Page 162 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Unit 8: Formation of Company

of a company are altered so as to have the power to purchase its own shares, then such Notes
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 fide 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.
Example:
(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 [Allen v. Gold 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.
Held: 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 9/10th 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.

(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.].

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