Introduction to Article – Companies Act, 1956
Section 26 of the 1956 Act dealt with Article prescribing regulations and made the article of association compulsory in cases of unlimited companies, companies limited by guarantee and a private company limited by shares. As regards public company limited by shares, there is no obligation to register articles of association. The Article of association prescribe the rules and regulations to be applied in the governance of the company. Section 27 of the 1956 Act covered regulations especially need to be included in the article of unlimited company of the Business Registration.Section 28 of the 1956 Act dealt with company limited by shares and provided that a company limited by shares may adopt all or any of the regulations contained in Table A in Schedule 1 to the 1956 Act.
Section 29 of the 1956 Act dealt with article of association of any company, not being a company limited by shares and provided that the article shall be in such one of the forms in Tables C,D and E in Schedule 1 as may be applicable. The provision was added to section 29 of the 1956 Act which is similar to the Companies (Amendment) Act, 1960. The provision further clarified that a company other than those in the applicable Tables in Schedule 1 as long as they were not inconsistent with the provisions contained in the Forms in any of the applicable Tables.
Companies Act, 2013: Section 5
Section 5 of the 2013 Act notified and has been in effect form 01-04-2014. Section 5 of the 2013 Act is a combination of sections 26 to 29 of the 1956 Act. MCA identifies section 30 of the 1956 Act also as a corresponding provision however there is no specific provision in section 5 of the 2013 Act which corresponds to section 30 of the 1956 Act. Section 5 of the 2013 Act of Business Registration introduces in addition to the provisions in sections 26 to 29 of the 1956 Act, certain new provisions relating to Article.
Every company has to have article under the 2013 Act. In the 1956 Act there was no obligation to register article in case of public companies.
Companies have the choice to adopt with or without modifications the article in Table F,G,H,I, and J of Schedule 1 of the 2013 Act. However, the article shall also contain such matters as may be prescribed in the Rules. Freedom has been given to the companies to include such other matters in the article which, a company considers necessary for its management. Rule 11 of the companies (Incorporation) Rules, 2014 also provides that the model articles as prescribed in Table F,G,H,I and J of the schedule 1 may be adopted by a company as may be applicable to the case of the company registration either in totally or otherwise.
Entrenchment provisions have been introduced in the 2013 Act in respect of the article of association, which implies that it may contain provisions for entrenchment to the effect that specified provisions of the Article can be altered only if conditions that are more restrictive than those applicable in case of special resolutions are met with.
Article of Association : Section 5(1) and (2) of the Companies Act, 2013
Sub-section (1) of section 5 of the 2013 provides that the article of a company shall include regulations for management of affairs of the company. The articles of a company are required to contain matters prescribed in Rule 11 of Companies(Incorporation) Rules, 2014. The provision, however, clarifies that additional matters other than those prescribed in the rules, which are considered in necessary for management, may also be included in the article.
Entrenchment of the Article (Section 5(3) to (5) of the Companies Act, 2013)
This is an important provision. This provision is in line with Section 22 of English Act, 2006. In most of the joint venture companies, on the basis of joint venture agreements, provisions are made in the article for affirmative votes in Board and General Meetings, Compulsory presence for quorum purposes both in the Board and General meetings etc., These articles have been contended to the repugnant to the provisions of the Act in terms of section 9 of the 1956 Act (now section 6 of the 2013 Act). Unfortunately, the provision of retrenchment under section 5 of the 2013 Act relates only to alterations to the article notwithstanding the fact that, judicial decisions support the view that provisions relating to affirmative vote and compulsory quorum are valid in law. Rule 10 of Companies (Incorporation) Rules, 2014 contains provisions relating to notice to the Registrar where entrenchment provisions are included in the article.
Model Article [Section 5(6) to (8) of the Companies Act, 2013]
Section 5(6) of the 2013 Act provides that the article of the company shall be in forms contained in tables F,G,H,I and J in schedule 1 to the 2013 Act as may be applicable to the company. Sub-section 7 of section 5 of the 2013 Act however grants flexibility to the companies to adopt the any or all of the regulations set out in the model articles.
It is prudent to adopt article given in Schedule 1 of the 2013 Act as it is, except where the Act, itself facilitates the companies to have their own article. Section 5(7) of the 2013 Act read with Rule 11 of the Companies (Incorporation) Rules, 2014 facilitates a company to adopt the articles in as given in the model article as applicable to the company either in full or in part. However, pursuant to section 5(8) of the 2013 Act in the case of a company registered after the commencement of the 2013 Act, where the articles registered by the company to extend have not excluded or modified the regulations contained in the model article applicable to them, the regulations of the model article shall be the regulations of the company as if they were contained in the duly registered articles of the company.
Provisions not applicable to companies registered under any previous law [Section 5(9) of the Companies Act, 2013]
Sub-section (9) of the 2013 Act excludes the operation of section 5 in respect of article registered under previous company law unless the articles are amended under the 2013 Act. The impact of section 5(9) of the 2013 Act, is that the companies are at liberty to restrain their existing article and it need not to be altered to fall in line with the new model article given under Schedule 1 to the 2013 Act. However the companies are at liberty to modify their articles in accordance with the 2013 Act to fall in line with the requirements of the 2013 Act.
RELEVANT RULES ISSUED UNDER COMPANIES ACT, 2013
The provisions related to section 5 of the 2013 Act in terms of its implementation are carried in the Companies (Incorporation) Rules, 2014. Rules 10 and 11 of Companies (Incorporation) Rules, 2014 are reproduced below for reference:
Rule 10: Where the articles provides the provisions for entrenchment, the company shall provide notice to the Registrar of such provisions in Form No. INC.7, as the case may be, along with the fee as given in the Companies (Registration offices and fees) Rules, 2014 at the time of incorporation of the company or the time of business registration or in case of existing companies, the same shall be filed in Form No. MGT. 14 within one month from the date of entrenchment of the article, as the case may be, along with the fees as provided in the Companies(Registration offices and fees)Rules, 2014 of the Business Registration.
Rule 11: The model articles as prescribed in Table F,G,H,I, and J of Schedule 1 may be adopted by a company as may be applicable to the case of the company, either in totality or otherwise.