Amendment of Articles of Association
A company can change its articles of association by calling a meeting of the shareholders and passing a resolution. A company can amend the articles for any reason that involves improvement of the business prospects. A company may wish to amend the articles to diversify its business or enhance the scope of its existing business.
The articles of association are the regulations which govern a company’s internal affairs. The articles govern the company’s management structure and hierarchy. The articles also provide a framework for implementing the objectives of the company. The objectives of a company can be found in the memorandum of association. A company’s business should be conducted according to the articles. The articles establish a contract between the company and the members. The contract governs the rights and obligations of the members.
All companies are permitted to amend the articles by fulfilling the applicable legal requirements. The Ministry of Corporate Affairs governs the procedure for amendment of the articles.
The following conditions should be followed by a company which is altering the articles of association:
- The alteration should not introduce any terms which are inconsistent with the objectives of the company.
- The alteration should not contravene or contradict the terms of the memorandum.
- The alteration should be consistent with the Companies Act, 2013 and other applicable laws.
- The alteration should be for the benefit of the company as a whole.
- The alteration should not introduce any terms which are disadvantageous to a minority of the shareholders.
- A company may be under litigation relating to the terms of the articles. In such cases, the alteration should be made under the guidance of the court.
- The alteration should not be made retrospectively. The effective date appointed for the modification should not be before the date of passing a special resolution.
- The alteration should not change the paid-up value of the shares.
- The alteration should not change the company’s liabilities towards lenders.
- The alteration should not remove any person from membership in the company.
- The alteration should not cancel the voting rights available to the shareholders.
- The alteration should not prevent shareholders from attending meetings.
- The alteration should not introduce benefits to persons who are not members of the company.
- The alteration should not be used as a method to enter into an agreement with persons who are not members of the company.
Procedure to Amend Articles of Association
- A board meeting should be held. The notice inviting the directors to attend the meeting should state the agendas. The notice should be given to the directors at least seven days before the meeting. The agendas should be the following:
- To discuss and approve the purpose for which the articles are amended.
- To recommend the shareholders to approve the purpose for which the articles are amended.
- To discuss and approve the amendments that are introduced in the articles
- To recommend the shareholders to approve the amendments that are introduced in the articles
- To finalise the date, time and place for the shareholders’ meeting
- To discuss and approve the ‘explanatory note’ which explains the purpose of the shareholders’ meeting
- To authorise the company’s secretary to forward the explanatory note and the notice for the meeting to the shareholders
- The notice for the meeting and the explanatory note should be sent to every shareholder twenty-one days before the meeting.
- A list of creditors, debenture holders and other lenders to the company should be compiled. The list should mention the name of the lender and the amount due. The date on which the credit facility was availed should also be mentioned. If a particular debt is in dispute, the fact should be disclosed. The list should be laid before the shareholders. The minutes of the meeting should record the fact that the shareholders perused the list. A shareholder may make any remarks regarding the list. The remarks should be recorded in the minutes.
- An affidavit should be drafted stating that the alteration does affect the amount repayable towards any of the lenders. The affidavit should be signed by the company’s secretary and at least two directors of the company. It should also be signed by the managing director. The affidavit should be laid before the shareholders. The minutes of the meeting should record the fact that the shareholders perused the affidavit. A shareholder may make any observations regarding the affidavit. The observations should be recorded in the minutes.
- The format which a company should follow for the articles depends on the type of company. Unlimited companies and guarantee companies having share capital need not follow any particular format. A company incorporated with share capital should draft the articles as per Table F. A guarantee company should draft the articles as per Table H. Table F and Table H form part of Schedule I of the Companies Act, 2013.
- The shareholders attending the meeting should pass a special resolution approving the alteration of the articles.
- A shareholder attending the meeting may observe that a particular lender is adversely affected by the alteration. In such cases, a copy of the minutes together with the altered articles should be forwarded to the concerned lender within fifteen days.
- Within thirty days of the meeting, the company should file form MGT-14 with the Ministry of Corporate Affairs (MCA). The purpose of filing form MGT-14 is to record that the company has passed a special resolution for altering the articles. Before filing the form, the applicant should register with the MCA.
- The format of form MGT-14 is given below for reference: