Alteration of aoa of a company_legal provision and checklist

Rajeev kumar Nayak (ACS) (283 Points)

17 November 2011

Dear All

I have a material on Alteration of AOA of a company which include legal provision and checklist for the same.

The same may be useful to U.

A copy of the same is also attached herewith....

ALTERATION OF ARTICLE OF ASSOCIATION OF A COMPANY

APPLICABLE SECTION:--------

· SECTION 31 OF THE COMPANIES ACT, 1956.

BARE ACT:

Sec. 31 of Companies Act, 1956:----

ALTERATION OF ARTICLES BY SPECIAL RESOLUTION.

(1) Subject to the provisions of this Act and to the conditions contained in its memorandum, a company may, by special resolution, alter its articles:

Provided that no alteration made in the articles under this sub-section which has the effect of converting a public company into a private company, shall have effect unless such alteration has been approved by the Central Government.

(2) Any alteration so made shall, subject to the provisions of this Act, be as valid as if originally contained in the articles and be subject in like manner to alteration by special resolution.

(2A) where any alteration such as is referred to in the proviso to sub-section (1) has been approved by the Central Government, a printed copy of the articles as altered shall be filed by the company with the Registrar within one month of the date of receipt of the order of approval.

(3) The power of altering articles under this section shall, in the case of any company formed and registered under Act No. 19 of 1857 and Act No. 7 of 1860 or either of them, extend to altering any provisions in Table B annexed to Act 19 of 1857, and shall also, in the case of an unlimited company formed and registered under the said Acts or either of them, extend to altering any regulations relating to the amount of capital or its distribution into shares, notwithstanding that those regulations are contained in the memorandum.

BASIC LEGAL PROVISION:-------

· As per the provision of Section 31 of the Companies Act, 1956 a Company can change its AOA by passing the Special Resolution (SR).

· However in case of alteration in AOA have the effect of converting the public company into private company, such alteration shall not take effect unless it is approved by Central Government.

· Power under this Section has been delegated to the Registrar of Companies (ROC) by MCA.

· The power to alter the AOA is statutory power and a company cannot restrict itself out of the power and provide that any of its articles are remain unaltered. Any restriction on the exercise of the power to alter the articles except to the extent provided in the Companies Act, 1956 or any other law will be invalid.

CASE LAWS ON ALTERATION OF AOA:------

· AOA of a company cannot be altered, if the alteration is repugnant to or inconsistent with any statute or general law or if it is of such a nature that it will defeat the provision of any law. The AOA of a company cannot be altered to enable the company to carry on an illegal scheme. [ Pioneer Mutual Benefit Society vs. Asst. Registrar (1933) ]

· The power to alter the articles cannot be used to violate the provision of the law. For e.g. – take away the shareholders rights to present the winding up petition. [Ramkrishna Industries Pvt. Ltd. vs. P.R. Ramkrishnan (1988) (Mad.)]

· when the Company Law Board (CLB) makes any alteration in MOA or AOA under Sec. 397 and 398, then company cannot make alteration which is inconsistent with the CLB order except as provided in the Sec. 404 of the Act.

· All members become bound by a valid alteration in the AOA whether they have voted in favour or against the resolution authorizing the alteration in AOA. [Hari Chandra Yogg Deva vs. Hindustan Co- Operative Insurance Society Ltd.]

· A company may by alteration strengthen the provision contained in the Act. For example where the Act provides for an Ordinary Resolution (OR) for transacting a particular business, AOA of the company may provide that for that business SR will be passed.

· However the AOA cannot make the provision for permanent appointment of a particular firm as Statutory Auditor of the Company as the Shareholders have the right to appoint them under the Act.

ALTERATION MUST BE BONAFIDE:-------

· Alteration must be bonafide and should be for the benefit of the company as a whole.

· The power to alter articles must be exercised bonafidely and for the benefit of the company as a whole. If a majority of shareholders alters the articles solely for their own benefit and interest, the alteration is bad and invalid. [Geary vs. Mestrose Co- Operative Dairy Co. Ltd.]

· The power to alter the AOA cannot be exercised in a manner that would constitute on the minority.

· An alteration in AOA whereby majority may require any member to sell his shares to any other member is liable to be struck down, if the compulsion is not necessary for the benefit of the company as a whole. [Clemens vs. Clemens Bros. Ltd. (1976)]

EXPULSION OF MEMBERS BY BODs:------

· An alteration in the AOA for the purpose of providing that the shares of an expelled member would be compulsorily transferred against the wishes of some of the existing shareholders, or even against his/her wishes or without his/her signature was held to be valid exercise of power of alteration. [Gothomi Solvent Oil Ltd. vs. Mallina Bharathi(2001) (AP)].

· While MCA has opined that an amendment to AOA of the company which confers the BODs the power to expel the members of the company is oppose to fundamental principles of company jurisprudence and ultra vires the company.

· Thus MCA and Judiciary (AP High Court) has given the contrary view on the same matter.

ADOPTION OF NEW SET OF AOA:--------------

· A company can never replace its Articles. It is only the regulation contained therein which may be changed. Accordingly the concerned company can adopt an entirely new set of regulations in place of old one by passing Special Resolution (SR) under Section 31. [MCA CLARIFICATION]

ALTERATION OF ARTICLES IN BREACH OF CONTRACT AND LIABILITY FOR DAMAGES:-----------

· A company is not precluded from altering the AOA even though such alteration will result in breach of contract. But if thereby, the company commits a breach of contract, it may liable for damages to other party to the contract. By altering AOA a company cannot escape from its contractual obligations. [In Re- Southern Foundaries Ltd.]

· Where compensation would not be adequate remedy the court may restrain by Injunction, the company from altering the AOA. [British Murac Syndicate Ltd. vs. Alperton Rubber Co. Ltd. (1915)]

· However on the same matter Karnataka High Court had given the different judgment in State of Karnataka vs. Mysore Coffee Curing Works Ltd. (1984) (Kar), where the court refused to restrain the company from amending its articles so as to cancel the power conferred to the State Government to nominate 3 directors including the chairman of the company. The court has given the judgment on the basis that Sec. 31(1) gives the unfettered power to amend the articles except to the extent of proviso of that Sub-section.

ALTERATION SHALL BE WITHIN MOA:----------

· As per Sec. 31, alteration in AOA should be consistent with the MOA of the company and any thing inconsistent with MOA shall not have effect.

INCREASE IN MEMBERSLIABILITY:------------

· The liabilities of members cannot be increased either by asking them to contribute more capital or otherwise simply by changing AOA. It requires the consent of the members in writing as prescribed in Sec. 38..

· However in case of Club etc. requirement to pay higher subscripttion fees by the members by altering the articles is not hit by Sec. 38 and consent of members is not required for that purpose.

ALTERATION IN AOA BY CONSENT OR UNANIMOUS AGREEMENT:-----

· Where all the shareholders in a company enter into an agreement which modified the AOA, but was not drafted as resolution nor passed at a general meeting, the articles could nevertheless be deemed to be effectively amended. This is on the basic principle of the company law that all the shareholders of a company acting together can do any thing intra- vires the company. [Cane vs. Jones]

RECTIFICATION OF MISTAKES:-----------

· A mistake whether clerical or any other in the AOA of the company can only be rectified by altering the AOA by passing the Special Resolution under Section 31.

POWER OF CLB TO ORDER ALTERATIONS:---------

· Section 404 of the Act empowered the CLB to order the alteration of MOA or AOA of the company or prevent any alteration as may be necessary for putting an end to complaints of oppression and mismanagement.

CONVERSION OF PUBLIC COMPANY TO PRIVATE COMPANY:-------

· Proviso of Sec. 31 applies only in case of conversion of public company into private company by means of altering the articles so as to comply the provision of Sec. 3(1)(iii).

· It does not apply in case of reduction of membership of a public company below 7 as such reduction does not convert public company into private company, nor it offends any provision of the Act. However it attracts the personal liabilities of members as per Sec. 45 besides the danger of being wound up under Section 433(d).

· In case of a listed public company wants to convert itself to a private company, then besides complying all other provisions of delisting of shares etc., Special Resolution for altering the articles under Section 31 shall be passed by postal ballot method in accordance with the provisions of Sec. 192A and Rues made there under.

APPROVAL OF CG (ROC):---------

· For getting the approval of CG (ROC) for alteration of articles converting public company into private company, an application shall be filed in e-form 1-B along with necessary annexures.

· MCA has instructed that such an application shall be made by the company within 3 months from the passing of the Special Resolution.

· Such application shall be accompanied by the following informations:-----

Ø Existing capital structure;

Ø Reason for conversion;

Ø Number of members of the company at then time when decision for conversion has been taken.

Ø A copy of current MOA and AOA;

Ø A copy of minutes of proceedings of meetings at which Special Resolution is passed;

Ø Prescribed fees.

· If the CG (ROC) approves the conversion, the company has to file a printed copy of AOA, as altered by it, within 1 months of the date of receipt of order for approval.

CHECKLIST FOR SECRETARIAL AUDIT

S.no	Particulars	Complied with	Not Complied with	Applica-bility	Remarks
	Check whether articles of the company were altered during the year under Scrutiny under Sec. 31.
	If the articles has been altered, then check the following:-
	A meeting of Board has been held where alterations of the AOA has been decided and a resolution was passed for convening the general meeting to obtain the consent of members by way of Special Resolution.
	General meeting of the company had duly called and held by complying all the applicable provisions of the Act and approval of members of the company by a Special Resolution (SR) had obtained.
	In case of listed company, three copies of the notice of general meeting has been sent to each stock exchange where the securities of the company are listed.
	Minutes book duly contain the proceeding of general meeting where SR has been passed.
	A copy of proceeding of general meeting has been sent to each stock exchange where the securities of the company are listed.
	In case of listed company, six copies altered AOA (one of them must be certified) has been sent to each stock exchange as soon as they are adopted by the company in general meeting.
	Check whether e-from 23 has been filed with ROC along with a certified copy of SR and explanatory statement and altered AOA within 30 days of passing the SR.
	The alterations have been incorporated in all copy of Articles.
3.	In case of alteration of articles has the effect of conversion of public company into private company following additional point will be checked:--
	In case of listed public company, for the purpose of conversion SR has been passed by the method of postal ballot in accordance of Sec. 192A and Rules made there under.
	Within 3 months of from the date of passing SR, an application in e-form 1-B along with requisite documents was filed with the ROC for their approval.
	The ROC has given the approval for conversion and fresh Certificate of Incorporation has been issued.
	The Articles of Association (AOA) were re- printed and one copy was filed with the ROC within 1 months.