Scope Of Object Clause In Memorandum Of Association

A PROJECT REPORT ON Scope of object clause in the Memorandum of Association

Project Submitted To: Dr. Dipak Das (faculty of law)

Project submitted by: Somesh Rai SEMESTER-V,SECTION-A ROLL NO- 166

Submitted on - 23 -10 -2019

HIDAYATULLAH NATIONAL LAW UNIVERSITY RAIPUR, C.G.

Declaration

I hereby declare that this project “Scope of object clause in the Memorandum of Association” which is submitted to “Hidayatullah National Law University, Raipur” is a record of an original work done by me under the guidance of Ankit awasthi, faculty of law Hidayatullah National Law University, Raipur and this project work has not performed the basis for the award of any Degree or Diploma fellowship and similar project if any.

Somesh Rai Semester-v Section-A Roll no. 166

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Acknowledements

I feel highly elated to work on the topic “Scope of object clause in the Memorandum of Association’’ I express my deepest regard and gratitude for our Faculty of Corporate Law -I. His consistent supervision, constant inspiration and invaluable guidance have been of immense help in understanding and carrying out the importance of the project report. I also want to thank the University for providing free and unlimited use of internet and the wellstocked library which played a very important role in completion of this project I want to thank the Respected Vice Chancellor of the University for giving us the opportunity of being a part of this institution

Somesh Rai Semester -V Roll no.166 Section -A

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Table of Contents Declaration of Originality Acknowledgments Table Of Content List Of Cases Ashbury Railway Carriage and Iron Co v Riche

II III IV 7

Attorney General v The Great Eastern Railway Company

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Re David Payne

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Cotman v Brougham

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Bell Houses Ltd v City Wall Properties Ltd

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Introduction

1

Scope

2

Objective

2

Research and Methodology

2

Review of Literature

2

Hypothesis

2

Mode Of Citation

2

Why “object” Clause?

3

Kinds of objects

4

Relevance Scope & Object.

5

Procedure of alteration.

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Conclusions

14

Refrence

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Chapter 1 – Introduction

Memorandum of Association: MoA is a document that regulates a company's external activities and must be drawn up on the formation of a registered or incorporated company. As the company's charter it (together with the company's articles of association) forms the company's constitution. The MoA gives to the company its name, the names of its members (shareholders) and number of shares held by them, and location of its registered office. It also states the company's objectives, amount of authorized share capital, whether liability of its members is limited by shares or by guaranty, and what type of contracts the company is allowed to enter into. Almost all of its provisions (except those mandated by corporate) can be altered by the company's members by following the prescribed procedures. The memorandum is a public document and may be inspected by anyone, usually at the public office where it is lodged. Object clause: It is a Section in a memorandum of association that describes the objectives for which the firm was formed. An objects clause is a provision in a company's memorandum of association stating the purpose and range of activities for which the company is carried on.

Generally, a lot of importance is associated with the object clause while forming of a company. Thus there is an ardent need to have the knowledge of what object clause really is and why is it important. Why it was inserted and what could be the consequences of non adherence to it. These are some questions which have been tried to be addressed in this study.

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Statement of Problem object clause of the memorandum of association defines the scope of the powers of company and declare any act beyond it ultravires. The procedur of alterarion of Object clause is rigid. it is very difficult to alter the Object clause.

Objectives Following are the objectives: 

To understand what constitutes the object clause of MoA.

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To find out its importance and relevance.

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To know the procedure of alteration.

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To develop a broader understanding about the whole concept.

Research Questions 

Why it is called “object” clause and not “purpose” clause?

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What are kinds of objects?

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What is the relevance, scope and importance of the object clause?

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How can object clause be altered?

Research And Methodology

This project work is descriptive & analytical in approach and has been done taking the help of secondary data i.e. websites, articles. It is descriptive in nature. To construct this project, the help of dictionaries, legal websites as well as social science websites, books on the said case have been taken. The points as discussed in this project include the study of different sources on the topic as well as the points guided by the faculty. Footnotes have also been provided for acknowledging the sources.

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Limitations Although the scope of research on the scope of object clause can be very vast, the scope of the project strictly limits itself to the understandings of the concepts and the provisions related to the object clause. Chapterization Chapter1- Introduction Chaper 2 - Why “object” Clause? Chapter 3 - Kinds of objects Chapter 4 - Relevance Scope & Object. Chapter 5 – doctrine of Ultra Vires Chapter 6 - Procedure of alteration. Chapter 7 - Conclusions

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Chapter 2 - Why “object” clause?

According to the Merriam Webster dictionary1, object means “the goal or end of an effort or activity”. The Oxford dictionary2 explains object as “the goal or purpose” of doing something. We can understand object as the goals of the immediate action of a person. E.g. If a company is involved in business of property, its object is to do the business of property. If a company makes cars, its object is to make cars. Merriam Webster3 defines “purpose” as the reason why something is done or used: the aim or intention of something. According to Oxford dictionary 4, it means the reason for which something is done or created or for which something exists. So we can understand purpose as the ultimate reason for which an act is done, or the motivation behind the act. The question is raised that why the Company Act 2013 has an object clause and not a purpose clause is very obvious. The reason being the objects of companies can be very diverse. The companies can have any objectives out of those mentioned in the Companies Act 2013. But most of the times, the purpose of the companies is to make profit. Though non profit organisations can also be incorporated under the act, but broadly purpose of the company could either be profit making or for benefit of the society. But there could any number of objectives out of those mentioned in the act. As the lawmakers intended that the activities the company is capable of undertaking should be open and clearly mentioned, that is why they call it for “object” clause, and not “purpose” clause.

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http://www.merriam-webster.com/dictionary/object http://www.oxforddictionaries.com/definition/english/object 3 http://www.merriam-webster.com/dictionary/purpose# 4 http://www.oxforddictionaries.com/definition/english/purpose 2

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Chapter 3 - Kinds of objects

Under Company Act 1956, two important amendments were made in the object clause of memorandum of association. The companies incorporated after those amendments cameint effect needed to split the object clause in two types. Object clause was divided into following two categories:

1. Main Object: This sub clause included the main objects of a company to be perused on its incorporation and the objects incidental o ancillary to attainment of the main objects. 2. Other objects: This sub clause includes other objects of the company not included in the main objects, and in case of companies other than trading corporations, with objects not confined to one state, and the states to whose territories the object extends. Incidental or ancillary objects: these objects maybe regarded as incidental or conducive to attainment of main objects of the company. This does not imply widening the concept of object clause, but is only taken to include such incidental acts which have a reasonably close proximity with the specified main objects.

As against the existing requirement of the 1956 Act, the 2013 Act does not require the objects clause in the memorandum to be classified as above. The basic purpose in the 1956 Act for such a classification as set out in section 149 of the 1956 Act, is to restrict a company from commencing any business to pursue ‘other objects of the company’ not incidental or ancillary to the main objects except on satisfaction of certain requirements as prescribed in the 1956 Act like passing a special resolution, filing of declaration with the ROC to the effect of resolution.

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Chapter 4 - Relevance, Scope and Importance

Rationale: There are several reasons, which can be identified for provision of object clause 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 use5.

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 objects6.

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.

Scope: It is possible to identify four legal functions which the object clauses serve in the law. The object clause is supposed to serve the following functions:

1. The first is the function of the objects clause in defining the company’s 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

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Avtar Singh, Company Law 47(12th ed., Lucknow: Eastern Book Company, 1999). Id.

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into of a contract) could sue upon the contract, nor could the ultra vires act be ratified by the shareholders, even unanimously7.

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 company’s 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 company’s 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 transaction8.

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.9

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 are the purposes of the object clause at the company law.

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Palmer’s Company Law 2120(25th ed., C.M.Schmittoff et.al.eds.,London: Sweet and Maxwell,1992). Id. 9 Id. 8

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Chapter 5 - Doctrine of ultra vires 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 Riche 10. 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.

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[1874-80] All ER Rep Ext 2219.

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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. The first authoritative example of the judicial departure from the approach taken in Ashbury was in Attorney General v The Great Eastern Railway Company11. 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 Payne 12. 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 power had been employed, but rather,

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

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whether or not the company in question had the capacity to conduct the transaction or employ the relevant power in question. In Cotman v Brougham13 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'.

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(1981)AC514.

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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 Ltd14 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.

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[1966]2 AllER 674.

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Chapter 6 - Procedure for alteration

Under the Companies Act 1956, the provisions of alteration of object clause of memorandum of association are given in section 17, 18 and 19 of the act. Provided that the alteration does not contravene the provisions of Section 17, Section 18, Section 19, Section 40, Section 149 (2A) of The Companies Act, 1956, the alteration can be made by following: Circumstances when an alteration can be made: Company can alter its object clause by way of addition, deletion, modification, substitution, or in any other way, only if it wants:a. to carry on its business more economically or more efficiently; or b. to attain its main purpose by new or improved means; or c. to enlarge or change the local area of its operations; or d. to carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company; or e. to restrict or abandon any of the objects specified in the memorandum; or f. To sell or dispose of the whole, or any part, of the undertaking, or of any of the undertakings, of the company; or g. To amalgamate with any other company or body of persons.

I.

Convene a Board Meeting to alter the object clause in memorandum of association of Company. At the Board meeting, the given resolutions must be passed:a. approving the change in the objects clause and recommending the proposal for members' consideration by way of special resolution; b. in the case of a public company, if the company proposes to take up the new activity by insertion of new objects, a special resolution for the commencement of new business in terms of section 149(2A) of the Act must also be passed; c. approving a draft of the special resolution to be passed at a general meeting of the members of the company; d. fixing the date, time, and venue of the general meeting and authorising a director or any other person to send the notice for the same to the members.

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II.

If a new line of activity is to taken by way of alteration of the Objects Clause, the proposal will have to be examined from the point of view of other statutes also, such as MRTP Act, Industries (Development & Regulation) Act, FEMA etc.

III.

Send 3 copies general meeting's notice to all the Stock Exchanges on which the company's securities are listed, at the same time when such notice is dispatched to the members

IV.

Convene the General meeting to pass the special resolution according the approval for the alteration.

V.

File FORM NO. 23 with the Registrar alongwith the requisite filing within 30 days of passing the special resolution, alongwith given documents:a. certified true copies of the special resolutions alongwith explanatory statement; b. copy of the notice send to members alongwith all the annexures; c. a printed copy of the memorandum as altered.

VI.

File six copies (one of them to be a certified copy) with the Stock Exchange immediately after the meeting, in the case of a listed company.

VII.

The Registrar shall then accordingly register the alteration and issue a certificate which will be the conclusive evidence that all the requirements with respect to the alteration have been duly complied with by the company.

VIII.

The alteration shall be complete and effective only on the issue of certificate by the Registrar

IX.

If the special resolution is not filed within 30 days, company must make a petition to the CLB for condonation of delay and extension of time within one month after the said period of 30 days, for revival of the special resolution.

X.

Incorporate the alteration in every copy of the memorandum.

Companies Act 2013 Section 13 of Companies Act 2013 regulates the process of amendment in Memorandum of Association is applicable to all companies. All clauses of Memorandum except Capital clause can be altered by following the provisions of Section 13 of Companies Act, 2013 by passing special resolution.

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Though no specific circumstances have been mentioned for the alteration of object clause of memorandum, procedure for Change in object clause Secretarial procedure for alteration in object clause is given below: 1. Calling of Board Meeting: Issue notice in accordance with the provisions of section 173(3) of the Companies Act, 2013, for convening a meeting of the Board of Directors. Main agenda for this Board meeting would be: a. To Get in-principal approval of Directors for change in object clause of Memorandum; b. Fix date, time and place for holding Extra-ordinary General meeting (EGM) to get approval of shareholders, by way of Special Resolution, for amendment in object clause of Memorandum. This amendment in object clause of Memorandum shall be in accordance with the requirement of section 13 of the Companies Act, 2013; c. To approve notice of EGM along with Agenda and Explanatory Statement to be annexed to the notice of General Meeting as per section 102(1) of the Companies Act, 2013; d. To authorise the Director or Company Secretary to issue Notice of the Extraordinary General meeting (EGM) as approved by the board under clause 1(c) mentioned above. 2. Issue Notice of the Extra-ordinary General meeting (EGM) to all Members, Directors and the Auditors of the company in accordance with the provisions of Section 101 of the Companies Act, 2013; 3. Holding of General Meeting: Hold the Extra-ordinary General meeting (EGM) on due date and pass the necessary Special Resolution under section 13(1) of the Companies Act, 2013, for change in object clause of Memorandum. 4. ROC Form filing: As per section 13(6), Company is required to file Special Resolution passed by shareholders for alteration of Memorandum with concerned Registrar of Companies. Hence, file form MGT.14 within 30 days of passing of Special Resolution with the concerned Registrar of Companies, with prescribed fees and along with following attachments: a. Notice of EGM; b. Certified True copy of Special Resolution; c. Altered Memorandum of Association; d. Certified True copy of Board Resolution may be attached as an optional attachment.

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Small Restriction regarding Change in object clause of Memorandum [Section 13 (8) and Rule 32]: A company, which has raised money from public through prospectus and still has any unutilized amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and Prescribed details in respect of such resolution shall also be published in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, if any, indicating therein the justification for such change; The dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control in accordance with regulations to be specified by the Securities and Exchange Board. As per Rule 32 of Companies (Incorporation) Rules, 2014, this Special Resolution under section 13(8) is to be passed through Postal Ballot.

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Chapter 7 – Conclusion

From the above study, it is now understood that there is specific reason why there is an “object” clause and not “purpose clause”. It is important to determine the objects for the formation of the company because of various reasons as mentioned in the report. The scope of the object may involve activities which are necessary for the fulfilment of the main objects. The Companies act 1956 though distinguished the objects into main objects and other objects, the Companies act 2013 hasn’t made any differences. The importance of the object clause also lies in the fact that any activity which is ultra vires the object clause cannot be undertaken by a company. Though, if any such ultra vires activity needs to be undertaken, alteration can be made into the object clause in such a way that it incorporates the desired activities. The Companies act 1956 provided for the necessary circumstances when such alteration could be made, but the 2013 act hasn’t made any provisions regarding this. Such alterations can now only be made in accordance of the Companies Act, 2013

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Bibliography Websites.

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https://www.icsi.edu/portals/0/INSPECTION,%20INQUIRY%20AND%20INVESTI GATION.pdf. www.icaiknowledgegateway.org/littledms/download.php?id=2509 http://www.iica.in/academy/icls_academic_schedule_lnvestig.

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Books    

Palmer‘s Company Law , Sweet and Maxwell Publication, 115 Release, April 2008. G.K.Kapoor, Company Law and Practice, Taxmann Publications, 20th Edition, 2015. Dr. T.P Ghosh, T.P Ghosh on Companies Act, 2013, Taxmann Publications, 2 ndEdition, June 2014. Study Material of Company Law, The Institute of Company Secretaries of India, 2014.

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