Tuesday, March 2, 2010

Alteration of Articles of Association

Whether a company can alter its articles of association in any other way than by a special resolution passed at general meeting?

Sub-section (1) of Section 31 of the Companies Act, 1956 in relevant part reads as follows:

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

When all the shareholders interested in a company entered into an agreement which modified the articles of association, but was not drafted as a resolution nor passed at a general meeting, the articles could nevertheless be deemed to be effectively modified. This is on the basic principle of company law that all the shareholders of a company acting together can do anything intra vires the company.  Section 31(1) of the Companies Act, 1956 does not undermine that principle but merely lays down the procedure whereby some only of the shareholders can validly alter the aritcles. See: Cane v. Jones, (1981) 1 All E R 533 (Ch D) : [1980] 1 WLR 1451.

In view of the above decision of the Chancery Division, a company can alter its articles even without convening a general meeting and passing a special resolution.
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  1. sir,

    Ur blog is too good it would be more better if the posts are discussed by members who are viewing the posts so that there will be knowledge sharing effectively and every one can acquire some knowledge. Sir actually the Articles Of Association cannot be altered if the AOA are ultravires to Minority by the Majority as specifed under SEC 31(1)of the Companies Act, 1956. However, u have specified the two important conditions that the Altered Articles shall not be beyond the powers of the Memorandum Of Association and the Companies Act, 1956.

  2. Dear Shravan,

    The relevant extract of your comment: "the Articles Of Association cannot be altered if the AOA are ultravires to Minority by the Majority as specifed under SEC 31(1)of the Companies Act, 1956...."

    I did not get the import of what you have tried to say.

  3. However, on a review of various authorities on the subject matter, the points which emerge can be be usefully listed in terms of the following propositions:

    (1) It is not necessary to show to validate an alteration that a particular member will get some benefit out of it, but it would be necessary to show that the alteration is needed for the equal good of the members as a whole and that the burdens and benefits of the alteration will fall upon all the members alike.

    (2) The alteration should not discriminate between members by conferring privileges on some and depriving others of their rights e.g. depriving members of their pre-emptive rights or increasing their liability. A member may, however, be subjected to a sacrifice if it is for the good of the organisation e.g. expelling a member and acquiring his shares at a fair value if his personal competing business is causing harm to the company.

    (3) All majority powers have to be exercised in absolute good faith for the benefit of the organisation as a whole, but good faith is not lost merely because the alteration operates to the disadvantage of some members.

    See: A. Ramaiya's Guide to the Companies Act, 17th Edition 2010, Part 1 at 532.