ENTRENCHMENT

Though the term entrenchment has not been defined in the act[i], the dictionary meaning provides that it means adding some extra safeguard. It is to make a clause so firm that changing or amending it becomes difficult. Therefore, one can say that the clause of entrenchment is added for checks and safeguard, to make certain amendments difficult.

The entrenchment provision in the articles is to protect the interest of minority shareholders by ensuring that amendments of such provisions in the AOA shall be possible after obtaining the approval of all the shareholders.

An entrenchment clause is one that makes certain amendments either impossible or difficult. These provisions are more restrictive than those whose execution or alteration cannot be complied with only by passing a special resolution. The provision for such entrenchment clause shall only be made:

By private company

During the formation of a company or by an amendment agreed by all members.

In a public company

Either during the formation of a company or amending the articles by passing a special resolution.

Family-owned companies, joint venture companies, close-held companies usually include the entrenchment provision in their article of association.

DISCUSSION THROUGH CASE LAW-

V B RANGARAJ V. V B GOPALAKRISHNAN[ii]

The issue, in this case, was shareholders entering into an agreement that is inconsistent and contrary to the article of association.

The apex court heavily relied on a precedent S.P. Jain v. Kalinga tubes ltd[iii]. The court held that the agreement will not be binding on the public company or the private company, as the agreement was members and non-members of the company and few terms were not in the article of association. Hence, the agreement will not be enforceable and the company is not bound by it.

The apex court in the case of Rangaraj held that the agreement between the shareholders is private and therefore, it will be not binding on the company. However, if such a clause was put in the article of association then it would have been binding on the company. So, to ensure the enforceability of the shareholder agreement, it is necessary to include the same.

PROVISION OF ENTRENCHMENT IN COMPANIES ACT, 2013

Section 5 (3), (4), and (5) provides for the provisions about the entrenchment clause. article of association can have entrenchment provisions to the effect which allows articles to be altered only if the conditions more restrictive than what is in the special resolution, met or complied with.

The provisions say that any entrenchment provision that is being made during the time of incorporation of the company or when the article of association is being amended. another provision says that the amendment of the entrenchment of a private company will only come into the effect if it is agreed upon by all the members. and, the amendment of the entrenchment for the public company will only come into effect if it is passed through the special resolution. when the provisions for entrenchment are provided in the article of association then the company must give notice to ROC (Registrar of Companies).

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.