2017 (8) TMI 391 - HC - Companies Law

High Court Upholds Validity of Corporate Document Changes, Emphasizes Statutory Compliance

The High Court upheld the validity of alterations to the Memorandum and Articles of Association, emphasizing statutory compliance. The court allowed the ... Amendment of the Memorandum of Association of the company - increasing authorized capital of the Company - Act to override memorandum, articles etc. - trial court stayed the amendment - Held that:- articles are internal regulations of a Company. It is a subordinate document to the Memorandum of Association. If companies were unable to alter their memorandum or Articles of Association to give effect to their desire changes, the corporate enterprise is likely to get frustrated and the purpose and object for which the company was formed would get defeated. In the present facts of the case, the Board of Directors had amended the Memorandum of Association and Articles of Association by simple majority but in an EOGM of the company called on 23/3/2017 passed a special resolution for amending the Articles of Association. In accordance with the provisions of Section 13(6) of the Act of 2013, after amendment of Memorandum of Association, the company had filed an application with the Registrar of Companies for recording alterations of its memorandum. Accordingly, the Registrar of Companies had registered the same. In accordance with the increased share capital, new shares were distributed. It was argued that shares were even offered to the plaintiff but he declined to accept the same. The Articles of Association were amended in accordance with the provisions of Section 14 of the Act of 2013. We, therefore, find that there was reasonable and statutory compliance of the provisions of law. Alternation to the memorandum allowed. Issues Involved:1. Legality of the alteration in the share capital clause and increase in authorized share capital.2. Validity of the resolutions passed in the Extra Ordinary General Meeting (EOGM).3. Compliance with the Companies Act, 2013 in altering the Memorandum and Articles of Association.4. Issuance of new shares and rights issue.5. Interim orders and their impact on company operations.Issue-wise Detailed Analysis:1. Legality of the alteration in the share capital clause and increase in authorized share capital:The plaintiff, a director of the Company, challenged the alteration of the share capital clause and the increase in authorized share capital from Rs. 5,00,000/- to Rs. 1,00,00,000/- as illegal, null, and void. The High Court noted that the alteration was carried out in accordance with Section 13(1) and Section 61 of the Companies Act, 2013, which allows a company to alter its memorandum by a special resolution. The trial court’s interpretation of these sections was found to be flawed, and the High Court emphasized that the alteration was valid as per the statutory provisions.2. Validity of the resolutions passed in the Extra Ordinary General Meeting (EOGM):The plaintiff contended that the resolutions passed in the EOGM on 27/01/2015 were not valid as they did not secure a 3/4th majority. The High Court observed that the resolution to amend the Memorandum of Association was passed by a simple majority, which is permissible under Section 61 of the Companies Act, 2013. However, the resolution to amend the Articles of Association did not secure the required 3/4th majority. Despite this, the Articles of Association were later amended by a special resolution in an EOGM held on 23/03/2017, thus rectifying the earlier procedural lapse.3. Compliance with the Companies Act, 2013 in altering the Memorandum and Articles of Association:The High Court scrutinized the compliance with Sections 13, 14, 61, and 64 of the Companies Act, 2013. It was found that the Company had followed the necessary procedures for altering the Memorandum of Association and subsequently filed the required documents with the Registrar of Companies. The Registrar had approved and registered the alterations, indicating statutory compliance. The Articles of Association were also amended in accordance with Section 14 of the Act.4. Issuance of new shares and rights issue:The plaintiff argued that the issuance of new shares and the rights issue approved by the board of directors on 09/03/2015 was illegal as it was done without amending the share capital clause in the Articles of Association. The High Court noted that the new shares were offered to all members, including the plaintiff, who declined to accept them. The Registrar of Companies had approved the increase in authorized capital and the issuance of new shares, thereby validating the actions of the board.5. Interim orders and their impact on company operations:The interim orders passed by the trial court had restrained the Company from holding further meetings and making changes to the Articles of Association. The High Court found that these orders were issued at a belated stage, after the substantive steps had already been taken by the Company. The ad-interim relief granted by the trial court was interpreted to have a retrospective effect, which was deemed unreasonable by the High Court. Consequently, the High Court set aside the interim orders, allowing the Company to proceed with its business operations.Conclusion:The High Court allowed the appeal, quashing the trial court’s order dated 03/04/2017, and upheld the validity of the alterations made to the Memorandum and Articles of Association. The court emphasized the importance of statutory compliance and the need for companies to be able to alter their governing documents to facilitate business growth and operations. The request for continuation of the interim order was rejected, enabling the Company to move forward with its planned activities.