Entrenchment of Article of Association under Section 5 of CA 2013

IN WHAT CASE the Article of Association of the Company are required to be entrenched. Please draft a resolution for entrenchment of Articles of Association of the Company.

Entrenchment of Article of Association is required in case where we want to specifically enforce the applicability of certain actions, which cannot be overridden until and unless supported by super majority or a referendum or in order to protect the interest of minority shareholders, where the consent of minority party is required to override the same.

The term entrenchment has not been defined in the Companies Act, 2013. The dictionary meaning is as follows:

(1) The process by which ideas become fixed and cannot be changed.

(2) basic law or constitution is a provision which makes certain amendments either more difficult or impossible

Therefore, it can be concluded that the entrenchment of provisions makes the current level of provisions more stringent/difficult to follow for coming period.

Entrenchment of provisions of Articles of Association is covered under sub section (3),(4) and (5) of Section 5 of the Companies Act, 2013 read with Rule 10 of the Companies (Incorporation) Rules, 2014, which is new provision introduced under the act and the same are summarised as follows:

• Article of Association contains provisions for entrenchment for giving an effect that the specified provisions of AOA may be altered only if conditions or procedures as are more restrictive are met or complied with.
• provisions shall only be made either at the time of incorporation of a company, or at the time of amending AOA
• In case of “New Company”

i. For PART I Company (i.e. Company authorized to register under this Act under Section 366) and Company with more than Seven Subscribers specify entrenched articles in Form NO. INC 7 during Incorporation.

ii. All other companies specify entrenched articles in Form INC 32 (Spice )or INC 2 or INC 7 as the case may be during incorporation

• In case of “Existing Company”

i. “Private Company” AOA provisions shall be entrenched by all the members of Company, by passing Board Resolution.

ii. In case of “Public Company:, AOA provisions shall be entrenched by all the members of Company, by passing Special Resolution.

• Rule 10 of the Companies (Incorporation) Rules, 2014: In case of existing company, e-form MGT-14 shall be filed with Registrar within 30 days along with:

i. Resolution agreed by all the members/ Special resolution

ii. Notice & explanatory statement.

iii. Copy of altered AOA

KEY CONSIDERATIONS:

• There is no restriction in entrenchment of the provisions of Article of Association, however the proposed entrenchment in provisions of AOA should not conflict and override the provisions or which is contrary to or inconsistent with Company’s Articles of Association. The opinion was drawn from the case of “V.B.Rangraj v V.B Gopalakrishnan [1991] 6 CLA 211 (SC)”, where it was held that shareholders among themselves enter into an agreement which stands inconsistent to articles.
• Any additional restriction or private agreement between members and non-members, shall not be binding on directors, members or company until and unless the same has been incorporated under Article of Association of the Company. The opinion was drawn from the case “Shanti Prasad Jain v. Kalinga Tubes Ltd [1965] 35 com cases 35 353 (SC): [1965} 2 SCR 720”, by Supreme Court.
• Any change in the Articles of the company shall conform to the provisions of the Companies Act, 2013/1956, as applicable and the conditions contained in the Memorandum of Association of the company. (Section 14(1)). A Company may alter its Articles in accordance with the above provisions in any of the manners mentioned below:

a) By adoption of new set of articles;

b) By addition/insertion of a new Clause/s;

c) By deletion of a Clause/s;

d) By amendment of a specific Clause/s;

e) By substitution of a specific Clause/s.

• By amendment, Company may insert provisions for entrenchment 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. (Section 5(3))

The Companies Act, 1956 did not have an explicit provision on entrenchment, but the concept of additional legal safeguards, checks and controls was recognized only through judicial decisions. Therefore, it is of utmost importance to ensure compliance with the Act at the time of drafting etc., such as including the entrenchment provisions in the AOA and giving notice to Registrar of Companies.

Only this will make such entrenchment provisions enforceable.

Hope this is article simplifies the conceptuality.

Specimen of resolution for entrenchment of Articles of Association of the Company:

(consider entrenchment in regards to Shareholder agreement)

CERTIFIED TRUE COPY OF SPECIAL RESOLUTION PASSED AT EXTRA ORDINARY GENERAL

MEETING OF THE MEMBERS OF THE “XYZ COMPANY” AT THE REGISTERED OFFICE OF

THE COMPANY ON 10TH JULY 2017, MONDAY AT 11:30 AM.

________________________________________________________________________

ITEM 1: ADOPTING OF ENTRENCHMENT OF PROVISIONS ARTICLE OF ASSOCIATION.

Special Resolution:

To pass with or without modification following resolution as unanimous resolution all the members of the company

The chairman informed the members that pursuant to the execution of shareholder agreement dated______________ and section 5 of the Companies Act, 2013, the Company would require incorporating the provisions of the shareholder agreement in the provisions of Article of Association; hence the following resolution is passed:

“RESOLVED THAT pursuant to Section 5 and other applicable provisions of the Companies Act, 2013, the article of Association (“article”) be and is hereby amended to incorporate the following entrenchment provision.

“Alteration of Article and Memorandum of Association; Any amendment in this entrenched article will require prior written consent of supreme majority, a referendum or consent of minority as the case may be.”

“RESOLVED FURTHER THAT Mr_____________________, Director/ authorized representative (as the case may be), be and is hereby authorized to file the copy of Entrenched Articles of the Company and file such other documents, including necessary forms, as required to be filed with the Registrar of Companies and do all such other acts, deeds, matter or things as may be necessary, appropriate, expedient or desirable to give effect to this resolution”

None of the directors, Key Managerial Personnel or their relatives are interested in the said resolution.

CERTIFIED TRUE COPY

FOR AND ON THE BEHALF OF THE BOARD OF DIRECTORS OF “XYZ COMPANY”

(MR._______________) (MR. ______________)

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Hope my article helps you all for conceptual and procedural clarity. Any other suggestions /opinions are welcomed. Free to contact me for specific formats

(Author-CS Anjali Gorsia, Company Secretary In Practice from Nagpur (Maharashtra) and can be contacted at csanjali.gorsia@gmail.com)