Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
Section 26 to 32 of the Companies
Act, 1956 specifically deals with the issue of Articles of Association. Section
26 of the Companies Act, 1956 is as follows:
“Section 26. There may be in the
case of public company limited by shares and there shall in the case of an
unlimited company or a company limited by guarantee or a private company
limited by shares, be registered with the memorandum, articles of association
signed by the subscribers of the memorandum, prescribing regulations for the
Company.”
Thus, while it is a requirement
for the Private Limited Companies to have an Articles of Association, it is an
option when it comes to Public Limited Companies. The detailed provisions of
the Companies Act, 1956 regulates the Public Limited Companies while liberty is
given to the Private Limited Companies to have their own regulations on many
issues or aspects. Normally, a care is taken while preparing articles of
association of a Public Limited Company in view of their exposure, stakes and
professional guidance.
The schedules to the Companies
Act, 1956 provides model Articles of Association which can be adopted by
different kind of companies. I do strongly feel that preparation of Articles of
Association is a difficult exercise unless the model articles are adopted or
only very few changes are made to the model articles to the extent provided
under the Companies Act, 1956.
It is the settled company law
principle that Articles can not override the provisions of the Act. Again,
certain privileges under the Companies Act, 1956 are available only when those
are backed by the Articles of Association. Though, we use the word
‘preparation’, I feel that the professionals advising the Company or involved
in incorporation of a Company normally may only do few additions or
alternations to the model Articles of Association provided in the Act itself.
But, when the promoters want to have their own say on the Company’s regulation,
two preliminary things should be in mind while preparing Articles of
Association of a Private Limited Company and those are:
1. It is not correct to delete
the regulations contained in the model articles of association without
considering its impact and in view of the fact that many provisions of the Act
can be availed only when those are backed by the Articles of Association.
2. While incorporating a
regulation which is not there in the model articles provided, one should be
very careful about the provisions of the Companies Act, 1956 and no provision
should go against the provisions of the Act.
It is settled legal principle
that any act which is against the Memorandum and Articles, and which is against
the provisions of the Act are void and those are normally referred to as “ultra
vires”.
Though, there is a principle of
“doctrine of constructive notice”, we can not expect the third parties to probe
into the Company with which they are entering a business transaction and it is
not possible practically in many cases. Only Public Financial Institutions or
the Financial Institutions may be in a position to probe company’s internal
regulations and other things when the Company approaches them for a loan.
Barring that, in many cases, a third party may not be able to look at the
company’s internal regulations and other internal issues and also we are aware
of “doctrine of indoor management” etc, though it operates in a different
situation.
Company Law is very complicated
and interesting. Any laxity on the part of the promoters or the professionals
advising the Company, can lead to lot of complications or difficulties.
Assuming a case that the
promoters or the majority in a Company has no intention at all to impeach the
rights of the other or cause any loss or damage; even in those cases, the
procedural irregularity may cause so many problems to the Company when a
dispute arises.
The complications can be like:
1. Can we say that an act which
is against the provisions of the Act or the regulations is legal?
2. Can we get all the business
deals of a Company set-aside on the ground that there exist a simple procedural
irregularity or the business deals are entered into ignoring the regulations of
the Company?
3. Where is the effective
mechanism to find-out as to whether the Company functions in accordance with
the provisions of the Act or not?
4. How to get a company corrected
when it is proceeding with an untenable regulation in its Articles?
A creditor or a shareholder can
not sustain a winding-up petition against a Private Limited Company showing
that the company contains a regulation and functions based on the regulation
which is clearly against the express provisions of the Act. It is difficult
really. Section 397/398 of the Companies Act, 1956 are not meant for ensuring
that the Company functions in accordance with the regulations thought the
Company Law Board is conferred with extraordinary powers while entertaining an
application under section 397/398 of the Act. There will be lot of problems
when some one approach the Civil Court seeking a declaration that a regulation
contained in the Articles of a Company is void or the transaction entered into
in violation of the regulations in the Articles are void.
In view of numerous complications
with incorrect drafting of Articles of Association, I would like to mention few
points which can be considered while preparing an Articles of Association of a
Company or getting a Private Limited Company incorporated.
1. It is to be remembered that
though we use the word “preparation of articles” while getting a company
incorporated, it is actually an adoption even when the promoters insist for few
changes in the model articles provided in the Act.
2. It is advisable to convince
the promoters not to insist for additions, changes, alternations or deletions
in the model articles provided in the Act.
3. Promoters are to be convinced
that the Articles can be altered easily.
4. It is to be remembered that
the additions, changes or alternations in the model articles provided requires
careful scrutiny of the provisions of the Act.
5. Unless it is necessary to have
a new regulation in the Articles of Association or a new regulation is must for
promoting the Company, it is better not to resort to additions, alternations,
changes etc. in the model Articles provided in the Act.
Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
