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CA Foundation · Business Laws · The Companies Act, 2013

Sunita, a shareholder of Greenfield Ltd, finds that the company's Articles allow the directors to refuse any share transfer. She asks about the legal effect of the Articles. Which statement is correct?

The Articles bind the company and its members as though each member had signed them. They create contractual obligations between the company and members, and between members themselves. They do not directly bind outsiders and need no court approval to take effect.

  1. AArticles bind the company and its members as if signed by each of themCorrect
  2. BArticles bind only the directors and not the members
  3. CArticles bind outsiders dealing with the company as well
  4. DArticles have no binding effect until a court approves them

Explanation

Under the Act, the memorandum and articles, when registered, bind the company and its members to the same extent as if signed by each of them. They do not bind outsiders as a contract, and no court approval is needed. Hence Sunita is bound as a member.

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