Companies Act Section 5

Companies Act Section 5: The Articles of a Company

1. Purpose and Content of Articles

Under Section 5 of the Companies Act, every company is required to have articles that outline the key regulations for the internal management of the company. 

These articles serve as the foundational document that governs how the company operates on a day-to-day basis and how it interacts with its members, directors, and stakeholders.

The content of the articles must address a variety of operational matters, ensuring that the company's internal governance is well-structured and in accordance with both the law and the company's specific needs. 

The articles provide the framework for managing the company’s affairs, including areas such as the roles and responsibilities of directors, the process for conducting meetings, and the rules regarding shareholding.

2. Prescribed Matters in the Articles

The articles must also include specific prescribed matters as required by applicable regulations. 

These are essential elements that every company must incorporate into its articles to comply with legal standards. 

However, this section allows for flexibility while the company must include the prescribed matters, it is also free to add additional regulations that it considers necessary for the effective management of its affairs. 

This flexibility gives companies the autonomy to design articles that are tailored to their specific business objectives, provided they comply with the legal framework.

3. Entrenchment Provisions in the Articles

An important feature of the articles is the ability to include entrenchment provisions. 

These provisions allow certain aspects of the company’s internal rules to be more difficult to alter than the standard procedures typically required for modifying the articles. 

In particular, entrenchment provisions ensure that certain regulations can only be changed if stricter conditions or more demanding procedures are followed, beyond the requirements of a special resolution (which itself requires a high majority vote).

A. Purpose of Entrenchment Provisions

The inclusion of entrenchment provisions acts as a protective mechanism, preventing hasty or improper changes to key regulations that could affect the company’s governance or stability. 

These provisions may be particularly useful in situations where the company’s founders or key stakeholders want to safeguard certain rights, decisions, or structures from being easily altered.

4. Process for Creating Entrenchment Provisions

The creation of entrenchment provisions is subject to specific rules depending on the type of company:

For a private company, all members must unanimously agree to the introduction of entrenchment provisions. 

This ensures that such provisions are only adopted if there is complete consensus among the company’s owners.  

For a public company, the adoption of entrenchment provisions requires a special resolution, meaning that at least 75% of the members voting must agree to the change. 

This higher threshold ensures that any entrenchment provisions are introduced only with significant support from the company’s members.

5. Notice to the Registrar of Entrenchment Provisions

Whenever entrenchment provisions are included in the articles, either at the formation of the company or through an amendment to the articles, the company must notify the Registrar of Companies. 

This notification must be done in the prescribed form and manner as outlined by regulations.

The requirement to inform the Registrar ensures transparency, as the entrenchment provisions become a matter of public record. 

This allows stakeholders, including creditors and potential investors, to be aware of any special restrictions or conditions that govern changes to the company’s articles.

6. Form of Articles: Schedule I Requirements

The articles must be drafted in a manner that complies with the forms specified in Schedule I of the Companies Act. 

These forms provide a model structure for drafting articles, ensuring consistency and clarity across different companies.

The relevant forms are contained in:

Table F  (for companies limited by shares),

Table G  (for companies limited by guarantee without share capital),

Table H  (for companies limited by guarantee with share capital),

Table I  (for unlimited companies with share capital), and

Table J  (for unlimited companies without share capital).

The company must select the appropriate form based on its corporate structure. 

By following these templates, companies ensure that their articles comply with statutory requirements while also reflecting their unique governance needs.

7. Adoption of Model Articles

A company has the option to adopt all or part of the regulations from the model articles provided by the Companies Act. 

These model articles serve as a guideline for companies, ensuring that they have access to pre-drafted regulations that cover various aspects of corporate governance.

If a company chooses to adopt the model articles, it can do so in their entirety or selectively include only those provisions that suit its particular governance framework. 

This offers a company flexibility while also benefiting from well-established, legally sound governance standards.

8. Regulations for Newly Registered Companies

For companies that are registered after the commencement of the Companies Act, the model articles will apply automatically if the company’s registered articles do not exclude or modify them. 

In other words, unless the company explicitly states otherwise, the model articles will be treated as if they were part of the company’s registered articles.

This provision ensures that companies that do not actively draft or modify their articles still have a set of governing rules that are legally enforceable. 

It provides a default mechanism for corporate governance, which can be particularly beneficial for smaller companies or new entrepreneurs who may not yet have the resources to draft bespoke articles.

9. Applicability to Companies Registered Under Previous Company Law

Section 5 clarifies that these provisions regarding articles do not apply to companies that were registered under any previous company law, unless those companies make amendments to their articles under the current Act. 

This ensures that companies formed before the current Companies Act retain the validity of their articles, even if they do not conform to the updated provisions of the new law.

However, if these companies choose to amend their articles in accordance with the current Companies Act, then they must comply with the provisions of Section 5, including the requirements related to entrenchment provisions, notification to the Registrar, and the adoption of model articles where applicable.