Chapter II
INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO

Section 5: Articles
Rules 2.7 and 2.8 of the Companies Rules, 2013
[Section 5 is not yet brought to force. The Companies Rules, 2013 is not yet brought to force.]

Corresponding provisions of the Companies Act, 1956:
Sections 26, 27, 28 and 29

Corresponding provisions of the English Companies Act, 2006:
Sections 18 and 22

Applicability:
This section is applicable to all companies.

Contents of Articles of Association [Section 5(1) and (2)]:
The articles of association of a company shall contain the regulations for management of the company.

The Articles shall also contain matters prescribed by the Central Government.

Use of word ‘shall’ suggests that articles must contain compulsorily provisions relating to management of the company.

Under draft rules, the Government has prescribed following specific provisions which a company may incorporate in its Articles.
1. Issue of equity shares with differential voting rights. draft Rule 4.2(1)(a)
2. Certain terms relating to preference shares. draft Rule 4.7(2)
3. Issue of shares on a preferential basis. draft Rule 4.11(2)
4. Fees for inspection of documents, registers etc. and copy thereof. draft Rule 7.12, Rule 7.14 and Rule 7.24
5. Fees for extracts from register of loans and investments. draft Rule 12.10
6. Fees for extracts from register of of contracts or arrangements in which directors are interested. draft Rule 12.15(4)

Entrenchment [Section 5(3), (4) and (5)]:

The Articles may contain entrenchment provisions. This is new a concept under the Indian Companies Act, as there was no such concept under the Companies Act, 1956.

The word ‘entrench’ is not defined under the Companies Act, 2013. As per Oxford English Dictionary, the word ‘entrench’ means establish (an attitude, habit, or belief) so firmly that change is very difficult or unlikely. As per wikipedia, an entrenched clause or entrenchment clause of a basic law or constitution is a provision which makes certain amendments either more difficult or impossible, i.e., inadmissible. It may require a form of supermajority, a referendum submitted to the people, or the consent of another party.

Use of word ‘may’ suggests that a company has discretion to include entrenchment provisions in its articles.

Such entrenchment provision may relate to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with.

And that such a provision can be made either at time of incorporation of the company or after incorporation thereof, by amendment in the articles.

If such entrenchment provisions are intended to be incorporated in the articles of a company after incorporation, then consent of members is mandatory in the prescribed manner. In case of a private company, consent of all the members of the company is required and  in case of a public company, consent of its members by way of a special resolution is required.

It may be noted that any amendment of articles requires consent of members by way of a special resolution, be it a private company or a public company [under section 14(1)]. However, in case of a private company intending to alter its articles to provide for aforesaid entrenchment provision, it shall obtain consent of all of its members. The manner of obtaining consent in case of a private company shall be by way a resolution, as it appears from instruction no.2 given in attachment instructions to Form no. 2.8.

Wordings of the provisions (sub-section 3) suggests that entrenchment provisions can only be relating to matters requiring consent of members by way of special resolution.

In case the company inserts such a clause in the articles, either on formation or by way of amendment, the company shall give notice to the Registrar of Companies informing the same within thirty days from the date of formation or amendment of the articles. Rule 2.7 prescribes intimation shall be given in Form no. 2.8.

Model Articles [Section 5(6) and (7)]:
Model of articles as applicable to different companies have been provided in Table F, G, H, I and J of Schedule I to the Act. Though format of articles shall be as per applicable table of Schedule I, a company is having freedom to adopt all or any of the regulations from applicable model articles.

Formats: The Articles of the company shall be in the form provided in Schedule I, i.e
For a company limited by shares – Table F
For a company limited by guarantee and having a share capital – Table G
For a company limited by guarantee and not having a share capital – Table H
For a unlimited company and having share capital – Table I
For a unlimited company and not having a share capital – Table J

Applicability of model articles [Section 5(8) and (9)]:
For companies incorporated after the commencement of the Companies Act, 2013, by default provisions of relevant model articles (to the extent applicable to it) shall apply. If a company intends to have a different provision than those prescribed in the relevant model articles, it shall specifically exclude or modify the same in its articles.

In case of companies registered under previous company law, the provisions of its articles shall apply upto the time it amends articles after commencement of the Companies Act, 2013. Upon amendment of articles (made after commencement of the Companies Act, 2013), provisions of relevant model table becomes applicable automatically by operation of law [sub-section (9) of section 5]. In case of  companies registered under previous company law, effect of section 6 may be noted.

Penalty:
Since no specific penalty or punishment is prescribed for contravention of section 5, general penalty prescribed under section 450 of the Act is applicable. Accordingly, the company as well as its officer who is in default or such other person shall be punishable with fine upto Rs.10,000/-. For continuing offence, they are punishable with further fine upto Rs.1,000/- for every day after the first during which contravention continues.

It may be noted that for second or subsequent contravention of the provision of this section, if made within a period of three years, then the company as well as its officer who is in default shall be punishable under section 451 with twice the amount of fine in addition to any imprisonment provided for the offence.

Adjudication:
Under Section 454, the officer appointed by the Central Government, not below the rank of Registrar of Companies, may adjudicate and impose monetary penalty for violation of this section. However, before imposing penalty, an opportunity of hearing shall be given to the Company and its officers.

Compounding:
It may be noted that under section 441, where offence is punishable with fine only, the same may be compounded by the National Company Law Tribunal or where the fine does not exceed Rs.5,00,000/- by the Regional Director or any other officer authorised by the Central Government.

Summary of forms and records:
Form no. 2.8 for giving notice to the Registrar with respect to the provision of entrenchment.