Alteration to Articles of Association in Business Organisations

Alteration to Articles of Association in Business Organisations

Alteration to articles of association is required for a number of purposes like adoption to changing requirements, to meet the need to redefine the powers of directors, and for many other routine rules and regulations of the company within the parameters of memorandum and Companies Act. The limitations to alter the Articles of the association are that those cannot override the Memorandum of association, the Companies Act and other prevalent statutes. Accordingly, the alteration of articles has been analyzed in the write up from the point of view these and other limitations.

Section 21 of CA 2006 permits alteration to articles only through the passing of a special resolution, but the company can also adopt articles to follow procedures that are stricter than only passing of the special resolution. ‘Section 22 of CA 2006 allows the articles to contain a provision for entrenchment nominating specified provisions of the articles that can be amended or deleted only if conditions or procedures more stringent than special resolution are met. A provision for entrenchment can be inserted only on formation of the company or by an amendment of the company’s articles which is agreed upon by all its members.’(L.Sealy and Sarah Worthington, page 204)1 As referred earlier the company can formulate stringent provisions in the articles to alter the articles so long as those provisions are not contrary to the Company Act.

This general power of altering the articles of association is subject to the following restrictions:
• “The alteration must not conflict with a memorandum of association, Companies Acts or other relevant laws.
• The number of shares which a member is bound to subscribe for may not be increased without the consent of members
• The alteration must be bona fide for the benefit of a company as a whole and must not amount to a fraud on the minority.”(Larry Mead and Kevin Bampton, page 63)
&nbsp.• Any alteration that is against the order of a court of law is illegal and void.
“If the alteration of articles involves alteration or abrogation of a class right, then in addition to special resolution the company must follow the regime appropriate to variation of class rights.”(Nicholas Bourne, page 68)

As per section 14 of CA 1985, the memorandum and articles of association are contractual in nature and therefore the members or shareholders are required to be taken into confidence before altering the articles of association. That probably is the reason that a special resolution is required to alter the articles.

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