Drafting "Objects Clause"?

We all know about the requirements of forming a Company in India. Incorporation of a Company, as a secretarial practice, may not be a complicated exercise. It is not difficult to get the Director Identification Numbers (DIN) for the proposed directors in the Company to be incorporated, it is not difficult to get Digital Signatures, it is not difficult to find the availability of name with the Registrar of Companies by filing e-form and it may not be difficult to comply with all the requirements and submitting an application to the Registrar of Companies asking for incorporation of a Company and eventually, a Certificate of Incorporation will be issued by the Registrar of Companies and a Private Company is entitled to commence business immediate to incorporation though a Public Limited Company needs to get further certificate like “Certificate of Commencement of Business”.

But, what is important in the entire process is about telling the promoters or the persons engaged in the formation of Company about basic concepts of Company Law. I am not talking about Public Limited Companies or Listed Public Companies as normally experienced will engage in the formation of Public Limited Companies and SEBI regulates the functioning of Listed Public Companies to a great extent in view of the authority conferred on it under section 55A of the Companies Act, 1956.

The difficulty comes with the Private Limited Companies or the closely held companies. Even, without having a basic understanding about the concepts of Company Law, proprietary ship concerns and partnerships are converted into companies in order to take advantage of many privileges like limited liability.

In the entire process of incorporating a Private Limited Company, two issues are significant. One relates to drafting an objects clause in the Memorandum and another is about drafting the Articles of Association. Even when it comes to Articles of Association, normally, the professionals prefer to adopt the articles provided in the schedule attached to the Companies Act, 1956. But, there can not be any such thing when it comes to “Objects Clause” and it needs to be drafted having discussion with the promoters of the Company.

It is true that the Memorandum and also Articles can be drafted at any time by following the procedure provided under the Companies Act, 1956. But, most of Private Companies or the Public Limited Companies do not adhere to the provisions of the Companies Act, 1956 and the professionals see many of such cases practically.

I would like to emphasize the importance of drafting “Objects Clause” carefully and explaining the promoters or the persons involved in the formation of the Company about the effect of “Objects Clause”.

We all know that section 13 of the Act deal with the “Objects Clause” in the Memorandum and objects are drafted under three headings viz., Main Objects, Ancillary Objects and Other Objects.

Conceptually, the Company Law is very very interesting. There are certain issues which operate as a public notice as every shareholder of a Company or stake holder can not take part in day-to-day affairs of the Company. As such, the Memorandum and Articles operate as a public notice and deemed notice to the shareholders of the Company. And, infact, only looking at the basic documents, people may like to invest in a Company.

Some may keep the objects very specific and some will draft objects very very vague where the language makes one to believe that the Company can do everything it wants. It is against the logic behind the Company Law Concept and such a practice to be avoided.

A shareholder may not be able to concentrate on the regular affairs of the Company and it does not mean that the interests of the shareholder can be compromised. If the Company chooses to change its objects clause and upon notice, a shareholder may like to object to that strongly or may take such steps to come-out of the Company by disposing his shares.

But, what happens in many cases and especially in Private Limited Companies and closely held Public Companies is that the Company does whatever it wants completely ignoring the “Objects Clause” and even the shareholder will not be having any notice of such an action by the Company and he will be knowing about the things after a long time when disputes arise. We are seeing all this practical difficulties. When a shareholder wants to question the action taken by the Company on the ground that the Company has completely ignored its Objects, then, though the action of the Company is per se illegal, there will be many complications like the interests of the third parties and the usual delays in the adjudication process in view of the overall interests of the shareholders. An action by a Company completely ignoring the commitments given in the basic document and especially Object Clause, is a serious wrong.

As such, professionals involved in the formation of Company should tell the promoters about the “Objects Clause” and avoid drafting “Objects Clause” with vague terminology.