Most Important Feature of a Company

In today’s world where business has become very complex and production is done on a large scale requiring large amount of funds, the company form of organisation has become very popular. The most important feature of a company is that it is a separate legal entity different from the persons who constitute it. A company comes into existence when it receives the certificate of incorporation from the Registrar of Companies. For incorporating a company, some documents are to be filed with the Registrar of Companies. The first and the most important document to be filed is the memorandum of association.

A Memorandum of a company limited by share must contain the following clauses:

Name Clause (ii) Registered Office Clause (iii) Objects Clause (iv) Liability Clause (v) Capital Clause and (vi) Association clause.

Memorandum of Association can not contain anything contrary to the provisions of Companies Act and if it does, then it would not have any legal effect. [1]

The capital of a company is vested into company itself. But the capital really belongs to shareholders and company keeps the capital as a kind of trust for them. So, the fund must have some specified objects for which the fund would be applied. [2] The objects clause fulfils this condition as it ensures that the shareholders know the objects for which the company is established. And also a company’s activities are to be confined to its objects clause. If a company does something which is beyond its objects clause, then that act is ultra vires and is null and void ab initio.

The objects clause thus gives protection to subscribers who learn from it the purposes to which their money can be applied and also gives protection to persons who deal with the company and who can infer from it the extent of the company powers. It enables the share holders and creditors and those dealing with the company to know what are its permitted range of enterprise. It enables the investor/creditor to know for what purpose his money is going to be applied. The clause determines purposes and objectives of the company and as the powers of the company in pursuance those objectives.

The restrictive covenant of the object clause stipulates that the powers of the company are limited for the attainment of the objectives set forth and any ancillary, incidental objectives which are having proximate connection with the actual objectives.

Chapter 1

Objects Clause [Section 13 (1) (c) & (d)]

This clause defines the objects of the company and thus indicates the sphere of its activities. The subscribers have the freedom to choose the objects as they wish to be incorporated into the objects clause however, it may not go against the law of land and the provisions of the Companies Act.

A company cannot do anything beyond or outside its objects clause and any act done beyond them will be ultra vires and void. Such an act cannot be ratified even by the: assent of the whole body of shareholders; The company may, however, do anything which is incidental to and consequential upon the objects specified, and such act is not to be considered as ultra vires. [3]

In Wamanlal V. Scindia Steam Navigation Co. [4] the Bombay High Court held that the objects clause sets out the statement to the share holders, creditors and all such others dealing with the company about the nature of use of the funds in the company. It sets out the statement to the share holders, creditors and all such others dealing with the company about the nature of use of the funds in the company.

Section 13 requires every company to divide its objects Clause into the following two parts [5] :

i) The main objects of the company. The objects which are incidental or ancillary to the attainment of the main objects are also covered in this part.

ii) Other Objects of the company not included in (i) above.

The objects given in (ii) include those objects of the company, which it is going to pursue after it is incorporated. In fact, section 149 requires that as and when a company wants to pursue an object given in the “Other Objects Clause”, the company can do so only after the company in general meeting has passed a resolution authorising the company to do so.

In Lakshmanaswamy Mudaliar and Others V. LIC of India [6] the Court after considering the well established principle of English Law laid down guidelines on main, ancillary and incidental objectives. It said that incidental objects proposed to be necessary for the attainment of the main objectives should have a proximate connection with the main object. It further said that the Company must prove relevance of ancillary objectives establishing proximate but definite connection. And any casual or remote connection cannot be construed as incidental or ancillary and such acts constitute ultra vires of the powers and objects of the company.

The objects of the company must not be illegal, immoral or opposed to public policy or in contravention of the Companies Act, 1956, For example, Section 77 prohibits a company from purchasing its own shares. Thus if the objects clause permits the company to purchase its own shares, it will be ultra vires and void.

The objects clause must be carefully drafted but it must be in a clear and unambiguous language. This clause enables the shareholders and the creditors to know the purpose for which the funds of the company are going to be used.

Alteration of the Objects Clause

Objects clause being the most important clause, alteration in this clause has wide implications. So, Legislature has placed some restrictions on the right of a company to alter the objects clause. A company may, by passing a special resolution and getting it confirmed by the Company Law Board [7] , alter its objects clause if the alteration is required to enable the company [8] :

i) To carry on its business more economically and more efficiently,

ii) To attain its main purpose by new or improved means,

iii) To enlarge or change the local area of its operation,

iv) To carry on some business which under the existing circumstance may be conveniently or advantageously combined with the business of the company,

v) To sell or dispose of the whole, or any part of the undertaking of the company,

vi) To restrict or abandon any of the objects specified in the memorandum or

vii) To amalgamate with any other company or body of persons.

In Straw Products Ltd V. Registrar of Companies [9] it was decided by the court that where the company has intention to change the mode of its operation for improving the efficiency to the advantage of the company, there should be no reason why it should not be allowed. In Indian Mechanical gold Extracting Co,Re [10] it was held that there is no prohibition for changing or expanding the area of operation.

In In Re Ambala electric Supply Co. Ltd [11] it was decided that a new business which has been undertaken and was wholly different from the existing business then the new business should be capable of being conveniently or advantageously combined with the existing business. Similarly in Juggilal Kamlapat Jute Mills V ROC [12] a jute company was allowed to venture into the business of rubber provided the new venture was not detrimental to the existing venture.

In Nagaisuree Tea Co. V Ram Chandra Karmani [13] & Marybong and Kyel tea estate Ltd. Re [14] the court held that amalgamation or merger might give rise to new objectives or change in the existing objectives which might include abandoning existing objectives which is permitted through alteration of the objects clause.

Procedurally, the company is under an obligation to file a copy of the special resolution with the Registrar of Companies within 30 days of the passing of it. And, the company has to also file a petition with the Company Law Board for confirmation of the special resolution passed at the general meeting. The Company Law Board has to satisfy itself that the notice of the special resolution was given to all persons, whose interests are likely to be affected by the alteration, and it is on discretion of the Company Law Board to refuse or confirm the alteration, partly or fully or subject to conditions it thinks fit. Also the notice must have been served on the Registrar of companies and the State Government. The company is under an obligation to send a certified copy of the order of the Company Law Board together with a printed copy of the altered Memorandum to the Registrar of companies, within three months of the passing of the order. The alteration is effective from the date of registration of the alteration.

If the required documents as mentioned above are not filed with the Registrar of Companies within the prescribed time, the alteration and the order of the Company Law Board confirming the alteration shall, at the expiry of such period, become void and inoperative.

In Government Stock Investment Co. [15] it was held that adoption of a new and improved means of business necessitates the alteration of the objects clause and registration of the same with the registrar of companies.

Ultra Vires and Objects Clause

Ultra means beyond and vires means the powers. Thus, ultra vires a company means beyond the powers of a company. The objects clause of the Memorandum enumerates the objects of the company, so any act which is beyond the objects clause is ultra vires the company and is therefore, null and void. The company shall not be bound by such acts which are ultra vires the company. The purpose of the doctrine of ultra vires is to protect the interests of members, outsiders and creditors.

Thus, by virtue of the objects clause, the members of the company know the purposes for which their money can be used by the company. And the third parties dealing with the company also have the knowledge of the purposes for which the company has been brought into existence. Also, the creditors are assured of the fact that the assets of the company will not be risked in unauthorised business.

Thus in order to protect the interests of the shareholders and the third parties who enter into contracts with the company, the company’s activities are confined to the objects given in the Memorandum of Association. The company cannot do anything beyond the objects clause and if it does, it will be considered ultra vires and would be void ab-initio.

Ultra vires acts can be of three categories:

1) Ultra vires the Companies Act,

2) Ultra vires the Memorandum of Association, and

3) Ultra vires the Articles of Association.

However, we are concerned only with the second category that is Ultra vires the Memorandum of Association, since the Objects clause is included in the Memorandum of Association.

Ultra vires the Memorandum: The Memorandum of Association defines the powers of the company. The object of the company is stated in the Memorandum. A company has no power to act on anything which is beyond the purview of the objects clause. Any act done in breach of the object clause will be ultra vires the Memorandum and will be void. Such an act cannot be ratified even by a unanimous resolution of all the shareholders. The doctrine of ultra vires was first applied in the famous case of Ashbury Railway carriage and Iron Co, v. Riche [16] . In this case the company was incorporated to make, and bell, or lend on hire, railway carriages and wagons and to carry on the business of mechanical engineers and general contractors. The directors of the company entered into a contract with Riche, a firm of railway contractors to finance the construction of a railway line in Belgium. The contract was ratified by the company by passing a special resolution at a general meeting. Later, the contract was repudiated by the company on grounds of its being ultra vires and it was sued for breach of contract. The House of Lords held that the contract was ultra vires the Memorandum and therefore void. It could not be ratified by the shareholders, as the contract was ultra vires the objects clause.

An act of a company can be declared ultra vires on two grounds. So, the act can be either substantially ultra vires or it ca be procedurally ultra vires. Substantive Ultra Vires occurs when the company does not have the power or authority to act or it acts in breach of the Objects clause or it acts for a purpose which is not provided in the Objects clause. And the company is not bound by such acts as every person doing business with the company is expected to know the purpose for which the company was being formed.

Procedural Ultra Vires occurs when the company has the power to do certain acts but the authority exercising power has no power to do that act on the behalf of the company. Acts which are procedurally ultra vires nevertheless bind the company as the people are not always expected to know the arrangement inside the company and the act is allowed by the company.

In Attorney General V. Great Eastern Railway Co., House of Lords held that the doctrine of ultra vires should be construed reasonably while deciding what is fairly incidental or ancillary. So, the company has the power to undertake any measure that is necessary for the attainment of the main objects or Incidental to and otherwise authorized by the law.

In Bell House Ltd V. City Wall Properties Ltd. [17] , the Court of Appeal observed that practice of drafting of object clause which is general in nature should not be allowed in the greater interest of the society. In this case, the objects clause stated that Board of Directors has power to carry on any business which in the opinion of the Board of Directors may be advantageously carried on. The company was basically an engineering contractor; and it undertook the business of procuring finance and entered into a contract with Defendant Company. On account of default, the plaintiff sues for specific performance. Defendants contended that finance procuring is not an object of the plaintiff company and it is ultra vires transaction. While plaintiff contended objects clause refers to the beneficial acts and whatever is beneficial to the share holders must be construed not as ultra vires. The Court of Appeal quashing the order of Lower Court held that the literal construction of the objects clause states that BOD has power to carry on any business which is beneficial and therefore it was not ultra vires the objects clause.

Effects of Ultra vires transactions:

1) Acts which are ultra vires the Memorandum of Association will be null and void and are unenforceable against the company. [18] Madras High Court has ruled in this regard that a complaint has to be fled within six months of the date of knwledege that the company has indulged into ultra vires transactions. [19]

2) The whole body of shareholders can not ratify a transaction which is ultra vires the Memorandum of Association.

3) The company can also not enforce ultra vires transactions against third parties as well as the outsiders also can not enforce ultra vires transaction against the company.

4) Any member of the company can approach the court and get an injunction restraining the company from proceeding with the ultra vires acts. [20]

5) Directors have a duty to ensure that the capital of the company is used for furthering the objectives of a company and do all acts which will benefit the company. In his duties the directors act as the agent of the company and if the capital of the company is diverted for pursuing interests which are not in agreement with the Memorandum of Association then directors may be held personally for such acts. Thus in Modi V. Shamji Ladha [21] the Bombay High court held while deciding on liability of directors in cases of ultra vires transaction that director would be personally held liable and a shareholder can maintain an action against the directors to restore the funds of the company. In cases of deliberate acts by the directors, they can be criminally charged. Again in Kathiawar Trading Co. V. Virchand [22] the Bombay High Court ruled that in cases where the capital of the company has been used for any objects other than those in objects clause, directors may be held personally liable.

6) If the funds of a company has been used for acquiring property and such act is ultra vires then company’s right over the property is held to be secure as the property is in fact capital of the company.