12.4.6 (Limitations on Power to alter Articles)

(i) The alteration must not exceed the powers given by the memorandum or conflict with the other provisions of the memorandum.

(ii) The alteration must not be inconsistent with any provision of the Companies Act or any other statute. For example, no company can purchase its own shares (s.77) and if the articles of a company are altered so as to have the power to purchase its own shares, then such power will be void.

(iii) The altered articles must not include anything which is illegal, or opposed to public policy or unlawful.

(iv) The alteration must be bona fde for the benefit of the company as a whole. The alteration will not, however, be bad merely because it inflicts hardship on an individual shareholder.

 Examples. (i) A company had a lien on all shares "not fully paid" for calls due to the company. There was only one shareholder A, who owned fully paid-up shares. He also held partly-paid shares in the company. A died. The company altered its articles striking out the words "not fully paid up" and thus gave itself a lien on all shares - whether fully paid up or not. The legal representative of A challenged the alteration on the ground that the alteration had retrospective effect.

Held: The alteration was good, as it was done bona fide for the benefit of the company as a whole, even though the alteration had a retrospective effect [AIIen v. GoId Reefs of West Africa Ltd. (1900) 1 Ch. 656]
.

(ii) By an alteration in the articles, a company was empowered to expropriate shares held by any member who was in business in competition with the company. At the time of alteration, there was only one member doing business in competition with the company. He challenged the alteration.

HeId: The alteration was valid, although only one member was at that time within the ambit of alteration, as the alteration was bona fide and for the benefit of the company [Sidebottom v. Kershaw Leese & Co, (1920) Ch. 154 (C.A.)].

(v) The alteration must not constitute a fraud on the minority by the majority. If the alteration is not for the benefit of the company as a whole, but for majority of the shareholders, then the alteration would be bad. In other words, an alteration to the articles must not discriminate between the majority shareholders and the minority shareholders so as to give the former an advantage of which the latter have been
deprived.

  Example: In Brown v. British Abrasive Wheel Co. (1919) 1 Ch. 290, the majority which held 98 per cent of the shares passed a special resolution that upon the request of holders of 9/10^th of the issues shares, a shareholder shall be bound to sell and transfer his shares to the nominee of such holders at a fair value. The alteration was held to be invalid since it amounted to an oppression of minority.

(vi) There cannot be alteration of the articles so as to compel the existing members to take or subscribe for more shares or in any way to contribute to the share capital, unless they given their consent in writing (s.38).

(vii) An alteration of articles to effect a conversion of a public company into a private company cannot be made without the approval of the Central Government (s.31).

(viii) A company cannot justify breach of contract with third parties or avoid a contractual liability by altering articles.

In British Murac Syndicate Ltd. v. Alperton Rubber Co. (1915)2 Ch. 186, an agreement provided that so long as the plaintiff syndicate should hold 5000 shares in the defendant company, it should have the right of nominating two directors of Board of the defendant company. A provision to the same effect was contained in article 88 of the defendant company’s Articles. The plaintiff syndicate nominated two directors whom the defendant company refused to accept. An attempt was then mad to cancel article 88, but an injunction was granted to restrain it. The learned judge observed that “The contract clearly involved as one its terms the article 88 was not be altered”.

However, where the damage is capable of being measured in terms of money, the company may alter its articles subject to being answerable in damages for breach.

(ix) The amended regulation in the Articles of Association cannot operate retrospectively, but only from the date of amendment [pyare Lal Sharma v. Managing Director, J & K Industries Ltd.].