In the company the Memorandum of Association sets the rules related to the company which the provide the scope of the activities of the company. It has the rights, privileges and power of the company. This is basically the constitution of the company. Providing this the object clause of the company states the scope of the activities of the company. This clause is important for the company because the any activity beyond this object is considered void and cannot be legally enforceable.
The object clause includes the three main components which are the main objects, ancillary objects and other objects. There are problems which are faced by the object clause which include the doctrine of ultra vires. In this the activities if done will create financial complications for the company.
In the object clause of the company there is doctrine which enable the object clause to be fulfilled at every scenario and anything which is done beyond that clause will not be valid. This doctrine was in the company’s law from starting but till 1855 the law was not felt necessary to the reason that the companies before 1855 were partnership companies and there were large number of partners in the company and due to the changes in the business cannot be made without the consent of the partners.
In 1855 there was the introduction of the concept of the limited liability. With this principle the unlimited liability was not there and the creditors felt that they are in the miserable state. As this happen the company was required to have two main documents one is the memorandum of association and other is the article of association. Due to this development the importance of memorandum was realised and the object stated in the memorandum were observed.
The research will be performed by using primary data like the MOA of the company and using secondary data like statutes, case laws etc. and the method involve will be doctrinal in nature. In this the research done in the second chapter is the analytical research, then in the third chapter the research is topic specific to trade done beyond the object clause by analysis of different case and lastly the fourth chapter is the comparative analysis of the laws related to corporation in India and U.S.A. The research analyses the flexibility of the object clause of the MOA of the company when the business is done beyond the object of the company and the implication on the object clause when the trade is done beyond the object clause to achieve the objective of the company.
Research Objective
- To analyse the alteration of the object clause of MOA.
- To analyse the implication of the object clause when trade is done beyond the object clause to achieve the objective of the company.
- To analyse the flexibility related to the object clause of company in India and U.S.A.
Scope and limitation
The scope of the research includes the evaluation of the object clause of the company, including the provisions of companies act, 2013, companies act 1956 and legislations of U.S.A which include the Delaware code and the Model Corporate business act.
The research is limited to the specific industry and or company size providing the research will be limited to the information provided by the companies, websites, journal articles, books, statutes and case laws related to the research objectives.
Chapter 2: Object clause: flexibility and alteration
In India the object cluse of the company as evolved from 1956 to 2013. In the 1956 act there was an amendment related to the companies act.[1] In the 1965 amendment in which the recommendations of the Vivian bose commission were incorporated. In this there was the introduction of the two different categories under which the company need to state the object and purpose of the company.[2] The first one is the principal and ancillary object which the company wants during the incorporation and second is the other objects.[3] Due to this the companies after the amendment need to provide three different kinds of object which are the main object, object incidental and the other objects.
With the introduction of the 2013 act there was no requirement of the company to define the main object and the ancillary object and other object.[4] Due to this the companies now have to incorporate all the objects in the object clause of the company. The act does not provide any law that the companies which are incorporated by the 1956 act need to change their object clause, the act provides that companies after commencement of the act companies need to frame the object in the manner which the 2013 act state.
In the corporate company the ownership of the corporate capital is vested in the company. However, the reality is that the capital of the company has been distributed to the shareholders in the form of shares.[5] These funds need to backed up by certain object so that the contributors may aware that their money is lawfully applied.
The object clause of the companies lies with the subscribers of the memorandum and their freedom to choose the object is unrestricted. In this the only restriction which the object clause has is the laws of the country and companies act.[6]
However, there are the reasons to explain the object clause clearly as it prevents the diversification of the company. It helps the company to do those businesses or trade which are connected to the business for which the company was initially established.[7] These objects prevent any concentration of the economic power. Moreover, the subscribes should state the object for which the company was formed and for than the needs to fulfil those objects.[8]
The object clause sets the field for the company to trade and business and it is the duty of the court to check that the work done doesn’t exceed the object of the company.[9] As per section 4[10] of the companies act, 2013 it explains what an MOA is, and section 4(1)[11] explains the information which the MOA need to provide, and in the sub-clause (c) provides that there should be any object for which the company was incorporated.[12] Thus, the object clause of the company is rigid and a company need to abide the terms and object mentioned in the object clause.
However, in a case of House of Lords it is observed that the ultra vires nature of the object clause should be maintained but if the act done beyond the object clause is reasonable and fair then it cannot be prohibited. Thus, a company can do act beyond the object clause only if the act done is in necessity and connected with the object attainment or it is prescribed by the law.[13]
As per the companies’ law abiding to the object clause is so strict that if the company is spending money in the charitable purpose, then also it is not permitted if it is not mentioned in the object clause of the company. Provided that company can spend in the charitable purpose but it should only on those which help in attaining the object of the company.[14]
In this aspect if the company need to change the trade and want to shift the business and involve in some new business it becomes very difficult. In this regard under the companies act, there is alteration of the object clause. Under section 2(3)[15] of the act, alteration include omission, additions, and substitutions in the object clause.
To alter the object clause of MOA it should be filed to the registrar, then the registrar needs to certify the registration in 30 days form the filing of special resolution under section 13(6).[16] In this if the procedure mentioned in section 13 of the act for the alteration of the object clause is not fulfilled then the registration for alteration will not be accepted.[17] Provided that if there is a guarantee company and it has no sharing capital then as per section 13(11) [18]if the company tries to change its memorandum to allow anyone who is not a member of the company to share its profit, that change will be invalid.
As the company’s act was amended in 2013 and section 17[19]of 1956 act was changed the necessary requirement for the alteration of object clause is the special resolution. Due to this the alteration of the object clause or even the memorandum has become company’s internal matter.
Chapter 3: Trade done beyond object clause.
In the 2013 act, the object clause is divided in to two sub-category one is the object for which the company came into incorporation and second is the matters which are required to achieve that object. In this the company must do certain matter, trade, business etc. to promote the objective of the company. To do these trades the permission of the director is required and the act should be done in good faith[20].
As per the company law the act done which is beyond the object clause whether it be charity, trade or any other business then the act must answer the following questions (1) whether the transaction is reasonably related to the company’s business? (2) whether the transaction done in good faith, without any fraud or deception? (3) whether the transaction done helps in prosperity of the company? [21]By using these tests one can check whether the act done beyond the object clause promote the objective or it is ultra vires.
In the case of charity done by the company it can restricted to that matter in which it is necessary for the management of the company. However, as per section 135[22] of the act it mandated to do charity as a social responsibility which is called as corporate social responsibility.
Including this the concept of ultra vires restrict the company manager to expand its business and, in this regard, to bypass the ultra vires clause the companies started containing different sub – clause in the object clause of the company. Due to this it enables to work in any field of business which the company can adopt.[23] This kind of object clause helps in expanding the business of the company.
To tackle this issue the three is main objective rule. In this the company wouldn’t be able to give up the main objects and pursue other object without alteration in memorandum.[24] As in the case of Dharmadeepti v. CIT[25], the court held that the main object for which the company was formed is for the charity which include the education and medical relief and as per this object the court provided that the main object of the company is to relief the poor. Thus, any activity which is carried beyond this main object will be the violation of the object clause.
However, in the English law this “main object rule” was totally changed. In the English court they provided that the object clause should be interpreted as merely secondary or auxiliary; rather, each one should be read as a substantive sentence that is unrestricted by reference to any other sub-clause or the name of the firm. The house of lords disapproved the “main object rule”.[26]
Due to this change in the rule the court in the case of Bell House v. City wall properties[27], provided that the object clause of the company authorises any business which in the consideration of the board of the directors deemed advantageous to the company and also it is in connection with the company. The court held the clause as a valid clause and the act done will be in good faith. However, court also provided that clause of such kind does not state any object rather they state that the object is those which the directors deemed fit.
In this one of the works that company do is charity. As per section 181 [28]of the 2013 act, the board of directors can contribute an amount of five percent of the average profit during the preceding three financial years for the charitable purpose. However, except this contribution to the charity, the directors are not allowed to do any charity unless the charity is related to the promotion of the object of the company. In the case of charitable purpose by the company can have the object and for that the charity should be for the public charity not for the private charity.[29] Thus, the charity done by the company either it should be provided in the object or it should be for the promotion of the object of the company.
Hence, the companies are bound to fulfil the object for which they are formed and, in this regard, it is necessary for them to do work which are related to the object of the company or it is defined by the company. The object clause is flexible to that extent till the company is doing business or trade which are near the promotion or fulfilment of the object of the company.
Chapter 4: Comparative analysis between U.S.A and India
In the U.S. jurisdiction the code which deals with the corporate affairs is the Delaware Code for corporation. In this code the laws related to object clause are not specified as it is specified in the Indian Company law. as in India the law of company law state that there should be object which the company need to abide and any matter other than the object clause will be ultra vires. In the U.S. law as per the Delaware code for corporation, section 102(a)(3)[30] presents the rules which are required for the certificate of incorporation. In this the section presents that the type of business or goals that will be pursued or advertised. Any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware shall be stated as the corporation’s purpose, either alone or in conjunction with other businesses or purposes. By doing so, all lawful acts and activities shall be within the corporation’s purposes, with the exception of any express limitations. Moreover, as per the Model Business corporate act, section 3.01 [31]provides that every corporation should have the purpose of engaging in any business for the limited purpose which are mentioned in the article of incorporation. However, in India only section 4(1)(c) [32]provides that there should be an object for the incorporation of the company. Addition to this in the U.S. they have article of incorporation which states about the purpose for the incorporation of the company on the other hand in India it is the memorandum of association which talks about the object of the company.
The clause has a broad perspective related to which the company can operate. In this the clause only mention that the act should be lawful due to this it provides a greater flexibility for future business. However, in India the amendments in the object clause are more complex and might require the approval of the shareholder or court interference. This makes the challenges faced by the company stringent.
In the U.S. act they have special section for the ultra vires, which is not present in the Indian laws. In the law the activities which are outside the scope of the object clause then the actions may be dealt under the U.S. legal laws. In the section 124 [33]of the Delaware code and section 3.04 [34]of Model Business corporate act, there are three legal actions which are mentioned in the law. One is the legal action that can be taken by the stakeholder was for the unauthorised transfer of property or the contract mention some unauthorised part. Then there is the corporate legal action that can be taken by the corporation of the company or even the legal representative if the loss is done due to the unauthorised action by the directors. And lastly there is general actions that the attorney general take against the corporation to dissolve it or to stop it from engaging in unauthorised activities.
In the U.S. some of the companies prefer to be more specific while stating the purpose as in the case of Banking company and insurance company other than this most of the companies opt for the general clause to avoid limitation on their future operations. As in India the memorandum of association can be changed and altered in the U.S. the company need to amend their article of incorporation.
Chapter 5: Conclusion & Recommendations
As per the India companies law MOA is the main part of the company and in that object, clause is very crucial. In this object clause denotes the important objects which the company need to fulfil and that are the reasons for the incorporation of the company. Considering this the object clause though being rigid in its nature it can be altered and the objects of the company can be changed to achieve new goals. The object clause is rigid in its implication but it is flexible when the question of alteration comes. Moreover, if the company done an act which is beyond the company’s object, then it can challenge only if the act which is done doesn’t help in achieving the object of the company. As there are certain acts which becomes necessary when the company progress and to not to stop the progress the act beyond the scope of object is acceptable if it fulfils the object of the company. Considering whether the object clause of USA is similar to the India the answer is no. The object clause or purpose of the company as per USA for which the company is incorporated is flexible enough that the company can do any act the necessary condition is that it should be lawful act done by the company. Then the object clause in India if there is any new object which the company wants to obtain it will be altered and in USA the object clause is amended.
It is recommended that the companies object should be clearly decided by the promoters of the company and it the object there should be scope of changes in the object clause of the company so that if the company changes the stream of production, it doesn’t hamper the progress of the company. There should be a bit more flexibility in the object clause of India companies so that a wider a company widen its productions and the ideas of new mind will not be restricted by the laws.
Hence, the object clause is the essential part of the company and it should be framed in proper manner thinking about the future of the company and what goals company want to achieve.
Author: Shivansh Raj, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.
Reference
STATUES
- The Companies act, 2013.
- The Model Business Corporate Act, 2016.
- Delaware code of corporation, 2013.
CASE LAWS
- Bhutoria Brothers (P) Ltd., In re 1957 SCC OnLine Cal 229.
- J. John v. Oriental Kuries Ltd., 1994 SCC OnLine Ker 209.
- Riche V. The Ashbury Railway Carriage and Iron Company, Limited., [L.R.] 9 Exch. 224.
- CIT v. Kamla Town Trust, (1996) 7 SCC 349.
- Consolidated Construction Consortium Ltd. v. Hitro Energy Solutions (P) Ltd., (2022) 7 SCC 164.
- Attorney general v. Great Eastern Railway Co, (1880) LR 5AC 373.
- Lakshmanaswami Mudaliar (Dr) v. LIC of India, 1962 SCC OnLine SC 9.
- Consolidated Construction Consortium Ltd. v. Hitro Energy Solutions (P) Ltd., (2022) 7 SCC 164.
- Le, Behrens & Co. Ltd, re, (1932) 2Ch 46.
- Cotman v. Brougham 1981 AC 514.
- Ajay Kumar Gupta Dochania v. Bhagyanager Silk Mills P. Ltd., 2012 SCC OnLine AP 1046.
- Dharmadeepti v. CIT, (1978) 3 SCC 499.
- Bellhouse ltd v. City wall properties ltd. (1966) 2 All E.R. 674
- P. Kapur v. Kaushalya Educational Trust, 1982 SCC OnLine Del 14.
ARTICLES
- Anmol Singh Khanuja, Understanding the doctrine of Ultra vires under the companies act, 2013, 24 SUP. AMI. 327, 328 (2021).
- Om Prakash Motiwal, Commissions of enquiry in India. 13, no. 2 JILI 220–29 (1971).
- J.C. Smit, The Compulsory Winding – up of Company on the ground of failure to commence Business within a yeat from its Incorporation or suspension of business for a year, 99 Issue 1 SALJ. 120, 122 (1982).
- Suresh Jwaalaa, Memorandum of Article of Association: An Analysis of their role in corporate governance as foundation of a company, 5 Issue 6 Int’l J.L. Mgmt. & Human. 539, 540 (2022).
- M. Sen, Rule of ultra vires in company law: has it outlived its purpose? 27, no. 2 JILI. 283, 283–90 (1985).
BOOKS
- AVTAR SINGH, COMPANY LAW, (Eastern Book Company 2023)
[1] Anmol Singh Khanuja, Understanding the doctrine of Ultra vires under the companies act, 2013, 24 SUP. AMI. 327, 328 (2021).
[2] Om Prakash Motiwal, Commissions of enquiry in India. 13, no. 2 JILI 220–29 (1971).
[3] Bhutoria Brothers (P) Ltd., In re 1957 SCC OnLine Cal 229.
[4] J.J.C. Smit, The Compulsory Winding – up of Company on the ground of failure to commence Business within a yeat from its Incorporation or suspension of business for a year, 99 Issue 1 SALJ. 120, 122 (1982).
[5] Suresh Jwaalaa, Memorandum of Article of Association: An Analysis of their role in corporate governance as foundation of a company, 5 Issue 6 Int’l J.L. Mgmt. & Human. 539, 540 (2022).
[6] C.J. John v. Oriental Kuries Ltd., 1994 SCC OnLine Ker 209.
[7] AVTAR SINGH, COMPANY LAW, (Eastern Book Company 2023)
[8] Riche V. The Ashbury Railway Carriage and Iron Company, Limited., [L.R.] 9 Exch. 224.
[9] CIT v. Kamla Town Trust, (1996) 7 SCC 349.
[10] The Companies act, 2013, § 4, No. 18, Acts of Parliament, 2013 (India).
[11] The Companies act, 2013, § 4(1), No. 18, Acts of Parliament, 2013 (India).
[12] Consolidated Construction Consortium Ltd. v. Hitro Energy Solutions (P) Ltd., (2022) 7 SCC 164.
[13] Attorney general v. Great Eastern Railway Co, (1880) LR 5AC 373.
[14] A. Lakshmanaswami Mudaliar (Dr) v. LIC of India, 1962 SCC OnLine SC 9.
[15] The Companies act, 2013, § 2(3), No. 18, Acts of Parliament, 2013 (India).
[16] The Companies act, 2013, § 13(6), No. 18, Acts of Parliament, 2013 (India).
[17] Consolidated Construction Consortium Ltd. v. Hitro Energy Solutions (P) Ltd., (2022) 7 SCC 164.
[18] The Companies act, 2013, § 13(11), No. 18, Acts of Parliament, 2013 (India).
[19] The Companies act, 1956, § 17, No. 18, Acts of Parliament, 1956 (India).
[20] G.M. Sen, Rule of ultra vires in company law: has it outlived its purpose? 27, no. 2 JILI. 283, 283–90 (1985).
[21] Le, Behrens & Co. Ltd, re, (1932) 2Ch 46.
[22] The Companies act, 2013, § 135, No. 18, Acts of Parliament, 2013 (India).
[23] Cotman v. Brougham 1981 AC 514.
[24] Ajay Kumar Gupta Dochania v. Bhagyanager Silk Mills P. Ltd., 2012 SCC OnLine AP 1046.
[25] Dharmadeepti v. CIT, (1978) 3 SCC 499.
[26] Cotman v. Broughan 1918 AC 514.
[27] Bellhouse ltd v. City wall properties ltd.
[28] The Companies act, 2013, § 18, No. 18, Acts of Parliament, 2013 (India).
[29] R. P. Kapur v. Kaushalya Educational Trust, 1982 SCC OnLine Del 14.
[30] 8 Del. C. 1953, § 102(a)(3).
[31] Model Bus. Corp. Act § 3.01 (Am. Bar Ass’n 2023).
[32] The Companies act, 2013, § 4(1)(c), No. 18, Acts of Parliament, 2013 (India).
[33] 8 Del. C. 1953, § 124.
[34] Model Bus. Corp. Act § 3.04 (Am. Bar Ass’n 2023)