Monday, February 8, 2016

Is it time to abolish the memorandum of association?

[The following guest post is contributed by Suprotik Das, a 4th year law student at the Jindal Global Law School, Sonepat, Haryana.]

With the advent of the recent Start-up India Action Plan, the focus for start-ups seems to be on simplification of convoluted legal procedures, efficiency and speed of incorporation. In this regard, the Government has proposed that incorporation and registration formalities be shifted to a mobile application platform with seamless integration with the MCA and Registrar of Companies.

There is perhaps one simple change that I wish to discuss which will ease the speed of incorporation and registration in India. This proposal, which has been adopted successfully in other countries within the Commonwealth such as the United Kingdom, Hong Kong and Singapore, involves abolishing the need for drafting a memorandum of association altogether.

The trend now tends to gravitate toward having an ‘all-inclusive’ constitutional document that facilitates incorporation-related matters and contains within it an amalgamation of important elements from the Articles of Association and the Memorandum of Association (“articles’ and “memorandum” for short). This would benefit start-ups (that meet the requirements delineated in the Action Plan) and potentially for new companies that do not qualify as start-ups.

For the purposes of this post, I have used the term ‘start-up’ in the context of those companies that qualify as start-ups under the Action-Plan and the term ‘company’ has been applied in the context of those companies which are not start-ups under the action plan and which would be incorporated in the future.

Let us now look at the approaches in India, Hong Kong and Singapore.

India

The Companies Act, 2013 requires both the articles and the memorandum. The memorandum, apart from other important share-capital and name-related matters contains the objects clause[1] of the company and the articles contain details of internal management of the company. Both can be amended pursuant to special resolutions under sections 13 and 14 of the Companies Act.

Hong Kong

As per the new Companies Ordinance (Cap. 622), which was notified on March 3, 2014, the requirement of drafting a separate Memorandum of Association was done away with. This is due to the removal of the doctrine of ultra vires and revival of the doctrine of post facto ratification. Further, the objects clause has been effortlessly included in the Articles. The result is a quick, seamless and simple procedure to incorporate a company in Hong Kong.[2]

Singapore

The Singapore Companies Act (Cap. 50) as recently amended has also done away with the bifurcation between Articles and Memorandum of Association and has combined them into a single document known as the ‘constitution’, which includes the objects clause (which is only optional).[3]

At this juncture, it now becomes pertinent to discuss what is meant by the doctrine of ultra-vires.

The Doctrine of Ultra Vires

This doctrine was recognized in the seminal case of Ashbury Rly Carriage and Iron Co v. Riche.[4] It states that if an act were done outside the company’s objects clause, it would be void ab initio.

The obvious practical effect of such an arrangement means that if the company carries out an act that is not contemplated by its memorandum, the following scenarios may arise:

1.         The shareholders can reject such an act as ultra vires in relation to the memorandum.

2.         The shareholders can ratify such an act ex post facto.

3.         If the act in question is part of a business strategy such as diversification or the existence of synergies, the memorandum could be altered through a special resolution of the members.

The doctrine of post facto ratification

The doctrine of ultra vires is fettered by the application of the doctrine of post facto ratification by shareholders. Suppose a director takes an action that is outside the ambit of the objects clause, shareholders in general meeting can ratify such an action if it is in the best interests of the company.

The practical effect of such a doctrine is this: companies and start-ups may have widely worded objects clauses and shareholders may ratify an ultra vires act without having to go through the herculean task of amending the memorandum through a special resolution.

The way forward

The Companies Law Committee Report has recommended that section 4(1)(c) be amended such that it allows companies to have a general objects clause. The proposed clause reads as follows – “to engage in any lawful act or activity or business as per the law for the time being in force”. However, the fetter to this general objects clause would be the prescription of sectoral restrictions by the concerned regulators. The conclusion that I draw from this is that the Committee has recognised the practical effect of post facto ratification.

Interestingly, the Report makes a reference to the English Companies Act, 2006 wherein it describes the statutory requirement of having the objects clause included within the articles of the company. As per section 31 of the English Companies Act, the objects are unfettered unless restricted by the articles, which leads us to conclude that even the United Kingdom has this practice of having in place an over-arching constitutional document for a company. Strangely, the Committee has not considered this practice, even after reviewing the English position.

If the objects clause in the memorandum is, in a manner of speaking ‘organic’, i.e., amenable to change, why not abolish the need for a separate document? The name and type of company, objects clause and other important share capital-related matters ought to be integrated into one holistic ‘constitutional’ document much like the approach of England, Hong Kong and Singapore.

From a global perspective, with the Government’s recent efforts to ensure the ease of doing business in India as well as the ‘Make in India’ campaign, this is something Parliament should consider so as to bring India on par with global standards of the ease of doing business. At a domestic level, this will greatly benefit companies and start-ups that seek to focus on a wide spectrum of services and products.

- Suprotik Das




[1] Section 4(1)(c) of the Companies Act, 2013.
[2] FAQ section - New Companies Ordinance, Companies Registry, Government of the Hong Kong SAR, http://www.cr.gov.hk/en/companies_ordinance/faq_abolition-ma.htm#02.
[3] Section 23(1A) of the Singapore Companies Act (Cap. 50).
[4] (1875) LR 7 HL 653

1 comment:

vswami said...

Offhand

The referred expert committee’ recommendation on amendment of sec 4 (1)(c) of the Act , instantly takes one to the practical wisdom or otherwise underlying the age-old maxim - Generalia Specialibus Non Derogant. According to a school of thought, vide Syntactical Presumptions - Denman Chambers, - the right or wrong of which is inevitably prone to a never ending debate,- that “has caused a great deal of litigation and seems frequently to have thwarted the maxim”. May be recommended to explore further, mostly for academic interest ; but unlikely to save from the cfommonly dreaded ‘brain drain’- agree ?