SCHOOL OF LAW, MUMBAI

FINAL DRAFT

On

Hutton Vs. Scarborough Cliff Hotel Co. Lts. (1865) 2 Drew

& Sm 521

IN COMPLIANCE TO THE PARTAIL FULFILLMENT OF THE MARKING

SCHEME, FOR TRIMESTER VIII OF 2016, IN THE SUBJECT OF
COMPANY LAW I.

SUBMITTED TO: - SUBMITTED

BY:-
MR. RAHUL NIKAM ANUSHA ANAND
ASSISTANT PROFESSOR A070
SVKMs NMIMS (SCHOOL OF LAW) B.B.A. L.LB (Hons.)
DATE OF SUBMISSION: 1st December 2016

TABLE OF CONTENTS

1
Sr. Particulars Page
No. No.

1. Abbreviations
2. Table of Cases

3. Table of Statutes

4. CHAPTER-I
INTRODUCTION
1.1 Statement of Problem
1.2 Objective of the Study
1.3 Review of Literature
1.4 Methodology
1.4.1 Research Objective
1.4.2 Hypothesis
1.4.3 Data Sources Used
5. CHAPTER-II
CRITICAL ANALYSIS

6. CHAPTER-III
CONCLUSION
3.1 Introduction

3.2 Provisions under the Law

3.3 Steps For Alteration of AOA:

3.4 Effect of Articles Of Association:

7. Bibliography

ABBREVIATIONS

Act, 1862 - The Companies Act, 1862, UK

AOA Article of Association

2
 Art Article
i.e that is
l Pounds
MOA- Memorandum of Association
SEC Section
UK United Kingdom

TABLE OF CASES

Andrews v Gas Meter Company Co [1897] 1 Ch 361

Hutton v Scarborough Cliff Hotel Co Ltd. (1865) 2 Drew &Sm 521
Irrigation Development Employees Association vs Government of Andhra
Pradesh [2005] 55 SCL 459 (AP).

TABLE OF STATUTES

The Companies Act, 1862, UK

The Companies Act, 1956, India
The Companies Act, 2013, India

Chapter 1
INTRODUCTION

The above-mentioned case is an 1865 UK case, which apparently deals with

Alteration against Memorandum. According to Section 50 of the Companies

3
 Act, 1862 1 , a company in a general meeting by special resolution, cannot
modify the regulations of the company, as the powers given under the section
are limited to altering, the regulations relating to the management of the
company, but not to altering its constitution.

Therefore, where a general meeting altered the articles of association by

inserting power to issues new shares with preferential dividend (where no such
power existed before):

It was held that such an alteration was an alteration in the constitution of the
company; as the intention of all parties to the original contract being that all
shareholders should stand pari passu2 with regard to the receipt of dividends,
and the Court granted an injunction restraining the issues of preference shares.

1.1 Statement of Problem

In the above case the courts held any alteration of articles in the memorandum,
which was not expressly mentioned priorly, cannot be inferred and acted upon.
The decision has come to be overruled by the 1884 judgment in the case of
Andrews v Gas Meter Company [1897] 1 Ch 361 which read as the power of
alteration of articles is subject to only what is clearly prohibited by the
memorandum, expressly or impliedly.

In the light of the above cases would it be right to say that if any change is
brought about in the articles of association (not prohibited in the memorandum)
would stand valid immaterial to the fact that it alters the composition of the
company?

1.2 Objective Of The Study

The objective, which the researcher had in mind while framing the
Research

1 Companies Act, 1862 was an act of the Parliament of the United Kingdom
regulating UK Company law

2 Side by side

4
 Work was to learn the provisions of the UK and Indian laws in regards to
Alteration of Articles and how have they evolved over the years.
The researcher also wanted to learn about the reasons that the case stands to
be overruled in the light of Andrews v Gas Meter Company 1884
judgment.

1.3 Review of Literature

In an article by Charles Wildand Stuart Weinstein:

The Authors in their article write to discuss the question of whether
certain preference shares issued by a limited company as long ago as
1865 were validly issued or not. With reference to Andrews v Gas Meter
Company they state that the companys original capital as stated in its
memorandum of association was 60,000 l, divided into 600 shares of
100 l each, every share being sub-divisible into fifths, with power to
increase the capital as provided by the articles of association. By the
articles of association, which accompanied the memorandum of
association, and was registered with it, power was given to the company
to increase the capital (Art 27), and it was provided that any new capital
should be considered as part of the original capital (Art 28). The issue of
preference shares was not contemplated or authorized. The authors in the
midst of the following case draw the attention of the reader toward the
judgment passed in the year of 1865 in the case of Hutton v Scarborough
Cliff Hotel Co whereby the company desired to acquire additional works,
and passed a special resolution under the powers conferred by the
Companies Act 1862, SEC 50 and 51, altering the articles and
authorizing the issue shares bearing a preferential dividend. The authors
articulate the learned judge who held that the creation of the preference
shares was ultra vires, and that their holders never became and are not
now shareholders in the company, and that they have none of the rights
of shareholders, whether preference or ordinary.

In a commentary by Avtar Singh:

The author under the caption of SEC 15 of the Companies Act 2013,

5
 briefly comments on the case of Hutton v Scarborough Cliff Hotel Co
under the ambit of alteration of articles against the memorandum. He
further says that sometimes a change in the articles seems to apparently
influence the memorandum. He discusses the case further and highlights
the changes brought about by the decision in Andrews v Gas Meter
Company. He strongly supports the decision upheld in the case of
Andrews v Gas Meter Company where the judge opined that if the
issuance of shares was forbidden by the memorandum then the issuance
would stand invalid but since it was not expressed thus the issue of the
shares was considered to be valid.

1.4 Methodology

1.4.1 Research Objective

Being a Company Law student and being under the guidance of the
professor it was really important for the researcher to dissect each section to
understand its working in the corporate world. Thus the researcher aims to
have a better understanding of the critical aspects of the company
documents major being the Memorandum and Articles of Association. The
researcher intends to understand the consequences of Alteration of Articles
and to which extent do they stand valid.

1.4.2 Hypothesis
An alteration in the Articles of Association is an alteration in the constitution
of the company

1.4.3 Data Sources Used

The research conducted is of secondary nature. Various online sites and
articles written by authors have been reviewed and commented upon. The
research is contains certain material facts, which have been derived from
various commentaries written by well-known foreign and Indian authors.

6
 Chapter 2
CRITICAL ANALYSIS

According to Section 2(2) of the Companies Act, 1956 articles means the
articles of association of a company as originally framed or as altered from time
to time in pursuance of any previous companies laws or of the present Act, i.e.
the Act of 1956.

Scarborough Cliff Hotel Company is a joint stock company which wanted to

increase its capital thus decided upon to issue preference shares which was
objected upon and litigated thereby giving rise to the judgment in the following
case which is discussed below in detail.

To begin with facts stated in brief:

- The company was formed under the act of Companies Act 1856, which was
repealed, then in toto3 by the Act of 1862. The constitution of Articles of
Association was retained in the new Act and the Companies then formed i.e
1856 could still be regulated by the previous Act.
- The Articles of Association, which regulated the management and
administration of the Company, could be altered, but subject to the
conditions of the Memorandum of Association.
- In a general meeting, a special resolution was passed, which altered the
Articles of Association by inserting the power to issue new shares with
Preferential dividend whereas no such power existed in the Memorandum.
- The Alteration was held to be inoperative. This is because the issuing of new
shares with preferential dividend was considered to be a variation of the
constitution of the company as fixed by the Memorandum.
- The court inferred from the Memorandums silence that the company
intended equality of status to all the shareholders.

Whilst the injunction granted by the Vice Chancellor restrained the directors to
issue any of the unallotted shares with a preferential dividend, proposed to

3 Completely

7
 increase the capital of the company by the sum of about l 59,000, by issuing new
shares to the amount of l 9 each, with a preferential dividend not exceeding l 7
percent, and for the present at least not to issue the unallotted shares in the
original capital. This they proposed doing under the articles of association which
provided by SEC 17 that upon a report from the board of directors
recommending an increase of the capital, and upon a resolution passed by an
extraordinary general meeting convened for the purpose, the company may from
time to time in the number of shares, and of the amount and value and, subject to
these articles, on conditions as the extraordinary general meeting shall direct.

On 5th July 1865 under the purview of SEC 72 (d) of the Companies Act 1862
which originally read as the directors may, with the sanction of the company in
general meeting, declare a dividend to be paid to the holders of shares in the
original capital of the company in proportion to their shares, was altered by the
following addition and in the event of the company authorizing the raising of
additional capital by creation and issuance of new shares, the directors may pay
a preferential or other dividend on such new shares in accordance with the
condition on which they may have been created or issued. Resolution for the
issuing of such proposed new shares was disputed upon and the plaintiffs filed
for an injunction to restrain the company from doing so.

The Vice Chancellor [Sir R. T. Kindersley] proposed the question to be that

whether the majority of shareholders at a general meeting have a right to alter
the articles of association so as to enable them to deal with shares in the way
proposed.
He framed answers to the same in the following manner:
1) The company being formed under the Act of 1856 though being repealed in
toto4 was subject to the exception of Table B, which dealt with constituting
the Articles of Association. Thus retaining the fact that the company may
still be regulated by it.
2) The Act of 1862 frames the contents of the Memorandum of Association,
which specifically deals with, the amount of capital divided into shares of

4 entirely

8
 certain fixed amounts. The SEC 12 provides that a company may modify
the conditions contained in the memorandum of association as to increase its
capital by the issue of new shares of such amounts as may be considered
expedient, or to consolidate its capital into shares of larger amounts, or to
convert its capital into stock ; but subject to the aforesaid the company can
make no such alteration contained in the memorandum of association. As
the memorandum of association fixes the constitution of the company which
cannot be fettered with.
3) The power to alter the article of association lies under SEC 50 of the Act,
1862 subject to the conditions mentioned in the memorandum of association.
He further said that if such power is given to a general meeting the company
would exceed its powers and end up altering the very constitution and nature
of the company.
4) He concluded his judgment by saying that issuance of new shares with a
preferential dividend is a variation of the constitution of the company. Of
course a company may start with preference shares but in absence of any
contract of that kind, every shareholder has a right to insist that the original
agreement between the parties was that all should stand on an equal footing
so far as relates to the receipt of dividends. Thus the injunction was granted.
The Vice-Chancellor granted an injunction restraining the issue of the
preference shares, and he held distinctly that the resolution altering the
articles was ultra vires. As we understand his judgment, he did so upon the
ground, that the memorandum of association implied that all the shareholders
should stand on an equal footing as to the receipt of dividends, and that this
condition was one which could not be avoided or done away with by a
special resolution altering the articles of association under the powers
conferred by SEC 50 and 51 of the Act, 1862.

This decisions turned upon the principle that although by SEC 8 of the Act,
1862 the memorandum is to state the amount of the original capital and the
number of shares into which it is to be divided, yet in other respects the
rights of the shareholders in respect of their shares and the terms on which
additional capital may be raised are matters to be regulated by the articles of
association rather than by the memorandum, and are, therefore, matters

9
 which (unless provided for by the memorandum), may be determined by the
company from time to time by special resolution pursuant to SEC 50 of the
Act. This view, however, clearly nullifies the doctrine that there is a
condition in the memorandum of association that all shareholders are to be
on equality unless the memorandum itself shows the contrary. There is no
implied condition in a companys article that all of its shares shall be equal
as discussed in the case of Andrews v Gas Meter Co [1897] 1 Ch 361.

Chapter 3
CONCLUSION

To conclude the research the researcher would like to briefly state the
provisions made for AOA and their alteration in India:

3.1 Introduction

Articles means the articles of association of a company as originally framed or

as altered from time to time in pursuance of any previous companies law 1956.
The articles of association are the rules and regulations of a company framed for
the purpose of internal management of its affairs. It deals with the rights of the
member of the company inter-se. The articles are framed for carrying out the
aims and object of the Memorandum of association. The articles of association
of a company are sub -ordinate to and are controlled by the memorandum of
association. Lord Cairns observed in this regard, The memorandum is as it
were the area beyond which the action of the company cannot go; inside that
area the shareholder may make such regulation for their own government as
they think fit.

3.2 Provisions under the Law

In regards to Companies Act 2013,

10
Alteration of Articles:
A company has an inherent power to alter its articles under SEC 31 of
the Companies Act. Any provision making Articles unalterable is regarded as
bad in law. Company cannot deprive itself, by an express provision in the
Articles or independent contract, of the power to alter its articles. However,
there are certain limitations or restrictions on the power of the company to alter
its articles of association.

The right of alteration of articles is subject to the following conditions:

1. The alteration must not be inconsistent with or go beyond the provisions of

the memorandum.

2. The alteration must not provide for anything, which is opposed to the
provisions of the act; for example, articles cannot authorize a company to
purchase its own shares.

3. The alteration of articles must be made in good faith for the benefit of the
company as a whole.

4. The alteration of articles must not constitute a fraud on minority.

5. No member of a company will be bound by any alteration made in the

memorandum or the articles after he become a member which requires him to
take or subscribe for more shares or in any way increases his liability to
contribute to the share capital of or otherwise to pay money to the company,
unless he agrees in writing before or after the alteration is made.

6. No alteration can be made in the articles, which has the effect of converting
the public company into a private company unless such alteration has been
approved by the central government.

7. An alteration in the articles, which causes a breach of contract with an

outsider, will be inoperative.

8. The alteration must not sanction anything, which is illegal.

11
 The altered articles will bind the members in the same way, as did the original
articles. The company must file with the registrar a copy of the special
resolution within one month from the date of its passing.

Any Company who is intending to make any change to the Article of

Association (AOA) of its company, will have to comply with the provisions of
Section- 14 of Companies Act, 2013 and any other applicable provisions of the
Act including fulfillment of condition as may be contained in the Memorandum
of Association (MOA) of Company.

Company can alter its Article by way of addition, deletion, modification,

substitution, or in any other way, only if it wants.

3.3 Steps For Alteration of AOA:

Convene a
Board
Meeting

Hold the
Board
Meteting

Convene a
General
Meeting

Filing and
Fees

Follow up

3.4 Effect of Articles Of Association:

Section 36 provides that the memorandum and articles, when registered, bind
the company and its members to the same extent as if they have been signed by

12
the company and by each member and contain covenants on its and his part to
observe all the provisions of the memorandum and of the articles. Thus the
company is bound to its members, the members are bound to the company and
the members are bound to other members by whatever is contained in these
documents. But in relation to articles, neither a company nor its members are
bound to outsiders.

The articles of association merely govern the internal management, business or

administration of a company. They may be binding between the members
affected by them but do not have the force of statute- Irrigation Development
Employees Association vs Government of Andhra Pradesh [2005]55 SCL 459
(AP).

The discussion on legal effect of memorandum and articles may be made under
the following heads-
1. Members bound to the company
2. Company bound to its members
3. Company and the outsiders

1. Members bound to the company

Each member must observe the provisions of articles and memorandum. For
instance, a company has a right of lien on members shares or to forfeit the
shares on non-payment of calls. Every member is bound by whatever is
contained in the memorandum and articles.
2. Company bound to members
A company is bound to its members by whatever is contained in its articles
and memorandum. The company is bound not only to the members as a
body but also to the individual members as to their individual rights. The
members can restrain the company from spending money on ultra vires
transaction. An individual can make the company fulfill its obligation to him
such as to send the notice for the meetings, to allow him to cast his vote in
the meeting.
3. Company and the outsiders
The articles do not constitute any binding contract as between a company

13
 and an outsider. An outsider cannot take advantage of the articles to found a
claim against the company. This is based on the general rule of law that a
stranger to a contract cannot acquire any rights under the contract. Thus if a
right is conferred by the articles on a person in any capacity other than that
of the member, it cannot be enforced against the company.

BIBLIOGRAPHY

Websites
http://hanumant.com/CompanyLaw-ByAvinash.html
http://taxguru.in/company-law/procedure-alternation-article-
companies-act-2013.html
http://www.preservearticles.com/201104085067/brief-notes-on-on-
articles-of-association-of-a-company-its-content-and-alteration.html
http://www.legalservicesindia.com/article/article/articles-of-
association-&-alteration-of-articles-1050-1.html

Articles and Books

Commentary by Avtar Singh on Company Law Seventh Edition
Page no. 75 -76
Smith and Keenans Company Law by Charles Wildand Stuart
Weinstein, Fifteenth Edition, Chapter 7 page no. 203
Limitations and Powers of a Company to Alter its Article of
Association (Companies Act, 1956) Article by Shekar Kumar

14
 Articles of Association And Alteration of Articles Article
by Kaushik Dhar

15