Corporate Law Object Clause

7/28/2019 Corporate Law Object Clause

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Corporate law - Object Clause

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Section-1

Object clauses and the law

Section 13 of the Companies Act mandates for the inclusion of the object clause in the

Memorandum of Association.These clauses provide for the statement of the objects of thecompany which the company wants to pursue as a business entity or otherwise. These

clauses are further divided into Main Objects, Objects incidental to the Main Objects and

Other Objects1. The first question that comes to the mind of any person researching on

the subject is that why at all, do we need to have such a clause or clauses?

1.1 Rationale for the Object Clause

There are several reasons, which can be identified for such a provision in the

Memorandum of Association.These reasons are listed as under:

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 servethe 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 clausedefines 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 thecompany is heading.

However the concept changes totally when it comes to the common law. At CommonLaw the object clause is supposed to serve the following functions:

1 As mandated by theAmendment Act, 1965 on the recommendation ofDaphtary-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).3Id.

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1.2 The Function of the Objects Clause in Common Law :It is possible to identify four legal functions which the object clauses serve in the

common law:1. The first is or rather was, the function of the objects clause in defining the companys

capacity vis-a-vis third parties. A Company incorporated under the Companies Acts

had legal personality only for the purposes laid down in its object clause. From this itwas deducted that an act done by the company outside its objects clause (an ultra

vires act) was null and void. Neither the company nor the other contracting party (if

the ultra vires act was the entering into of a contract) could sue upon the contract, norcould the ultra vires act be ratified by the shareholders, even unanimously4.

2. Secondly, the object clause defined some of the limits upon the authority of thedirectors as agents of the company. The authority might of course, also be limited by

provisions in the companys Articles of Association or by, say, a resolution of the

shareholders in general meeting. However that might be, the objects clause would

also operate to define and limit the actual authority of the directors (or the authority

of a particular director), because the directors could not be regarded as having actualauthority as agents to do something on behalf of the company which the company did

not itself have capacity to do. Moreover, since the object clause was contained in thecompanys registered documents, the doctrine of constructive notice would prevent

the third party from successfully arguing against the company that the directors had

ostensible or usual authority to enter into the transaction5.

3. Thirdly, the object clause is part of the memorandum of the company, which, by

section 14 of the English Act, is treated as a contract between the members inter se

and between each member and the company. Consequently, for the company topurport to engage in an ultra vires transaction might be regarded as a prospective

breach of contract on its part, making it liable to be restrained from carrying thematter further at he suit of the individual shareholder.6

4. Fourthly, since it is the duty of the directors to cause the company to remain within its

constitutional powers, for the directors to enter into an ultra vires transaction onbehalf of the company is a breach of the duty owned by the directors to their

company, which exposes them to suit by the company and, possibly, by the individual

shareholder suing derivatively on behalf of the company.

These were the purposes of the object clause at the common law. They have all been

subsequently modified by statute, first by section 9 of the European Communities Act,

1972 (as later consolidated in section 35 of the Companies Act, 1985) and, secondly, bysections 108 to 112 of the Companies Act, 1989. As a consequence, the objects clause

can be said no longer to have the effect of defining he companys capacity as far as third

parties are concerned, but the authority of directors, the contractual rights of individualshareholders and the duties owned by directors to their companies are still to some extend

4Palmers Company Law 2120(25th ed., C.M.Schmittoff et.al.eds.,London:Sweet and Maxwell,1992).5Id.6Id.

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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 theposition of the alteration of the object clause as provided in the law which is precisely

what has been discussed in the next section.

7 Id.

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Section-2

Alteration of the object clauses and the law

2.1 Interpretation of Statutory Provisions

This section will continue the discussion, which was left, in the previous section but thefocus of the discussion will be related to the exact topic of the project. No doubt, while

drafting the Memorandum the draftsman may take any number of precautions but still

after a particular point of time the company may feel the need of alteration of the objectclause due to several reasons. In Indian Companies Act the provisions for the alteration

are contained in s.16, 17and18 and 19 of the Act.Broadly the scheme of the Act is such

that Ss. 16 and 17 contain the substantive aspects of the law of the alteration of the object

clauses and ss.18 and 19 contain what can be defined as the procedural aspects of the law.This section will aim at the discussion of these aspects and will be dependent upon the

interpretation of the section by the researcher and will not contain the case law, which

will be mentioned in a separate section itself. Thus this section will deal with the position

of the law as contained in the statute itself.Section 16 is a contemporary of sections 2 and 17 of the English Companies Act of 1985

and lays down the basic rules for the alteration of the memorandum of a company.S.16 ofthe Companies act, provides for the alteration of memorandum and clause (1) of the

section lays down that the company shall not alter the conditions contained in its

memorandum except in the cases, in the mode and to the extent for which the expressprovision is made in this Act. One possible interpretation that can be drawn is that clause

(1) permits for the alteration of only those conditions in the memorandum for with the

Act provides expressly and alongwith provides the mode and the extent of the alteration.

Thus, even if in a case of a condition for which alteration is provided for expressly in theAct but the extent and mode are not provided for is unalterable by the company. At the

same time, it the extent and notification is provided under any of the notifications

permitted under the Act it will be alterable.Clause (2) of Section 16, seems to researcher, more like a qualifying clause for clause (1)

of the section. Clause (2) provides that the conditions contained in the memorandum are

only those provisions, which are required by section 13 or by any other specific provisioncontained in the Act, to be stated in the memorandum. Thus, where clause (1) had

narrowed down the scope of the alteration of conditions in the memorandum to only

those conditions for which express provision was made in the Act, clause (2) further

narrows it down to only those conditions mentioned under section 13 or any other sectionof the Act which expressly provide for the conditions to be stated in the memorandum.

In this way, the interpretation seems to be that other clauses which are contained in the

memorandum but have not been provided for under section 13 or any other expressprovision of the Act`, but their mode and extent of alteration have been expressly

provided in the act are not alterable under clauses (1) and (2). This dilemma is solved by

Clause (3), which talks about other clauses. After the above-mentioned interpretation itis very clear that the other clauses is a reference made to those clauses which are not

included in clause (3) of section 16, that is, all those clauses which are contained in the

memorandum but are not to be included mandatory in the memorandum of the company

under section 13 of the Act or under any other section of the Act. With respect of the

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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 inthe 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 amemorandum 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 theindustry, 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 providesfor 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 thealteration 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 involvedin 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 thecompany 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 asto 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 isthe 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 thename 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 thecompanies. 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

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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 acompany .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 hasbeen 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 andeconomy 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 managementof 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 withthat 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 thealteration 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 clauseThis 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 ofCourts.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 quasijudicial 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.

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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 thecompany 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 EnglishLaw 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.

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Section-3

Judicial interpretation of the Law relating to the Alteration of an

Object ClauseThis 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 CaseLaw 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 madebefore 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 ofVeeraswami, J.in the case ofIn 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 moreeconomically 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 todecide 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 thecompany 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 ofIn re Delhi Bharat Grain MerchantAssociation14 ,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 offorward 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 businessmust remain essentially the same and the condition, alteration and the changes should

12 (1964) 34Comp.Cas.729.13

In general, except for this judgement,the courts have approached the section in very liberal way and the

whole object of the section is enabling.

14 (1974) 44Comp.Cas.21415 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.

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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 thecompany 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. Thecompany, 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 moreconformity 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 diversificationshould 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 thenationalization 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 forinstitutions 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 hasbeen 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 heldby D.S. Mathur, J., in the case ofJ.K. Jute Mills Ltd. v. Registrar of Companies21that 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 wouldimmediately 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

16See also,New Asiatic Insurance Co.Ltd.;(1967)37Comp.Cas.33117 See also,In re Scientific Poultry Breeders Association;[1933]3Comp.Cas.89.18In re Indian Iron and Steel Company;[1957]27Comp.Cas.361.See also,Re,Drages Ltd.;[1942]1AllER

194.19 [1975]45Comp.Cas.226.20See,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 andcircumstances 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 unanimousor 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 confirmthe 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 hepurpose 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 runefficiently 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 bedetrimental 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 invariablybe 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

22See 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 ofPunjab Distilling Works v. Registrar of Companies (1963) 33Comp. 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 saidthat 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 ofAmbala Electric Company Ltd.

24In re Motilal Padmapat Sugar Mills Pvt. Ltd.,(1969)34 Comp. Cas.86.

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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 ofMahalakshmi 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 toprotect 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 procuredand 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 thecourt. 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 andis not a mere right in procedure. In another case ofIn 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 becomesthe 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 thepublic, 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

30AIR1961 Cal.666

31AIR 1865 Cal.16;(Per,B.C.Mitra,J.)

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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 Incorporatedcompany 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 orderconfirming 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 clausesaltered, 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 itshould 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 thealterations in the objects of the Company.

The court held that if the directors, and members of a company proposed to alter itsobjects 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 existingbusiness, 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 andthe 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 thecompany 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 theMemorandum 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 ofIn re,

Mafatlal Consultancy Ltd32. In this case, the Petitioner Company was carrying on thebusiness 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 accordinglypassed 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 ofregistration 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 companydidnt 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 laiddown wasIn 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 adoptedthe 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 thenecessity 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 whichagain 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 bythe 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, ifany, 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 theobject 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,

33 AIR 1957 Cal.593.,(Per,P.B.Mukerji,J.)

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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 regardedpermissible 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 withoutany 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 objectstated 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 againstdirectors 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 therelationship 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 limitingitself 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.

4.1 Introduction to the Ultra Vires RuleIn English Law, prior to legislative reforms, culminating in those contained within the

Companies Act 1989, the ultra vires rule was a regulatory device which sought to prevent

a registered company from entering into any type of transaction which exceeded thescope of the company's contractual capacity; contractual capacity being determined by

the contents of a company's object clause. Where a transaction was ultra vires and void

not even the unanimous consent of all shareholders would be able to reverse the effect ofthe transaction's invalidity.

The application of the ultra vires rule to corporations was first evident in the form of

contractual restraints placed upon statutory companies which had been formed in thenineteenth century in the wake of an expansion in economic activity. Statutory

companies, formed primarily in connection with the utility industries were created by

individual Acts of Parliament. The creating statute would inevitably contain limitationsupon the statutory company's contractual capacity. A statutory company which

transgressed its contractual capacity would be deemed to have acted ultra vires and

accordingly the transaction would be deemed void.Until the introduction of the Joint Stock Companies Act, 1856, the ultra vires rule had no

application to a joint stock company34. Prior to 1856, the contractual capacity of a joint

stock company was of a similar nature to that of a business partnership. Accordingly, any

contractual act or transaction would be valid providing it was ratified by the unanimousconsent of the company's membership.

The 1856 Act was aimed at altering the aforementioned partnership type relationship and

was deemed necessary following the enactment of the Limited Liability Act, 1855. The1855 Act permitted joint stock companies to be incorporated on the premise that the

members of such companies would be afforded the protection of limited liability.

Consequently, the position of prospective company creditors was rendered insecure

because the logical consequence of the introduction of limited liability meant that acompany's membership was able to avert their own personal liability for corporate debts.

To protect creditors, and also to secure the investment interests of existing and futureshareholders, the legislature considered it appropriate to regulate the ambit of corporate

capacity.

34 A joint stock company was one created in compliance with registration procedures laid down by a

governing statute, the first such governing statute being theJoint 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 alterationof 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 toprohibit 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 tothe 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 resolvethe 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 includingobjects 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.InAshbury 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 personupon 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 withina 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 theprotection 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 acompany'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 anultra 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 theoffending 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

35 [1874-80] All ER Rep Ext 2219.

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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 theright 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 unlikelyto 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 giventheir 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 mechanicalengineering.

4.2 Judicial Interpretation ofUltra Vires RuleWhile accepting the validity of the ultra vires rule, the judiciary was inclined, in cases

afterAshbury, to weaken the strict application of the rule. While giving theoretical

protection to both shareholders and creditors, the ultra vires rule, together with theconstructive notice rule36 was not conducive to commercial practice. The first

authoritative example of the judicial departure from the approach taken in Ashbury was in

Attorney General v The Great Eastern Railway Company37. Here, the House of Lords,

only five years after it had laid down the strict interpretation of the ultra vires rule,sought to weaken theAshbury approach, by providing that the ultra vires rule should be

applied reasonably. According to the House, it was legitimate for a company to pursue acourse of business other than the one defined as the company's principal object, providingthat the business purpose in question was reasonably incidental to the principal object. In

addition, the House concluded that a company was entitled to employ any power

reasonably incidental to the use of a company's stated objects, irrespective of the fact thatthe power use was not expressly provided for within the company's object clause.

One of the most significant decisions in connection with the dilution of the applicability

of the ultra vires rule occurred in Re David Payne38. Prior to Re David Payne it hadgenerally been considered that where a company entered into a contract and as a

consequence of the resulting transaction subsequently pursued an activity outside its

stated objects, then the contract which facilitated the breach of contractual capacity

would itself be of an ultra vires nature. The Re David Payne decision redefined thesignificance and effect of the ultra vires rule in so far as it emphasized that the rule was

not concerned with how a particular transaction had been conducted or how a company

36Under which a third party when contracting with a company was deemed to have

constructive knowledge of the company's objects clause.37 [1874-80]All ER Rep Ext 1459.38 [1904-07]All ER Rep Ext 1501.

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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 Brougham39the 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 onthe 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 companyregistration 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 ofcompanies. 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 objectclause was to be construed as subsidiary or ancillary to any other object.

Although the substratum rule in its application to third party transactions was impliedlyabolished 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 theposition 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 betweenthe 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 Ltd40 the scope of a company's permissiblecontractual 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 objectsclause.

Following the decisions taken in AG v The Great Eastern Railway Co, Re David Payne ,

Cotman v Brougham andBell Houses Ltdv City Wall Properties Ltd, the ultra vires rulehad 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 (1981)AC514.40 [1966]2 AllER 674.

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4.3 The Statutory Reform of the Ultra Vires RuleIn relation to incorporated companies, the judicial construction of the ultra vires rule was

for the most part aimed at curtailing the severity of its strict application in Ashbury.Parliament, on the other hand, was slow to act to either clarify the nature and extent of

the rule or remedy its commercial inequalities.

The first statutory reform of the ultra vires rule was made, following therecommendations of the Cohen Committee. Parliament, in passing Section 5 of the

Company Act 1948, made it possible for companies to alter their objects clause by special

resolution. This alteration power allowed companies a greater flexibility in relation tofuture transactions. However, although the validity of a company's capacity to enter into a

transaction could be secured by an alteration of the objects clause, the reform did little to

protect third parties in a situation where an alteration had not been made. Indeed, if forexample, a company decided not to alter its objects clause to ensure the company's

capacity was brought within the bounds of a proposed transaction, it followed that the

company could subsequently refuse to proceed with the transaction on the basis that its

performance would have constituted an ultra vires act. The likelihood of a company

wishing to withdraw from a transaction would be rare but such a scenario could, forexample, have occurred in a situation where a company's financial stability had declined

to such an extent that the proposed transaction became an inopportune venture.The implementation of a company's ability to alter its objects clause did little to modify

the effect of the ultra vires rule. However, had the full set of recommendations advanced

by the Cohen Committee report been given full statutory force the position would havebeen quite different. The Cohen Committee had recommended that in favour of third

parties a company should have all the powers of a natural person. If this recommendation

had been implemented the ultra vires rule would have been abolished in relation to third

party dealings. Notwithstanding that the Cohen Committee had proposed to abolish theultra vires rule in connection with third party dealings, the report still sought to retain the

ability of the rule to safeguard shareholder interests. In effect, the Cohen Committeeproposed that the objects clause should be relegated to the position of forming aconstituent part of a companies articles of association, thereby affecting the exercise of

directors powers as opposed to a rule regulating the external contractual capacity of the

company. Had the Committee's complete set of recommendations been enacted, then theconfusion which emerged from the line of cases which followed on from the decision in

Re Lee Behrens, would never have occurred.

In 1962 the Jenkins Committee recommended the abolition of the constructiveknowledge rule in relation to third party dealings. Other than where a third party had

actual knowledge of the contents of a company's constitutional documents, the

consequence of this proposal would have enabled a third party to enforce any transaction

against the company. Indeed, the Jenkins Committee suggested that actual knowledgeshould not in itself defeat a third party transaction where the third party had honestly and

reasonably failed to appreciate that the contents of an objects clause prevented the

company from entering into the transaction.Although the recommendations of both the Cohen and Jenkins Committee reports failed

to attain statutory recognition, the ultra vires rule was to be the subjected to a major

reform following the UK's entry into the European Community. Section 9 of the

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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 CommunitiesAct(EC) 1972. Section 9 EC Act 1972 was subsequently replaced, its wording unaltered,

by s35 of the Companies Act 1985.

4.4 The Companies Act 1989 of England and Ultra ViresThe 1989 Act introduced a number of amendments to the 1985 Companies Act. Section

35(1) CA 1985, as amended by the 1989 Act, now provides that,

"The validity of an act done by a company shall not be called into question on theground of lack of capacity by reason of anything in the company's memorandum"

Although the Companies Act 1989, did not (contrary to the recommendations of the

Prentice report) remove the need for a company to include an objects clause within itsmemorandum, nevertheless, it did seek to avoid the practice of prolonged clauses,

commonly used after the decision in Cotman v Brougham41. This was achieved by

introducing a standard type of objects clause, which now permits companies to pursue

any activity within a commercial context.

The ultra vires rule was applied to incorporated companies in the mid-nineteenth century

to protect both shareholders and creditors from the exploitation of the commercialadvantages associated with the introduction of the concept of limited liability. Initially,

the protection may have been considered justifiable because the then, radical concept of

limited liability, had a potential to encourage the fraudulent abuse of investment funds.The judiciary undoubtedly played a significant role in attempting to curtail the potency of

the ultra vires rule, albeit that the judicial confusion concerning its applicability to abuses

of corporate powers should not be forgotten. Indeed, prior to the UK's accession into the

EC and the subsequent reforms to the ultra vires rule which followed thereafter, the ruleconferred little practical relief in relation to the protection of shareholder and creditor

interests. Its main purpose was negative in character because its continued existenceresulted in the drafting of prolonged object clauses, which demanded thoroughscrutinisation by third parties eager to confirm a company's capacity to contract. The

abrogation of the ultra vires rule was, in so far as it retained a theoretical nuisance value,

a most necessary step.The legislative reform, culminating in the 1989 Act, has abolished the ultra vires rule in

relation to third party dealings. In addition, the 1989 Act, in its promotion of contractual

freedom, has sought to reform issues relating to directors authority. Such reforms wereinevitable in order to prevent a company's contractual capacity being set aside on the

subsidiary issue of a deficiency in agency powers. Indeed, the danger of transactions

being set aside on the grounds of such a deficiency is considerably eroded by the 1989

Act's abolition of the constructive notice rule in relation to a company's constitutionaldocuments.

Although the language of the 1989 Act, is, in its treatment of issues relating to corporate

capacity and directors authority, difficult and liable to conflicting interpretations, it wouldappear that its purpose of removing the ultra vires rule, together with its general

promotion of contractual freedom in respect of corporate transactions, has been achieved.

Undoubtedly, shareholders and creditors who could have previously relied upon a

41Supra 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

4.5 Ultra Vires in India

In India,Perhaps we have continued with the same notion.This was very evident from themost celebrated case ofDr.Lakshamanswami Mudaliar v.LIC42where it was clearly held

that an act beyond the objects mentioned in the memorandum is ultra vires and cannot be

ratified.The court in this case further laid down that the powers can be exercised only forthe purpose of the attainment of the objects and it is the main objects which are the most

important.Though not under the scope of this project the doctrine of ultra vires as

existing in India does need reform.This is important from the point of view of the factthat ultra vires and the object clause form a sort of cause and effect relationship since if

the doctrine of ultra vires is abolished or reduced as in UK the degree of the litigation as

regarding the alteration of the object clause will also be reduced.

42 AIR 1963 SC 1185.

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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 contentiouspoints 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 sub-

headings depending upon the class of the people looked at.

5.1 Creditor Interests

The existence of the doctrine does not entitle a creditor dealing with a company to

assume that it will only act intra vires and, if he neglects to enquire or, having enquired,draws the wrong conclusion, he may risk loss from which other creditors may

fortuitously benefit. The doctrine was more in the nature of a trap than a protection forthe creditor. Indeed, the doctrine had adverse effects even for a diligent creditor or thirdparty dealing with a company, as he may spend considerable time and effort to ensure

that a proposed transaction is intra vires.

In theory, no doubt the doctrine ofultra vires may provide protection by limiting the

business and so preventing unauthorized operations, which may damage the solvency of acompany and its ability to repay. In practice this is not a consideration, which weighs

with creditors at all. The prolixity of memoranda of association, and the power of a

company to alter its objects, and the ability of a company to operate through subsidiaries,

make it impractical to rely on the objects to impose any limitation on the businesseswhich the company may carry on44. Such limitations may be, however, and in many

cases are, imposed by creditors by including the necessary restrictions in their contractswith the company.

In practicality, a creditor lending funds on a long-term basis will normally impose

conditions to ensure that the loan is applied for a particular purpose, and will check the

object clause of the company. A creditor advancing short-term funds, or advancesrepayable on demand, is less likely to scrutinize the object clause of the company and be

more ready to assume that, if it is a trading company, the borrowing is within its powers.

Normally, the creditor lending funds on any significant scale will ascertain whether or not

there are in the articles any restrictions on the directors' borrowing powers, but these

normally expressly provide that any breach of the borrowing limit will not invalidate theborrowing.

Frequently, there will be a lending agreement, which will contain such restrictions on

the activities of the company, which the lender considers prudent.

43 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.44Ultra Vires, LAW SOCIETY'S GAZETTE 1772 (83(22): 11 th 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 companycan 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 beone class which has been most affected by the whole jumble of law. The researchers

view in this regard is that a creditorper 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 viresdoctrine 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 hisrelationship 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 objectclause of the company.In view of some commentators45 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 andsubsequent 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 ofall, 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 companycan enter into the agreement with the creditors. Further, the company cannot bind itselfnot to exercise its right conferred by the statute without shareholders approval.

5.2 Shareholders interests

No doubt shareholders interests are well protected in theory, by the law as well.

However in practicality, memoranda of association are excessively prolix, being designedto include every conceivable business. This defeats the object of having an object clause

and confers no protection on members. It also fails to guide investors as to what is the

real business of a company. One more important query in this regard can be that what is

the remedy available for the shareholder. In this regard the researchers view is that since

the law has provided enough protection to the shareholders in regard to that of theapproval by the CLB, there should ideally be no need for such a protection. In view of the

researcher perhaps this remedy is too far fetched and this point will be dealt by theresearcher while dealing with the practical aspects of the whole process of alteration.

45Id.

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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 placeover 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 countryas 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, butit 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 ofobject 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 limitedby 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 downby 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 whichthe 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

Vires, (1990) 1 Comp LJ 33.

47Id.48 S. 5 of Companies Act, 1985.49Re Hampstead Garden Trust,[1962] 2 All ER 879.

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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.

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Jurisprudential aspects of alteration of object clauses

Jurisprudentially, the researcher thinks that the company is a creature of law which has

been conferred upon several characteristics which are bound by certain limits and objectclause contained in MoA is one such limitation. Thus, a company can be equated to a

natural person, for its rights and liabilities are governed by the object clause contained

in the MoA of the company and subject to the law under which the company has beencreated. Thus, essentially this is an artificial concept with little or minimal relationship to

that of a natural person. In fact, this was the basic philosophy behind the whole concept

of ultra vires acts of corporations. This jurisprudence and theory finds favor, in the

writings on this subject as well.50

It may be said that corporations can do those things only which are incidental to thefulfillment of the purposes for which the law created it. All the acts of this corporation or

company are directed towards this legally appointed end.51Thus, a company incorporated

by special statute is limited to the powers conferred by the statute and those reasonablyincidental thereto. The reason behind the object clause in the MoA of a company is this

only. As after the legislature realized that there was, in fact, no requirement of an ultravires doctrine and the drafting of the object clauses was done vast enough to include

every conceivable work done by the company, the approach of the legislature was toremove all these obstacles and bring the legal personality of a company more closer to

that of a natural person and its contractual capacity also approached that of a natural

person. Thus, first of use of CLB in place of courts and then subsequent amendment ofeven CLB is a pointer towards this fact only.

Analyzed from the point of view of American Realist School, the matters which

come up before the court in the matters concerning attraction of object clause depend a

lot on what the judges view of companys financial and market situation is. Thus, the

discretion of judge involved in this case is not, purely legal in natural but commercial,since, the judge will have to analyze the companys future prospects, its present situation

etc. Though, this was the basic reasoning why the amendment in the Act was made so as

to include a quasi-judicial authority like CLB, the law was further amended and therequirement of approval by CLB or by court was dispensed with following the

philosophy of the liberal school which said that since it is a mere contractual relationship

between the members of the company and the company itself and hence, the shareholdersare the best judge of what is good for them.

50Salmond on Jurisprudence 313 (12th ed., P.J. Fitzgerald ed., Bombay: N.M. Tripathi Pvt. Ltd., 1999).51Id.

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Commercial aspects of law relating to the alteration of object

clauseLaw is not devoid of context and any study of law, not taking into account the

practical aspects of it, will be a useless study. Hence it is very important to understand

the implications of the law in the context in which it is made. For corporate law, thecontext acquires all the more importance in commercial transaction

Regarding the present study at hand, the law mandates that for the alteration of

object clauses in the MoA a special meeting of the members of the company is necessary.

However in practical scenario this is something which is very problematic since, it neverhappens that the member of a company, say, a shareholder who is even 100 shares of the

company, will actually travel down for the meeting. Thus, a very substantial chunk of the

members of the company never turn up for the meeting. It is also not commercially viablefor a company having a shareholding, which exists in lakhs of shares to do all these

things by post as well. Thus, if Reliance Industries Ltd. has to go for the alteration of the

object clause, they will have to seek the approval of 10 lakh plus of shareholders which isa situation extremely difficult to envisage, since even going by the postal ballot 52 it will

cast the company a fortune so as to hold that special meeting. Thus, for a company, theprocess of going for alteration is not at all commercially viable, especially when it is a

company with a large shareholding like Reliance Industries Ltd or Hindustan Lever Ltd.etc,.

The alteration of object clause also attains significance from the commercial point

of view when the company is going for Mergers and Acquisitions.53 Thus, is a companywant to go ahead with the M&A it has to go for the alteration of object clause but at the

same time there might be several hurdles which might be posed by the law in this regard

e.g. a shareholder may get an order of injunction from the court and this might lead to thegetting over of a certain phase which was the most profitable for the acquiring company

since at that time the market price of the company getting acquired was lowest. Thus,

where the companies are indulging in speculative takeovers of Sunrise industries, it maybecome difficult for them to alter their object clause at that very moment. The company,

may as well, in that case form another company but the problem here will be that from

where will the new company get the capital since the shareholders of the earlier company

will not be the shareholders of the new company.54The way out can be that the requiredamount of capital can be given by the earlier company as an interest free loan to the

newly formed company, provided the object clause of the earlier company permit it to do

so. Thus, in this can by exploiting a loophole, the company need not go in for the tediousand lengthy process of alteration of object clauses.

The alteration of object clause acquired a lot of importance some time back, when

the companies which had traditionally been the mechanical companies went ahead with

the automation drive where the medium of production were changed. Though, thishappened in the case of every few companies e.g. Ford Motor Company, there was a

requirement for change in the object clause.

52 As mandated by the new rules issued by the Department of Company Affairs.53 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.

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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 patentregime, 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 itmight 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 orbusinesses so as to spread out the risk which might be associated with one particular

business.

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Practical Aspects of Alteration to the object cause

This section has been broadly based on the practical study conducted, by the

Researcher. The effort in this section is to analyze that how close is the law followed in

practical situations. Though, the researcher could not lay his hands on any of the

litigation which has been carried out by the companies regarding the alteration of objectclauses but after talking to the lawyers involved in drafting of MoA and those involved in

the litigation of alteration of object clause, the researcher got several useful pieces ofinformation which point out to the fact that how close is the reality to the law in theory.

Appendix I is a sample of the certificate of incorporation as is used by theRegistrar of companies mentioning only the name of the company and no further detail

has been mentioned in this certificate.

Appendix II is a sample of the to MoA of a company involved in the business ofInformation Technology. If the object of this company are closely; analyzed then they are

divided into three parts, as mandated by the law. Since, it is more or less settled that the

clauses contained under the main objects clause are the actual objects of the company andthose contained under the heading of objects incidental or ancillary to the Attainment of

the main objects is actually the power conferred on the company to attain those objects.

The drafting of the objects of the company has a lot of significance regarding alterationof the objects since the objects are altered only where the drafting of the object leaves

them redundant in the light of the new developments. This is also very clear by a perusal

of clause 4 and 5 of the main objects, which were altered by a special EGM. The

diversity of the objects created by this amendment is very clear by the very fact that acompany which was mainly a company providing IT solutions has also ventured into the

business of consultancy and marketing. This could have created several problems for the

company, had any member objected to such an alteration. However since this company

has a very limited. Shareholding, which is also more or less under the control of thepromoters, these alterations could have been carried on. If the clauses mentioned in part

(B) are analyzed then it will be very clear that these are the powers of the company, sincethere is no way the things like take-over, buying and selling of raw materials etc. can be

considered as the main objects of the company. In practice there is hardly any change in

this part of the MoA since, every company uses these powers at some point of other. The

only limitation in one of there clauses is in clause 12 where the provision of investment inthe other companies but not doing the banking business as has been defined under

Banking Regulations Act, 1949 has been made. Similar is the provision contained under

clause 18 as well. These objects (powers) are actually not in any way concerned with thepresent activities of the company but these have been left broad so as to include even the

investment or donations of the company in the philanthropic activities as well.

Thus, though, theoretically the powers are meant to be used only as a means forthe attainment of the main objects in actuality, it is every broad and includes every

possible and conceivable activity in which the company might indulge at some point on

the other.It has come to the knowledge of the researcher after talking with the lawyers and

company secretaries that in actuality, the special meeting is not even attended by even

2% of the shareholders. Further, it is deliberately made complicated by the registered

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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, afterresearching 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. Theremay 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. Hencethere 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 informedcustomer 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 theshareholders 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 withthe particular areas in which the alterations can be made, the law should allow free

alterations as have also been pr

Documents

Corporate Law Object Clause