In the grip of tradition’s shadow: can internal policies or historical practices override express provisions of the AOA?

Article of Association (AoA) is amongst the most fundamental documents of a company containing the bylaws and regulations of how the company will be governed. A recent decision of the Delhi High Court, involving the grant of Green Card to the members of the Delhi Gymkhana has categorically observed that company law principles dictate that a company’s AoA is binding and any deviations or alterations to its provisions must be implemented through formal amendments, not through informal practices or customs.

Whilst no issue could be raised with the aforesaid observations, especially in the context of the facts, where the historical practices or customs being referred to were of a management committee (as opposed to shareholders), the question may be raised as to whether the aforesaid statement could be considered as an infallible principle, capable of no deviation. In other words, is an AoA incapable of being amended through informal processes, where the statute requires a formal resolution? Considering the recent development in English law jurisprudence, especially the recent decision involving Bramber Road management, we note that the English Courts are open to considering such a possibility based on Duomatic principles. By exploring these developments and their relevance to Indian company law, this blog seeks to determine whether a balance can be struck between procedural rigidity and practical flexibility. Ultimately, the discussion underscores the necessity of reconciling tradition and formal governance in the modern corporate context.        

History And Common Law Practice

English law jurisprudence on company law enshrines the Duomatic principle that allows shareholders to informally approve a company’s action through unanimous consent. This means that shareholders can bypass the formality of passing a resolution. The principle is also known as the ratification principle. It is however necessary that all members of the company must agree to the ratified action and such agreement must be positively manifested without any dishonesty or bad faith towards the company or members. This principle is especially relevant for small companies where the same people act as directors and shareholders. It can be used to ratify a decision made by the directors in breach of duty. The Duomatic principle prevents anyone from asserting that the company is not bound by a transaction due to procedural shortcomings. Referring to the observations made in the English case of Bowthorpe Holdings Ltd v. Hills [EWHC 2331 (Ch)] the court further noted that the application of the Duomatic principles is applicable only when bona fide transactions are involved.

Whilst most day-to-day decisions required to operate a company will be made by directors and members of management, some actions do require the approval of the company’s shareholders. When this applies, the UK’s Companies Act, 2006 includes formal processes for obtaining consent usually via a properly called meeting or more commonly through a validly served written resolution.

Very recently the British High Courts have addressed the dispute of overriding the provisions of the articles of the company without formal resolution and procedural inadequacies in Re: Bramber Road Management Limited [(2024) EWHC 51 (Ch)]. The court inter alia explored several legal principles including the ‘Alteration of Articles by Conduct’. The High Court determined that the interpretation of Section 33 of the Companies Act (UK), 2006, provides that even without a formal resolution, a company’s articles may be amended by an agreement, by long-term acquiescence, or by applying the Duomatic principle. The court also observed that the principle of Estoppel also applies where inconsistencies and procedural irregularities may arise by long-term conduct.      

The Indian Company law jurisprudence provides a strict adherence to the provisions of the Companies Act for any amendments or modifications of the Articles or Memorandum of the Company. Modifications and alterations to the articles of the company requires a special resolution in the general meeting to be materialized. The Supreme Court in its decision of Mahima Datla v. Renuka Datla (CA 2776 of 2022) reserved that the Duomatic principle is applicable even in the Indian context which states that strict adherence to a statutory requirement may be dispensed with if the same is consented by all members.

The court’s decision sent a clear message: clubs, associations, and other entities must ensure that any changes to membership policies or other governance practices are formally approved and in line with their AoA. This ruling reinforces the legal principle that a company’s internal policies or historical practices cannot override or replace the explicit terms of its AoA, which is binding unless formally amended. Additionally, the judgment indirectly raised questions about whether informal consent principles, like the Duomatic principle in English law (which allows unanimous shareholder consent to validate informal decisions), could have a place in Indian company law. However, in this case, the court held that the management committee’s informal practices were insufficient to justify deviation from the AoA’s requirements.

Duomatic Principle And It’s Practical Application

In a recent case of Prem Shankar Jha & Anr v. Delhi Gymkhana Club Ltd and Ors (2024), the Delhi High Court examined the legality of certain membership practices at the Delhi Gymkhana Club, specifically regarding the club’s issuance of “Green Card” memberships to dependent family members of existing members. The petitioners challenged this practice, arguing that it violated the express provisions of the Articles of Association (AoA) of the Delhi Gymkhana Club, which did not formally recognize these Green Card memberships or the eligibility criteria applied by the club’s management.

The Controversy

The Delhi Gymkhana Club, one of India’s oldest clubs, had long offered Green Card memberships to family members of existing members, allowing them access to club facilities and membership benefits. However, these practices evolved as an internal policy or tradition rather than through amendments to the AoA. The petitioners argued that the club’s management committee had essentially bypassed formal amendment procedures required by law, creating a membership category that was not aligned with the AoA’s strict provisions. According to the petitioners, this not only violated the company’s governing document but also discriminated against members who were not given the same consideration or opportunity.

The club defended its practices, arguing that the long-standing policy was a customary practice meant to cater to the needs of members’ families and should be accepted as part of the club’s operating norms. The club maintained that these informal customs were in the best interests of the members and that there was no harm in continuing the practice without altering the AoA.

The Decision and Turn of Events

The High Court ruled in favor of the petitioners, stating that any internal practice or tradition, no matter how longstanding, cannot override the formal requirements set forth in the AoA. The court emphasized that the AoA is a binding document that dictates the structure and governance of the company and that any deviations or modifications to its provisions require a formal amendment passed by shareholders, not an informal policy developed by a management committee. The court’s judgment underscored that adherence to the AoA is mandatory and that informal practices cannot alter or substitute formal procedures required for governance changes. It highlighted that a company’s governing body must respect the statutory requirements for amendments, especially when dealing with membership rights and privileges.

Conclusion

While the Delhi High Court’s ruling highlights the importance of formal processes in altering the AoA, it’s worth considering how the Duomatic principle could impact Indian jurisprudence in the future. The court didn’t apply the Duomatic principle here, as the case dealt with committee customs rather than shareholder agreements. But if it had, would the outcome have been different? As noted earlier, the Delhi High Court did not probably have an opportunity to apply the Duomatic principles, as the customs pertained to the discharge of committee functions and not that of shareholders. This remains an interesting area to observe as it could reshape how informal practices and unanimous shareholder agreements are treated in Indian company law.  Nonetheless, it would be interesting to see, if such a principle could have been applied, would the Bench had taken a different stand.

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Author: Debarun Mukherjee, Final Year BBA LLB(Hons), Bharati Vidyapeeth University Pune