Scroll Top

THE SUITABILITY OF THE ANGLO-AMERICAN MODEL OF CORPORATE LAW IN INDIA

INTRODUCTION

Corporate law is a branch of law that governs the rights, relations, and conduct of companies, their shareholders, and other stakeholders. In India, the Companies Act, of 2013, regulates the corporate sector. The Anglo-American model of corporate law is one of the most popular models, and it has been adopted by many countries, including India. However, the debate on whether the Anglo-American model of corporate law is suitable for India has been a topic of discussion for a long time. This blog aims to provide an analysis of three important aspects of the Anglo-American model of corporate law in India, namely, the Certificate of Incorporation and its Conclusiveness, the Doctrine of Ultra Vires, and the Right of First Offer, vis-à-vis the Companies Act, 2013.

CERTIFICATE OF INCORPORATION AND ITS CONCLUSIVENESS

The Certificate of Incorporation is a crucial document that is issued by the Registrar of Companies (ROC) when a company is incorporated. It is conclusive proof of the existence of a corporation, and it is granted by the Registrar of Companies. In India, the Certificate of Incorporation is governed by the Companies Act, of 2013. Under the Anglo-American model of corporate law, the Certificate of Incorporation is also considered conclusive evidence of the existence of a corporation.

In India, the Certificate of Incorporation is considered prima facie evidence of the existence of a corporation. However, it is not considered conclusive evidence. In India, the courts have the power to look beyond the Certificate of Incorporation and examine the validity of the incorporation. The courts can declare the incorporation invalid if they find that the incorporation was done in violation of the Companies Act or any other law. It contains the name, type, address, and other essential details of the company. The Certificate of Incorporation is considered conclusive evidence that the company is duly incorporated and is in compliance with all legal requirements.

The Companies Act, 2013 has also reiterated the importance of the Certificate of Incorporation. Section 7 of the Act provides that a certificate of incorporation issued by the ROC shall be conclusive evidence that the company is duly registered under this Act. The Act also states that any proceeding against a company for a defect in its incorporation can only be initiated within two years of its incorporation.

DOCTRINE OF ULTRA VIRES VIS-À-VIS COMPANIES ACT, 2013

The Doctrine of Ultra Vires is a fundamental principle of corporate law, which provides that a company can only undertake activities that are within the scope of its objects as stated in its Memorandum of Association. Any action taken by the company that falls outside the scope of its objects is considered ultra vires and therefore void.

In the case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, the House of Lords established the Doctrine of Ultra Vires. The court held that any action taken by a company that is beyond the scope of its objects is null and void.

The Companies Act, of 2013, also recognizes the Doctrine of Ultra Vires. Section 4 of the Act provides that the Memorandum of Association of a company shall contain the objects for which the company is formed. Section 10(1) of the Act further provides that a company shall not carry on any business or exercise any borrowing powers except those specified in its Memorandum of Association. Under the Anglo-American model of corporate law, the Doctrine of Ultra Vires is not as strict as in India. The corporations in the Anglo-American model can act beyond their legal powers, provided that the action is in the best interest of the corporation and its shareholders. This flexibility is essential for the growth of the corporate sector.

There have been cases where companies have engaged in activities that are beyond the scope of their stated objectives but have been allowed to continue operating without consequences. This raises questions about whether the doctrine of ultra vires is being properly enforced in India, and whether the Anglo-American model of corporate law is well-suited to the Indian context. However, in India, the Doctrine of Ultra Vires is strict, which can lead to legal uncertainty and restrict the growth of the corporate sector. Therefore, there is a need to revisit the Doctrine of Ultra Vires in India and make it more flexible to promote the growth of the corporate sector.

RIGHT OF FIRST OFFER VIS-À-VIS COMPANIES ACT, 2013 – A JUDICIAL ANALYSIS

The Right of First Offer (ROFO) is a contractual right that gives a shareholder the first opportunity to purchase additional shares in the company before they are offered to third parties. ROFOs are commonly used in shareholder agreements to protect the interests of existing shareholders.

The Companies Act, 2013, provides for the ROFO in Section 62(1)(a)(ii). This provision states that a company may offer shares to its existing shareholders in proportion to their existing shareholding before offering them to the public. The Act also allows private companies to include provisions for the ROFO in their Articles of Association. This principle is not specifically enshrined in the Companies Act, of 2013, but is consistent with the Anglo-American model of corporate law. The rationale behind the principle is to allow existing shareholders to maintain their proportional ownership of the company and to prevent dilution of their shareholdings.

However, there are some concerns about the right of the first offer in India. For example, there have been cases where existing shareholders have been unable or unwilling to exercise their right of first offer, leading to the shares being sold to outside investors. This raises questions about whether the right of first offer is being properly enforced in India, and whether the Anglo-American model of corporate law is well-suited to the Indian context.

CONCLUSION

In conclusion, the Anglo-American model of corporate law has played a significant role in shaping the Indian corporate legal framework. The Companies Act, 2013 has incorporated several provisions of the Anglo-American model, making it more modern and dynamic. The Certificate of Incorporation is a crucial document that provides conclusive evidence of the existence of a company, and any discrepancy in the certificate can lead to legal consequences. The Doctrine of Ultra Vires has lost its significance with the abolition of the ultra vires doctrine by the Companies Act, 2013, which grants companies the power to undertake any activity that is not expressly prohibited by law. However, the Right of First Offer still holds relevance in Indian corporate law and provides a fair opportunity for existing shareholders to purchase additional shares before they are offered to external investors.

Indian corporate law has undergone significant changes over the years to become more investor-friendly, transparent, and accountable. However, there is still room for improvement, particularly in protecting the interests of minority shareholders and improving corporate governance practices. The incorporation of the Anglo-American model of corporate law has certainly helped India move towards these goals, but there is a need for continuous evaluation and improvement to ensure a fair and efficient corporate legal system.

Author(s) Name: Muhammad Aslah (School of Legal Studies, Dr. Janaki Ammal Campus, Kannur University)