Business Daily from THE HINDU group of publications
Thursday, Sep 28, 2006
Corporate - Courts/Legal Issues
The sealed fate of company seal
S. D. Israni
One of the first things that every promoter does after the incorporation of a company is to arrange for the making of a seal to be designated as the Common Seal of the company. A company is a juristic person with an independent existence, but unlike a natural person, it cannot sign on its own; it is the common seal of the company which acts as the seal of authentication on behalf of the company. However, as can be observed, in recent years the common seal seems to have lost much of its sheen; barring share certificates, the common seal is hardly used in any document. After demat, even this use has also reduced considerably. Hence, the question is: Has the common seal lost its relevance and should it be done away with?
The Panchanan Dhara case
This issue has assumed greater relevance after the recent judgment of the Supreme Court in Panchanan Dhara & Others vs Monmatha Nath Maity (Decd.) thru L.RS.  131 Comp Cas 577 (SC). In that case, the apex court was considering an appeal against an order passed by the Calcutta High Court. Earlier the High Court had affirmed the order passed by a District Judge in West Bengal. One of the parties involved in the issue was a company that possessed the suit property, which it intended to sell.
Some persons (Respondent Nos. 1 and 2 in the above case), coming to know of the intention of the company, entered into an agreement with it for the sale of the property. An advance was paid to the company and the balance amount was to be paid within 14 months. However, some disputes arose among the parties which eventually resulted in a consent decree by which the company was to execute and register a sale deed. As the company failed to do so, a suit for specific performance of the said agreement for sale was filed in the munsif court.
Before the Trial Judge, inter alia, the following contention was raised on behalf of the appellant:
The agreement for sale was not enforceable as the provisions of Section 46 and 48 of the Companies Act, 1956, had not been compiled with.
The Trial Judge held that, the contention of non-compliance of Sections 46 and 48 of the Companies Act was not tenable, as all the directors were parties to the agreement. Consequently, the said provisions were not attracted.
The aggrieved party went in appeal, but the same was dismissed by the First Appellate Court. In the Second Appeal preferred by the appellant, a Single Judge of the court dealt with all the contentions raised on behalf of the appellant and dismissed the suit. It was contended on behalf of the appellant that considering the provisions of Sections 46 and 48 of the Companies Act, which were not been complied with, the said agreement could not have been enforced.
On behalf of the respondents, as regards the alleged non-compliance of the provisions of Sections 46 and 48, it was urged that from the findings of the fact arrived at by all courts, it was evident that all the directors had signed the agreement of sale on behalf of the company and in any event they had sufficient authority to do so. It was also pointed to the court that even under the Articles of Association of the company; one of the directors was entitled to execute the deed of sale on behalf of the company.
The apex court made a reference to the provisions in Sections 46 and 48. The court observed that Section 46 merely laid down the mode of signing a contract on behalf of the company. That once a deed was executed on behalf of the company, it was the company and not the persons signing that could sue or be sued on the contract if the evidence was clear that the signature was only that of the company.
Similarly, the apex court observed, Section 48 provides for the procedure to be followed for the execution of deeds by a company. The Section permits a company to empower any person, either generally or in respect of any specified matters, as its attorney, to execute deeds on its behalf. Such deeds can be executed in any place, either in or outside India. However, the power has to be given in writing and under the common seal of the company.
The apex court noted that an oral agreement for sale was permissible under the law. Moreover, the apex court also noticed that there was no dispute about the fact that the agreement for sale had been entered into by three directors of the company. In addition, the subsequent letters written on behalf of the company clearly demonstrated that all the directors were aware of the agreement.
The apex court noted that before the courts below, execution of the agreement was not denied. Therefore, in the view of the apex court, merely due to the absence of a resolution, the contract could not have been held to be invalid or illegal.
Relic of the past
Coming to the question of putting up the seal of the company, the Supreme Court observed that, "it is a relic of the days when mediaeval barons, who could not read or write, used their rings to make a characteristic impress. Even in absence of a seal, the company may still be held to be liable having regard to the nature of a transaction and the authority of those who had executed it. If the act of the directors is not ultra vires or no public policy is involved, the parties acting thereupon cannot be left at large."
Although the Companies Act continues to provide for a common seal, it is clear that failure to affix the common seal on any deed or document by itself will not absolve the directors of their liability. Failure to affix the common seal cannot be a ground on which the company can escape its obligations. For all practical purposes, the common seal is as good as dead.
The common seal will continue more as a ritual rather than as a substantive mark of identification. Eventually, it is the overall circumstances of a given case that would weigh with the courts and not the mere affixation or otherwise of the common seal on a document or an agreement. Thus, the common seal of a company is no more as sacrosanct as it used to be.
(The author is a practising Company Secretary. E-mail: firstname.lastname@example.org)
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