Alteration of Articles and Breach of Contract

Introduction:

The “Articles of Association” of a company are the bylaws, rules, and regulations that aid to control the management of the company’s internal affairs as well as conducting the company’s business.[1]. They refer to a company’s articles of organisation, which were originally framed or changed from time to time to comply with any previous company legislation or this Act. All of the regulations in Table A of Schedule I of the Act are also included in articles, insofar as they pertain to a corporation. Articles have had a critical and vital part in controlling the company’s operations.

Alteration of Articles of Association/ Amendment of Articles

A corporation has the legal authority to change its articles, provided that the change is subject to the provisions of this Act and the restrictions set forth in the memorandum. The Companies Act of 2013, provides that a corporation may amend its articles through a special resolution, subject to the terms of this section and the conditions of the memorandum and that any alteration made shall be as valid as if it was originally incorporated in the articles.[2]

A business can alter its articles of association, which stipulates that a special resolution is required to amend or repeal any provision in the articles of association. A special resolution of the shareholders can change a company’s articles of association. The requirements and limits of the Companies Acts should be met by these revisions.[3]

If the change involves transforming a public corporation into a private company, Section 31(1) says that the change must be approved by the Central Government.[4]

Section 31(2) specifies that when a resolution to change the articles of incorporation is passed, the resolution might take effect immediately or at a later date specified in the resolution.

Section 31(3) states that if the business is created by Acts No. 19 of 1857 and No. 7 of 1360, the power to amend the articles includes the ability to amend any provision in Table B, which is annexed to Act 19 of 1857. The changing power extends to any restrictions connected to the quantity of capital or its distribution in the form of shares, independent of those regulations that are contained in the memorandum, in the event of an unlimited company that is registered under such acts.

A private business is banned from changing its article if the changes are in conflict with the provisions of Section 12 of the Companies Act, 2013. In order to preserve the interests of minority members, some articles are restricted with some restrictions.

Alteration of Articles in Association

The change can occur in the following situations:

1. Conversion of a public firm to a private corporation.

2. The transformation of a private corporation into a public corporation. The freedom to change the articles is critical for a firm since it cannot be denied the ability to change its articles in any way.

The alteration of articles can be done in any of the following manners: 

1. Adopting a new set of articles;

 2. Adding or inserting additional clauses;

3. Eliminating a clause or clauses;

4. By changing a specific clause or clauses;

5. By substituting a clause or clauses.[5]

Restrictions on Alteration of the Articles of Association

There are some restrictions on how a company can use its ability to change its articles, which are as follows:

•  The memorandum’s powers are not to be exceeded by the change. In the event of a contradiction between the change and the memorandum, the memorandum will take precedence.

• Any changes to the articles must not conflict with the terms of any other statute or the Company Act of 2013.

•  When a company is converted from a private to a public company or vice versa as a result of an alteration, the company must also follow the additional conversion procedure prescribed by law for the conversion of a public company to a private company and the conversion of a private company to a public company.

•  Any modification that is illegal or contrary to public policy must be excluded.

• The change must be helpful to the organisation, in other words, it must be genuine. If a change is favourable to the majority of shareholders but not to the company as a whole, it is considered undesirable. As a result, changing the articles cannot result in discrimination between the majority and minority shareholders of the same firm in order to retain the former in a better position.

• No modification by the majority on the minority can be considered fraud.

• The provision of retrenchment can also be included in the articles by modification, which has the consequence that various provisions of articles can only be changed if the condition or method for alteration has been followed in the case of a special decision.

•  In the event of a private company, retrenchment measures can be included only if all members agree, and in the case of a public corporation, by special resolution.

• Changes to articles are not allowed to have a retroactive effect. Only from the date of the change do the articles take effect.

• Subject to the foregoing criteria, the company’s articles of incorporation may be altered, and no non-alterable clauses may be placed in the Articles.[6]

Alteration Against Memorandum of Association

There are times when changes to the articles of incorporation have an impact on the memorandum of incorporation. In the case of Hutton vs. Scarborough Cliff Hotel Co.[7], the general meeting passed a resolution granting the ability to issue additional shares with a preferential dividend, but the memorandum did not grant this power. This change was found ineffective because the issuance of new shares with a preferential dividend was considered a change to the company’s constitution as defined by the memorandum. The memorandum was silent since it neither permits nor prohibits the issuance of preference shares.

The court stated that the power to amend the articles is limited to what is plainly prohibited by the memoranda, either openly or implicitly.

The court in Andrews vs. Gas Meter Co. Ltd[8] upheld the validity of the share issue. The company’s nominal capital was €60,000, according to the 5th paragraph of its memorandum, and it could be divided into 600 shares of €100 each. In the memorandum and articles of association, there was no provision for preference shares. Directors issue shares with a preferential dividend after approving a special resolution. The court stated that if the memorandum had prohibited this, then the issue would be illegitimate.

However, because there was no such phrase, the problem remained.

Alteration in Breach of Contract

A change to the articles of incorporation constitutes a breach of contract with an outsider. A business secretary accepted employment with a wage of Rs. 50 per month in ChithambaramChettiar vs. Krishna Aiyangar[9]. The articles of incorporation included this clause. The monthly payment has been reduced to Rs. 25 per month as a result of the change. The court decided that if the contract is entirely dependent on the provisions of the articles of association, the change will be effective; nevertheless, if the firm has engaged in an independent agreement, it may repudiate it by altering the articles, but it will be liable for damages for breach.

The plaintiff in Hari Chandana vs. Hindustan Insurance Society[10] purchased insurance from the defendant company, which guaranteed to pay a particular amount of money on a given date. The company’s articles of incorporation were changed, and the fund that was to be paid was moved to a separate account. The special fund was insolvent when the due day arrived. The plaintiff then filed a lawsuit against the corporation. In this case, the court determined that the consequence of the change results in a fundamental breach of the company’s earlier contract with the plaintiff, which is now inapplicable to this new article.

Procedure for Alteration of Articles of Association

The following steps must be followed for the amendment of the articles of association, according to the procedures outlined in Section 14 of the Companies Act, 2013:

STEP 1

 A shorter notice in writing should be sent to every director of the company at his registered address to call for a “Board Meeting” where the proposal for altering the articles of association will be presented, and in case of urgent business, a shorter notice in writing should be sent to every director of the company on his registered address to call for a “Board Meeting” where the proposal for altering the articles of association will be presented.

STEP 2

The Board of Directors will meet for the following purposes:

1. To evaluate and decide whether the articles of incorporation need to be changed.
2. To approve a change to the articles of incorporation for shareholder approval.
3.  To authorise any director to sign, certify, and fill out the form for modification in the registrar office or other statutory body required to do so, as well as to carry out the alteration operation.
4. Set a date, time, place, and date for the general meeting in order to pass the special resolution required by Section 14 of the Companies Act, 2013.
5.  As required by Section 102 of the Companies Act, 2013, the draught notice of general meeting, as well as the statement of explanation that is affixed to the notice, is approved.

6. The notice for the general meeting must be issued and signed by a director or the Company Secretary.

STEP 3

 Within 15 days of the Board meeting’s conclusion, the document is prepared and sent to all directors for their views via any methods of communication, such as mail, hand, or email.

STEP 4

A shareholder’s meeting must also be held on the day set for the change of articles with a 3/4th majority. Section 114(2), as well as Section 5, must be observed in the case of a private business with provisions for entrenchment (4).

STEP 5

A certified copy of the special resolution must be filed with the registrar within 30 days of the special resolution being passed, as required by Section 114 of the Companies Act, 2013.

STEP 6

In the general meeting, the alteration is then prepared, signed, and compiled.

STEP 7

All required revisions to the articles of association are made in all copies.

As discussed in Southern Foundries v. Shirlaw[11], a corporation can change its article even if it results in a breach of contract, however, in certain circumstances, the breach damages must be borne by the company.[12]

Effect of Alteration of the Articles of Association

Articles that have been altered have the same binding effect as the original articles. Originally framed articles or articles that have been altered from time to time are referred to as altered articles. The articles have the same binding effect on the company and its members as if they were signed by the company and each member individually.

The government believes that when a company’s articles of association are amended to result in the expulsion of a member from the management, it violates the company’s jurisprudence principles and is regarded as ultra vires.

The change should not result in any provision that is unconstitutional under the law, and if the change is legal, it is as legitimate and effective as the original articles.               

Legal Effects of Articles of Association

• The members are bound to the company
• Member can bring legal action against the company
• The members are bound to the other members
• The company is bound to the outsiders

Conclusion

Every corporation has an article of association, which is a document that contains the firm’s rules, regulations, and bye-laws for effective and hassle-free administration. A few types of companies, such as an unlimited company, a corporation whose shares are limited by guarantee, and a private business, are required to have articles of organisation. All of the important subjects that are required for the management and administration of the companies are covered in the articles of association. It can also be changed or revised as needed by following the processes outlined in the Companies Act of 2013.

The Companies Act of 1956 had numerous distinct requirements governing articles of organisation, but many of those sections were changed after the 2013 Act. Previously, the modification could not lead to the conversion of a corporation from public to private or private to public, but this is now allowed thanks to the Act of 2013. Similarly, there was no provision for retrenchment before the 2013 Act, but after that, the provision for entrenchment was added. The articles of association are very significant in every corporation since they cover all of the major aspects of management.

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References:

[1]Section 2(5) of Companies Act,2013

[2]Section 14 of Companies Act,2013

[3]Section 31 of Companies Act,2013

[4]Section 31(1) of Companies Act,2013, Unless a company’s articles specifically restrict the objects of the company, its objects are unrestricted

[5]Taxmans Companies Act,37^th edition,2021

[6]Supra note:5

[7][1865] 62 ER 717

[8][1897] 1 Ch 361

[9]ILR 33 MAD 36

[10]Air 1925 Cal 690

[11][1940] AC 701

[12]Cleartax.in