Object Clause

PROJECT WORK ON
Object Clause
SUBMITTED TO :
Mrs. Nandita S. Jha
(Faculty of Corporate Law)

Swetank
Sharma
ROLL NO. 1179
7th SEMESTER

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DECLARATION

I hereby declare that the project work entitled “OBJECT CLAUSE” submitted to the CNLU
Patna, is a record of an original work done by me under the guidance of Mrs. Nandita S. Jha,
Assistant Professor of Law, Chanakya National Law University, Patna, and this project work is
submitted in the partial fulfillment of the requirements for the award of the degree of B.A. L.L.B.
The results embodied in this project have not been submitted to any other University or Institute
for the award of any degree or diploma.

Place:
Date:
/

Signature of the Candidate

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ACKNOWLEDGEMENT

Writing a project is one of the most significant academic challenges I have

ever faced. Though this project has been presented by me but there are many
people who remained in veil, who gave their all support and helped me to
complete this project.
First of all I am very grateful to my subject teacher Mrs.Nandita Ma’am
without the kind support of whom and help the completion of the project was
a herculean task for me. She donated her valuable time from her busy
schedule to help me to complete this project and suggested me from where
and how to collect data.
I am very thankful to the librarian who provided me several books on this
topic which proved beneficial in completing this project.
I acknowledge my friends who gave their valuable and meticulous advice
which was very useful and could not be ignored in writing the project. I want
to convey my sincere thanks to all the people who have helped me directly or
indirectly throughout the project.

Further, I declare that this project has been made by me with the help of the
reffered books. & no help has been taken from any other article.
Furthermore, all recognition has been given to the author in case otherwise.

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Table of Contents

Chapter-(1)
INTRODUCTION .......................................................................................................................... 4
OBJECTIVE ................................................................................................................................... 6
METHODOLOGY .......................................................................................................................... 7

Chapter-(2)
Doctrine of Ultra Vires ................................................................................................................... 8

Chapter-(3)
Effect of Ultra vire transaction ..................................................................................................... 10

Chapter-(4)
Alteration of object clause ............................................................................................................ 12

Chapter-(5
Conclusion .................................................................................................................................... 14

Bibliography ................................................................................................................................. 15
Websites ................................................................................................................................... 15

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List of cases

 Lakshmanaswami Mudaliar v. L.I.C, AIR 1963 SC 1185

 Ashbury Rly. Carriage & Iron Company v. Riche, 1875, LR 7HL 653
 Weeks v. Propert:
 Attorney General v. Great Eastern Railway Co. ,(1880) LR 5 AC 473
 Re Exchange Banking Co, (1882) 21 Ch D 519
 Pullman car co. v Central Co., 35 L Ed 69: 139 US 62 (1891)
 Ayers v South Australian Banking co, (1871) LR 3 PC 548
 Jehangir R Modi v Shamji Ladha

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Chapter-(1)
Introduction

Object Clause can be defined as a section in a memorandum of association that describes the
objectives for which the firm was formed. If the firm's activities fall outside of these objectives,
the firm is said to be acting ultra vires (beyond its powers).1 In other words object clause can be
defined as Section in a memorandum of association that states the function and purpose that
needs to be carried out by the company. If the company's activity falls outside this sphere, then it
is said to be an ultra vires act.2 It is the third clause in the memorandum which states the objects
for which the proposed company is to be established.

Following are the reasons for incorporation of object clause in the MOA:
 The ownership of the corporate capital is vested in the company itself. But in reality that
capital has been contributed by the share-holders and is held by the company as though
in trust for them. Such a fund must obviously be dedicated to some defined objects so
that the contributors may know the purposes to which it can be lawfully applied. The
statement of objects, therefore, gives a very important protection to the shareholders by
ensuring that funds raised for one undertaking are not going to be risked in another.
 The objects clause, in the second place, affords a certain degree of protection to the
creditors also. The creditors of a company trust the corporation and not the shareholders
and they have to seek their repayment only out of the company's assets. The fact that the
corporate capital cannot be spent on any project not directly within the terms of the
company's objects gives the creditors a feeling of security. Public financial institutions
providing loans to companies have to go object-wise because they have their own list of
priorities. The objects clause is their only guidance in this respect.
 Thirdly, by confining the corporate activities within a defined field, the statement of
objects serves public interest also. It prevents diversification of a company's activities in
directions not closely connected with the business for which the company may have been
initially established. It also prevents concentration of economic power. Any change of

1
Onject Clause, http://www.businessdictionary.com/definition/objects-clause.html, Last seen 2nd Nov’17
2
MoA, http://www.mca.gov.in/SearchableActs/Section4.htm, last seen 2nd Nov’17

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objects would require sanctions, thus giving the sanctioning authority an opportunity to
examine whether the proposed plan of diversification would not be against public
interest.

The common law’s provision takes depart from the Indian Law in this regard. The new
Companies Act, 2006 [UK] does not require objects to be stated in the memorandum. The
objects, if at all, have only to be stated in the articles. If there is no such statement, the company
would be with unrestricted objects. Thus the statement of objects, if any, would operate as a
contract between the company and its members. This has the effect of eliminating all the
complications caused by the doctrine of ultra vires. This doctrine would no longer be operative in
a dealing by the company with outsiders. Choice of objects lies with the subscribers to the
memorandum and their freedom in this respect is almost unrestricted. The only obvious
restrictions are that the objects should not go against the law of the land and the provisions of
Companies Act.

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Aims and Objectives

1) The researcher wants to know about the term Object Clause.

2) The researcher wants to know about the term ultra vires transaction
3) The researcher wants to know about the alteration of object clause
4) The researcher wants to understand the reasons for incorporation of object clause.

Sources of Data:
The following secondary sources of data have been used in the project-
1. Books
2. Websites
3. Cases

Method of Writing:
The method of writing followed in the course of this research paper is primarily
analytical.

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Methodology

The methodology of the present project with includes Doctrinal techniques.

In doctrinal method we solve any problem with the help of law. Only with the help of legal
resource, we see legal provision. We can solve any kind of problem from legal provision. It is
only based on the legal proposition. In which researcher analyze any problem with the help of
law and it is based on the only the written material.
Doctrinal research involves analyze of case law, arranging, ordering and systematizing legal
proposition and study of legal institution through legal reasoning or rational deduction.
In this research field work is not needed and library reference is through enough. It is only based
on library. The source of data is act judgment, legislation, and judiciary. It is not concerned with
people.

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Chapter-(2)
Doctrine of Ultra-vires

A company cannot do anything beyond the powers expressly or impliedly conferred upon it by
the statute or memorandum of association. Any purported activity beyond, such powers be
ineffective even if agreed to by all the members. This rule is commonly known as 'doctrine of
ultra-vires’. The word 'ultra' means 'beyond' and the word ‘vires’ means the 'powers'. 'Ultra
vires', therefore, means beyond the powers. So, when used with reference to a company, it means
beyond the powers of the company. The powers of a company are essentially derived from the
statute constituting it and the memorandum of association.

After the advent of Joint Stock Companies, the rule of ultra vires was for the first time laid down
by the House of Lords in Ashbury Rly. Carriage & Iron Company v. Riche [1875] LR 7 HL 653.
In this case, the object of the doctrine was explained by Lord Justice Cairns as follows
(i) to protect investors of the company so that they may know the objects in which their money is
to be employed; and
(ii) to protect the creditors by ensuring that the company funds, to which they must look for
payment are not dissipated in unauthorised activities.

Case Law:

Ashbury Rly. Carriage & Iron Company v. Riche3

Facts of the case: The company had been formed with the object of carrying on business as
Mechanical Engineers and General Contractors'. The contractors entered into an agreement for
financing the construction of a railway in Belgium and there was evidence that the agreement
had been ratified by all the members. The company repudiated the agreement and was sued for
breach of contract. The other party brought an action for damages for breach of contract His
contentions were firstly, that the contract in question came well within the meaning of the words

3
Ashbury Rly. Carriage & Iron Company v. Riche, 1875, LR 7HL 653 (1875, House of Lords)

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'general contractors' and, was, therefore within the powers of the company, and secondly, that the
contract was ratified by the majority of the shareholders.
Decision:
The Court held that the term 'general contractors' must be taken to indicate the making generally
of such contracts as were connected with the business of mechanical engineers. If, the term
'general contractors' was not so interpreted, it would authorise the making of contracts of any
kind and every description, such as, for instance, fire and marine insurance and the memorandum
in place of specifying the particular kind of business, would virtually allow the carrying on
business of any kind whatsoever and would, therefore, be altogether meaningless. Hence the
contract was entirely beyond the objects in the Memorandum of Association.
The doctrine of ultra vires has been upheld in a large number of Indian cases also.

Case law: Lakshmanaswami Mudaliar v. L.I.C.4

Facts of the case: The directors of the company were authorised 'to make Payment towards any
charitable or any benevolent object or for any general public or useful object’. In accordance
with shareholders' resolution, the directors paid Rs. 2 lakhs to a trust for the purpose of
promoting technical and business knowledge. The company's business having been taken over by
LIC, it had no business left of its own.

Decision: The Supreme court held that the payment was ultra vires the company. They could
spend for the promotion only on such charitable objects as would be useful for the attainment of
the company's own objects.

It may, however, be noted that section 3(1)(c) of the act provides that any matter considered
necessary in furtherance of the main objects can well be pursued. Thus in case any incidental
object has not been specified, it would be allowed by the principle of reasonable construction of
the memorandum.

4
Lakshmanaswami Mudaliar v. L.I.C , AIR 1963 SC 1185.

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Chapter-(3)
CONSEQUENCES OF A ULTRA VIRES TRANSACTION

When a company gets involved in an ultra vires transaction the question arises as to what are its
effects.

1. Injunction.—In the first place, the members are entitled to hold a reg-istered company to
its registered objects has been recognised long since. Hence whenever an ultra vires act
has been or is about to be undertaken, any member of the company can get an injunction
to restrain it from proceeding with it.5

2. Personal liability of directors.—It is one of the duties of directors to see that the corporate
capital is used only for the legitimate business of the company. If any part of it has been
diverted to purposes foreign to the company's memorandum, the directors will be
personally liable to replace it.6 Thus, for example, the Bombay High Court in Jehangir R
Modi v Shamji Ladha held that a shareholder can maintain an action against the directors
to compel them to restore to the company the funds of the company that have been
employed by them in transactions that they have no authority to enter into, without
making the company a party to the suit.

3. Breach of warranty of authority.—It is the duty of an agent to act within the scope of his
authority. For if he goes beyond he will be personally liable to the third party for breach
of warranty of authority. The directors of a company are its agents. As such it is their
duty to keep within the limit of the company's powers. If they induce, however
innocently, an outsider to contract with the company in a matter in which the company
does not have the power to act, they will be personally liable to him for his loss. In Weeks
v. Propert: A railway company invited proposals for a loan on debentures. At the time the
advertisement was published the Company had issued debentures of the amount of
£60,000 being the full amount which it was by its constitution authorised to issue. It had

5
Attorney General v. Great Eastern Railway Co. (1880) LR 5 AC 473.
6
Re Exchange Banking Co (1882) 21 Ch D 519.

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thus exhausted its borrowing powers. The plaintiff offered a loan of £500 upon the
footing of that advertisement. The directors accepted it and issued to him a debenture of
the company. The loan being ultra vires was held to be void. In an action by the plaintiff
against the director, it was held that the directors by inserting the advertisement had
warranted that they had the power to borrow which they did not in fact possess. Their
warranty consequently was broken and they were personally liable.

4. Ultra vires contracts: "A contract of a corporation", observed GRAY J., "which is ultra
vires, that is to say, outside the objects as defined by its memorandum is wholly void and
of no legal effect".7 The objection to an ultra vires contract is, not merely that the
corporation ought not to have made it, but that it could not make it. The question is not as
to the legality of the Contract, the question is as to the competency and power of the
company. to make it "An ultra vires contract, being void ab initio, cannot Become inra
vires, by reason of estoppel, lapse of time, ratification, acquiescence or delay.

5. Ultra Vires acquired property- the company’s right over the property is held secure if
company’s money has been spent ultra vires in purchasing the property. That asset,
though wrongly acquired, represents the corporate capital. In Ayers v South Australian
Banking co.8 it was held that Property legally and by formal transfer to a corporation is in
law vested with the company even though it was not empowered to acquire such
property.

7
Pullman car co. v Central Co. 35 L Ed 69: 139 US 62 (1891)
8
(1871) LR 3 PC 548

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Chapter – (4)
Alteration of Object Clause

Object Clause of MoA can be altered following provisions under Section 13 of Companies Act
2013 read with Companies (Incorporation) Rules, 2014. As per Section 13 of Companies Act
2013 which states that a Company may, by a special resolution and after complying with the
procedure specified in this section, alter the provisions of its Memorandum.

STEPS FOR ALTERATION IN OBJECT CLAUSE OF MEMORANDUM OF

ASSOCIATION9
I. Calling and Convening A Board Meeting
 Call and Convene a Board Meeting to alter the Object clause in Memorandum of
Association of Company by giving Notice of at least 7 days as provided under section
173(3) of the Act.
 Main Agenda for this Board meeting would be:

a. To get the approval of Directors for change in Object clause of Memorandum;

b. Fix date, time and place for holding Extra-ordinary General Meeting (EGM) to
get approval of shareholders, by way of Special Resolution, for amendment in
Object Clause of Memorandum. This amendment in Object Clause of
Memorandum shall be in accordance with the requirement of Section 13 of the
Companies Act, 2013.
c. To approve Notice of Extra-ordinary General Meeting (EGM) along with Agenda
and Explanatory Statement to be annexed to the notice of General Meeting as per
section 102(1) of the Companies Act, 2013;
d. To authorise the Director or Company Secretary to issue Notice of the Extra-
ordinary General meeting (EGM) as approved by the Board under clause 1(c)
mentioned above.

9
Amendment to MoA, http://tlaindia.org/wp-content/uploads/2015/07/Feb-2016-Amendment-to-MOA.pdf, last seen
2nd Nov’17

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II. Issue Notice of EGM

 Issue Notice of the Extra-ordinary General meeting (EGM) in writing to all Members,
Directors and the Auditors of the company at least 21 days before the actual date of the
EGM in accordance with the provisions of Section 101 of the Companies Act, 2013 to all
the Directors, Members and Auditors of Company.
 The Notice shall specify the place, date, day and time of the meeting and contain a
statement on the business to be transacted at the EGM.

III. Holding of General Meeting

 Hold the Extra-ordinary General meeting (EGM) on due date and pass the necessary
Special Resolution under section 13(1) of the Companies Act, 2013, for change in Object
clause of Memorandum.
 Quorum: As per Section 103 (b) of the Companies Act, 2013 which states that in the
case of a Private Company, two members personally present, shall be the quorum for a
meeting of the company.

IV. ROC Form filing

As per Section 13 of Companies Act 2013, Company is required to file Special Resolution
passed by shareholders for Alteration of Memorandum within 30 days of passing of Special
Resolution with the concerned Registrar of Companies in Form MGT-14 with prescribed fees
and along with following attachments:
 Certified True Copies of the Special Resolutions along with explanatory statement;
 Copy of the Notice of EGM send to members along with all the Annexure;
 A printed copy of the Altered Memorandum;
 Certified True copy of Board Resolution may be attached as an optional attachment.

V. Duty of Registrar of Companies

 As per section 13(10) of Companies Act 2013, no alteration made under this section
shall have any effect until it has been registered in accordance with the provisions of this
section.

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 As per section 13 (9) of Companies Act 2013, The Registrar shall register any alteration
of the Memorandum with respect to the objects of the company and certify the
registration within a period of thirty days from the date of filing of the Special
Resolution in accordance with clause (a) of sub-section (6) of this section. Concerned
Registrar of Companies (ROC) will check the E-forms and attached documents and will
give effect to the change in Object clause of the Memorandum.
 Thereafter, the Registrar will issue such certificate which will be the conclusive evidence
that all the requirements with respect to the alteration have been duly complied with by
the company.
 The alteration shall be complete and effective only on the issue of certificate by the
Registrar.
 If the special resolution is not filed within 30 days from the date of passing of such
Resolution, then additional fees will be levy as per Companies Act- 2013.
 It is the duty of the company to incorporate the alteration in every copy of the
memorandum.

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Chapter-(5)

CONCLUSION

Object clause is one of the most essential part of the Memorandum of Association. It is the third
section of the memorandum. For a legal scholar object clause can be said to have a certain level
of similarity between a preamble of any statute where the preamble states the purpose for which
the act has been brought into effect. Similarlyan object clause of a memorandum of a company
states the purpose for which the company has been incorporated. There are various functions for
incorporation of object clause. These are:-
1. To secure the interest of shareholder and creditors.
2. Public Interest.
3. Guidance for the administering body/ authority.

If any act is done contrary to the object of the company or any contract has been entered which is
beyond the object clause then that act is said to be ultra vires i.e. beyond its power. The ultra
vires acts are void ab initio and no ratification can make such acts as an intra vires act. The
doctrine of Ultra vires has found its reference in the case like Transbury Railway Co. Case and
LIC case. Further, there are various consequences of an ultra vires act. Some of which are-
A. Injunction
B. Ultra vires contract
C. Beyond the authority
D. Personal liability of director.
E. Ultra vires property.

Furthermore, a company may wish to alter its object clause later on.(e.g. if it wants to expand its
business). In such a case a provision is needed for alteration of object clause. This has been laid
down under section 13 of the act. It requires that a board meeting shall be convened after a notice
of 7days. Here the directors passes a resolution and calls for an EGM. The notice is given to all
the stakeholders and that notice shall consist the date, time and place of the meeting. A special
resolution is passed in this EGM. Once the resolution has been passed the resolution shall be

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submitted to the ROC with all essential certificates within 30 days. Incase it is filed after 30days,
a fine may levied on the company. An alteration takes effect only when it is certified by the
ROC.Once the alteration takes place, the company shall incorporate the altered object clause in
all its memorandum.

Once all these requirements are fulfilled, the object clause of the Memorandum of Association
stands altered.

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Bibliography
BOOKS:
 G.K. Kapoor, “Company Law”, Taxmann’s Publications Ltd., 16th Edition,
2013.
 Singh, Avtar, “Company Law”, Eastern Book Company, 14th Edition,
Lucknow, 2013.
 Anantharaman, K.S., “Lectures on Company Law and Company Act”, Lexis
NexisButterworthsWadhwa Publications, 10th Edition.
 Bhandari, M.C., ‘Guide to Memorandum, Articles and Incorporation of
Companies’ 4th edition, Nagpur, Wadhwa Publishers, 2005.

WEB SITES VISITED:

1. http://taxguru.in/company-law/procedures-incorporation-company-
india.html
2. http://business.mapsofindia.com/doing-business-in-india/types-of-
business-entities-in-india.html
3. http://madaan.com/incorporate.htm
4. http://www.indianentrepreneur.com/resources/the-different-types-of-
business-entities-in-india/


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