1957 (2) TMI 16 - HC - Companies Law

Forming incorporated company Mode of and Memorandum of association Special resolution and confirmation by CLB required for alteration of

Summary

Issues Involved:
1. Confirmation of alteration of the memorandum of association.
2. Legality of contributing company funds to political purposes.
3. Interpretation of relevant provisions of the Companies Act, 1956.
4. Imposition of terms and conditions by the court.

Detailed Analysis:

1. Confirmation of Alteration of the Memorandum of Association:
The Indian Iron & Steel Co. Ltd. sought the court's confirmation of the alteration of its memorandum of association by a special resolution passed on December 7, 1956. The alteration involved deleting sub-clause 3(16) and substituting it with two new sub-clauses: 16(a) and 16(b). The original clause allowed the company to support associations and funds for employees and contribute to charitable or useful objects. The amended clause 16(a) included contributing to political purposes, which was a significant departure from the company's primary business.

2. Legality of Contributing Company Funds to Political Purposes:
The court addressed the major question of whether a company should be allowed to divert its funds for political purposes. The company argued that its business prosperity depended on the industrial policy of the Central Government and that contributing to political funds would enable it to carry on its business more efficiently. The court expressed concerns about the potential dangers and ethical implications of such contributions, emphasizing that it could lead to unhealthy competition among companies and the undue influence of big businesses in politics.

3. Interpretation of Relevant Provisions of the Companies Act, 1956:
The court examined sections 12, 13, and 17 of the Companies Act, 1956, to determine the legality of the proposed alteration. Section 12 allows the formation of a company for any lawful purpose, and section 13 requires the memorandum to state the company's objects. The court concluded that contributing to political funds is not legally prohibited and falls within the scope of a "lawful purpose." Section 17 permits the alteration of the memorandum by special resolution for specific purposes, including carrying on business more economically or efficiently. The court interpreted that contributing to political funds could be considered a measure of efficient business management.

4. Imposition of Terms and Conditions by the Court:
Section 17(2) of the Companies Act, 1956, stipulates that the alteration of the memorandum shall not take effect until confirmed by the court. The court has the power to impose terms and conditions while confirming the alteration. The court decided to impose conditions to ensure transparency and accountability. It confirmed clause 16(b) without conditions but imposed the following conditions on clause 16(a):
- The alteration shall remain effective for six years, after which the sanction will lapse unless further extended.
- The company must disclose every contribution to political parties in its balance sheet and profit and loss account annually.
- The company can apply for an extension of the sanction by demonstrating compliance with the court's directions.

The court emphasized the importance of full disclosure of political contributions to maintain transparency and prevent undue influence in politics. The court also left the amount of contribution to the discretion of the shareholders.

Conclusion:
The court confirmed the alteration of the memorandum of association with specific terms and conditions to ensure transparency and accountability in the company's contributions to political funds. The decision balanced the company's business interests with the need to maintain ethical standards and prevent undue influence in politics. The court's interpretation of the Companies Act, 1956, allowed for the alteration, provided it met the criteria of carrying on business more efficiently and economically.