Alteration of Objects

alteration

Section 17(1) of the 1956 Act contained clauses (a) to (g) specifying purposes for which the object clause in the memorandum could be altered. The 2013 Act has not specified any purpose for which the object clause or any other clause of the memorandum could be altered, thus leaving the same to the wisdom of the shareholders. The only restriction or additional conditions to comply with or specified in the case of the company wishing to alter its memorandum by alteration of its name, or registered office, or changing its object when it has raised money from the public. Rule 32 of the Companies (Incorporation) Rules, 2014 read with Section 13(8)  of the 2013 Act, provide guidance on changing the objects clause of a company.

Efficient and economical conduct of business

When a company registration is not in fact carrying on any business it cannot alter its objects under this clause. An alteration to the memorandum providing for payment of remuneration to the members of the governing body will enable the company to carry on its business more economically or more efficiently. The words ‘efficiently and economically’ are capable of giving a very wide power to the company to alter its objects clause for more economic and efficient functioning.

To attain its main purpose

In clause (b), note the expression  ” to attain its main purpose” not to attain its main objects. To ascertain which of the numerous matters set out in the memorandum comprises its main objects one has first to look at the memorandum and then get assistance from the evidence as to what in fact have been the main objects and if there is doubt, also have reference to what has actually done. Under this head an alteration can only be made to enable the company to attain its main purpose, not any purpose.

Enlarge or change the local area of operations

When the effect of the alteration was to enlarge the area of the company’s operation, the order of confirmation normally imposed a condition that the company‘s name indicating that its business was carried on in a particular area should be changed.

Conveniently combined with the existing business

alteration

This gives wide scope for carrying on any business which may conveniently or advantageously be combined with the existing business-which means that the field for alteration of the memorandum is extensive, the only condition being that it should not be prejudicial to or destructive of the existing business.  When a company does not carry on any “existing” business, or has stopped such business this clause does not apply. The question whether any given additional business may be conveniently or advantageously combined with the existing business is within the discretion of those engaged in the business , the views of the shareholders also being given foremost regard. The question must be considered as a business proposition keeping in mind that the new business is not destructive of or inconsistent with business the existing business. The highlights the necessity of adopting a business-like approach in examining whether the newly adopted objects are capable of presenting a convenient and advantageous combination  with the existing objects. This aspect will remain important despite the fact that the approval of the Company Law Board is no longer necessary and the matter is wholly a part of the domestic  jurisdiction. Any shareholder can challenge on the ground that there is violation of section 17 of the 1956 Act because non-combinable objects are being herded together. Such challenge cannot be presented by a person who is not a member of the company.

alteration

The company which is carried on distillery business and was empowered to carry on other objects allied to that business could not alter its objects so as to include a cinema business as it was not a business which could be said to be conveniently or advantageously carried on with the distillery business. But  a company which was formed for generating power was allowed to carry on ‘cold storage and other allied business’.

The general considerations on which an alteration of memorandum to carry an additional business was permitted were thus stated in Lawrence J., in Patent Tyre Company Ltd., . It is essentially a business proposition, whether an additional business can or cannot be conveniently carried on under existing circumstances with the business of the company. The additional business, of course, must not be destructive of or inconsistent with the existing business; it must leave the existing business substantially what it was before; but the additional business may be one which is different from the original business and yet may well be conveniently and advantageously combined with the business which is being carried on”. A charitable or other associations registered under section 25 may also alter its memorandum.

Where the existing memorandum provided that each clause should be construed independently as a separate object, the court confirmation of an alteration adding new sub-clauses was refused except on condition of deleting the provision in question or limiting its application.

The validity of a resolution to undertake new business had to be examined in connection with the company’s legitimate business and not in connection with an unauthorized business though the company was actually carrying on that business. Thus where a company was manufacturing hinges without any authority in the memorandum and it wanted to combine with it the protection of sewing machines also, it was held that section 17(1) (d) of the 1956 Act would not cover such a case. Where the business sought to be acquired was unlawful confirmation of the necessary alteration was refused.

alteration

Where a banking company whose business was nationalized wanted to shift over to other business, the resolution for alteration of the clause was confirmed. Where a company was no longer carrying on any business due to financial difficulty and had also leased out its premises, it could be permitted to alter its object clause to enable it to undertake new business. Where a company’s forward business in the food grains and jaggery was banned, the company was allowed it to alter objects so as to undertake the same business in cotton. Where the business of a company was nationalized and it proposed to undertake new objects, the same was allowed, keeping in mind only two things, whether the  company was financially sound and whether there were any objections. The CLB accepted this view and it laid down that it was not necessary that the company should have been actually carrying on some business to which a new object might be added. A company could undertake any of the businesses specified in its objects.

The Company Law Board refused to allow the applicant company to diversify its activities and venture into new fields when it found that instead of meeting the cost and expenditure of the new project out of the company’s own legitimate funds, there was every apprehension that the company might embark upon the new project with the monies refundable to the various depositors.  This approach should be prejudicial to public interest.

Negative objects

Any new positive object could be added with the sanction of the Company  Law Board to the existing objects of the company. But an object negatively expressed, e,g., that ” the company shall not undertake the following objects”, could not, in the opinion of the company law board, be allowed.

Alteration of object from one part of objects clause to other

alteration

A Company was carrying on the services of register and share transfer agent. This object was mentioned in the “other objects” part of its objects clause. Securities and Exchange Board Regulations,  subsequently introduced, required such companies to have the service of such agency to be included in the main objects of the company. The company accordingly applied to the Company Law Board for confirmation of the alteration. The CLB did not grant its confirmation because it was not a typical alteration within the meeting of section 17. In an allied case on the subject, the CLB laid down that any new business  started long after the company’s incorporation could not be shown as the main objects of the company by alteration of the company’s memorandum.

Wholly new object for a wholly different business  

A company engaged in the business of running nursing homes became insolvent and was put under administration under the Insolvency Act, 1986. The memorandum contained an inserted clause enabling the company, to carry on business as nursing home proprietors. There was no special resolution in the company’s records nor any with the office of the Registrar but because all the shareholders has acquiesced it was held, that that was a good consent and had the effect of a special resolution. But another important aspect of the matter remained open to doubt and this was whether section 4 of the 1985 Act would permit the adoption of a wholly new object for a wholly different business.

Restrict or abandon any of the objects

Even for deleting any portion of the object clause, the procedure laid down in this section has to be followed. The CLB had jurisdiction to confirm alteration which involved the abandonment of objects which were in their character fundamental . The words restrict or abandon have been held not to include in the case of charitable company, substitution of one kind of beneficiary of charity with another.

Amalgamation

alteration

Where the company asked for bare power to amalgamate by altering its memorandum of association, there was no scope for interlocutory relief of injunction. Section 398 gives jurisdiction to the court to sanction an arrangement, even though there may be no power in the objects clause of the memorandum of association of the company .

Disposal of undertakings in spin off division

A scheme of amalgamation involved spin-off division and, therefore, a disposal of the undertakings of the company. This was held to be not the company’s memorandum of association. The position of creditors was explained by the Andhra Pradesh High Court in Re , commercial and industrial Bank Ltd., The court said that it was a matter which the shareholders of the company have to decide and when the shareholders of the company after considering the pros and cons of the matter have agreed that the proposed amendments should be made in the memorandum, it is difficult to see how the creditor can object to it. The creditor is only concerned with his money and when the company is ready to give him security for his claim there is no reason why the court should not conform the resolution. A scheme for the rehabilitation of a sick industrial company prepared and approved by the BIFR involved inter-state shifting of the company’s registered office. The scheme made provisions for settlement of the dues of the creditors. It was held that in a petition for confirmation of the resolution for shifting the office, the CLB could not ask for payment of any dues to any creditor since the BIFR scheme was binding upon everyone concerned.  Where a company has a large number of creditors, the Company Law Board  said that it would not be desirable to exempt the company from publishing the general notice in newspapers on the plea that the company would have to bear heavy publication charges. For more clarification about Company Registration in Bangalore, kindly visit our website and fee free to make a call. We assisting you in a right way. Thanks for reading!!!

Leave a Reply

Your email address will not be published. Required fields are marked *