Alteration of articles is much easier than memorandum as it can be altered by special resolution. However, there are various limitations under the Companies act to the powers of the shareholders to alter the articles.
Articles subject to the provisions of the Companies Act and memorandum may be altered by a special resolution. In case of conversion of a public company into a private company alteration in the articles would only be effective after approval of the Central government. The powers are now vested with the Registrar of Companies vide Notification.
Alteration of the articles shall not violate provisions of the memorandum. It must be made bonafide for the benefit of the company. All clauses in the articles ultra vires the Memorandum shall be null and void, and the articles shall be held inoperative. Alteration must not contain anything illegal and shall not constitute fraud on the minority. Alteration in the articles increasing the liability of the members can be done only with the consent of the members
The court may even restrain an alteration where it is likely to cause a damage which cannot be adequately compensated in terms of money. Similarly a company cannot, by altering articles justify a breach of contract. Any alteration so made shall be valid as if originally contained in the articles.
Where a special resolution has been passed alerting the articles or an alteration has been approved by the Central Government where required a printed copy of the articles so altered shall be filed by the company with the Registrar of Companies within one month of the date of the passing of special resolution or of receipt of the order of approval as the case may be.
Effects of memorandum and articles
Members and company: The Memorandum and articles shall when registered bind the company and the members thereof to the same extent as if they had been respectively signed by the company and by each member.
Articles form contractual obligations between its members and the company. Memorandum and articles constitute a binding contract. Provisions of articles can be enforced by a suit by the company. Any alteration made bonafide in the interest of the company is valid and binding even though the interest of some members may be affected articles of association is also a public document.
The articles define the duties, rights and powers of the governing body as between themselves and the company at large and the mode and form in which the business of the company is to be carried on and the form in which changes in the internal regulations of the company may vary from time to time be made.
Members cannot violate the articles and the company can enforce the articles by suit against the members. If the company commits any act which is ultra vires the article, then it would be null and void and not binding on the members unless the majority of the members by a special resolution in a general meeting ratify the act. Thus the articles bind the members to the company and the company to its members just as a contract between each member and the company.
Members inter se: Articles also bind the members between themselves. No member can act in his individual capacity. Members between themselves are bound by the articles of the company and have to comply with the rules and regulations framed for the internal management of the company. Articles constitute a contract between the members themselves and the rights can be enforced by or against a member through the company.
Company and outsiders: All outsiders dealing with the company are assumed to read the articles of the company and are bound by the same. The article being a public document is open for inspection. Subsequently an outsider cannot raise a plea that he was ignorant of the articles of the company.
Source: Business Law