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MOU - 08 - Chapter 2 PDF
MOU - 08 - Chapter 2 PDF
with the outside world and the scope of its activities. Its purpose is to
enable shareholders, creditors and those who deal with the company to
1 Egyptian salt and soda Co, Ltd. V. Port said salt Association Ltd. (1931) A.C. 677.
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be incorporated or it should be in a form as near there to as the
association are similar with slight variations depending upon nature of the
-2
1. The name of the company, with 'Limited' as the last word of the
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Limited' as the last words of the name in the case of a private
limited company.
situated.
object and
(c) Other objects of the company not included in (a) and (b)
above.
objects not confined to one state the states to whose territories the
objects extend.
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each subscriber shall take at least one share and shall write
specified amount.
which states that the subscribers desire to form a company and agree to
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C. OBJECTS CLAUSE
The Act requires, among other things the objects of the company
India.
simply to state the objects of the Company. But in the case of the
persons dealing with the company to know the extent of the company's
power and authority, and to protect the subscribers who will know the
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Gower, the purpose is to ensure, that an investor in a gold mining
company did not find himself holding shares in a fried-fish shop and
those who allowed credit to a limited company some assurance that its
the company outside the area of the objects is ultra vires the company and
The objects clause is, thus of great legal significance and requires
to be discussed in detail.
most important part of the memorandum is the objects clause. The object
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In the case of a company to be registered under the amendment, the
objects clause must be divided into two sub-clauses namely (i) main
others interested to have a clear idea of the main objects and other
new provision therein requiring that both at the initial stage and at later
(63)
The 1965 amendment has given effect to the following
(i) The act should be suitably amended to provide that each company
shall state its purposes and objects under two separate categories,
viz:
(a) The principal and ancillary objects which the company intends at
the time of its incorporation to pursue and (b) all other objects
which are separate from the principal and ancillary ones mentioned
(ii) A provision should be made in the Act to the effect that a company
shall not engage itself in any activities coming within the scope of
be made whereby, even at the initial stage, the shareholders are given an
10 Report of the commission of Inquiry on the Administration of Dalmia - Jain Companies (1962), p.p.
797-798.
11 See, Daphtary-Sastri Report, entitled, Amendment and Administration of the Companies Act, (1963)
Para 2-5.
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activity the Company would embark upon. Thus, the promoters, the
signatories to the memorandum and the first directors are now required to
12 See Report of the Joint Committee on the Companies (Second) Amendment Bill, 1964, (1965).
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the Act should continue to apply to companies in existence immediately
and the provision of the proposed new clause requiring the division of
objects into (i) main objects and objects ancillary there to and (ii) other
also mention the names of those states to whose territories the objects of
1. Main Objects
ancillary to the attainment of the main object. The 'Main Objects' shall be
noted that this sub-clause is a combination of two types of objects, that is,
ancillary objects are nothing but the part of the main object which the Act
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the main-object has come to an end. In Re Amalgamated Syndicate,13 a
company was formed to erect stands and to let out seats to view Queen
Company, inter alia, to carry on all kinds of promotion business and act
as house agents. The company lost money on the venture and after the
held that the company must be wound up as the main object had come to
an end and the other matters were incidental to the main object. Aslo in
self to investment and financial speculation. Held, the Company was not
entitled to do so.
The objects under this category are not independent objects and
as stated in memorandum.
attainment of the main objects, but noting further. These records cannot
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be construed as widening the scope of the objects clause, but will only be
carrying out the main object. In other words, incidental acts are those
objects.
was held that the expenditure was conducive to the combined progress of
powers.15
3. Other Objects
The third part of the objects clause enumerates the objects which
incidental there to, but which are nevertheless necessary to enable the
may anticipate to pursue. By providing this sub-cause the Act seeks that
the Company should state its objects in clear, plain and unambiguous
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terms for which the funds of the Company can be used or the field of
among the incidental or ancillary objects many such powers, and the
which the company is floated and the range of its permissible activities.
16 Narhari Rao, C.V., "Should the’ objects clause' in the memorandum of association of a private
company be Dichotomised under three - fold classification", 1983 (0): CS 753.
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Parliament, has no existence, and cannot act as a legal person, outside the
incorporated under a companies Act does not enjoy full legal personality,
as e.g., a Chartered company does,18 but its legal personality exists, only
clause.19
company registered under the Companies Act is the single most important
for the existence of a company and is the source of its power. This clause
defines the area beyond which the Company cannot travel. It delimits the
and extent of vitality and power which by law are given to the
nothing shall be done beyond that ambit and that no attempt shall be
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made to use the corporate life for any purpose other than that which is so
specified."21
Company, for the stated objects confer on the company all powers
(2) It limits and restricts the powers of the company to those, thus
objects clause is, thus, of great legal significance. Any act of the
company and even the unanimous consent of all the share holders
shareholders by ensuring that the funds raised for one undertaking are not
some defined objects so that the contributors may know the purpose to
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The objects clause, in the second place, affords a certain degree of
corporation and not the shareholders and they have to seek their
The fact that the corporate capital cannot be spent on any projects
nor directly within the terms of the Company's objects gives the creditors
a feeling of security.23 Hence it has been said that the objects clause"
must delimit and identify the objects in such plain and unambiguous
manner as that the reader can identify the field of industry within which
the business for which the companies were formed initially. No doubt
finances of the company and there are various incentives in the form of
etc.) But such diversifications tended in the rapid enlargement of the unit
23 Kania J., in wamanlal V. Scindia Sterm Navigation Co., Supra, Note 17.
24 Lord wrenbury in Cotman V. Brougham (1918) A.C. 514
(72)
of management and accentuated the problem of concentration of
business for which the Company may have been initially established, the
power.
Therefore, the objects clause is the most significant and vital clause
INTERPRETATION
needed in future. The objects clause is thus not confined to only that
include all other business which the company may undertake in future.
The restraining effect of the doctrine and the rigidity of the objects clause
lured the promoters of the company to provide for a much wider object
25 Antony, T.J., "Diffusion of Economic Power under Cos. Act", Economic Times, 19th October, 1971,
P. 7.
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clause ranging from "the growing and sale of timber to the operation of
beauty saloon."26
conferring a wide range of powers on companies. The rule owes its origin
to the decision in the Ashbury case in which it was hold that the words
main business.
make them a trap for unwary people. General words construed literally
may mean anything, but they must be taken in connection with what are
under general words to turn a company for manufacturing one thing into a
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specified in each paragraph of this clause shall be in no wise limited or
the first) which appear to embody the main objects of the company. The
means even if the main object of a company fails, the company may carry
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concluded with a declaration that every sub-clause should be deemed a
substantive clause not subsidiary to the objects in the first sub-clause. The
intra vires, it was laid down that the memorandum must be construed
independently.
Thus the tug of war between the "Main object" rule of construction and
the "Literal interpretation is still going on. In England thus the latest case
on the point has excluded the "Main object" rule whereas in India the
where the court is satisfied that the subject matter of the business for
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This view of the court provided some measure of protection to
GoWer, "The fact that the whole substratum has gone will not make the
future activities of the company ultra vires provided that the activities are
within the specified powers, if the members choose not to petition, that is
their own affair."34 Moreover, even the members could not make use of
the remedy, if all the main objects have not failed and the whole
substratum has not been destroyed. And further this principle will,
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Thus, the rale has failed to prevent the evasion of ultra vires as
stated, this Amendment Act has amended section 13(1) of the Act, and
and objects ancillary or incidental to such objects, and (ii) other objects.
In making this provision with respect to the latter type of companies the
might really embark on an entirely new object, and there by risk their
And further, the legislature has also amended section 149 of the
Act. From the Section as it now stands, it appears that in the case of a
business coming under 'other objects' unless the company has approved it
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by a special resolution in general meeting and also the declaration in a
prescribed form has been filed with the registrar of companies. Thus, this
not only acts beyond the express and implied powers of the corporation,
but also acts which are contrary to public policy or contrary to some
statute expressly prohibiting them. The latter class of acts are now termed
'illegal', and the term 'ultra vires' is confined to the former class. In the
words of HAJ Ford, "the expression 'ultra vires' is more apt for a
objects for which the company was formed as disclosed by the objects
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clause in its memorandum of association or by any legislative list of
• «
capital which is the substitute for unlimited liability shall be held intact
incorrect and confusing. A company cannot purchase its own shares not
one for which the company lacks capacity is that a person from whom the
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company acquires property in a transaction beyond its capacity will in
general be assisted by the courts to take back the property from the
show either that he was not in pari delicto, as where, for example, he
use in cases where the company acts beyond its permitted objects.
directors and acts ultra vires the company. An act is ultra vires the
of association.
40 Re Wrexham, Mold & Connaha Quay Rly. Co., (1989) 1 Ch. 440.
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This distinction was for the first time made in Ashbury Rly.
Carriage & Iron Co. Ltd. v. Richie41 and here the court also emphasised
the dual purpose of the rule, i.e. protection of both investors and creditors.
same transaction, but the grounds of attack in each case, differ from each
other. Where the charge is of the transaction being ultra vires, the essence
of the allegation made is the lack of corporate power, to enter into the
ultra vires transaction is void abinitio, and the law allows the company to
rescind applies only against a third party who was a party to the breach,
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and only as long as the right has not been lost by intervening
outside the objects of the company does not become valid, even if the
never came into existence, and the question of its ratification does not
without the common seal, is an ultra vires act and a subsequent resolution
the company provided that the directors shall have the power with the
of shareholders. It was held, that the transaction was not one which was
ultra vires of the company. Even if it was held that the directors of the
Company could not enter into these transactions without the assent of the
(83)
shareholders or was capable of being approved. In either case the
question of ultra vires would not arise, and it is not, open to minority of
majority have abused their powers and are depriving the minority of their
rights.
the Rolled Steel case slade L.J. made certain obiter observations47 and
Act, 1985.
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Another aspect of the distinction between die two types of acts (i.e.
act ultra vires the company and the act ultra vires the directors) is that a
the company's powers, since the memorandum which sets them out, is
registered and can be inspected by the public. But a member of the public
Consequently where acts are intra vires the Company but ultra vires the
GIFTS.
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been discussed that how the objects differ from powers. And, it is
The object power debate has left its strongest mark in the area of
companies to their shareholders may also fall into this category. The
capacity issue may arise whenever it is alleged that the disposition had
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passed in general meeting a resolution authorising the payment in general
Bowen L.J. explain the judicial as "charity has no business to sit at board
for five years for the benefit of the family of a deceased officers was not
ultra vires.
In the next leading case of Re Lee, Behrons & Co. Ltd.55 the
children. Five years after the death of a former managing directors, the
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coinpany promised to pay an annuity of £ 500 to the widow of a former
managing directors.
Unfortunately, the court hold that the transaction was ultra vires,
money and that money can only be spent for purposes reasonably
Company's business?
2, It is a bonafide transaction?
Company?
Applying these tests to the facts the learned Judge held that the
five years after his death was ultra vires. The court held that the
desire to provide for the applicant (widow), and the question what, if any,
benefit would accrue to the company never presented itself to their minds.
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Next, in Parke v. Daily News Ltd., a case concerned with ex gratia
But this decision does not explain Rew & Roith Ltd.56 Here the
clause. Yet Plowman J., again following Lee, Behrens held that the
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undertaking was invalid. Appreciating the judgement K.W. Weddubum
ask whether it is" for the benefit and to promote the prosperity of the
act of a Company which is within the scope of the power expressed in its
memorandum will not be ultra vires simply because its directors had
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behalf of the Company. This approach has certainly put a restricted
application, on Re Lee, Behrens & Co., in which it was expressed that the
* express and not merely the implied powers of a company must be used
Horsley & Weight Ltd.60 and Rolled steel products (Holdings) Ltd. v.
It has been held in Re Horsley & weight Ltd.62 that if the objects
director a main object of the Company, since the pursuit of the purposes
objects clause in the above form can therefore only elevate authorised
activities into a main object if the activity in question can be pursued for
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consequence, any enquiry as to the directors' motives in exercising it is
And so, for the first time in almost a hundred years, the English
This decision has received criticism also. Some critics say that provision
The next case demonstrates how, the Horsley & weight was
misinterpreted.
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In Rolled steel products (Holdings) Ltd. v. Sritish Steel
charged its assets with amounts payable under the guarantee. It was held
by the court of Appeal that the guarantee and charge were not ultra vires,
because the first company had power by the objects cluase of its
charge were not ultra vires, because the first company had power by the
objects clause of its memorandum to enter into such transactions, but the
the second company to whom they were given, because the motive of the
and the second company, and the creditor was aware of this improper
motive.
Vinelott J. observed that the phrase ultra vires is used, even when
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In the broaden sense it is used to describe a transaction which falls
within the scope of the powers of the company, express or implied, but is
are also described as ultra vires in the narrow sense, they are "incapable
off being made binding on the Company even by the assent of all the
members."
trouble the courts. Reasonable certainty can only be achieved if all the
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