Beruflich Dokumente
Kultur Dokumente
1.
Since the shareholder while making the investment in any company must possess the information regarding the business plans of the company, these object clauses serve the purpose of providing the information to the shareholder about the prospects of the company. Further since, the shareholder is putting his money in the company he must know the purpose for which the money has been put to the use2.
2.
The object clause confers a degree of security to the creditors since the object clause defines the limit to which the company can operate the creditor will remain safe if the objects clauses are provided for and the company sticks to those objects3.
3. These objects also serve the public interest by preventing the concentration of the economic power and giving the public a chance of knowing the direction in which the company is heading. However the concept changes totally when it comes to the common law. At Common Law the object clause is supposed to serve the following functions:
As mandated by the Amendment Act, 1965 on the recommendation of Daphtary-Shastry Report.Also mandated by the Department of Company Affairs. See, Company News and Notes,January1,1968. 2 Avtar Singh, Company Law 47(12th ed., Lucknow: Eastern Book Company, 1999). 3 Id.
Palmers Company Law 2120(25th ed., C.M.Schmittoff et.al.eds.,London: Sweet and Maxwell,1992). Id. 6 Id.
delimited by the provisions of the objets clause (if less extensively than was the case before the statutory reforms)7. This section will not discuss other concepts like the construction of the object clauses and other concepts incidental to that since those are outside the scope of the project. Having explained the concept of object clause briefly the next pertinent discussion will be the position of the alteration of the object clause as provided in the law which is precisely what has been discussed in the next section.
Id.
alteration of the those clauses the procedure provided for is different and those clauses alongwith the appointment of the manager or managing director may be altered in the same manner as the Articles of Association.Thus a clear cut distinction has been made in the clauses of memorandum. At one level, are those clauses whose inclusion has been made mandatory by the section 13 or any other section of the Act and they have to follow a different procedure provided in the Act and at the other level, are those clauses in a memorandum which are not provided under section 13 or any other section. For such clauses the procedure provided is in two ways. In one way, if any specific procedure has been provided for their alteration then they have to be altered in that specific way. However, if no such procedure is provided for, such alteration will be at the same level as that of Articles of Association. The philosophy which inherent in such a division is that the memorandum of the company is not left in the straight jacket as provided at the beginning of the companys constitutional document but yielding to the demands of the industry, the legislator has done a division of the clauses of memorandum into clauses whose alteration will strike at the very base of the company and those clauses, whose alteration is not as important and can be taken care of by putting them in the same level of scrutiny. This notion a further emphasized by Clause (4) of the section which provides for that these other clauses will qualify for all those references which have been made to Articles of Association. Coming to the next provision in the Act, s.17 as already stated as well, is partly substantive and partly procedural in nature. This section lays down certain limits as to the alteration of the object clauses and the inherent intention of the legislature in this regard seems to be that the alteration should not be so easy so as to be done by the company bypassing all the laws and the basic proceduarlities which are well settled in the law. The basic philosophy behind these provisions seems to be that the legislature is more involved in protecting the interests of the creditors and the shareholders. Clause (1) of the section is the part of the section that lays down the substantive part of the law regarding the alteration of the object clause. The clause provides that the company can alter its objects, by special resolution, so as to enable it to pursue the objects as laid down in sub0clauses (a) to (g). In this regard the researcher feels that the legislature has affirmatively limited the boundaries of alteration to the object clause so as to comply with the philosophy of protection of that of the shareholders and the creditors. Further it must also be noted that the special resolution mentioned in the section will be as per the provisions of s.171 of the Companies Act.The first sub-clause of the section deals with the running of the company in a more efficient and economical way. This is the sub-clause which is most widely used by the companies in order to alter the object clause of the company and as is clear from the language used in the sub-clause the law leaves a wide gap since for a commercial company any alteration can be justified in the name of more efficient and economical running of the business. The second sub-clause requires that the alteration must be to carry on the business by new or improved means. This was basically enacted to promote the use of new scientific discoveries by the companies. However this is not a very widely used ground and leaves for a very narrow scope of alteration. One more reason for the scarce use of this provision is also that since the companies are nowadays leaving the object clauses with so wide languages that it is not in usual practice to mention the means to attain the means i.e. the use of the type of
the technology etc., but, at the same time, in wake of newer and newer laws as regarding the intellectual property regime and development of knowledge based industry like that of Information Technology or Biotechnology, it will become very important ground for a company .But at the same time it should also be noted that the phrase used is the attainment of the main purpose which simply means that the alteration under this head cant be made for the ancillary objects. The third sub-clause is again one ground not exactly one which is much litigated upon or used since the memorandum of the companies leave their area of operation to be a global or countrywide operation. In the latter case which is generally when the company has been formed so as to operate as a licensee in a particular area e.g. Cellular company or a franchisee of a particular company if the company wants to go for other areas then only this ground is used and normally it has been found that this clause doesnt start up much of controversy. The fourth ground is the ground, which in the view of the researcher is the most litigated ground as well8. Since a company cant expect the future plans of the company to amalgamate or acquire any other company it is usually done as the company progresses and since this in one aspect which is very intricately connected with the commerce and economy of the company this leaves the shareholders and the directors of the company in such differences.e.g.the recent differences between the shareholders and the management of the computer giant Compaq regarding its amalgamation with Hewlett Packard is one such example.However this alteration has generally been found to find favor with the judiciary unless the future business has been found to be one which is inconsistent with that of the existing business.This interpretation will be dealt with later in the project while discussing the judicial interpretation on the subject.Section 18 provides for the procedural aspect of the law relating to the alteration of the object clause of the Memorandum of Association9 and provides that the company will have to register the alteration with the registrar of the companies within one month from the date of passing of the resolution in the special meeting with a copy of such resolution and the altered MoA.
2.2 Amendments and the law regarding the Alteration of object clause
This section will restrict its discussion to mainly the amendment brought by the Amendments Acts of 1974, 1988 and 1996.The one major amendment which was made in these amendments was the substitution of the word Company Law Board 10 in place of Courts.The administrative law commission had recommended the change because of the very nature of the cases which are administrative in nature but the joint committee of the Parliament which considered the Bill recommended that instead of the vesting the power in the central government the power should be vested in the CLB which should be a quasi judicial authority. However by the amendment Act of 1996 this requirement as regarding the CLB was also reduced and now for the alteration of the object clause the company
8
There are also a lot of policy considerations which a court may have to look into while deciding on the matter and the efforts have been made to give guidelines to the companies so as to further the aims as desired buy the legislature e.g.promotion of broad-based investment in the industries etc. See also, Company News and Notes, October 1,1963. 9 Hereinafter,MoA. 10 Hereinafter, CLB.
doesnt require any permission of the CLB and the alteration can be done by a special resolution as mandated by the clause (1) of the Section 17. The consequential change which was made in the s.18 was that for the alteration of the object clause now the company had to approach the Registrar of Companies with a copy of its special resolution alongwith the copy of its altered memorandum within one month of the alteration. 11One difference between the English Law and the Indian Law in this regard is that the English Law by its Amendment in 1989 removed the restriction of complying with the conditions as mentioned in the s.17 but the Indian Law is still continuing with the same restrictions.
11
For a listed company copies of the altered memorandum will also be sent to the Stock Exchanges where the company is listed.
Section-3 Judicial interpretation of the Law relating to the Alteration of an Object Clause
This section deals with the interpretation of the law of the alteration of the object clause as interpreted by the judiciary. This section is mainly concerned with the Indian Case Law but as well deals with some of the English cases on the subject as well. It must be stressed at this juncture that though the concept of approval has been abolished by the 1996 Amendment still this case law is relevant to the extent that if the objection is made before the court then the case law will still be relevant. On the ground of the alteration of the object clause under 17(1)(a), i.e. under the ground of carrying the business more efficiently or economically, perhaps the most important judicial pronouncement laid down by the judiciary was in the words of Veeraswami, J. in the case of In re Dalmia Cement (Bharat) Ltd.12. In this case the court while interpreting the sections 17 (1)(a) and (d) held that these sections had employed language of wide amplitude and it is difficult to confine its scope by a statement that it will be applicable to this or that situation. Whether a company can carry on its business more economically or more efficiently is a matter for the judgement of the directors. They alone are the best fitted persons by reason of their experience in the particular business to decide whether the business can be carried on more economically or more efficiently by adding fresh objects. The court of course, on given facts can apply its mind and see whether the directors may reasonably and fairly form that opinion. If the directors of the company consider that under the existing circumstances, it will be convenient and advantageous to combine the new objects with the existing objects, and if it appears that the conclusion may be fairly arrived at, this court will not go behind it and hold an enquiry as to whether the opinions of the directors is well founded or justified. It was further held by the court that s. 17(1) should be narrowly interpreted. 13 The next very important pronounce,ment came in the case of In re Delhi Bharat Grain Merchant Association14 ,where S.Rangarajan, J. laid down the law which is still very much valid15.In this case, a company which was found with the object of doing ready and forward business in foodgrains and jaggery and acted as the clearing house in respect of forward trading in foodgrains sought to include reference to ready and forward business in cotton by way of an amendment in the Memorandum of Association since forward trading in foodgrains and jaggery had been banned. Thus, it was held that where the company seeks to alter object clauses in its Memorandum of Association, the business must remain essentially the same and the condition, alteration and the changes should
12
13
(1964) 34Comp.Cas.729. In general, except for this judgement,the courts have approached the section in very liberal way and the
14 15
(1974) 44Comp.Cas.214 These cases are important because these cases laid down the law in cases where it becomes imposible for the company to carry on the existing business because of the change in circumstances e.g. nationalisation of the industry etc. and the company seeks an alterationin the object clause because of that.
only be steps in order to improve the efficiency of the company 16. Though not dealt with in this Project the most controversial decisions under this ground are made when they are concerned with the political donations by the company which are justified by the company in the name of improving the efficiency. 17regarding this ground it has beeen further held that the words efficiently and economicallyare capable of giving a very wide power to the company to alter its objects and it has to be construed liberally.18 Another important case on this ground is In re United Collieries Ltd19 (Per,Sabyasachi MukerjiJ.). In this case the Petitioner Company was carrying on a business of colliery. This business was taken over by the State on nationalization of the industry. The company, therefore, proposed to venture into entirely new fields and sought sanction of the Court for the alteration of the object clause of its Memorandum of Association under s.17 of the Companies Act. In a judgement, which has set landmarks for many further judgement as it laid the focus of the law bringing it more closer and in much more conformity to the industry, it was held that the proposal of the amendment had received the approval of the shareholders, notice had been given to the creditors and none of them opposed, the financial position of the company was also not unsound, only the Registrar of the Companies opposed in this case. It was held that, normally, a diversification should not be permitted unless it defeats the business already carried on but in this case at hand, the business carried on by the company could not longer be carried on due to the nationalization of that business. The fact that the memorandum had other objects did not entitle the company to diversify its objects in the peculiar circumstance of this case. The court held that the days of devotion to single purpose or limited purposes both for institutions and projects and men and institutions must go in for multipurpose activities and ventures. . The next ground on which not quite a substantial amount of contentious litigation has been recorded is 17(1)(c). It is generally seen in the context of this ground that the courts are willing to allow the alteration when the objection has been made to the effect.20 Perhaps, the most litigated ground in this regard is that under17 (1)(d). It has been held by D.S. Mathur, J., in the case of J.K. Jute Mills Ltd. v. Registrar of Companies 21that the word combine used in s.17 (1)(d) of the Companies Act, 1956,strongly suggests that the new business should not be detrimental to the existing business of the company, nor should the new business be meant to replace the existing business, which would immediately or in stages be discontinued, in other words the additional business should not be destructive of, or inconsistent with, the existing business. It is immaterial whether the existing business is akin to or connected with the existing business. To lay down an
16 17
See also,New Asiatic Insurance Co.Ltd.;(1967)37Comp.Cas.331 See also,In re Scientific Poultry Breeders Association;[1933]3Comp.Cas.89. 18 In re Indian Iron and Steel Company ;[1957]27Comp.Cas.361.See also,Re,Drages Ltd.;[1942]1AllER 194. 19 [1975]45Comp.Cas.226. 20 See,In re Indian Mechanical Gold Extraction Company;[1891]3Ch.538. 21 (1967)37 Comp. Cas.20 All
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inflexible rule as to the nature of the new business which can be conveniently or advantageously combined with the business of the company is difficult. Whether the new business is or is not detrimental to the existing business will depend on the fact and circumstances of each case.22 The court can refuse to confirm the alteration if it is of the opinion that the alteration is not in the interest of the members of the company or any of its creditors. The unanimous or majority decision of the shareholders of the company to alter the memorandum of association of the company is not binding on the court but is a factor which is in favor of the confirmation thereof,but even in that case the court has the discretion not to confirm the alteration or to confirm the same in whole or in part, provided the proposed alteration falls within the scope of s.17(1). In this case, the court confirmed the unanimous resolution of company, formed for he purpose of carrying on the jute business, to alter its memorandum of association so as to include in the object clause of its memorandum clause to undertake and carry on the business as manufacturers of natural rubber, synthetic rubber and reclaim rubber and all kinds of rubber goods and bye products. The learned court further held that if, for example, the existing business is not being run efficiently or is running at a loss, and it is possible to run it efficiently or at a profit by making improvement or by expanding the plan, and even then no attempt is made to efficiently run the existing business, the opening of a new business shall invariably be detrimental to the existing business and it cant be said that the new business can be combined with the existing one.23 As regarding evidence it is also true that no hard and fast rule can be laid down as to the quantum of the evidence required for the satisfaction of the court. This shall invariably be dependent upon the facts and circumstances of each case. For example, if the company is in a sound financial position and the shareholders and the creditors do not object to the alteration, the court may take a lenient view and act like a court of revision. Alteration to memorandum of a company can also be confirmed in part and can be made subject to some other condition like maintaining of separate profit and loss account in respect of the new business for a particular period of time.24
22
See also,In re Modi Spinning and Weaving Mills Ltd. ,(1963)33 Comp.Cas.901; In re Ambala Electric Supply Co. Ltd.,(1963)33 Comp.Cas.580.
23
At the same time there is a decision of Punjab Distilling Works v. Registrar of Companies (1963) 33 Comp. Cas.811.where an alteration of the memorandum of association to carry on a new business was not confirmed because it had nothing to do even remotely with the existing business and it could not be said that the new business would be conducive to, and efficient and economical in doing the existing business which is clearly in conflict with the earlier decision of Ambala Electric Company Ltd.
24
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In another important case25 it has been held that company formed mainly for the purpose of carrying out mining operations applied for our alteration of object clause of the Memorandum of Association by addition of certain clauses which pertain to things like entering into contract with the government for construction of buildings, dams, giving them on lease, construction of houses and selling them, fabrication of steel, aluminum, copper, zinc etc., to buy, purchase, sell and acquire shares, debentures and securities of other limited companies. It was held by the court that with the name of the company as the Bharat Mining Co Ltd. it will not only be illogical but also misleading to the world dealing with the company to introduce these independent and separate businesses, these businesses cant by any means be called businesses which under the existing circumstances, may conveniently or advantageously be combined with the existing business of the company as in s. 17(1)(d) and nor do these business enable the Company to carry on its existing business more economically or more efficiently or to attain its main purpose by new or improved means.26It has further been held in the case of In re Rajendra Industries Pvt.Ltd27 that the interest of the shareholder is the prime criteria and to be considered before the objects of the company can be altered. This case further laid down the test as: (1) the proposed business can conveniently or advantageously be combined with the existing business of the company. (2) this must be so under the existing circumstances and not under the hypothetical circumstances. There are certain important English decisions in this regard as well. 28It also should be noted that in all these cases the financial position of the company also can be taken into account to judge.It has been held in the case of In re Samatraj Films Pvt.Ltd29 There can be no objection to giving sanction under section 17 of the Companies Act for the alteration of Memorandum of Association of a company in good financial position to include in its object clauses provision for giving donations or grants for any religious, educational, charitable or any other social purposes for the benefit of humanity or of any section thereof.
25
26
In this regard ,See also, Hari Krishan Lohia v.Hoolungoree Tea Co.Ltd .[1970]40 Comp. Cas.458 (Cal.);
27
(1961) 37Comp.Cas.563.
28
29
See,Chartered Surveyors Benevolent Fund Inc.;[1936] 2 AllER 1631. (1974) 44 Comp.Cas.477; (Per, B.K.Patra, J).
12
Thus two conclusions which can be clearly drawn from the above held discussion are: 1.That the proposed business should not be destructive to the existing business. 2.That the decision of the court will depend on the facts of each case and court has been conferred wide discretion in this regard. Also very important litigation is carried on the point of who can object as to the decision of the company as regarding the alteration of the object clause. The court in the case of Mahalakshmi Bank Ltd. v. Registrar of Companies30 (Per, S.C.Lahiri, CJ) laid down that it is clear from the provisions of ss. 12,13,14 of the Indian Companies Act (1913) which correspond substantially to S. 17 of the Companies Act, 1956, that if the alteration proposed is one of the several things enumerated in clauses (a) to (g) of S. 12 of the Act of 1913 of Sec. 17 of the Act of 1956, the court has the jurisdiction to confirm the alteration wholly or in part. But this exercise of the power as conferred by these sections is fenced strong by the safeguards, which are calculated to protect the interests of the creators. Shareholders and general public. The creditors are protected by the express provisions in the section itself. Their consent has to be procured and their claims have to be satisfied in certain events that are mentioned in the section itself. The public and the shareholders individually and collectively are protected by the necessary publicity of the proceedings and the discretion, which has been entrusted to the court. So, in determining whether the discretionary power of the court ought to be exercised in favor of the confirmation of the alteration and if so, in what manner, it is necessary for the court to consider the facts of the case and the background on which the alteration is asked for. The right to present a petition for the confirmation of alteration of Memorandum of an erstwhile banking company under Sec. 17 of the Companies Act is a substantive right and is not a mere right in procedure. In another case of In re Standard General Insurance Ltd.31while interpreting S. 17 of the Act, the court laid down that if the company has existing liability to state in respect of sales tax or excise duty, no doubt the state becomes the creditor of the company and therefore be entitled to oppose the alteration, if its interests as a creditor is likely to be affected by the proposed alteration. But the statute does no confer upon the state, as a prospective creditor, in respect of future liabilities of the company, the right to oppose the proposed alterations of the objects of the company. The Memorandum of Association of the company is no doubt a notice to the public at large, of the objects of the company but such notice does not vest in the members of the public, a right to come and raise objections when the company proposes to alter its objects. To hold that the landlord or any other member of the public who claims that there is a chance of his becoming the creditor of the company in the future, has the right
30
AIR1961 Cal.666
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to oppose the alteration, could open the doors to serious mischief. The publication of the advertisement in the newspapers is not an invitation the public at large to appear and oppose the application for alteration of the objects of the company. An Incorporated company is the creation of statute. Its rights, privileges, obligations and liabilities have been defined and are controlled by the statute. The statute has prescribed the person or classes of persons whose interests require the courts protection, when an order confirming the alteration of the objects of the Company is going to be made. To say that the members of the public have the right to oppose the proposed alterations would be to introduce an additional restriction on the companys right to have its objects clauses altered, which is not warranted by the law. The High Court cannot in its exercise of discretion under S. 17, introduce this new bar, not prescribed by the legislature. No doubt the power to impose conditions while making an order confirming the alterations in the object clauses, hold that the interests of the public at large should be protected and it should be allowed to come and raise objections to the proposed alterations. To say that the public should be heard and that it has right to object would necessarily involve a wide and unwarranted departure from the requirements of the statute. If the Company has no existing business with which the new business proposed by the altered objects can be combined, the court ought not to make an order confirming the alterations in the objects of the Company. The court held that if the directors, and members of a company proposed to alter its objects and if there is no objection from the creditors or if their position is not prejudiced by the proposed alteration, the court should not stand in the way of the companys seeking new objects to enable it to embark on a new venture. But there are some obvious limitations the new business must not be disruptive or inconsistent with the existing business, the financial position of the company must be sound to enable it to carry on the new business but in no case the decision of the shareholders, creditors and directors is final and it if for the courts to see if the statutory requirement has been complied with and the alteration sought for are not contrary to or inconsistent with the object clauses in the memorandum as they stand. The doctrine of paramount object or main object of the company is a matter which is material for the consideration in application for an order for winding up of the company on the just and equitable ground or in other applications where the question of winding up is material, e.g. In an application under S. 397 of the Act. If the substratum of the company is gone, that may be a good cause or ground for making an order of winding up of the company on the just and equitable ground. But the loss of the substratum is not by itself a ground on which the company court should decline to confirm alteration in the Memorandum of Association of a company, if the conditions mentioned above are fulfilled. There was also an argument placed in this case where it was argued that the modern practice was to allow alteration with constituted a completely new set of objects in modern form in place of old objects. It was held that under S. 17 a company is permitted to alter its objects and not merely to extend or add to them.
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One more contentious point in this regard is on the shifting of the object from the other objects to the main objects. In this regard there has been an important case of In re, Mafatlal Consultancy Ltd32. In this case, the Petitioner Company was carrying on the business of Registrars and share transfer agents in accordance with the provisions of clause 70A of its memorandum of association. The company had sought to transfer the clause 70A from the other clause to the main object of the company It accordingly passed the requisite resolution under sections 149(2A) and 189 of the Act and prayed for the confirmation by the CLB.The reason given for the alteration was that the business carried on by the co. now had come within the purview of SEBI and for the purpose of registration with the board it had desired that the company should amend the object clause by shifting the existing clause 70A from Part C to main object in Part A.Rejecting the petition the CLB said that s.17 provides the no. Of reasons which have been mentioned under clauses (a) to (g) and in the instant case the proposal of the company didnt fall under any of these clauses. All the objects whether stated in Part A or Part C are the objects of the company and a company is empowered to take up activity in any one of them and such a transition as desired by the company could not be deemed to be an alteration under s.17.another case where general principles on the alterations were laid down was In re Bhutoria Brothers33;where in drawing a comparison between the English law and the Indian Law ,the courts held that The Companies Act, 1956 had not adopted the modern English law on the subject of alterations of the memorandum of the company. The present position in English law ,as a result of the enactment of sections 77 and 78 of the Companies Act of 1947 and the re-enacted section 5 of the Act of 1948 is that the necessity for confirmation by the court has been removed subject to the right of the objectors to petition for the cancellation of the alteration. The onus, therefore, in England has shifted from the company and the courts to objectors to take initiative of making an application to the court objecting to the alteration. On the other hand, reading sections 13 and 10 of the Companies Act, 1956 together, it is clear that object was in the memorandum on treated as conditions of the memorandum and, therefore, can be altered only according to express provisions of the statute which again are contained in section 17 thereof. The law, therefore, attaches a greater sanctity to object clauses of the memorandum. The Procedure in India under the Companies Act, 1956 for changing an object in the memorandum is by special resolution confirmed by the courts under section 17 of the Companies Act. By expressed statutory provisions enacted in sub-sections (2)and(3) of section 17, the alteration shall not take effect until and in so far as it is conferred by the court on petition and the court may make an order confirming the auditioned either wholly or in part and on such terms and condition, if any, as it thinks fit. One indispensable condition under section 13 with states requirements of a memorandum of a company it that the memorandum shall state objects of the company. Stating the object of the company in the memorandum is not a mere technicality, but also a necessity of a great technical import. The public who are called upon to subscribe to the capital of the company by purchase of its shares should know clearly what are the objects for which
32
[1995]17 C.L.A.385,
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they are paying and which they want to encourage. To give this necessary information, the statement of object should be clear. It must not be too vague and too wide for in that case, it shall defeat its very own purpose and object. That is why it is not regarded permissible in law to have one solitary clause in the memorandum of agreement saying the company will carry on all kinds of businesses without stating what the kind of businesses is. But this limitation does not mean that the memorandum has to be without any flexibility. Great liberty of language and aspirations are accorded to memorandum of agreement in stating its object so long as it gives reasonable information and indications of the business the company intends to carry on. The next consideration is that object stated should be those which a company intends to carry out in the near and reasonable future. They should not be too remote objects for a too remote future and mere possibilities in some distant and uncertain time. All this is in the best interests of the company and ultimately the for the protection of the interest of the shareholders against directors embarking upon spurious and doubtful business and squandering companys trading funds under the cover of vague and ambiguous object clauses in the memorandum and whom the shareholders might otherwise finding were to control on management operation of the what of majority which the directors will normally be expected to enjoy.
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Section-4 The Ultra Vires Rule and the Alteration of the object clause
This section is perhaps the most important section of this paper. This section ventures into the most controversial aspect of the law in this regard. This section deals with the relationship between the dreaded doctrine of Company Law i.e. the Ultra Vires doctrine and the object clause in the MoA.However, since it was not possible for the researcher to start the discussion without laying down the context of Ultra Vires Doctrine the earlier part of this section deals with the Doctrine as such but with obvious limitation of limiting itself to that of the alteration of object clause. The first part of the section deals primarily with the English Law and the Indian Law has been dealt with in the later half.
A joint stock company was one created in compliance with registration procedures laid down by a governing statute, the first such governing statute being the Joint Stock Companies Act ,1844.
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The 1856 Act specified that a company should include an object clause within its memorandum, a clause that would define the contractual capacity of the company. However, in so far as the 1856 Act failed to stipulate any method by which an alteration of an object clause could be achieved, the status of the clause and its effect on contractual capacity was unclear. For example, the omission of any alteration powers in relation to the object clause could, on the one hand, have been indicative of the legislature's desire to prohibit any alteration to a company's objects clause subsequent to the company's registration. Alternatively, by failing to expressly state that an alteration of an object clause was prohibited, the 1856 Act could have been interpreted as allowing alterations to the clause (following the consent of the company's membership) in which case, any attempted restriction on corporate capacity would have been seriously weakened. The problem surrounding the interpretation of the 1856 Act was to some extent improved by the implementation of the Companies Act 1862 which, inter alia, attempted to resolve the ambiguity surrounding the status of the object clause. The 1862 Act provided, in respect of the company's memorandum, that save for two exceptions, the memorandum could not be altered. However, the 1862 Act, while planting the seeds from which the application of the ultra vires rule would subsequently flourish, was not, however, conclusive as to the extent and nature of the legal effect of an objects clause. The ambiguity existed because the 1862 Act failed to prevent a company from including objects that could cover every conceivable form of corporate transaction. The clarification of the legal nature and contents of an object clause required judicial elucidation. The elucidation was applied in Ashbury Railway Carriage and Iron Co v Riche35. In Ashbury the House of Lords was obliged to decide between two interpretations of the 1862 Act, namely: a) that the legislature must be deemed to have conferred all the powers of a natural person upon a company unless such powers had been taken away either expressly or by implication, or alternatively; b) that any matter which was not authorized expressly or by necessary implication within a company's objects clause must be taken to have been forbidden. The House of Lords preferred this latter interpretation on the premise that it secured the protection of creditor interests. However, the House justified its decision in terms of both shareholder and creditor protection. Shareholders would be protected because a company would be unable to alter the direction of its business other than to follow its stated objects. Therefore, a prospective shareholder of a company could, by examining a company's memorandum, decide whether to invest in a company on the basis of its set objects. If a company subsequently attempted to deviate from its objects clause a shareholder could either seek an injunction to restrain the company from entering into an ultra vires transaction and/or where a company's main object (substratum) had failed, seek an order for the winding up of the company. In addition, where a company entered into an ultra vires transaction, any shareholder would be afforded the right to have the offending transaction set aside. Corporate creditors would be protected because in entering into a credit agreement with a company they could, by examining the object clause, discover the purpose and nature of
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the business for which the credit facilities were to be employed. However, somewhat perversely, a company's unsecured creditors had no right to petition for an injunction to prevent a company from entering into an ultra vires transaction, nor had the creditor the right to apply to the court for a winding up order on the failure of a company's substratum. Therefore, the unsecured corporate creditor was in a hapless position. Further, in the majority of commercial transactions unsecured creditors would be unlikely to attain actual notice of a company's objects clause due, on their part, to a lack of knowledge, inclination, or funds to expend on legal advice in relation to the construction of an objects clause. A company's ability to include an elaborate and extensive set of business purposes within its objects clause was also precluded following the House of Lords decision in Ashbury. By employing the ejusdem generis rule of construction the House of Lords restricted the context in which objects were to be given effect. As such, objects were not to be given their true literal meaning but instead had to be construed in the context of the company's main corporate object (the substratum rule). Accordingly, in Ashbury, an object which provided that the company could operate, as 'general contractors' had to be construed in relation to the company's principal business objective which was one of mechanical engineering.
19
power had been employed, but rather, whether or not the company in question had the capacity to conduct the transaction or employ the relevant power in question. In Cotman v Brougham39 the applicability of the substratum rule was impliedly abolished; albeit that the abrogation of the substratum rule was not effected by a judicial concern for its potentially adverse effect upon commercial practice. In Cotman, the House of Lords departed from both the substratum rule and the ejusdem generis rule of construction on the premise that it was obliged to accept that where a company's memorandum had been approved by the registrar of companies, such approval was conclusive evidence of the fact that all the requirements of the Companies legislation had, in relation to company registration procedures, been adhered to. In Cotman the memorandum failed to clearly specify the objects of the company; it did not limit and identify the objects in a plain and unambiguous manner. The House of Lords doubted whether the memorandum should have been approved by the registrar of companies. However, as stated, as it had been approved, the House was obliged to accept its validity. Accordingly, the validity afforded to the nature of the object clause resulted in the acceptance of a set of objects which were not to be restrictively construed by reference to a main object. As such, no object contained within the company's object clause was to be construed as subsidiary or ancillary to any other object. Although the substratum rule in its application to third party transactions was impliedly abolished by the Cotman decision, it should be noted that in relation to a shareholder petitioning for the winding up of a company, the rule remained intact. Lord Parker of Waddington clearly made the distinction between the position of a shareholder and the position to be afforded to a third party transaction. Lord Parker stated that, '... the question whether or not a company can be wound up for failure of substratum is a question of equity between a company and its shareholders. The question whether or not a transaction is ultra vires is a question of law between the company and third party'. This case is a typical example of how to avoid the future litigation as regarding the alteration of object clause the object clauses are worded so broadly. In Bell Houses Ltd v City Wall Properties Ltd 40 the scope of a company's permissible contractual capacity was to be further widened by the registrar of companies approval of an objects clause which authorized a company to carry on any business whatsoever which, in the opinion of the directors, could be advantageously carried on by the company in conjunction with or ancillary to any of the businesses specified in the objects clause. Following the decisions taken in AG v The Great Eastern Railway Co, Re David Payne , Cotman v Brougham and Bell Houses Ltd v City Wall Properties Ltd, the ultra vires rule had reached a point whereby its practical application was severely limited. However, it would be very misleading to suggest that it had been relegated to a rule of marginal importance.
39 40
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21
European Communities Act 1972 was passed to comply with the EC's First Directive on Company Law. The First Directive was implemented into UK law by s.9 of the European Communities Act(EC) 1972. Section 9 EC Act 1972 was subsequently replaced, its wording unaltered, by s35 of the Companies Act 1985.
Supra note 6.
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company's constitutional documents to ensure that their investments were only employed in the pursuit of legitimate purposes, are the theoretical victims of the legislative reforms. However, whilst theoretical victims, in practice their loss should be of little significance. This has more or less been the Ultra Vires Doctrine in England
42
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Section-5 Critique of the Ultra Vires Doctrine and the alteration of the object clause
There are several questions, which may be of interest and involve certain contentious points in the subject as regarding the position of two most important players in this regard i.e. the creditors and the shareholders43. These issues are further divided into several subheadings depending upon the class of the people looked at.
These questions were prepared by Prentice Committee Report but the researcher has tried to answer these questions from what is right from the researchers point of view. 44 Ultra Vires, LAW SOCIETY'S GAZETTE 1772 (83(22): 11th June, 1986).
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Consideration of the object clauses as a protection where such commercial instruments are issued is theoretical rather than practical, because most modern memoranda of association authorize widely diverse objects and in any event the company can alter its objects or operate through subsidiaries. One important and pertinent question in this regard is that what is the standing of a creditor regarding challenging of the alteration by the company. This is a question which assumes a lot of importance since the creditors seem to be one class which has been most affected by the whole jumble of law. The researchers view in this regard is that a creditor per se has no right and all his rights are merely contractual in nature which is a notion further solidified by the fact that if the ultra vires doctrine is abolished then the contractual capacity of the company will be more like that of a natural person and further the intervention of a creditor regarding the company entering into and ultra vires transaction is not practical since it is very difficult for a creditor to know of the transactions being entered into by the company.Thus ,as such the creditor has no practical means of knowing that what the company is doing and since his relationship with the company is more in the nature of a contract,there seems no justification to the researcher to allow the creditor to object to the alteration of the object clause of the company.In view of some commentators 45 even if such a right is created that will be totally ineffectual for the reasons mentioned above by the researcher.In fact,to prove their point the commentators cite the example of existence of such a right and subsequent withdrawal in December 1947, indicating that experience showed that such a right was unnecessary and ineffective. A very pertinent question in this regard is that can the creditors contractually bind the company so as not to alter the objects of the company in future? In view of the researcher the answer to this question will be no, since, first of all, this will be a matter which will ideally be regulated by the articles of association of the company since those will regulate the extent to which the directors of the company can enter into the agreement with the creditors. Further, the company cannot bind itself not to exercise its right conferred by the statute without shareholders approval.
45
Id.
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The assumption that the entire public has access to the MoA is based on archaic thinking46. Consequent to industrial growth and wide dispersal of shareholding vis-a-vis the vastness of India, those who deal with the company are not only confined to the place over which the Registrar of the Companies has jurisdiction. They may have a right to receive the required information by post; but such exercise will involve time and it may frustrate conclusions of dealing with a company47. The aforesaid concept of law is perhaps justified in England since that is a small country as compared to India.The assumption as to the possibility of automatic inspection At public registry, therefore, needs review. It is not being convassed that no company need spell out in advance what it proposes to do. Of course, it is essential that the lines of the business ate spelled out somewhere, but it is pointless to insist on the demarcation between the main objects and the ancillary objects especially when the main objects embrace a score of activities.
5.3 Comparison between the Indian and English law on the attraction of object clause
The objection with regard to attraction in English law, has to be made by, (1) by holders of not less in the aggregating than 15% in nominal value of the companys issued share capital as any class of it or, if the company is not limited by shares, not less than 15% of the companys members, or
(2)
by the holders of not less than 15% of the companys debentures entitling the holders to object to attraction of its objects. 48. Also, the application cannot be made by the person who ahs consecuted to or voted in favor of, the attraction. 49 The English law further provides that such an objection must be made within 21 days on which the resolution altering the companys objects was passed. The Indian law, on the other hand, does not mandate any such qualification for objection to attraction though some of these qualifications have been laid down by the judiciary, which have already been discussed.
More or less, the English law and Indian law are same as far as procedure for attraction is concerned i.e. both legal systems require the special meeting of the members to pass the resolution conferring the attraction but the English law is regarding the grounds on which the attraction can be asked, is much more liberal in nature than Indian law since, the English law has done away with the specific grounds mentioned. The company can now alter the object clause for any purpose, provided it is lawful. Further, in Indian law the
46
A.C.Kesavan et al., Ambiguities, Absurdities and Archaism In The Companies Act: Doctrine of Ultra
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grounds pre-specified and are the only grounds or purposes for which an alteration can be made. In fact, after the 1996 amendment, the Indian law is inching closer to the English law.
27
50 51
Salmond on Jurisprudence 313 (12th ed., P.J. Fitzgerald ed., Bombay: N.M. Tripathi Pvt. Ltd., 1999). Id.
28
As mandated by the new rules issued by the Department of Company Affairs. Hereinafter, M & A. 54 The process of making the new company will also require the shareholders consent and another EGM if it not been provided under the object clause of the company.
29
No doubt a lot of these commercial problems can be tackled if the objects are drafted in a futuristic and broad manner. E.g. if a pharmaceutical company has mentioned the manufacture of a drug under its objects clause, but with the introduction of patent regime, it is no longer able to continue with the production of same drug or requires to pay a sum to the patent holder, it will have to go for the alteration of object clause and may be, other clauses as well but if the name of a particular drug is not mentioned it might as well continue its business by manufacture of some other drug. Alteration of objects clauses is very important for the companies which are having a high cash flaw and disposable income in order of invest in other companies or businesses so as to spread out the risk which might be associated with one particular business.
30
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office of the company which is many a times in obscure places though the activities of the company are, for all practical purposes, carried on or controlled from a metropolitan.
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Conclusion
The endeavor of the researcher in this whole effort was to analyze the concept of the alteration of the object clause from a different point of view. Traditionally, as was stated by the researcher to be his hypothesis as well, the alteration of the object clause is supposed to be topic in law, which is very well settled in nature. However, after researching the topic the researcher feels that this is not so. This topic is very much an alive topic and s gradual shift in the philosophy can be observed which is driving this concept to become more in hands of the industry rather than in the hands of state. There may be several behind this and the most prominent seems to be hat the legislature has realized that it is very difficult for the state machinery to control these areas since these areas are nowadays being well recognized in the form of contractual agreements. Hence there is a drift towards more of autonomy for the companies and in the world of the shareholders consciousness where the shareholder is highly conscious about his rights and the flow of information is so fast that the shareholder knows that what can be future strategy of the company and what is the best course of action available to him to attain maximum advantage,in short,the shareholder has become a mature and informed customer who can shift his loyalties if not satisfied thereby harming the company .Thus ,these conditions force the companies to work in consonance of the demands of the shareholders and the possibility of laws intervention is virtually negligible. The researcher feels that there is definitely a need of change in the legislative policy towards the object clauses and in view of the researcher instead of providing with the particular areas in which the alterations can be made, the law should allow free alterations as have also been provided under the English Law as well.This will be a step that will be more in consonance of the liberal policy with maximum autonomy for the company.Further if the relationship of the shareholder and the company is a mere contractual relationship then there is no logic in law to provide for the grounds under which the company can make alterations. Further it is very clear from the study made by the researcher that the very concept of the meeting where the consent of the members can be sought is a farce in practicality. As found out by the researcher, in practice there is a virtual monopoly of certain promoters over the company and it is their will which is taken into account. However the courts are found to adopt an attitude which is highly liberal since they assume that the directors of the company know what is good for the company or what is bad for the company. In view of the researcher the courts should pierce the corporate veil and see that who is actually governing the companys decisions. The courts have been found lacking in this attitude. One more aspect which was noticed by the researcher that the companies are preparing the object clauses which are leaving the part (B) so wide so as to include everything which can perhaps be conceived of even when the thing doesnt have any relation with the actual business of the company. This leaves us with flawed interpretation of the part (B) clauses because these clauses are by the very definition meant to be the clauses which are to be used for the attainment of the main objects and though these clauses do not enjoy the special status as the main objects these clauses should have a certain degree of relation between the main clause. This practice should also need to be checked by the Legal enforcers.
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Further, as has already been stated the law has been very broadly interpreted by the courts in this regard and though by virtue of the amendment in 1996 the requirement of the ratification by the CLB has been done away with, the case law decided is as much valid and holds true. Jurisprudentially also, the law on the subject has been found to be more inching in favor of the liberal philosophy where the legal creation has been made much more closer to the natural human being and the rights and duties of the legal creation are also governed by the contractual rather than statutory principles.
34