1. This petition by the above-named company under Section 17 of the Companies Act, 1956 (hereinafter referred to as "the Act"), was admitted and came up for final hearing and disposal before this Bench on August 20, 1991.
2. The company was incorporated on September 12, 1988, for carrying on the business of latex rubber gloves and other rubber products. The company took all preliminary steps such as acquiring necessary land, getting sanction of loan from financial institutions and entering into agreement with foreign companies for technical, financial and other assistance and supply of equipment for the purpose of manufacture of the products for which the company was incorporated but due to sudden fall in the price of the said products, the company was forced to abandon the project. It is noticed from the directors report on the accounts for the year ended March 31, 1990, that the company did not implement the project for manufacture of latex rubber gloves due to adverse international market conditions and the directors, after detailed discussions with the buy-back partners, decided not to manufacture the said products immediately and, accordingly, the company surrendered the land allotted by Cochin Export Processing Zone. It is also noticed from the company's annual accounts for the period ending March 31, 1990, that, out of the paid-up capital of Rs. 8.16 lakhs, the company had already spent Rs. 5.22 lakhs towards preliminary and pre-operative expenses. It is mentioned in the petition that the board of directors considered various ways and means to run the company and after a detailed study, they decided to take up the business of aqua farming, fish culture, fish farming and processing and export of marine products. It is also mentioned that two directors of the company are working in the field of processing and export of marine products and with the specialised knowledge of the directors, the company will be able to take up the new line of activities profitably. It is further mentioned that the directors are also confident of raising additional funds required for the proposed activities by way of equity and term loan from financial institutions/banks.
3. As there is no specific provision in the objects clause of the memorandum of association of the company for carrying on the proposed business of aqua farming and marine products, the company, by a special resolution passed in accordance with Section 189 of the Act, at the extraordinary general meeting thereof held on August 27, 1990, has altered the objects clause of the memorandum to enable the company to carry on the business of aqua farming, marine products etc., and has come before this Bench for confirmation of the said alteration. Since the company has not been carrying on any business at present, on the last date of hearing, it was enquired from the authorized representative of the company as to under which clause of Section 17(1) of the Act, the alteration proposed by the company could be allowed.
The company's representative took adjournment on that date for filing written submissions on this point. A written submission has since been made by the authorised representative of the company. In the said written submission, the reasons for not carrying on the business for which the company was incorporated and also the reason for which the company now wants to take up the proposed business of aqua farming, fish culture, etc., have been stated. Section 17 of the Act sets out the circumstances when the amendment of the memorandum of association with respect to the objects of a company could be confirmed by the Company Law Board (hereinafter referred to as "the CLB"). Section 17(1) reads as follows : "17. (1) A company may, by special resolution, alter the provisions of its memorandum so as to change the place of its registered office from one State to another, or with respect to the objects of the company so far as may be required to enable it - (d) to carry on some business which, under existing circumstances, may conveniently or advantageously be combined with the business of the company ; (e) to restrict or abandon any of the objects specified in the memorandum ; (f) to sell or dispose of the whole, or any part, of the undertaking, or of any of the undertakings, of the company ; or 4. As the company is not carrying on any business at present, the point arising for determination is whether the alteration of the objects clause of the memorandum of association as prayed for in the petition is in accordance with the provisions of Section 17(1) of the Act.
5. It has been held in Indian Iron and Steel Co. Ltd., In re [1957] 27 Comp Cas 361 (Cal) that a company can alter the objects of its memorandum of association by a special resolution only to the extent required to enable it to do any of the things specified in Clauses (a) to (g) of Section 17(1) and for no other purpose. One of the purposes as specified in Clause (a) is to carry on its business more economically or more efficiently. Clause (d) of the said section provides for carrying on some business which, under the existing circumstances, may conveniently or advantageously be combined with the business of the company. The word "business" appearing in Clause (a) and also in the later portion of Clause (d) refers to an existing business of the company. The words "some business" appearing in Clause (d) refer to "new business" which is not there already. The scope of alteration covered by clauses (a) and (d) came up for consideration before the court/CLB from time to time. It has been held that if a company wants to add some new objects so as to carry on its existing business more economically or more efficiently, such amendment should be allowed under Clause (a). In so far as Clause (d) is concerned, the court/CLB has allowed alteration of the objects clause for inclusion of new objects after being satisfied that, under the existing circumstances, the company can conveniently combine the new business with the existing business and the new business is not inconsistent with, or destructive of, the business being carried on by the company.
In this connection, the decisions of various courts in the cases of Industrial Cables (India) Ltd. v. Registrar of Companies [1973] 43 Comp Cas 353 (P & H), Straw Products Ltd. v. Registrar of Companies [1969] 39 Comp Cas 974 (Orissa), Juggilal Kamlapat Jute Mills Co. Ltd. v.Registrar of Companies [1967] 37 Comp Cas 20 (All), Bhutoria Bros.
Private Ltd., In re [1958] 28 Comp Cas 122 (Cal), New Asiatic Insurance Co. Ltd., In re [1967] 37 Comp Cas 331 (Punj) and Motilal Padampat Sugar Mills Co. Private Ltd., In re [1964] 34 Comp Cas 86 (All) may be referred to. In all the above cases, on the date when the special resolutions were passed or when the petitions came up for consideration before the courts, the companies were carrying on business and the courts allowed the companies to combine some new business with the existing business.
6. In case, however, the company has not been carrying on any business either on the date when the special resolution was passed or when the petition is heard by CLB, it is for consideration whether the company can be allowed to alter the objects clause as there is no existing business with which the new business can be combined as provided in Clause (d) of Section 17(1). It has been held in Motilal Hirabhai Spg., Wvg. and Mfg. Co. Ltd., In re [1970] 40 Comp Cas 1216 (Guj) that the language of Clauses (a) and (d) of Section 17(1) unmistakably indicates that, before any alteration in the objects clause is sanctioned, which enables the company to start or undertake a new business activity, the company must invariably be doing some business at the relevant date. It is also held that if the company is not shown to be doing any business, in other words, the company is virtually a defunct company, the court will have no jurisdiction to sanction the proposed alteration in the objects clause. Similar view was also expressed in the cases of Link Electro Mechanical Works v. Registrar of Companies [1963] 3 Comp LJ 111 (All), Eastern Woollen Mills Ltd., In re (UC) IC 219/57 dated 13-12-1987) and Drages Ltd., In re [1942] 1 All ER 194 (Ch D).
7. However, in many other cases, the court/CLB held that the objects clause of the memorandum of association can be allowed to be altered for carrying on some new business even if the company is not carrying on any business. After nationalisation of banks, collieries and life insurance business, many companies wanted to start new business as the business they were carrying on was suspended due to operation of law and the court allowed the companies to carry on some other business by altering the objects clause of the memorandum of association. In all such cases, the companies had no business either on the date when the special resolution was passed or when the matter came up before the court/CLB for consideration. In this connection, the decisions of the court/CLB in the following cases may be referred to : United Collieries Ltd., In re [1975] 45 Comp Cas 226 (Cal), Canara Bank Ltd., In re [1973] Tax LR 1884 (Kar), New Asiatic Insurance Co.
Ltd., In re [1965] 2 Com LJ 24, Central Bank of India Ltd., (Company Petition No. 167 of 1970 (Bom) and Tinnevelly Tuticorin Electric Supply Co. Ltd. (Comp Petition No. 224(17) CLB of 1975).
"As the company's electricity undertaking has been nationalised by the Tamil Nadu Government, the equity shareholders desire that the company should continue to function by incorporating other useful objects in the objects clause of the memorandum of association legally under Section 17 ; we do not find any reason to deny the same.".
8. In another case, viz., Mahalaxmi Bank Ltd. v. Registrar of Companies [1961] 31 Comp Cas 287 (Cal), the company was carrying on the business of banking and, by an order of the court in a scheme of arrangement, the company was prohibited from functioning as a bank until further orders from the Reserve Bank of India. The company subsequently applied to the Reserve Bank for permission to carry on non-banking business.
The Reserve Bank asked the company to alter the objects clause of the memorandum of association. The company changed the objects clause with a view to carry on other non-banking business and the same was allowed by the court.
9. In all the cases referred to above, the companies, were compelled by process of law to part with their existing business but not voluntarily. However, the fact remains that, in spite of there being no existing business, the court/CLB allowed the companies to carry on new business which, under the existing circumstances, could be carried on by the companies. Therefore, combination of new business with the existing business was not considered to be essential for alteration under Section 17(1)(d) of the Act. In a recent order dated November 19, 1990, CLB, Northern Region Bench in Super Byteron Systems Ltd. [1991] 5 CLA 169, allowed the company to alter the objects clause for carrying on some new business in spite of the fact that the company has not done any business ever since its incorporation. In the said matter, the company was incorporated in October, 1985, for carrying on the business of manufacture of electrical equipment connected with telephones and telegraphs and obtained a business commencement certificate in March, 1989. The company did not find it convenient to carry on the said business and wanted to go in for the business of manufacturing and trading in pipes, pipe systems and fittings. The company, subsequenlty, obtained an industrial licence for manufacture of pipes and piping systems and negotiated foreign currency loan for its project. In allowing the petition, CLB made the following observations : "Since the company had already gone ahead to take effective steps and also to enter into foreign collaboration with Vanguard Chemicals Co.; USA, the company would be put to a situation of no return if the alteration prayed for is not allowed. It also appears that the failure of the company to do the business of carrying out the main object with which the company was incorporated is due to circumstances beyond its control at least to the extent that it has become commercially impossible for the company to do the business (if not physically impossible). In a way, therefore, the inability of the company to carry on its main object is on a footing similar to that of the case of United Collieries Ltd., In re [1975] 45 Comp Cas 226 (Cal)." 10. In the aforesaid case, suspension of business for which the company was incorporated was voluntary and still the CLB allowed the company to amend its objects clause to undertake some new business applying the ratio of the decision of the Calcutta High Court in United Collieries Ltd., In re [1975] 45 Comp Cas 226.
11. From the above discussion, it will appear that one view is that the company should not be allowed to amend the objects clause unless it is already carrying on any business. The other view is that carrying on any business is not always a must for changing the objects clause for undertaking some new business. A company is expected to carry on the business for which it is incorporated. The objects clause of a company, according to Clause (d) of Section 13(1), is in two parts, viz., (i) the main objects to be pursued on incorporation and objects incidental and ancillary to the attainment of the main objects ; (ii) other objects not included in (i). In case the company does not commence any business within one year of its incorporation, it may be a ground for winding up under Section 433(c) of the Act. Perhaps, the Legislature did not visualise a situation where, even before pursuing any of the objects mentioned in the memorandum of association, the company may be compelled by circumstances to change its objects clause to carry on some other business which, under the existing circumstances, the company can carry on. However, in Section 17, there is no prohibition that the company should not be allowed to change its objects clause to enable it to start some new business unless it has actually translated any of its objects as set out in the memorandum of association into business. What is contemplated in Section 17(1)(d) is that if there is some existing business, it has to be ensured that the new business to be embarked upon can conveniently or advantageously be combined with the existing business under the existing circumstances and the new business is not inconsistent with, or destructive of, the existing business. The scope of alteration under Section 17(1)(d) has been well explained in Canara Bank Ltd., In re [1973] Tax LR 1884 (Kar). It was observed in that case at pages 1887 and 1888 as follows : "The argument urged on behalf of the Registrar was that since the petitioner was not carrying on any business now, Clause (d) was inapplicable. It has to be observed that Section 17(1) of the Companies Act and the corresponding provision which was there in the Indian Companies Act of 1913 in India and similar provisions in the Acts governing companies in England have already received by courts in India as well as in England, a liberal construction. If an amendment to a memorandum of association can be brought under any one of the clauses, an amendment of the memorandum sought by a company should be confirmed by a court in the ordinary course.
Clause (d) of Sub-section (1) of Section 17 of the Companies Act provides that an amendment permitting a company to carry on some business which, under the existing circumstances, may conveniently or advantageously be combined with the business of the company is permissible. It was urged on behalf of the petitioner that, under the existing circumstances, the business can be carried on by the company since the new business is neither destructive of, nor inconsistent with, the business of the company. On the other hand, it was argued on behalf of the Registrar that, since there was no existing business of the company, Clause (d) was inapplicable. I fail to appreciate the submission made on behalf of the Registrar in this behalf. To me it appears that Clause (d) requires the court, before confirming the amendments to the objects clause of the memorandum of association of a company, only to see whether the object to be introduced anew would be destructive of, or inconsistent with, the existing business of the company. If the company has no existing business at all, then there is no difficulty at all in holding that the new clause can be allowed to be introduced. To say that unless some existing business of the company is there with which the new business can be allowed to be combined, no amendment can be allowed under Clause (d) amounts to placing a very narrow construction on that clause. It is no doubt true that if some existing business is there, then the court will have to enquire into the question whether the new business can be conveniently or advantageously combined with the existing business. On a true construction, Clause (d) of Subsection (1) of Section 17 of the Companies Act must be read as an enabling provision authorising a company to take up new business which would not be destructive of or inconsistent with any existing business of the company. It is, therefore, incorrect to hold that, when there is no existing business, no other business can be permitted to be undertaken." 12. The above observations of the Karnataka High Court, though made in the context of a banking company which suspended its banking business owing to nationalisation of its undertaking, shall also hold good in the case of a company which has suspended its business voluntarily because the present market condition is not favourable for carrying on the business for which the company was incorporated. The object that will be pursued by the company is essentially a business proposition and must be determined by the person engaged in the business of the company. In corporate management, the directors and shareholders of a company are the best judges to decide the business to be carried on by a company. In considering whether the new business proposed to be undertaken by the company should be allowed, foremost regard should be given to the views of the shareholders but there is still a residuary power and duty of the court (now CLB) to see that the expression of view by the shareholders is a sensible one (Bhutoria Brothers Private Ltd. [1958] 28 Comp Cas 122 (Cal)). It has been observed in Mahalaxmi Bank ltd. [1961] 31 Comp Cas 287 (Cal) that if the alteration proposed is one of the several things enumerated in Clauses (a) to (g) of Section 17(1) of the Act, the court has jurisdiction to confirm the alteration either wholly or in part. It has further been observed that the power of the court in this section is discretionary and, in determining whether the said discretionary power ought to be exercised in favour of confirmation of the alteration and if so, in what manner, it is necessary to consider the facts and the background on which the alteration is asked for. It has been held in Nateswar Spg. Wvg. Mills Ltd., AIR 1960 Mad 257, that, if the alteration is within the company's power under Section 17(1) and does not prejudice any of the interests which the court is to safeguard by Section 17(3), the court has no power under Section 17(2) to refuse to confirm the alteration. Under Section 17(3) and (6), the CLB shall, in exercising its power under the said section, have regard to the rights and interests of the members of the company (and of every class of them) as well as to the rights and interests of the creditors of the company (and of every class of them).
13. In this case, the special resolution for alteration of the objects clause of the memorandum of association has been passed unanimously by the shareholders and there is no objection from any shareholder or creditor of the company or from any other person. The business proposed to be carried on by the company is also not illegal. Although the company has lost a part of its paid-up capital towards preliminary and pre operative expenses, it has excess of assets over liabilities to the extent of Rs. 2.96 lakhs as per its last audited balance-sheet as at March 31, 1990. In this background, nobody's interest would be affected if the amendment sought for is confirmed. It also appears that the alteration of the objects clause has become necessary so as to enable the company to carry on some business for its survival because, under the existing circumstances, the company feels that it will not be commercially viable at the moment to carry on the business as set out in the existing objects clause of the memorandum of association.
14. The Registrar of Companies, Kerala, to whom a notice of this petition was served has sent a report dated February 8, 1991, wherein he has stated that the special resolution passed by the company for alteration of the objects has been taken on record and he has no objection to the proposed alteration being allowed by this Bench on merit.
15. This Bench is satisfied that having regard to the rights and interests of the members of the company (and of every class of them) as well as to the rights and interests of the creditors of the company (and of every class of them), it is just and proper that the petition should be allowed subject to the condition that the company shall change its name suitably in consonance with the main object as agreed to by the authorised representative of the petitioner company.
16. This Bench doth therefore, hereby order, that the alteration in the memorandum of association of the above-named petitioner company for change of the objects clause as proposed by the special resolution passed in accordance with Section 189 of the Companies Act, 1956, at its extraordinary general meeting held on August 27, 1990 (which special resolution is set forth in the Schedule hereto) be and the same is hereby confirmed.
"RESOLVED that the objects clause of the memorandum of association of the company be altered by adding the following new Clause IIIA(2) after the existing Clause IIIA(1) thereof : To do the business of all kinds of aqua farming, fish culturing and to do the business of fishing including deep sea fishing and do the business of processors, exporters, dealers, agents, brokers of all varieties of fishes, sea foods, frog legs and other aqua products".