiture of the shares subject to certain compliances.

The Court referred to Clause 29, 30 and 31 of Schedule I of Table A of the Companies Act and held that a notice is required to be given to the shareholder giving them an opportunity for payment of the call money. Thus, before any forfeiture can be made an appropriate service of notice is a condition precedent to be fulfilled. Therefore, if there is any, irregularity either in the contents of the notice or in the service of notice as required under Clause (30) the same would be fatal to the validity to the forfeiture. The Supreme Court in Public Passenger Service Ltd. v. M.A. Khadar (1967) 36 Comp Cas 1 had held that a defective notice of forfeiture of shares renders the subsequent forfeiture invalid. Further, there was nothing to indicate that due notice was given to Primus or to the Official Liquidator before the resolution was passed by the Board of Directors of the appellant-Company. Once shares were allotted and registered in the name of Primus, the appellant-Company had no power to forfeit the shares on the ground of failure of consideration. Therefore, there was no infirmity in the order passed by the BSE.[Madhusudan Securities Ltd. v BSE Ltd., 2019 SCC OnLine SAT 166, decided on 09-09-2019]

Case BriefsHigh Courts

Karnataka High Court: B.V. Nagarathna, J., disposed of the petitions seeking the provisions of Sections 164(2) and 167(1)(a) and the proviso to Section 167(1)(a) of the Companies Act, 2013, to be held unconstitutional.

In the pertinent matter, the petitioner sought for declaring Section 164(2) of the Companies Act, 2013 (Act) and the press release dated 06-06-2017 vide Annexure-A as unconstitutional and in violation of the fundamental rights of the petitioner as guaranteed under the provisions of Part III of the Constitution. The petitioners further contended that there was an arbitrary exercise of power by the concerned respondent authority in disqualifying the petitioners as directors of the respective companies by giving retrospective operation to the aforesaid provisions of the Act. That the disqualification is not on account of any act/omission of the director per se, but due to the default committed by the company in which he is a director. Also, the consequence of the default so made was serious, almost penal and disproportionate to the same; therefore, it is in violation of Article 14 of the Constitution.

The respondents vehemently contended that the object of the provision is to keep away directors of defaulting companies from being reappointed as directors in the same company or other companies. It was further contended that if the said object and purpose is not given its complete effect and meaning, then it would be unviable. Moreover, holding the post of a director of a company is not pursuant to any fundamental right since it is a statutory right or one arising under the Memorandum of Association or Articles of Association of the company and thus contractual. Lastly, Section 164(2) of the Act is a reasonable restriction imposed in public interest vide Article 19(6) of the Constitution.

The Court while appreciating the assistance rendered by the respective counsels, was of the opinion that:

  1. Where the disqualification considering any financial year “prior to 01-04-2014 as well as subsequent thereto” while reckoning continuous period of three financial years under Section 164 (2)(a) of the Act, is made irrespective of whether the petitioners are directors of public companies or private companies, is bad in law.
  2. Writ petition would stand dismissed if the disqualification of the directors has occurred under the provisions of the 1956 Act in respect of the public companies.
  3. Directors would stand disqualified if the disqualification was on the basis of three continuous financial years subsequent to 01-04-2014, irrespective of whether the petitioners are directors of public companies or private companies among other things.

The Court further directed the respondents to restore the DIN of those directors whose disqualification has been quashed by the Court. And those petitioners who have challenged only the striking off of the companies in which they are directors have an alternative remedy of filing a proceeding before National Company Law Tribunal (NCLT) under Section 252 of the Companies Act, 2013.[Yashodhara Shroff v. Union of India, 2019 SCC OnLine Kar 682, decided on 12-06-2017]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial) passed orders at the stage of admission of appeals filed by Cyrus Investments against the judgment of National Company Law Tribunal, Mumbai whereby it dismissed appellant’s applications filed under Sections 241 and 242 of the Companies Act, 2013 alleging oppression and mismanagement on the part of the respondents.

At the stage of admission of the appeal, the appellant prayed for an interim order of stay on the conversion of the respondent – ‘Tata Sons Ltd.’ from a public limited company to a private limited company. The appellant submitted that Tata Sons was a public limited company. It cannot convert into a private limited company without amending its Articles of Association which is subject to approval of National Company Law Tribunal, as mandated by Section 14. The question which arose for consideration was whether Section 14 was applicable to the case of Tata Sons? The respondent made submissions to support its stand that it was actually a private company all along.

The Appellate Tribunal considered the submissions made by both the parties and did not find any plausible ground to stop the conversion of Tata Sons to a private limited company. While reaching this conclusion, the Appellate Tribunal appraised itself of the following facts (as submitted by the respondent):

  • Tata Sons was incorporated as a private company in 1917. It continued to remain so under the Companies Act, 1956.
  • Articles of Association of Tata Sons contained three restrictions which are applicable to private companies in terms of Section 3(1)(iii) of the Companies Act, 1956.
  • Appellant became shareholder of Tata Sons when it was a private company.
  • Companies (Amendment) Act, 1974 amended Section 43-A which provides that if average annual turnover of a private company exceeds a prescribed amount, than it would be a deemed public company. Proviso thereto also provides that even after becoming a deemed public company, such company can retain matters specified in Section 3(1)(iii) in its Articles of Association.
  • Tata Sons being such a company, became a deemed public company while retaining the characteristics of a private company in terms on Section 3(1)(iii).
  • Tata Sons continued as a hybrid company; the word hybrid denoting essentially a private company exhibiting all the restrictions of Section 3(1)(iii), which however, is a deemed public company on account of, inter alia, excess annual turnover.
  • In Darius Rutton v. Kavasmaneck Gharda Chemicals Ltd., (2015) 14 SCC 277 the Supreme Court held that the concept of hybrid companies was not abolished by the Companies (Amendment) Act, 2000.

The Appellate Tribunal found favour with respondent’s submission that Articles of Association of Tata Sons continued to be aligned with the definition of a private company; and therefore, there was no requirement to file an application under Section 14 of Companies Act, 2013. However, at the same time, Tata Sons was directed not to take steps in terms of its Article 75 and force the appellant to transfer its shares as the appeal was pending and such action could affect the merits of the appeal because in such a situation, the respondent would cease to be members of the respondent. The appeal is posted for hearing on September 24, 2018, at 2:00 pm. [Cyrus Investments (P) Ltd. v. Tata Sons Ltd., Company Appeal (AT) No. 254 of 2018, dated 24-08-2018]