Companies Act 2013

Section 14: Alteration of articles.

Chapter II
INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO
Provisions of the Companies Act, 2013:
Section 14: Alteration of articles.
Rule 2.30 of the Companies Rules, 2013
[Section 14 is not yet brought to force and the Companies Rules, 2013 is not yet brought to force]Corresponding provisions of the Companies Act, 1956:
Section 31Corresponding provisions of the English Companies Act, 2006
Sections 21, 23, 24 and 26Applicability:
This section is applicable to all companies.
A company may later its articles of association with consent of its members by way of a special resolution. However this power is subject to provisions of the Companies Act and Memorandum of association of the company. Meaning, while a company is free to alter its articles of association the way it wants, it shall not be contrary to provisions of the Act and its memorandum of association.
A private company may alter its articles of association by removing restrictions and limitations of a private company to convert itself into a public company. And upon receiving consent of its members, a private company becomes a public company. [1st proviso to section 14(1)]
And registering altered articles and receiving fresh certificate of incorporation from the Registrar of Companies remains formality, though important.
Normally consent of members by special resolution for alteration of articles suffices. However, if articles contains entrenchment provision, i.e. requiring consent of more or all members for alteration of its articles, the same shall be obtained. [section 5(3)].
A public company may alter its articles of association by inserting restrictions and limitations of a private company to convert itself into a private company. However, it’s conversion is subject to approval of National Company Law Tribunal. [2nd proviso to section 14(1)].
Every alteration of articles and in case of conversion of a public company into a private company by altering articles, a copy of order of National Company Law Tribunal shall also be filed with the Registrar of Companies in Form no. 2.31 within 15 days of receipt of the order of the Tribunal. Copy of printed articles of association is also required to be filed along with it. [section 14(2) r/w rule 2.30].
Wordings of draft Rule 2.30 suggests that altered articles shall be filed only in case of conversion of a public company into a private company by altering articles.
Any alteration of the articles once registered with the Registrar of Companies shall be valid as if it were originally contained in the articles. [section 14(3)].
Penalty: 
Since no specific penalty or punishment is prescribed for contravention of section 14, 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.

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, where it decides that no prosecution be launched. 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.
Only company may apply for compounding for violation of section 14. Since directors and officers of company who is in default are punishable with fine or imprisonment or both, they cannot avail compounding mechanism to settle the contravention.

Summary of forms and records:
Altered articles with copy of order of National Company Law Tribunal together with printed copy of altered articles of association shall be filed in Form no. 2.31 within 15 days of receipt of the order of the Tribunal. [rule 2.30].
A copy of special resolution together with the explanatory statement under section 102, if any, shall be filed with the Registrar in Form No. 7.14 [section 117 r/w rule 7.22].
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Companies Act 2013

Section 10: Effect of Memorandum and Articles.

Chapter II
INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO

Provisions of the Companies Act, 2013:
Section 10: Effect of Memorandum and Articles.
[Section 10 is not yet brought to force]

Corresponding provisions of the Companies Act, 1956:
Section 36

Corresponding provisions of the English Companies Act, 2006
Section 33

Applicability:
This provision is applicable to all companies.

This section provides that the provisions contained in the memorandum and articles of association of a company shall be binding on the company and each of the members thereof. It is to be treated in the same manner as if a contract signed by the company and each of its members.
Thus, contents of articles of association shall be observed by members and the company, as if an agreement signed by and between them.

Articles of association does not constitute an agreement between the company and outsiders or third parties.

However, while dealing with or entering into contract with a company, outsiders or third parties shall consider provisions of memorandum and articles of association of the company, as there may be provisions in it relating to the subject matter for which it deals with the company. For example, Articles may provide that where a dispute arises between the company and contractee party, such dispute shall be referred to arbitration. [Ganges Sugar Works Ltd. v. Nuri Miah 28 Ind Cas 384 All; AIR 1915 All 234].  In Kotla Venkataswamy Mukherjee v. Rammurthy,

It further provides that all moneys payable by members to the company shall be debt due from him to the company.

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Companies Act 2013

Section 7: Incorporation of a Company

Chapter II
INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO

Provisions of the Companies Act, 2013:
Section 7: Incorporation of a Company
Rule 2.9 to 2.15 of the Companies Rules, 2013
[Section 7 is not yet brought to force and the Companies Rules, 2013 is not yet brought to force]

Corresponding provisions of the Companies Act, 1956:
Sections 33, 34, 35

Corresponding provisions of the English Companies Act, 2006:
Sections 9 to 15

Applicability:
This provision is applicable to all companies.

Filing documents for incorporation of company [Section 7(1)]:
For registration of a company, following documents and information shall be filed with the Registrar of Companies within whose jurisdiction the registered office of the company is proposed to be situated. Rule 2.9 requires such documents to be filed in Form no. 2.9:

(i) Memorandum and Articles of association of the Company [Section 7(1)(a)]

A. Subscribers:
Memorandum of Association (‘MOA’) and Articles of Association (‘AOA’) shall be duly signed by all its subscribers. Rule 2.10 states that ‘each subscriber’ shall add his name, address, description, occupation, if any, in the presence of at least one witness.

Where the subscriber is a Limited Liability Partnership, the memorandum and articles of association shall be signed by a partner of the Limited Liability Partnership, duly authorized by a resolution approved by all the partners of the Limited Liability Partnership. The partner so authorized shall not, at the same time, be a subscriber to the memorandum and articles of Association in his individual capacity or any other capacity.

Where the subscriber is a body corporate, the memorandum and articles of association shall be signed by director, officer or employee of the body corporate duly authorized in this behalf by a resolution of the board of directors of the body corporate. However such director, officer or employee so authorized shall not, at the same time, be a subscriber to the memorandum and articles of Association in his individual capacity or any other capacity.

Also, the following particulars shall be filed with the Registrar:-
(a) CIN of the Company / Registration No of the body corporate, if any
(b) GLN, if any
(c) Name of the body corporate
(d) Registered office address/ principal place of business
(e) E-mail Id
(f) In case of company, certified true copy of the board resolution specifying inter alia the authorization to subscribe to the memorandum of association of the proposed company and to make investment in the proposed company, the number of shares proposed to be subscribed by the body corporate, and the name, address and designation of the person authorized to subscribe to the Memorandum.
(g) In case of LLP, certified true copy of the resolution agreed to by all the partners specifying inter alia the authorization to subscribe to the memorandum of association of the proposed company and to make investment in the proposed company, the number of shares proposed to be subscribed in the body corporate, and the name of the partner authorized to subscribe to the Memorandum.
(h) In case of foreign bodies corporate, following additional details to be submitted:-

  • copy of certificate of incorporation of the foreign body corporate; and
  • registered office address along with proof.

Where the subscriber is a foreign national residing outside India:
(a) If, a foreign national is on a visit in India and intend to incorporate a company (while in India), in such case the incorporation shall be allowed if, he/she is having a valid Business Visa.
However, in case of a foreign national visited in India is a Person is of Indian Origin or Overseas Citizen of India, requirement of business Visa will not be applicable.

(b) Where the subscriber is a foreign national residing outside India in a country in any part of the Commonwealth, his signatures and address on the memorandum and articles of association and proof of identity shall be notarized by a Notary (Public) in that part of the Commonwealth.

The Commonwealth is a voluntary association of 53 independent countries. More about it can be accessed from http://thecommonwealth.org/about-us.

(c) Where the subscriber is a foreign national residing outside India in a country which is a party to the Hague Apostille Convention, 1961, his signatures and address on the memorandum and articles of association and proof of identity shall be notarized before the Notary (Public) of the country of his origin and be duly apostillised in accordance with the said Hague Convention. More details can be accessed from http://www.hcch.net/index_en.php.

(d) Where the subscriber is a foreign national in a country outside the Commonwealth and which is not a party to the Hague Apostille Convention, 1961, his signatures and address on the memorandum and articles of association and proof of identity, shall be notarized before the Notary (Public) of such country and the certificate of the Notary (Public) shall be authenticated by a Diplomatic or Consular Officer empowered in this behalf under section 3 of the Diplomatic and Consular Officers (Oaths and Fees) Act, 1948 (40 of 1948) or, where there is no such officer by any of the officials mentioned in section 6 of the Commissioners of Oaths Act, 1889 (52 and 53 Vic.C.10), or in any Act amending the same.

(i) Where subscriber is an illiterate person, he can affix his thumb impression or mark.

In such case, the person writing for him shall
(a) read and explain the contents of the memorandum and articles of association to the subscriber and make an endorsement to that effect on the memorandum and articles of association;
(b) also write against the name of the subscriber, the number of shares taken by him;
(c) place the name of the subscriber against or below the thumb impression or mark; and
(d) authenticate it by his own signature.

B. Witness:
The witness shall attest the signatures of subscribers and shall likewise sign and add his name, address, description and occupation, if any.

The witness shall also state (rather confirm) that subscriber/s has/have subscribed and signed in his presence and also state the date and place.

Thus, witness can be only such person in whose presence subscriber has subscribed and signed Memorandum.

Witness is also required, under Rule 2.10 to verify ID of subscriber and satisfy himself that identification particulars filled by subscribers in Memorandum matches with their particulars as stated in Identity Proof of subscribers.

Can witness be a minor?
Section 118 of the Evidence Act, 1872 envisages that all persons shall be competent to testify, unless the Court considers that they are prevented from understanding the questions put to them or from giving rational answers to these questions, because of tender years, extreme old age, disease- whether of mind, or any other cause of the same kind. A child of tender age can be allowed to testify if he has intellectual capacity to understand questions and give rational answers thereto. [Ratansinh Dalsukhbhai Nayak vs State Of Gujarat AIR 2004 SC 23 ].

(ii) Declaration by professionals [Section 7(1)(b)]

Declaration in form no. 2.10 is required from:
(a) by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of the company; and
(b) by a person named in the articles as a director, manager or secretary of the company.

It may be noted that a declaration attracts stamp duty. Rate of stamp duty varies from State to State within India.

(iii) Affidavit from subscribers and first directors [Section 7(1)(c)]

Rule 2.12 states that an affidavit from each of the subscribers to the memorandum and from persons named as the first directors, if any, in the articles that he is not convicted of any offence in connection with the promotion, formation or management of any company, or that he has not been found guilty of any fraud or misfeasance or of any breach of duty to any company under this Act or any previous company law during the preceding five years and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete.

It may be noted that an affidavit attracts stamp duty. Rate of stamp duty varies from State to State within India.

(iv) The address for correspondence till its registered office is established [Section 7(1)(d)]

Every company is required to have a registered office. However, for convenience it is provided that at time of incorporation of a company, temporarily it may have a place as a correspondence office.
Section 12 of the Companies Act, 2013 requires every company to have a registered office within 15 days of its incorporation and its particulars shall be filed with the Registrar of Companies within 30 days of its incorporation.

(v) Particulars of every subscriber to be filed with the Registrar at the time of incorporation. [Section 7(1)(e)].

Rule 2.13 states that the particulars of name, including surname or family name, residential address, nationality and other particulars such as father name or spouse name, date and place of birth, occupation, Email id, phone, fax and mobile number of every subscriber to the memorandum along with proof of identity is required to be submitted.
Each subscriber (including first directors of a company) to the MOA and AOA shall furnish the specimen signature in Form no. 2.32 duly verified by their respective banker at the time of incorporation.

(vi) Particulars of first directors of the company and their consent to act as such. [Section 7(1)(f) and (g)]

Rule 2.14 states that the particulars of the persons mentioned in the articles as the first directors of the company, their names, including surnames or family names, the Director Identification Number, residential address, nationality and such other particulars including proof of identity and his interest in other firms or bodies corporate along with his consent to act as director of the company is required to be filed.

Certificate of Incorporation – Section 7(2):
The Registrar of Companies shall register all the above mentioned documents and information and issue a certificate of incorporation stating that the proposed company is incorporated under this Act. Rule 2.15 prescribes format of Certificate of Incorporation to be in Form no. 2.13.

Corporate Identity Number (CIN) – Section 7(3):
The Registrar of Companies shall allot a Corporate Identity Number (CIN) to the company and which shall be also included in the certificate of incorporation.

Preserving incorporation documents till company is dissolved – Section 7(4)
It is the responsibility of the company to maintain and preserve at its registered office copies of all the documents originally filed (at the time of incorporation) until the dissolution of the company.

Penalty – Section 7(5), (6) and (7):
In any document filed with the Registrar of Companies for incorporation of a company, if any information or representation is false or incorrect or material fact or information is suppressed by any person and he is aware of such information, he shall be liable under section 447. [Section 7(5)].

In addition to above, if after incorporation of a company it is proved that the company got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information, in any document or declaration or by any fraudulent action then promoters, first directors and persons making declaration [under section 7(1)(b)] shall be liable under section 447. [Section 7(6)].

The offence under sub-sections (5) and (6) of section 7 is made cognizable offence and person accused of such offence shall not be released on bail or on his own bond without giving opportunity to Public Prosecutor to oppose the application to release the person on bail or personal bond. [Section 212(6)].

Where a company got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information, in any document or declaration or by any fraudulent action then, in addition to action under sub-section (6) of section 7, the Tribunal may, on application made to it under sub-section (7) of section 7, on being satisfied that the situation so warrants:

  1. pass such orders, as it may think, for regulation of the management of the Company including changes, if any, in its memorandum and articles, in public interest or in the interest of the company and its members and creditors; or
  2. direct that liability of the members shall be unlimited; or
  3. direct removal of the name of the company from the register of companies; or
  4. pass an order for the winding up of the company; or
  5. pass such orders as it may deem fit.

Summary of forms and records:
Form No. 2.9 – An Application for incorporation of companies.
Form No. 2.10 for a declaration to be given by an advocate, a Chartered Accountant, Cost accountant or Company Secretary in practice.
Form 2.11 for an affidavit shall be submitted by each subscribers and first directors.
Form No. 2.12 for the particulars of each person mentioned in the articles as first director of the company and his interest in other firms or bodies corporate along with his consent to act as director of the company shall be filed in Form No. 2.13 for Certificate of Incorporation.

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Companies Act 2013

Section 5 Articles

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.

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