A company has an inherent power to alter its articles. Section 31 of the Companies Act conferred the power of alteration to the company which states that a company may alter its articles by passing a special resolution to this effect. A company may even change its Articles with retrospective effect.
Any provision making Articles unalterable is regarded as bad in law. Company cannot deprive itself, by an express provision in the Articles or independent contract, of the power to alter its articles. However, there are certain limitations or restrictions on the power of the company to alter its articles of association.
Image Source: cdn.indiafilings.com
ADVERTISEMENTS:
These are as follows:
1. Articles can be altered only by a special resolution. Articles can never be altered by an ordinary resolution even if they provide for such a procedure.
2. Alteration can neither be beyond the provisions of the companies Act nor the memorandum of association. Articles may, however be altered to explain ambiguous portions or to supplement the memorandum with regard to those things upon which it is silent.
3. Alteration of articles seeking to take away the company’s power to alter its articles would be void as being contrary to the provisions of the Act. But an alteration prescribing a special method for passing the special resolution for altering the Articles will be valid.
ADVERTISEMENTS:
4. Alternation seeking to impose an additional liability on a member of the company after the date on which he became a member, to take shares more than what he has already taken or to pay any more money than what he is liable to pay on his shares shall not be binding upon him unless he agrees in writing to such an alteration except in case where the company is a club or any other association and the alteration of Articles provides for increase in the rate of subscription by the members. (Sec. 38)
5. Alteration should not be illegal or against public policy besides not being contrary to any other statute in force.
6. The power to alter the Articles must be exercised by the shareholders in good faith for the benefit of the company as a whole. Alterations made bona fide and in the interests of the company shall be valid even if they are likely to affect adversely the personal interests of some of the members of the company.
Alteration of Articles so as to give power to the directors to require any shareholder who competed with the company’s business to transfer his shares at full value is valid and binding upon the members of the company for it will be beneficial to and in the interest of the whole company.
ADVERTISEMENTS:
Alteration of Articles shall not be valid if it has been made for the benefit of an aggressive, vindictive or fraudulent majority. The leading case is Brown v. British Abrasive Wheel Co. (1919):
A company was in great need of further capital. The majority representing 98% of the shares were willing to provide the capital if they could buy up the two per cent minority. The majority passed a resolution altering the Articles to enable them to purchase the minority shares. The plaintiff challenged the alteration.
Held, the alteration of the Articles of Association is void as it constitutes fraud by majority shareholders upon the minority shareholders.
7. Certain provisions of the Articles cannot be altered except with the prior approval of the Central Government. These include increasing the remuneration of directors of public company not in accordance with Schedule XIII of the Act, conversion of a public company into a private company etc.
8. A company can alter its articles even if it causes a breach of an agreement with the outsider. Company cannot be prevented by injunction from altering its articles which constitute a breach of contract although it may be liable to pay damages, if it acts upon them. The remedy of the outsider depends on this fact whether his contract is purely on the terms in the articles or it is an independent contract.
In the former case, the alteration will be operative and outsider will have no remedy against the company. While in the latter case, the company can repudiate the contract by altering its articles, but will be liable for the damages caused to the third party on account of such breach. This is because “a company cannot, by altering articles, cause a breach of contract.”