Section 5 of the Companies Act: Articles of Association (AOA) By CS Divyanshu Bansal


Applicability:

This section is applicable to all companies.

Section 5(1) and (2): Contents in Articles of Association

Overview: 

The articles of association are drawn for internal administration of the Company. The articles of the company, besides containing the regulations of the company shall also include such additional matters as may be necessary for its management.

Under Companies Act, 1956, it was not mandatory for a public company limited by shares to have its articles, as it could adopt the entire Table A of its articles; however under Companies Act, 2013, it is mandatory for every company to have its own articles.

Section 5(3): Entrenchment provisions:

Under the Companies Act, 2013 a new provision with regard to the entrenchment has been added in the articles, which provides that certain specified provisions of articles can be altered if more restrictive conditions or provisions are complied with, as compared to those applicable in case of special resolution.

Entering such provision in the articles is a way to protect the interest of minority shareholders, where consent of all the members is required to amend the provisions in the articles, instead of passing a special resolution.

Section 5(4) and (5): Alteration of Entrenchment Provisions:

Such provisions shall be made either at the time of formation of the company, or can be altered;

  1. In Private Company: by consent of all the members
  2. In Public Company: by special resolution

Intimation to ROC for entrenchment provisions

  1. Where the entrenchment provisions are made at the time of incorporation: The Company shall give notice to the Registrar for entrenchment provisions in Form INC-2(One person company) or Form INC-7(other companies), as the case may be.
  2. Where the entrenchment provisions are made in an existing company:The Company shall file with the registrar Form MGT-14 within 30 days from the date of entrenchment of the articles.

Such provisions may even be entered in the articles of Joint Venture companies.

Section 5(6) and (7): Model Articles:

The articles shall contain such matters, as prescribed in Tables, F,G,H,I & J of Schedule I which may be adopted by the company as may be applicable to the case of the company, either in totally or otherwise.

Though the format of articles shall be as per applicable table of Schedule I, however the company has a freedom to adopt all or any of the regulations from applicable model articles.

Formats

The Articles of the company shall be in the form provided in Schedule I, i.e.

Table F: For a company limited by shares;
Table G: For a company limited by guarantee and having a share capital;
Table H: For a company limited by guarantee and not having a share capital;
Table I:  For a unlimited company and having share capital;
Table J: For a unlimited company and not having a share capital;

Section 5(8) and (9): Applicability of model articles:

For companies incorporated after the commencement of the Companies Act, 2013, by default the provisions of relevant model articles, to the extent applicable, shall apply; i.e.

In case of companies registered after the commencement of the Companies Act, 2013, where the registered articles do not exclude or modify the regulations contained in the model articles, its registered articles shall be deemed to be the model articles of the company, to the extent as if they were contained in the duly registered articles of the company.

In case of companies registered under any previous company law, the provisions of its articles shall apply up to the time it amends articles after commencement of the Companies Act, 2013. Upon amendment of articles (made after commencement of the Companies Act, 2013), provisions of relevant model table becomes applicable automatically. 

Whether every company is required to alter its Articles of Association as per the new format under the Companies Act, 2013? 

Ans. Section 5(6) of Companies Act, 2013 provides that the articles of a company shall be in respective form as specified in Table, F, G, H, I and J in Schedule I, as may be applicable to such company. 

Section 5(9) provides that nothing in this section shall apply to the articles of a company registered under any previous law unless amended under the Act. 

It is not necessary but suggested that whenever a company amends its articles, it should ensure that subsequent to the amendment, the articles are as per the format specified under the Companies Act, 2013. 

Since certain provisions of Companies Act, 2013 require specific clauses in the Articles to carry out operations of any organization; such as for issuance of bonus shares, it is advisable that Articles should be altered in line with the new requirements as various provisions themselves require specific clauses to be incorporated in the Articles. 

Penalty:

No specific penalty or punishment is prescribed for contravention of Section 5, hence general penalty prescribed under section 450 of the Act is applicable. Accordingly, the company as well as the officer who is in default or such other person, shall be punishable with a fine up to Rs.10,000/-. However where the offence is a continuing one, the fine may extend to Rs.1,000/- for every day after the first during which contravention continues.

It may also be noted that for second or subsequent contravention of the provision of this section, if made within a period of three years, then the company as well as its officer who is in default shall be punishable under section 451 with twice the amount of fine in addition to any imprisonment provided for the offence.

Compounding:

It may be noted that under section 441, where offence is punishable with fine only, the same may be compounded by the National Company Law Tribunal or where the fine does not exceed Rs.5,00,000/- by the Regional Director or any other officer authorised by the Central Government.

Adjudication:

Under Section 454, the officer appointed by the Central Government, not below the rank of Registrar of Companies, may adjudicate and impose monetary penalty for violation of this section. However, before imposing penalty, an opportunity of hearing shall be given to the Company and its officers.

Author
CS Divyanshu Bansal
Email ID: divyanshubansal401@gmail.com
Ph: +91-9958381905

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