Companies Act Section 14

Companies Act Section 14: Alteration of Articles of Association

Introduction

Section 14 of the Companies Act addresses the procedure for altering a company’s Articles of Association (AOA). 

The articles are a vital document that outlines the internal regulations governing the company’s operations, its relationship with shareholders, and the management of its affairs. 

Altering the articles allows a company to adapt to changes in its business structure, objectives, or requirements. 

However, these alterations are subject to strict legal procedures to protect the interests of shareholders, creditors, and other stakeholders.

1. General Provision for Altering the Articles

Under the provisions of the Companies Act, a company may alter its Articles of Association by passing a special resolution. 

This procedure applies to all types of changes that a company might want to make in its internal governance or operational structure. 

Importantly, the ability to alter the articles is subject to the conditions set forth in the company’s memorandum of association and the Companies Act itself.

Special Resolution Requirement

A special resolution must be passed to alter the articles, meaning that at least 75% of the shareholders present and voting must approve the change. The rationale for requiring a higher threshold for altering the articles is to ensure that significant changes affecting the company's internal structure are made with broad support from the shareholders.

Types of Conversions

The scope of alterations under this section includes changes that result in the conversion of the company from one type to another. Specifically:

1. Conversion of a Private Company into a Public Company:

A private company can decide to convert itself into a public company by altering its articles. This change might occur if the company wants to expand its capital base, gain access to public markets, or increase transparency and corporate governance.   

2. Conversion of a Public Company into a Private Company:

Conversely, a public company may wish to revert to private status. 

This conversion might be driven by the desire for greater operational flexibility, reduced regulatory burdens, or increased control by a smaller group of shareholders. 

However, in this case, the alteration must receive additional approval from the Central Government to ensure that the conversion does not prejudice the interests of public shareholders or other stakeholders.

Provisions for Private Companies

When a private company alters its articles in such a way that it removes the limitations and restrictions placed on private companies by the Companies Act, it will cease to be considered a private company from the date of that alteration. 

These restrictions typically include limitations on the transferability of shares, the number of members (limited to 200), and restrictions on inviting the public to subscribe for shares or debentures.

Immediate Effect of Alteration: 

Once the articles are altered, the company will automatically be treated as a public company, regardless of whether it has formally converted itself into one. 

This reflects the fundamental differences between the governance structures and legal obligations of private and public companies.

2. Approval for Conversion to Private Company

If the alteration of the articles involves the conversion of a public company into a private company, the change is not valid unless it is approved by the Central Government. 

This additional layer of approval ensures that such conversions, which can significantly affect the rights and obligations of shareholders, creditors, and the public, are carefully scrutinized.

Application for Approval

The company must submit an application to the Central Government in the prescribed form and manner. 

This application must include all relevant details about the proposed alteration and the reasons behind the company's decision to revert to private status. 

The Central Government will review the application to ensure that the conversion is in the best interest of shareholders and does not disadvantage any other parties with a vested interest in the company’s public status.

Pending Tribunal Cases

In cases where an application for conversion was already pending before the Tribunal at the time the Companies (Amendment) Act, 2019 came into effect, the matter will continue to be adjudicated by the Tribunal under the laws in force before the Amendment Act. 

This ensures continuity and fairness for companies that initiated the process before the new legal provisions took effect.

3. Filing Requirements for Altered Articles

Once the articles have been altered, the company must ensure that all necessary filings are made with the Registrar of Companies (RoC). This filing process is essential for validating the alteration and ensuring that the company’s official records reflect the updated articles.

Key Filing Steps

1. Filing the Altered Articles:

The altered articles, along with a copy of the Central Government’s approval order (in cases involving the conversion of a public company to a private company), must be filed with the Registrar within 15 days of the special resolution being passed.   

2. Printed Copy:

A printed copy of the altered articles must be provided in the prescribed manner. The RoC will then review the filings to ensure they comply with legal requirements.   

3. Registration:

Once the Registrar is satisfied with the documentation, the altered articles will be registered in the company’s records. This step formally acknowledges the changes and ensures that third parties, such as investors or creditors, can access the updated articles through the public register.

4. Validity of Altered Articles

Upon successful registration of the alteration with the RoC, the altered articles are considered legally valid and enforceable as if they had been originally included in the company’s articles.

Legal Standing: 

The altered articles will have the same legal force as the original articles, subject to the provisions of the Companies Act. This means that the company and its shareholders must now operate in accordance with the revised articles, and all business decisions and governance actions must align with the new provisions.

Binding Nature: 

Once registered, the alterations are binding on the company and all its members. This underscores the importance of proper adherence to the filing requirements and government approval processes to ensure that the alterations are effective.

5. Protection of Stakeholders During Alterations

The process of altering the articles, particularly when it involves significant changes like converting from a public company to a private one, is designed to protect the interests of various stakeholders, including creditors, shareholders, and the public. 

Government Oversight: 

The requirement for Central Government approval in certain cases provides a layer of oversight to ensure that the conversion is not undertaken for improper purposes, such as avoiding transparency or reducing shareholder rights.

Transparency in Filing: 

By mandating that all alterations are filed with the RoC and made publicly accessible, the Companies Act ensures that stakeholders have access to up-to-date information about the company’s governance structure.