ALTERATION OF ARTICLES BY
SPECIAL RESOLUTION
Company amending
articles so as to empower its board to expel member in certain circumstances -
Amendment whether valid
Recently a case has come to the notice of the Central
Government where a public limited company has amended its articles of
association by including a clause by a special resolution passed at the
extraordinary general meeting of the company empowering the board of directors
of the company to expel a member in a case where the board is prima facie of
the view that activities or conduct of the member is detrimental to the
interests of the company or that by reason of his continuance as a member, it
would be prejudicial to the future of the company. The question whether such an amendment of the articles of
association of a company is valid has been under consideration of the
Department. After considering the
scheme of the companies Act, the Department is of the view that amendment of
articles of association of a company providing for expulsion of a member by the
management is opposed to the fundamental principles of the company
jurisprudence and is ultra vires of the company. Such a provision is repugnant to the various provisions in the
Companies Act pertaining to the rights of a member in a public limited company
and cuts across the scheme of the Act as it has the effect of rendering
nugatory the very powers of the Central Government under section 111 and the
powers of the Courts under sections 107 and 395 and is, therefore, void by the
operation of the provisions of section 9.
The articles of association is a contract between the company and its
members setting out the rights of members inter se under the contract and
expulsion of a member is not only as violation of this contract but it is also
opposed to the principles of natural justice.
Moreover, under section 23 of the Indian Contract Act, any agreement
which is contrary to any law or opposed to public policy would be deemed to be
unlawful and void.
The Supreme Court in the case of
Bajaj Auto Ltd. v. N.K.Firodia [1971] 41 Comp. Cas. 1 has laid down the law as to the conditions on the basis of
which directors could refuse a person to be admitted as a member of the
company. The principles laid down by
the Supreme Court in this case, even though pertain to the refusal of a
company to the admission of a person as
a member of the company, are applicable even with greater force to a case of
expulsion of an existing member. As,
under article 141 of the Constitution,
the law declared by the Supreme Court is binding on all Courts within the
territory of India, any provision pertaining to the expulsion of a member by
the management of a company which is
against the law as laid down by the
Supreme Court will be illegal and ultra vires. In the light of the aforesaid position it is clarified that
assumption by the board of directors of a company of any power to expel a
member by amending its articles of association is illegal and void.