Discuss the Limit upon the Powers of a Company to Alter the Articles of Association.

Meaning of Articles of Association: 

The Articles of Association of a company contains rules, regulations and bye-laws relating to the management of its internal affairs and for the attainment of its objects as given in the Memorandum.

Section 2 (5) of the Companies Act defines Articles of Association as follows: Articles means the Articles of Association as originally framed or as altered from time to time in pursuance of any previous Companies Law or of this Act. It governs the relationship between the company and its members by prescribing their rights and obligations.

Contents of Articles: The Articles of Association usually deal with the following matters :

  • Share capital and rights attached to different classes of shares.
  • Lien on shares.
  • Procedure of making calls on shares.
  • Forfeiture of shares.
  • Transfer and transmission of shares.
  • Alteration of capital
  • Common seal of the company
  • Alteration of share capital
  • Dividend, reserves and capitalization of profits.
  • Accounts and audit
  • Buy back of shares
  • Issue of redeemable preference shares
  • Borrowing powers of the directors
  • General meetings
  • Rules as to resolutions
  • Remuneration of managerial personnel.

There should not be anything in the Articles which is against the provisions of the Companies Act or the Memorandum of Association. Alteration of Articles: Articles can be altered simply by passing a special resolution. Approval of the Tribunal is required where public company is to be converted into a private company.

Restrictions (Limitations) Regarding Alteration of Articles

  • Alteration should not be inconsistent with the provisions of the Companies Act, 2013 or other status. Thus, a company cannot alter its articles so  to pay dividend out of capital in case of inadequate profit, Its is contrary to section123 of the companies act. Similar a subsidiary company cannot  its articles so as to hold shares in the holding company. It is contrary to the provisions of section 19 of the companies Act.
  • Alteration must not be inconsistent with the conditions contained in the Memorandum (Section 14) : The Articles are subordinate to the Memorandum and hence should not over -ride the Memorandum. There an not be any alteration which gives powers not given by the Memorandum.
  • Alteration must be bonafide for the benefit of the company : The alteration should be in the interest of the company as a whole and must be bonafide for its benefit. On the other hand, alteration made bona fide in the interests of the company shall be valid even if it is likely to affect adversely the personal interests of some of the members of the company.
  • Alteration should not be oppressive to the minority : The alteration should not be oppressive to the minority and must not constitute a fraud on the minority.
  • Alteration must not increase the liability of the existing members: By altering Articles, shareholders cannot be asked to pay more than their liability, unless they give their consent in writing. Where the company is a club or association and the alteration requires, a member to pay subscription at a higher rate, it would be binding on the member.
  • Alteration must not allow anything which is illegal or unlawful or opposed to public policy.
  • Alteration must not deprive any person of his rights under a contract.  If a person accepts the appointment purely on the terms of the Articles, the alteration shall be valid and binding upon such a person.
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