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Unrestricted objects for companies - A look before leap

Yogina 
on 02 July 2016

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Object (from the word objectives) of a company mean the range of activities that a company intends to undertake upon incorporation. The memorandum contains the company’s purpose and/or objectives.  An objects clause circumscribed the capacity, or power, of a company to act. The legal position is that any contract entered into beyond the power, or ultra vires, would be deemed void ab initio. The members of the company cannot ratify such act.

Anyone desirous to enter into the contract with the company will study company’s object clause first. For instance, government authorities do check specific object clause before issuing a tender, banks do check whether borrowings are covered or not in objects and appropriate authorities do check objects before issuing licence etc. A company cannot enter in a contract for a business, activity etc, if is not mentioned in the object clause of Memorandum of Association (MOA) of the Company.

As per section 4(1)(c) of The Companies Act, 2013, the memorandum  of a company shall “state the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof.” However, in erstwhile Companies Act, 1956, provisions for objects clause was mentioned in section 13(1)(d) of that act, which says the memorandum of every company shall state:

“ i. 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;

 ii. other objects of the company not included in sub-clause (i).”

So, a company can take up activities which are mentioned in the other objects, not necessarily related to main object(s) with approvals, pursuant to erstwhile Companies Act, which is missing in the Companies Act, 2013. In this context The Company Law Committee  on 1st February, 2016 recommended a liberal operational regime by allowing companies to  have the additional option of a generic object clause, i.e., “to engage in any lawful act or activity or business as per the law for the time being in force” in the MOA.  

The Companies (Amendment) Bill, 2016, which was introduced in the Lok Sabha on 16th March, 2016 presented a complete paradigm shift about the objects of the company. As against the conventional view of having objects clause a-must, the proposed amendment to section 4(1)(c) states 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;"

As per these provisions, companies are required to state objects in MOA only when they choose to opt for the specific object(s).  This is one of the most aggressive moves in the history of Indian Companies’ Act that hops from defined object(s) to unrestricted object(s). Obviously when the new amended companies act will sees the light of the day, sure sort, companies will like to have unrestricted object(s), free from any limitation, just to do business like a natural person.

However, there are some nagging uncertainties that need clarification before the companies can opt for unrestricted object(s).  A careful consideration is required on the following points:-

Specific Object(s) :-  The Companies (Amendment) Bill, 2016 does not define what constitute specific object(s). Companies Act, 2006 of United Kingdom, which adopted unrestricted objects, excludes charity companies, itself in the sub section (4) and (5) of section 31 of the said act. There is no amendment in the section 8 of the existing Companies Act, 2013 which deals with the formation of Companies with charitable objects, etc. So it is imperative to have a clear picture of “specific object(s)” with respect to charitable companies, insurance companies, banking companies, financial institutions, non-banking financial companies, special purpose vehicles, joint venture companies etc.  Again companies do bind themselves by loan/debt agreements, shareholders agreement, joint venture agreements, and convents. What is free and fair way ie eligibility to adopt unrestricted object(s) deserves  to be clarified.

Model Memorandum:- Pursuant to newly inserted sub-section (6A) of the Companies (Amendment) Bill, 2016, “A company may adopt the model memorandum applicable to such a company.”  However under Companies Act, 2006 of United Kingdom, memorandum constitutes only of subscription clause. There, MOA is a single page document containing name of subscribers and corresponding shares, if any.  This memorandum will never be amended in the life of the company. Companies Act, 2006 of United Kingdom have model articles instead of model memorandum. Similar is the case for companies of Hong Kong which are governed by Companies Ordinance of Hong Kong, effective from 3rd March, 2014. MOA was abolished all together in Hong Kong while adaptation of unrestricted object(s) took place. Again pursuant to section 28(1) of The Companies Act, 2015 of Republic of Kenya, “unless the articles of a company specifically restrict the objects of the company, its objects are unrestricted”. In Kenya too, it is articles, which are of importance. In India even after Companies (Amendment) Bill, 2016, Indian companies desirous to have unrestricted object(s) will continue to have MOA with name clause, registered office clause, capital clause, liability clause, subscription clause. Needless to say, these clauses can be changed/amended resulting into the alteration of MOA as and when required. Since there is basic difference in the approach for welcoming similar changes (unrestricted object(s), in India and at abroad, it will be interesting to know how model memorandum will look like.   

Transitional provisions:- By virtue of section 28 of Companies Act, 2006 of United Kingdom, provisions in the memoranda of existing companies will be treated as provisions in the articles if they are of a type that will not in be in the memoranda of companies formed under the said Act.  In the same line, Companies Ordinance of Hong Kong prescribed that existing clause of their MOA will be treated as the part of Articles. Such types of provisions are missing in the Companies (Amendment) Bill, 2016. In India, all companies have object clause in their MOA. Existing section 13 of the Companies Act, 2013 which deals with alteration of memorandum had not been amended by the Companies (Amendment) Bill, 2016.  How a company can adopt unrestricted object(s) require an elaborate clarification.   

Corporate Identification Number:- Every company operating in India have a corporate Identity Number (CIN) consisting of 21 digits. These digits represent different information. While first digit is for  the company’s status, whether listed or unlisted, second to sixth digit denotes industry type. Ministry of Corporate Affairs have worked out harmonised code to identify industries. A company having objects of a particular industry will be allotted the number representing the said industry. Companies to have unrestricted object(s) will require a revisit to harmonised coding system to fill five places of CIN.

Contradiction with existing provisions:- The existing provisions of the Companies Act, 2013 that emphasises on the objects of the company and not amended by Companies (Amendment)Bill, 2016 will became contradictory with section 4(1)(c) representing unrestricted object(s). For example, section 26(1)(a)(x) of The Companies Act, 2013  which require one of matters to be stated in prospects as “main objects and present business of the company.....”. These sorts of contradictions will invite clarification on the subject matter.  

The reasons and objectives of amendments in the existing Companies Act, 2013 are not only bringing ease in doing business but also addressing difficulties in the implementation of the existing provisions,  harmonise with accounting standard, acts, rules and regulations of Securities and Exchange Board of India and that of Reserve Bank of India. Clearly a plethora of clarifications required to achieve all the objectives of the Companies (Amendment) Bill, 2016.

Unrestricted object(s) are best suitable for companies where promoter employs own money to run their business. This type of companies forms majority in the Indian context. A Complete understanding of existing situation and impact of change must be assessable in the light of needed clarifications. A look before the leap is must.   

Note: Readers can share their constructive comments at yoginakochar@yahoo.co.in

Disclaimer: The views expressed in this article is only for academic purpose for the discussed topic and shall not be construed as any professional advice in any manner. This article is the property of the writer CS Yogina Kochar and no part of it can be copied, reproduced or distributed in any manner.  


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