Role of the courts in altering the memorandum of association of companies in Bangladesh

The memorandum of association (memorandum) is a legal document formulated as part of the incorporation process of companies. The significance of the memorandum lies in the fact that it comprises the objects clause of a particular company. The objects clause defines the scope and nature of businesses which a company wishes to undertake at the time of incorporation. By listing out the nature of businesses in the objects clause, a company limits itself within the scope of the objects clause. This limitation creates difficulties for companies when they desire to expand their business into new markets and industries. However, the problem can be easily resolved by amending the memorandum.

In Bangladesh, amendment of the memorandum is permitted under Section 12 of the Companies Act 1994 (CA 1994). This provision requires a company to a pass a special resolution that an amendment of the memorandum is necessary for any of the six purposes listed in Section 12(1) of the CA 1994 which are: “(a) to carry on its business more economically or more efficiently; or (b) to attain its main purpose by new or improved means; or (c) to enlarge or change the local area of its operations; or (d) to carry on some business which, under the existing circumstances. may conveniently or advantageously be combined with the business of the company; or (e) to restrict or abandon any of the objects specified in the memorandum; or (f) to sell or dispose of the whole or any part of the undertaking of the company; or (g) to amalgamate with any other company or body of persons.

Furthermore, a confirmation from the Court[i], i.e. the High Court Division of the Supreme Court of Bangladesh, is required for the amendment to take place. The confirmation is accorded by the Court after it is satisfied “(a) that sufficient notice has been given to every holder of debentures of the company, and to any person or class of person whose interest will, in the option of the Court, be affected by the alteration; and (b) that, with respect to every creditor who in the opinion of the Court is entitled to object, and who signifies his objections in manner directed by the Court, either his consent to the alteration has been obtained or his debt or claim has been discharged or has been determined, or has been secured to the satisfaction of the Court.”[ii] It is to be noted that the Court may, in the cases of any person or class, for special reasons, dispense with the notice required.[iii]

It appears from the above the wording of the provision that the Court is merely required to check whether the requirements of the provisions have been satisfied and whether any creditor is disfavouring the amendment. Nevertheless, it will not be wise to reach a conclusion on the basis of a plain reading of the statute. It is imperative to analyse case laws of Bangladesh and of other jurisdictions having a similar provision within their governing company law statutes.

The corresponding provision to Section 12 of CA 1994 in India is Section 17 of the Companies Act 1956. In dealing with an application made under Section 17 of the Companies Act 1956, the Calcutta High Court in the case of Fort Gloster Jute Manufacturing Co. Ltd. Re, (Gloster)[iv] stated that: “… the question as to whether a company should enlarge its scope of operation or embark on some new kind of business different to that which is already being carried on is a matter which primarily concerns only its members and creditors and if the members and creditors including holders of a debenture do not object and if it be not shown to the court that the new business which the company proposes to indulge in is of a speculative type or is otherwise objectionable the court should not stand in the way of the alteration of the objects clause. …[v]

Role of the courts in altering the memorandum of association of companies in Bangladesh

Role of the courts in altering the memorandum of association of companies in Bangladesh

The role of the Court in dealing with applications for alteration of memorandum has been succinctly delineated by B.C. Mitra J in Standard General Assurance Co. Ltd., Re, (Standard General)[vi] where he opined that: “… It is not a matter for the court to determine as to what business the company should carry on. If the directors and members of a company propose to alter its objects, and if there; is no objection from the creditors or if their position is not prejudiced by the proposed alteration, this court should not stand in the way of the company’s seeking new objects to enable it to embark on a new venture. But there are certain obvious limitations … The new business must not be destructive of or inconsistent with the existing business. There must be some existing business which the company should be carrying on at the time when it passes the resolution for altering its objects and such business must be carried on under its existing object clauses. The company’s financial position must be sound, to enable it to carry on the new business. Subject to limitations mentioned, the wisdom of the directors and members of the company in regard to the decision to carry on the new business proposed under the altered object must prevail. This is the view taken by this court so far, and I propose to adhere to and follow the same. In a trading company, whose aim is to earn profits for the benefit of share-holders, the directors and share-holders of the company are the best judges of the trading policy of the company and so long as the requirements of the statute are complied with and the policy pursued by the company through the object clauses in its memorandum is not fraudulent or unfair to any class of its members and does not violate the statutory provisions, the court should not easily or lightly interfere, with the decision of the share-holders and directors of the company and also of creditors, if any. But the decision of the share-holders, creditors and directors, is not final and it is for the court to see if the statutory requirement has been complied with and the alterations sought for are not contrary to or inconsistent with the object clauses in the memorandum as they stand.[vii]

It can be ascertained from above that the Indian courts are of the opinion that the courts should seek to play a limited role by ensuring that amendment is compliant with statute and the alterations aimed at are not contradictory to the objects clause. This is evident from the case of Juggilal Kamlapat Jute Mills Co. vs. Registrar Of Companies (Juggilal)[viii] where the Allahabad High Court allowed a company carrying on business in jute to alter its memorandum for the purpose of manufacturing of rubber goods. D.S. Mathur, J. justified it on the ground that “ the manufacture of rubber goods shall not, under the existing circumstances, be detrimental to, nor shall be destructive of, or inconsistent with the existing business, and can be advantageously combined with the existing business of the company. …[ix] D.S. Mathur, J. went further to say that there is no need to obtain a licence for opening the new factory prior to confirmation of alteration of memorandum: “It is not necessary that the alteration be confirmed only after the company obtains an industrial licence for opening the new factory: in fact, it is desirable to have the memorandum of association altered before taking steps for obtaining an industrial licence. …[x]

The petition for alteration has also been liberally construed by the courts in the UK. The Court of Appeal in the case of Bolsom Brothers (1928) Ltd., Re[xi] entertained a petition pursuant to Section 5 of the Companies Act 1929 for confirmation of alterations of memorandum to include certain trade although those trades were already carried out by the company. The object of the petition was only to regularise the position and the Court of Appeal allowed the company to include those items of trade in the memorandum.

In Bangladesh, in order to receive confirmation for alterations of memorandum, the Court must primarily be satisfied that the proposed alteration of the memorandum “will secure to the company an enhanced capacity to make a foray in an expanded area of business as would prove economically beneficial for it.”[xii] It must be the case that the proposed alterations of the memorandum of the company relate to carrying on its business more economically and efficiently.[xiii] Furthermore, in most of the cases, it is seen that the Court in issuing confirmation to amendment  of memorandum applications under Section 12 of the CA 1994, require the applicant companies to make donations.  

It is imperative to note that the Law attaches great sanctity to the objects clauses of the memorandum.[xiv] The reason is that the sanctity of the objects clause is to be maintained for the security of the creditors as well as the shareholders.[xv] Although in considering what is more beneficial to the existing business of the company, foremost regard should be given to the views of the shareholders, it is to be noted as stated by Syed Amirul Islam, J in the case of Niloy Motors (Pvt.) Ltd. vs. Registrar Joint Stock Companies and Firms (Niloy Motors)[xvi] that “ …There is still a residuary power and duty of the Court to see that this expression of view by the shareholder is a sensible one and the introduction of the proposed new business, if it at all can be called a business, is obviously not something which can not with reason be conveniently or advantageously combined with the existing business.[xvii]

His Lordships further stated that “… the legal position is that it has to be seen if the alteration is conducive to the business of the company. If on consideration of the resolution it appears to the Court that it meets the requirements of the Section the Court will confirm the same. However, in affirming a resolution this Court can not only modify it as is thought just and proper but in an appropriate case can also refuse to confirm the same. It is the solemn duty of the Court to see the welfare of the company and its members and a company may not be allowed to embark upon a business which would break down the substratum of the company or endanger its running business.[xviii]

It transpires from above that the judiciary of Bangladesh will not merely carry out a rubberstamp role in dealing with applications but will rather seek to ensure that the proposed amendments of the memorandum does not expose the company to any risk and ensures its wellbeing. This act of the Court has not been universally appreciated: academics and many company law lawyers hold the view that amendments to the memorandum is an administrative matter and should be accomplished without the interference of the Court. The patrons of this view can be categorised into two groups. One group believes that since the courts are overburdened with cases, requiring the courts to decide whether alterations of memorandum should take place causes this simple administrative task to be time consuming and expensive. The other group comprises of those people whose dishonest and malafide objectives are deterred by the Court when a confirmation of alteration application is refused by the Court. It is because of the latter group of people that provisions like Section 12 of the CA 1994 still exist today although arguments are being constantly voiced for its removal.

[i] CA 1994, s 12(2)

[ii] CA 1994, s 12(3)

[iii] ibid

[iv] 68 Cal WN 481

[v] Gloster [4]

[vi] AIR 1965 Cal 16

[vii] Standard General [55]

[viii] [1967] 37 CompCas 20 All

[ix] Juggilal [36]

[x] Juggilal [39]

[xi] [1935] Ch 413 : [1935] 5 Com Cases 401

[xii] Mr. Sunirmal Chaudhuri vs. The Registrar of Joint Stock Companies & Firms [2008] HCD [2009] MLR 432 [6] [Syed Refaat Ahmed, J]

[xiii] Shasha Textiles Ltd. Vs Registrar, Joint Stock Companies & Firms [2010] HCD [2011] BLC 173

[xiv] Niloy Motors (Pvt.) Ltd. vs. Registrar Joint Stock Companies and Firms [2004] HCD (Matter No. 19 of 2003) [5] [Syed Amirul Islam, J]

[xv] Ibid

[xvi] [2004] HCD (Matter No. 19 of 2003)

[xvii] Niloy Motors [8]

[xviii] Niloy Motors [10]

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Mohammad Taqi Yasir

Mohammad Taqi Yasir is a LLB graduate of the University of London International Programmes. He is one of the 15 students around the world who was awarded first class in 2017 by the University of London. After completing his LLB in 2017, he commenced his legal career at a leading law firm in Dhaka and is currently practicing in civil law, more specifically in the areas of company law. He is also an entrepreneur holding board position at a digital marketing and event management company, Planet X Incorporated. His interests extend to the field of philanthropy as well and he current performs the role of an advisor for a charity called Born To Smile and holds the position of Vice President of a social enterprise named, Footsteps Foundation.

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