CS Santosh Pandey

CS Santosh Pandey1. INTRODUCTION

As we know the basic feature of a Company is that it is an artificial person in the eyes of law which is capable of pursuing its object in its own name. The main object clause of the Memorandum of the company reflects the business activity to be carried out by the company. In this article, we are going to discuss the concept of object clause and its consequences by analysing the provisions of the Companies Act, 1956 (hereinafter referred to as ‘1956 Act’),Companies Act, 2013 (hereinafter referred to as ‘2013 Act’) respectively, and what are the changes expected as a result of the proposed Companies (Amendment) Bill, 2016.

To understand the changes and to assess the impact therefore, let us start with the scenario which was prevailing under the Companies Act, 1956.

2. SCENARIO UNDER THE COMPANIES ACT, 1956 (1956 Act)

As per the provisions of erstwhile clause (d) of Sub-section (1) of Section 13 of the 1956 Act-

“The Memorandum of every company shall state-

  1. The main objects of the Company to be pursued by the Company on its incorporation and objects incidental or ancillary to the attainment of the main objects,
  2. other objects of the company not included in sub-clause (i).”

By the inception of the 1956 Act, it was very clear that any person being a promoter, who wants to incorporate a company and do business, have to be very much clear about the line he is going to be into. As at the time of the incorporation or any time thereof, the memorandum of the Company shall reflect the objects to be carried on by it.

Also, there were two other category of objects exist in the previous 1956 Act, i.e.-

(i) Incidental and ancillary objects; and

(ii) Other objects

Further, as per black law dictionary word ‘incidental’ means-

Depending on something, i.e. something, which is likely to happen, or is happening in addition to another event.

Therefore, by analysing the above it can be said that, by the use of the word incidental the legislature had covered within its ambit the activities which may occur/ happen as a result of pursuing the main objects carried out by the Company. Also, as per the black law dictionary, word ‘ancillary’ means-

“A proceeding attendant upon or which aids another proceeding considered as principal.”

Meaning of the word ‘ancillary’ reflects that, it deals with those objects which are for the furtherance of the main object in any manner.

In addition to the above, under the 1956 Act, the memorandum of association of a company was also required to state the other objects which a Company intended to carry out in near future.

These other objects may or may not be for the furtherance of the main objects mentioned in the memorandum of association of the company. In fact, they were business activities other than those contained in main objects. For pursuing any activity which is mentioned therein the clause of OTHER OBJECTS of the Memorandum of Association of the Company, the company needs to comply with the provisions of Section 149(2A) & (2B), i.e.-

(a) Either the company shall obtain the approval of the shareholder by way of SPECIAL RESOLUTION, or

(b) The company shall attain the approval of majority of the members of the company along with the approval of the CENTRAL GOVERNMENT.

It is to be noted that if the company intending to do any activity which is not mention in the memorandum of association of the company, it has to follow the process of changing the object clause of the Memorandum and attain member’s approval by passing special resolution along with approval of the Registrar of Companies.

Consequences, if the company does business activities beyond what is stated in the  Main Object Clause-

If any company works beyond the objects to be pursued by the company mentioned in the Main Object clause of the Memorandum of the Company, than the DOCTRINE OF ULTRA-VIRES comes into force.

As per black law dictionary, ‘ultra-vires’ means-

‘a body exercising an invalid excess or power of authority.’

In other words, it can be said that in corporate law, ultra vires describes acts attempted by a corporation that are beyond the scope of powers granted by the corporation’s main objects clause.

As per the doctrine of Ultra-Vires, any act done by the company which is beyond the empowerment stipulated by the Memorandum of the Company is void-ab initio and the members of the company cannot ratify such act. The doctrine of Ultra-vires has been established on the basis of the judgement given under UK company law case Ashbury Railway Carriage and Iron Co Ltd v Riche.

The importance of this case is found diminished by the amendment made in the UK’s Companies act in the Year 2006 by the insertion of Section 31.

Sub section (1) of Section 31of the UK’s Companies Act, 2006 –

“Unless a company’s articles specifically restrict the objects of the company, its objects are unrestricted.”

It is to be noted that in sub-section (1) the act itself provides the power to the Companies to do any activity and expand the business and do not restrict to any specific activity line.

For Indian Companies Act, it was there, a very crucial judgment to be taken into consideration.

Now, let us see the scenario under the Companies Act, 2013

SCENARIO UNDER THE COMPANIES ACT, 2013  (2013 Act)

On 1st April, 2014, the Companies Act, 2013 has taken effect and the provisions of Section 4(1)(c) says that-

The memorandum of the company shall state-

“the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof”

By analysing the above provision we can conclude that the new companies act, is not going to give any shelter to the concept of OTHER OBJECTS, which can be carried on by the company.

In the said clause it can also be observed that-

As long as the 1956 Act stipulates, the new act also stipulates that, the promoter having any thought of incorporating a company have to be very clear about the activity line or business to be carried on by the company in the future to earn growth.

Now only two category of objects exists-

  1. Main objects;
  2. Matter considered necessary for the furtherance thereof.

If we go through the said clause (c), the words have been used-

‘any matter considered necessary in the furtherance of the main objects.’

This means any objects which is not necessary for the furtherance of the main objects, even though the said object is lawful, cannot be carried on by the company.

It is to be noted that the said clause has not used any words like ‘incidental’ or ‘ancillary’. It stipulates that the activity can or cannot be ‘incidental’ or ‘ancillary’, but it should be for pursuing the main objects of the Company.

If at any-time, company intends to change its business activity, it is required to alter the object clause of the Memorandum of the company after obtaining the shareholders approval by way of SPECIAL RESOLUTION, even if the activity belongs to the lawful activity.

The DOCTRINE OF ULTRA-VIRES and the case of Ashbury Railway Carriage and Iron Co Ltd v Riche, still exists under the 2013 Act.

CHANGES EXPECTED ON ACCOUNT OF PROPOSED COMPANIES (AMENDMENT) BILL, 2016

By the companies amendment Bill, 2016 seeks to amend Section 4 (1) (c) of the Companies Act, 2013 i.e. relating to object clause of the company, the Government has proposed to inserted the following in place of the present section 4(1)(c):-

“that the company may engage in any lawful act or activity or business, or any act or activity or business to pursue any specific object or objects, as per the law for the time being in force:

Provided that in case a company proposes to pursue any specific object or objects or restrict its objects, the Memorandum shall state the said object or objects for which the company is incorporated and any matter considered necessary in furtherance thereof and in such case the company shall not pursue any act or activity or business, other than specific objects stated in the Memorandum;”

By the proposed amendment the government seeks to provide the following three options

a) The promoter can engage in any lawful object, and mention such in the Memorandum of Association of the company, or

b) The company can specifically mention the objects to be carried out by the Company in the Memorandum of the Company, if the company want itself to restrict to particular activity, or

c) It can specifically mention the object which will not be carried out by the Company.

It has been provided that the main object of the company can be anything and may not restrict to any specific object unless the promoters itself wants to restrict themselves.

Further, on account of the proposed amendment, the promoter can also take the advantage by not mentioning the specific main object of the company to be pursued; rather mentioning the specific main object which will not be pursued by the company. This provision is quite similar to the situation prevailing in the UK, in this regard. The proposed amendment would help the Companies in focusing on multiple business activities without going for amendment to its main object(s) time and again. This will help in quick decision making and also, reduction of cost of compliance  on account of non –requirement of following the process of change in main object(s) clause before commencing any lawful object, until it belongs to any restricted category, if any, mentioned by the Company.

By the proposed Companies Amendment Bill, 2016, the value of the DOCTRINE OF ULTA-VIRES and the relevance of case law of Ashbury Railway Carriage and Iron Co Ltd v Riche have been diminished to a large extent however, it will continue to exist under the new (proposed) regime.

The applicability of the doctrine will therefore, be applicable the following two situations-

  1. Specific main object TO BE carried on by the company has been mentioned in the Memorandum,
  1. Specific main object NOT TO BE carried on by the company has been mentioned in the Memorandum.

Therefore, once the proposed amendment becomes effective, the Companies willing to proceed with the option of stipulating specific main object not to be carried on by the Company will have to take necessary approvals from the shareholders and the company law authorities. This would obviously be a one time cost to save a plenty of money, in the near future!

In order to see the impact after the proposed amendment in comparison to the situation presently applicable under the 2013 Act, we may refer the chart as under :

COMPARISON AT GLIMPSE

S.No.ParticularsCompanies Act, 1956Companies Act, 2013Companies Amendment Bill, 2016
1.Main Object Clause
PersistPersistPersist
2.Incidental or Ancillary Object ClausePersistPersist, but the scope has been widened by the use phrase-

‘objects which are necessary for the furtherance of the main objects’

As same as Companies Act, 2013
3.Other ObjectPersistDo not persistDo not persist.
4.Main Object to be Specific
PersistPersistMay Persist
5.Concept of Restricted Objects
Do not persistDo not persistMay Persist
6.Applicability of Doctrine of Ultra-ViresPersistPersistPersist as long as the company specifically mention the activities to be carried or not to be carried out by the Company

CONCLUSION

The proposed amendment in the Companies (Amendment) Bill, 2016 is going to be very beneficial amendment for the industry and is a step towards ease of doing business. However, it is subject to various other restrictions, agreements which could be on account of stipulations by Bankers, Financial Institutions in terms of loan/debt agreement, Shareholders agreement, Joint Venture Agreement, SEBI’s mandate in case of IPOs (clarification is yet to come from SEBI), RBI mandate for NBFCs and so on.

Therefore, as of now, it seems that the said proposed amendment would mainly help those who don’t intent to get themselves listed or are not into the business activities like NBFC Companies and other Companies regulated by other laws and required to follow stipulations made under those laws and those who have restrictions by virtue of shareholders agreements/ Joint Venture Agreement and such other documents.  Thus, it can be said that the Companies (Amendment) Bill, 2013, will be more beneficial for the companies who are going to make profit by making their own money invested instead of money belonging to others.

If you have any query, you may reach out to the author at cs.santosh.com @gmail.com.

Posted Under

Category : Company Law (2996)
Type : Articles (10773)
Tags : Companies Act (1523) Companies Act 2013 (1277)
  • MOHIT SALUJA

    Very nicely written article Santosh Bhai, and that too in simplified way.

    • Santosh Pandey

      Thank you Mohit