But is it really necessary to amend Section 13 to restrict the scope for abuse of the existing objects clause in a MoA of a private company? On the contrary, the remedy lies in fixing the legal responsibility and liability resulting from any deviation from the main objects on the board of directors, unless there is evidence to establish that any of the directors concerned had opposed such deviation.

Without prejudice to action for recovery of the losses/damages/liability from the managing director and other directors (except those who had not merely resisted the deviation before it was actually resorted to but had done all else that they could, in the circumstances, do to stop it), there should be a provision broadly similar to Sections 35 and 35A of the Companies Act, 1985, in the UK, making it clear that the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's memorandum (Section 35 of the UK ActThe amendments proposed by the committee may achieve no useful purpose. In a small private company, the company's interests will generally coalesce with those of its members. If there is oppression or mismanagement in a private company, Sections 397 and 398 of the Companies Act provide the remedy of an application to the National Tribunal. If it is not a member but an outsider whose interests are adversely affected in any operation in contravention of the restriction in the objects clauses, the solution to the problem would be not reducing the objects to one or ruling out, altogether, objects incidental to the sole object but ensuring that the corporate veil is not used by the directors/shareholders of the delinquent company to hoodwink the innocent third party and making the directors, and failing the directors, the company itself compensate the trapped third party for the losses he may have incurred through the unauthorised activity of the company.

It is unrealistic to expect a third party to be aware of the competence of a company to undertake a particular business or engage in a particular activity, that is, the scope of its objects clause.

SPC special

A small private company (SPC) is, undoubtedly, a fledgling. Assuming that an SPC has recourse to ultra vires activities or stretches the scope of a business, incidental or ancillary to its main object as declared in the MoA too far, what will be the total damage it may cause to the public?

The odds are that the damage may be relatively negligible since the total volume of an SPC's transactions is by its very definition limited to an amount which is not considerable. Will it be worth our while to deprive it of the right to do any business which is really incidental to an industry which constitutes its main object. It is one thing to insist on all the incidental objects being clearly spelt out and quite another to prohibit them totally.

What is the great benefit over and above its entitlements as a private company, that its special status would secure for an SPC that will justify the rigid discipline that is sought to be imposed on it? The committee observes that "SPC should have the flexibility to hold board meetings as per business exigencies, as the volume of business transacted by these companies is significantly less than that of a public company."

The recommendation of the committee is that "unless otherwise so provided in the articles of association (AoA), an SPC should be required to hold board meetings at least once in a calendar year". The committee suggests further that "the provisions of Section 292 of the Act should not be applicable to an SPC." The concession that an SPC can get away with one board meeting in the whole year will not do the SPC good, for as long as there is a business with capital of Rs 50 lakh or a turnover of several crore of rupees, they are bound to involve all kinds decisions which the board can alone take, ranging from the appointment of an authorised representative to participate in any statutory proceedings to the execution of a contract for supplies or services to an outside party.

It may be in the SPC's own interest to have at least one meeting every quarter in the financial year, with the right to convene as many special meetings as may be found necessary for meeting business exigencies from time to time. By no means can the curtailment of the right to engage in any business incidental to the main business of an SPC be justified by this single concession.

Regulatory relaxation

Most of the recommendations of the committee are of a routine nature and unexceptionable. They seek to dispense with procedures which are not relevant in the cases of companies in which the public are not interested. The Supreme Court judgement in the Madhusoodhanan vs Kerala Kaumudi (2003 55 CLA 372) case shows that control over a private company can be hijacked by abuse of the procedure prescribed in law or even the articles of a company for issuing additional capital and for holding general meetings, annual or extraordinary. The Company Law Board (CLB) has dealt with large numbers of such cases.

In most of them, the CLB's solution to the problem of oppression and mismanagement is to direct one of the disputants to acquire all the shares of the other at a price to be determined by some reputed chartered accountant or other. The Committee has not addressed itself to this common phenomenon, but the suggestions that it has made are not likely either to help victims of oppression in such cases or accentuate their difficulties. The proposal in the Companies (Amendment) Bill, 2003 introduced in the Rajya Sabha less than three months ago, may make some of the subterfuges which are currently employed, less easy, for example, the requirement that applications for transfers of shares should be placed before all the shareholders in general body for their consideration.

Recommendation No. 2.11 of the Naresh Chandra Committee, proposing written resolutions in lieu of general meetings, which is as good as a postal ballot, may serve to eliminate some of the fraudulent methods adopted by manipulators.

(By arrangement with Corporate Law Adviser,

New Delhi.)

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