Entrenchment of Article of Association
/ Others

Entrenchment of Article of Association

The term entrenchment has not been explained in the Companies Act, 2013. The meaning is as follows:

  • To apply additional legal safeguards;
  • To place (someone or something) in a firm position that cannot easily be changed;
  • Basic law or constitution is a provision that makes definite amendments either more difficult or impossible.

Therefore, ‘entrenchment’ means the addition of provision which makes certain amendments either harder or cumbersome by the procedure, checks, and safeguards.

When entrenchment of Article of Association is required?
The entrenchment of Article of Association is required just in case where we would like to specifically enforce the applicability of specific actions, which can’t be overridden until and unless supported by a supermajority or a referendum or so as to guard the interest of minority shareholders, where the agreement of minority party is required to override an equivalent.

The term entrenchment has not been defined within the Companies Act, 2013. However, the meaning is as follows:

  • The method by which ideas become fixed and can’t be changed.
  • Basic law or constitution may be a provision that makes certain amendments either harder or impossible.

Therefore, it is often concluded that the entrenchment of provisions makes the present level of requirements more stringent/challenging to follow for the coming period.

Which companies will submit entrenchment provisions in their AoA
Following companies will submit to include entrenchment provisions in the AoA:

  • Closely-held companies intend to restrict the transfer of shares and maintain the status of “Closely-held”.
  • Family-owned companies intend to keep the same family’s control and management.
  • Companies in which there is a strategic investment by private equity firm/ angel investor which expect to have more control over the management and control (shareholding, investments, borrowings, authority, etc.) over the company;
  • Joint Venture (‘JV’) company which may include restrictive provisions on the other JV party (e.g. shareholding, investments, borrowings, authority, etc.) or may consist of provisions which may need unified consent of both JV partners (e.g. increase in capital, granting of shares, assembling of general meeting, etc.)

Provisions of articles of association
Provisions are enclosed under subsection (3),(4), and (5) of Section 5 of the Companies Act, 2013 peruse with Rule 10 of the Companies (Incorporation) Rules, 2014, which is a new provision instigated under the Act and the same are condensed as follows: 

Article of Association restrains provisions for entrenchment for giving an effect that the specified provisions of AOA may be altered if conditions or procedures as are more restrictive are met or complied with. Provisions shall only be made either at the time of incorporation of a company or at the time of amending AOA

Forms need to be filled
Following forms need to be filed:

  • Spice 32
  • MGT-14
  1. In the case of “New Company.”
    • For PART I Company (i.e. company sanctioned to register under this Act under Section 366) and company with more than seven subscribers identify entrenched articles in Form no. INC 7 during Incorporation.
    • All other companies certify entrenched articles in Form INC 32 (Spice) or INC 2 or INC 7 as the case may be throughout incorporation.
  1. In the case of “Existing Company.”
    • “All the company members shall entrench private Company” AOA provisions by passing Board Resolution.
    • In the case of “Public Company, “AOA provisions shall be entrenched by all the company members by passing Special Resolution. Rule 10 of the Companies (Incorporation) Rules, 2014: In case of an existing company, e-form MGT-14 shall be filed with the registrar within 30 days along with:
      • Resolution consented by all the members/ Special resolution
      • Notice & explanatory statement.
      • Copy of altered AOA

An Entrenchment clause of a basic law or constitution is a provision that makes certain amendments more difficult or impossible. The article may contain entrenchment provisions. It is a new concept under the Indian companies act, as there was no such concept under the old Act.

We assist our clients in dealing with compliances related to company incorporation, business setup, ROC filings, winding up of the company etc. If you have any questions or wish to know more about AoA entrenchment, kindly contact us.