Alteration of ‑ Company amending articles so as to empower its board to expel member in certain circumstances - Companies Law - Circular : No. 32/75,

Circular : No. 32/75, dated 1-11-1975. Subject:- Alteration of ‑ Company amending articles so as to empower its board to expel member in certain circumstances 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 a 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 [1974] 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.