Alteration to Articles of Association in Business Organisations - Essay Example

Alteration to Articles of Association in Business Organisations Articles of association are rules and regulations that control the internal affairs of the company. Companies Act 2006 requires every company limited by guarantee to register it articles and those articles must be a near to Table C as far as possible. Companies limited by shares may adopt Table A, the model articles, provided in the CA 2006. When table A is adopted without modification the company need not register articles of association; and when table A is not adopted by the company limited by shares or adopted with modifications, the company has to get its article registered with Registrar of Companies either at the time of incorporation or at a later stage. Alteration to articles of association is required for a number of purposes like adoption to changing requirements, to meet the need to redefine the powers of directors, and for many other routine rules and regulations of the company within the parameters of memorandum and Companies Act. The limitations to alter the Articles of association are that those cannot override the Memorandum of association, the Companies Act and other prevalent statute. Accordingly the alteration of articles have been analyzed in the write up from the point of view these and other limitations. Section 21 of CA 2006 permits alteration to articles only through passing of special resolution, but the company can also adopt articles to follow procedures that are stricter than only passing of special resolution. ‘Section 22 of CA 2006 allows the articles to contain a provision for entrenchment nominating specified provisions of the articles that can be amended or deleted only if conditions or procedures more stringent than special resolution are met. A provision for entrenchment can be inserted only on formation of the company or by an amendment of the company’s articles which is agreed upon by all its members.’(L.Sealy and Sarah Worthington, page 204)1 As referred earlier the company can formulate stringent provisions in the articles to alter the articles so long as those provisions are not contrary to the Company Act. This general power of altering the articles of association is subject the following restrictions: “The alteration must not conflict with memorandum of association, Companies Acts or other relevant laws; The number of shares which a member is bound to subscribe for may not be increased without consent of members The alteration must be bona fide for the benefit of a company as a whole and must not amount to a fraud on the minority.”(Larry Mead and Kevin Bampton, page 63)2 Any alteration that is against the order of a court of law is illegal and void. “If the alteration of articles involves an alteration or abrogation of a class right, then in addition to special resolution the company must follow the regime appropriate to variation of class rights.”(Nicholas Bourne, page 68)3 As per section 14 of CA 1985 the memorandum and articles of association are contractual in nature and therefore the members or shareholders are required to be taken into confidence before altering the articles of association.. That probably is the reason that a special resolution is required to alter the articles. It may be noted that the right to change articles of association by special resolution is vested in the members of the company and not in the company. This right vested in the members cannot be taken away from them by entering into a contract by the company with the members. Even if such a contract exists, the members’ right to requisition a meeting for the purpose of seeking a special resolution to alter the articles of association cannot be taken away from the members. ‘If the articles are validly altered, the company cannot be prevented from acting on the altered articles although it may involve a breach of contract (Southern Foundries (1926) Ltd. vs. Shrilaw)4 Any change in the article has to be in consistent with the provisions of Memorandum of association as well as exiting articles of association. The reason is that constitution of the company, that includes both memorandum as well as articles, is supreme and members cannot override the constitution till there is alteration in such constitution following proper legally available procedure. For examples shareholder cannot override the power already given to directors by the articles of association. Members can ‘change the articles by special resolution or change the directors by ordinary resolution but until they do so, they must let the directors exercise the authority which they have been given by the members in the constitution and the general meeting cannot retrospectively reverse or annul the board’s acts and decisions, even by special resolution.’(Michael Griffith and others, page 169)5 Though articles existed at the time of acquiring membership are of contractual in nature between the company and the member, a company is not barred from altering the articles of association. ‘A company is not precluded from altering its articles even if by such alteration a breach of contract will be involved. No injunction can issue to prevent the adoption of a new article. But if thereby the company commits a breach of contract, it may be liable in damages to the other party to the contract. By effecting alterations in its articles a company cannot defeat or escape from its contractual obligation,’ (Southern Foundries Ltd. vs. Shirlaw, page 445)6 Articles cannot be altered to increase the liabilities of members or shareholders of the company unless the members are in complete agreement with such alteration. Section 25 of CA 2006 clearly establishes that a member or shareholder of the company shall not be bound by any alteration to articles that takes place after the date of his becoming member particularly when such alteration requires the members to subscribe for more shares than already held by such member or the alteration results into increase of liability of the member to contribute to the capital of the company or otherwise to pay money to the company. But the alteration to articles increasing the liability of members can takes place only upon the agreement of members. These provisions provide a safety to the existing shareholders. One of the basic principle of the company law is that all the shareholders of a company can act together to do anything that intra vires the company. When all shareholders are interested in a particular arrangement that may lead to increasing the liabilities of the members, then such an action by changing the articles alteration is justifiable so long it is not illegal. Articles of association may be altered with retrospective effect, but these alterations should be such as not to increase the liability of members, unless members agree to such alteration of articles. Even though articles are contractual in nature with the members, but members should not assume that articles will not be altered. Alteration is required to change rules and regulation as per the need of the time and also to transact the business of the company in most effective way. ‘A shareholder has no right to assume that his company’s articles would always remain in a particular form and he cannot object to an alteration as fraudulent provided it was passed bona fide and did not unfairly discriminate. (Greenhalgh vs. Arderene Cinemas)7 It is important to note that articles cannot be altered in a fashion or way that is repugnant to or inconsistent with any law. This is because articles cannot be altered to permit the company to pursue its objectives in an illegal manner. The power to alter the articles cannot be misused to violate any provision of any law. The alteration has to be for the benefit of the company a whole. When alteration is only for the benefit for few or some influential members or shareholders or for a class of shareholders and not in the interests of the company, the alteration of such articles is considered illegal and against the minority interest. In Allen v. Gold Reefs of West Africa (1900) Lindley, M R (page 671)8 stated that “the power thus conferred on corporation to alter the regulations is limited only by the provisions contained in the company’s memorandum of association. It must be exercised for the benefit of the company as a whole and it must not be exceeded. These conditions are always implied and are seldom, if ever, expressed. But if they are complied with I can discover no ground for judicially putting any other restrictions on the power conferred by the section than those contained in it.” What constitutes ‘for the benefit of the company a whole’ is a subjective issue. As per Lord Standale ‘an alteration cannot be for the benefit of the company as a whole if in fact it is detriment to one of the members of the company, because the company a whole means the whole body of corporators, and one of them has detriment occasioned to him by the alteration, it cannot be for the benefit of the company as a whole.’ (L.Sealy and Sarah Worthington, page 209)9 It is a subjective issue when ‘benefit of the company as whole’ is viewed or considered during the course of alteration of articles. It means in the interest of company as a whole even when alteration of articles is going to affect only a section of shareholders. Dixon J has stated that ‘power of alteration is not fiduciary. The shareholders are not trustee for one another, and unlike directors, they occupy no fiduciary position. The references to the ‘benefit’ and ‘whole’ was but a very general expression negativing purposing foreign to the company’s operation, affair, and organization. The company as a whole is a corporate entity consisting of all the shareholders.’(Saleem Shiekh and William Rees, page 28)10 The statutory right to adopt or altered an article cannot be exercised in a manner that would tantamount as a fraud on minority shareholders. The power must be exercised bona fide in the interest of the entire company and not for one or few privileged sections. The expression “for the benefit of the company as a whole means for the benefit of shareholders as a general body. Its effect should not be such to discriminate between majority shareholders and the minority shareholders so as to give the former an advantage of which the later are deprived. There must be honesty in what is being done.”(Greenhalgh v. Ardene Cinema Ltd., p.1120)11 The entire issue of alteration of article being ‘bona fide for benefit as a whole’ has been summarized in Halsbury’s Laws of England12 : “Any alteration must be made in good faith for the benefit of the company as a whole, that is, for the corporation as a general body. Subject to this the article must be freely altered. It is for the shareholders and not for the court to determine whether or not the alteration is for the benefit of the company and court will not readily interfere with an alteration made in good faith unless it is of such a character that no reasonable person could have regarded it as made for the benefit of the company. The alteration may affect the rights of member as between himself and company by retrospective operation, since the shares are held subject to the statutory power of altering the articles.” Word Count: 2032 References Read More