Corporate Law Fd Ankana.docx

DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY

CORPORATE LAW PROJECT ON:

TOPIC : ALTERING THE OBJECTS CLAUSE OF MOA: CURRENT TRENDS SUBMITTED BY: ANKANA MUKHERJEE

UNDER THE GUIDANCE OF: MS. PRIYA ANURAGANI

ENROLLMENT NO-150101018

ASSISTANT PROFESSOR (LAW)

SECTION- ‘A’

DR. RAM MANOHAR LOHIYA

B.A. LLB (Hons.), SEMESTER VI

NATIONAL LAW UNIVERSITY

SIGNATURE OF STUDENT:

SIGNATURE OF PROFESSOR:

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OBJECTIVE OF THE STUDY

The objective of this paper is to analyse and understand the provisions relating to the alteration in the objects clause of Memorandum of Association as provided under Companies Act, 2013 and the current trends of the same.

TENTATIVE RESEARCH QUESTIONS

Q.1. What is the Object Clause of the Memorandum of the Association of Company? Q.2. What are the steps for alteration in the objects clause of Memorandum of Association under Companies Act, 2013? Q.3. What are the current trends regarding the object clause of Memorandum of Association?

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Contents

WHAT IS OBJECT CLAUSE .................................................................................................................. 4 PROCEDURE FOR CHANCE IN OBJECT CLAUSE............................................................................ 4 The format under the Companies Act’2013 includes only two sub clauses: ........................................... 5 Object Clause under the Companies (Amendment) Bill ......................................................................... 5 POSITIVE SIDE OF THE AMENDMENT.............................................................................................. 7 CRITICISM OF THE AMENDMENT ..................................................................................................... 7 CURRENT SCINARIO ............................................................................................................................ 8 ANNOTATED BIBLIOGRAPHY ............................................................................................................. 9

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WHAT IS OBJECT CLAUSE The memorandum of Association (MOA) of any Company as per Companies Act’ 2013 has five clauses: 

Name Clause



Registered Office clause



Object Clause



Liability Clause



Capital Clause

Any of these clauses can be altered by the Company as and when it wants to do so. These clauses can be altered by passing a special resolution of the shareholders of the Company except in case of the capital clause which can be altered by passing an ordinary resolution by the shareholders of the Company. Object clause is the clause in the MOA of the Company which defines the main business activity of the company. It defines the main objects that the company is going to pursue after incorporation. The object clause also enlists the objects that are necessary/incidental for furtherance of the main objects i.e the objects which help in conduct of the Main Objects of the Company or are necessary for the conduct of the main objects. Earlier under the Companies Act’ 1956 there used to be an Other Object Clause also which defined all other objects that the company could undertake other than the Main and Ancillary objects. This other object clause has now been done away with under the Companies Act’2013.

PROCEDURE FOR CHANCE IN OBJECT CLAUSE

First call a board meeting for approval of change in object clause. The agenda of the board meeting will be to approve the change in object clause and to call an EGM to get the shareholder’s approval for change in object clause. The board meeting should be called by giving at least 7 days notice. The board will determine the changes in the object clause and will set the agenda for EGM. The board will approve notice for calling EGM by fixing date, time and venue of EGM. Here another thing to be kept in mind while altering the Object clause of Memorandum is that the Registrar may ask for adoption of new set of memorandum and articles in line with the new Companies Act’2013. 4|Page

The statutory backing for adopting new set of memorandum and articles is given in Section 6 of the Companies Act’2013. herefore, the provisions under the old memorandum/articles may be repugnant i.e contradictory/inconsistent with the provisions of the Companies Act’2013 and hence may be termed as void therefore it is advisable to adopt new set of memorandum and articles as per Companies Act’2013.

The format under the Companies Act’2013 includes only two sub clauses: 

THE

OBJECTS

TO

BE

PURSUED

BY

THE

COMPANY

ON

ITS

INCORPORATION i.e Main Objects. 

MATTERS WHICH ARE NECESSARY FOR FURTHERANCE OF THE MAIN OBJECTS. Therefore while altering the object clause it is advisable for the company:



To amend the title of incidental object Clause of the Memorandum Of Association by passing the following resolution: “Clause III (B) of the objects that are incidental or ancillary to the attainment of the main objects of the Memorandum of Association be and hereby replaced with the title “MATTERS WHICH ARE NECESSARY FOR FURTHERANCE OF THE OBJECTS SPECIFIED IN CLAUSE III (A) ARE:-“



To Delete the other objects clause of the Memorandum Of Association by passing the following resolution: “Pursuant to the provisions of Section 4, 13 and all other applicable provisions, if any, of the Companies Act, 2013, (including any amendment thereto or re-enactment thereof), and subject to necessary approval(s) if any, from the competent authorities, the Other Objects Clause of the Memorandum of Association of the Company be removed by completely deleting the clause III (C)”.

Object Clause under the Companies (Amendment) Bill

The Companies (Amendment) Bill, 2017 was introduced in Parliament to usher in more changes to the recently amended Companies Act, 2013 (the “Act of 2013”). Among the proposed reforms, one proposal was to do away with the need for an ‘object clause’ in the 5|Page

Memorandum of Association (MOA). Section 4(1)(c) of Act of 2013 lays down a requirement of including an object clause in the MOA which states the objectives behind the incorporation of a company and mandates every MOA to state “the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof”. This was a departure from section 13(d) of the Companies Act, 1956 (the “Act of 1956”) which provided that every company should separately provide for ‘main’ and ‘other’ objects.1 The actions undertaken by any company are required to be within bounds of its object clause and any action beyond its realms is to be considered ultra vires, a principle established in the case of Ashbury Railway Carriage & Iron Company Ltd. v. Riche.2 However, such ultra vires act is different from an illegal act. Under conditions where the company exceeds its objects, they are neither able to sue the company for breach of contract nor seek specific performance. Such actions undertaken ultra vires the objects were considered void, as laid down in Ashbury Railway Carriage3. Thus, the only actions which a company could have undertaken are those within the ambit of objects clause. An argument which attempted to negate the allegation of an ultra vires agreement was that of constructive notice, which states that since outsiders/third parties had access to the MOA which contained the object clause, they would be deemed to have knowledge about extent of company’s ability to enter into transactions. But, the interplay between the ultra vires and constructive notice doctrines has not been an easy one to deal with, especially for courts. In section 31(1) of the (English) Companies Act of 2006 the provision states that unless the articles of company specifically restrict the objects of a company, its objects are unrestricted. A similar approach is followed in section 23 of the Singapore Companies Act. Likewise, the Companies (Amendment) Bill, 2016 in India sought to do away with the requirement of having a specific object clause. By introducing amendments to section 4(1)(c) of the Act of 2013, it extended an option to the company to either merely mention that it will engage in lawful activities or choose to enumerate specific objects in detail. However, by way of a proviso, it was stated that if a company chose to lay down specific objects, it won’t be permitted to engage in activities ultra vires such ambit. 1

Section 13(d) was amended through the Companies (Amendment) Act, 1965. The changes were in line with the suggestions of Daphtary Sastri Committee. 2 (1875) LR 7 HL 653. 3 Id.

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POSITIVE SIDE OF THE AMENDMENT 

The amendment sought to grant maximum autonomy to persons controlling the affairs of the company to enter into any transaction unhindered and un-impacted by any illdrafted clauses in the MOA. But the transactions entered into were subject to laws in force and hence the transactions could still be challenged and be vitiated by applicable laws. Thus, the defence that transactions carried out beyond object clause being void and not binding upon the company was relinquished the moment a company decided not to have an object clause. It was beneficial for third parties since any breach of contract or fraudulent transactions could be brought before the court for redressal, without having the burden to prove the vires of transaction.



Due to the mandate of having a detailed object clause, the practice of drafting the object clause as widely as possible had developed, and which was in direct correlation to obviating the necessity to seek consent of general meeting by special resolution whenever any new venture was contemplated. The proposed clause in the Bill would have given unlimited power in the hands of persons controlling the company to enter into any possible transaction as deemed correct without having the need to amend the clause or to seek consent from other stakeholders from time to time.



In 1998, the Company Law Review considered the removal of object clause requirement as a bid to promote “straightforward, cost-effective and fair” corporate law system.4 Thus, the attempt has always been to provide greater flexibility in carrying out business.

CRITICISM OF THE AMENDMENT 

It was not clear what the drafters tried to achieve through the proviso to section 4(1)(C) as proposed in the Companies (Amendment) Bill, 2016. It merely allowed the company to proceed with the traditional approach of laying down an exhaustive object clause. It did not in any way unburden the court of the need to decide on basis of factual analysis whether certain action would be incidental or consequential to what has been expressly mentioned in the clause.



With such unrestrictive clauses, the shareholders would be required to keep adequate check on the exercise of such power by adding appropriate internal

4

Modern Company Law for a Competitive Economy: Final Report, 2001.

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control clauses and distributing powers proportionately. One of the reasons which Daphtary Sastri Committee gave for having a detailed object clause was to give all the stakeholders (shareholders and other interested parties) a clear idea of what the objects were. With such liberal position, there was higher possibility of their rights being impaired without the presence of adequate checks and balance. 

The concern about establishment of bogus entities was raised by the Parliamentary Standing Committee on Finance in its 37th Report that considered the provisions of the Companies (Amendment) Bill, 2016,5 and removal of such blanket exemption was suggested. The Committee found that the reduction of object clause to a mere redundant provision in the Memorandum as “too far-fetched.” The Committee argued that a well stated object clause instilled confidence amongst the investors and creditors of the company.

CURRENT SCINARIO The suggestion given by Parliamentary Standing Committee on Finance in its 37th Report was accepted in the amendments to the bill circulated on April 5, 2017 and the status quo was restored by removing the proposed amendment in the Companies (Amendment) Bill, 2017 as passed by Lok Sabha on July 27, 2017.

5

Standing Committee on Finance, 16th Lok Sabha, 37th Report, p. 58, pp. 3.31.

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ANNOTATED BIBLIOGRAPHY

1. Section 13(d) was amended through the Companies (Amendment) Act, 1965. The changes were in line with the suggestions of Daphtary Sastri Committee, report of the commission of inquiry on the administration of Dalmia-Jain Companies. 2. Ashbury Railway Carriage & Iron Company Ltd. v. Riche (1875) LR 7 HL 653. 3. Id. 4. Modern Company Law for a Competitive Economy: Final Report, 2001. A consultation document from the Company Law Review Steering Group. 5. Standing Committee on Finance, 16th Lok Sabha, 37th Report, p. 58, pp. 3.31.

6. https://indiacorplaw.in/2017/08/object-clause-companies-amendment-bill-flipflop.html#_ftn2 Object Clause under the Companies (Amendment) Bill: A Flip-Flop.

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