Corporate law - Object Clause

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 the company 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 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.

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 it was 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, nor could 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 the directors 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 actual authority 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 the companys 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 to purport 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 the matter 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 on behalf 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, by sections 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 individual shareholders and the duties owned by directors to their companies are still to some extend
4 5

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.

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 the focus 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 object clause 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 of the 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 express provision 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 the Act 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 provision contained 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 section of 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 express provision 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 it is 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

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.

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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

whole object of the section is enabling.

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

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

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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

In re Bharat Mining Co Ltd., (1967) 37 Comp. Cas.430 (per, P.B.Mukerji, J.).

26

In this regard ,See also, Hari Krishan Lohia v.Hoolungoree Tea Co.Ltd .[1970]40 Comp. Cas.458 (Cal.);

Nagaisuree Tea Co.Ltd.v.Ram Chandra; [1966] 2Comp.LJ208(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).

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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 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

31

AIR 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 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,

33

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

15

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.

16

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.

4.1 Introduction to the Ultra Vires Rule

In 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 the scope 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 of the 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 the nineteenth 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 limitations upon 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 unanimous consent 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. The 1855 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 a company'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 future shareholders, 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 the Joint Stock Companies Act ,1844.

17

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
35

[1874-80] All ER Rep Ext 2219.

18

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.

4.2 Judicial Interpretation of Ultra Vires Rule

While accepting the validity of the ultra vires rule, the judiciary was inclined, in cases after Ashbury, to weaken the strict application of the rule. While giving theoretical protection to both shareholders and creditors, the ultra vires rule, together with the constructive 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 Company 37. Here, the House of Lords, only five years after it had laid down the strict interpretation of the ultra vires rule, sought to weaken the Ashbury approach, by providing that the ultra vires rule should be applied reasonably. According to the House, it was legitimate for a company to pursue a course of business other than the one defined as the company's principal object, providing that 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 that the 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 had generally 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 the significance 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 Under which a third party when contracting with a company was deemed to have constructive knowledge of the company's objects clause.
36 37 38

[1874-80]All ER Rep Ext 1459. [1904-07]All ER Rep Ext 1501.

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

(1981)AC514. [1966]2 AllER 674.

20

4.3 The Statutory Reform of the Ultra Vires Rule

In 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 the recommendations 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 to future 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 for example, 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, for example, 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 have been 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 the ultra 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 Committee proposed that the objects clause should be relegated to the position of forming a constituent 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 the confusion 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 constructive knowledge 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 knowledge should 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

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.

4.4 The Companies Act 1989 of England and Ultra Vires

The 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 the ground 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 its memorandum, 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 commercial advantages 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 rule conferred little practical relief in relation to the protection of shareholder and creditor interests. Its main purpose was negative in character because its continued existence resulted in the drafting of prolonged object clauses, which demanded thorough scrutinisation 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 were inevitable 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 constitutional documents. 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 would appear 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
41

Supra note 6.

22

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 the most celebrated case of Dr.Lakshamanswami Mudaliar v.LIC42 where 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 for the 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 fact that 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.

23

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.

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 for the creditor. Indeed, the doctrine had adverse effects even for a diligent creditor or third party 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 of ultra vires may provide protection by limiting the business and so preventing unauthorized operations, which may damage the solvency of a company 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 businesses which 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 contracts with 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 advances repayable 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 the borrowing. 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. 44 Ultra Vires, LAW SOCIETY'S GAZETTE 1772 (83(22): 11th June, 1986).

24

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.

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 designed to 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 the approval 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 the researcher while dealing with the practical aspects of the whole process of alteration.

45

Id.

25

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

Vires, (1990) 1 Comp LJ 33.

47 48

Id. S. 5 of Companies Act, 1985. 49 Re Hampstead Garden Trust,[1962] 2 All ER 879.

26

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 object clause 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 been created. 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 the fulfillment of the purposes for which the law created it. All the acts of this corporation or company are directed towards this legally appointed end.51 Thus, a company incorporated by special statute is limited to the powers conferred by the statute and those reasonably incidental 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 ultra vires 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 to remove 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 of even 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 the requirement 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 shareholders are the best judge of what is good for them.

50 51

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

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Commercial aspects of law relating to the alteration of object clause

Law 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, the context 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 never happens 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 viable for 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 is a 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, the process 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 company want 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 the getting 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 may become 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. 54 The way out can be that the required amount 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 tedious and 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, this happened in the case of every few companies e.g. Ford Motor Company, there was a requirement for change in the object clause.
52 53

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.

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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 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.

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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 object clauses 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 of information 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 the Registrar 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 of Information 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 and those 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 alteration of 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 a company 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 the promoters, 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, since there 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 in the 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 the present 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 for the 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, 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.

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