Management | Time to seal the common seal

Management | Time to seal the common seal

The use of seals, whether in wax, lacquer or embossed on paper to authenticate documents is a practice as old as writing itself. Some of the most dramatic moments in period cinema revolve around the solemn act of placing a seal on a royal decree (perhaps to save a beleaguered hero/heroine’s life!). Historically, monarchs and sovereign governments executed documents under seal to indicate their authority and the authenticity of such documents. Apart from preventing forgery, the presence of an unbroken seal indicated that the sealed document had not been tampered with. British common law then evolved to require corporate entities to use a common seal in the execution of certain kinds of documents. Corporate law in independent India went on to reflect this. This legacy of British law continues to reside in the Companies Act, 1956, though at present corporate entities do not have much occasion to put the common seal to use.

The Companies Act, in Section 34, envisages that a company on incorporation would have a common seal for its corporate use. Article 84 of Table A of Schedule I of the Act also indicates that the board shall provide for a common seal and this common seal shall be affixed on a document only on the authority of the board or a committee of the board, and also specifies the process to be adopted for any such affixation.

These provisions indicate that the framers of law innewly-independent India had envisaged that a company would need to have a common seal, which would be used by it in various transactions undertaken in the course of its business, in line with the then prevalent law in India and the existing provisions in English law. This requirement may have been relevant then, but is now more of a relic of the past as over the years, the use of the common seal by companies has diminished considerably.

One of the prescribed uses of the common seal is found under the Companies (Issue of Share Certificate) Rules, 1960, which provides thatall share certificates of a company are required tobe issued under the common seal. Such requirementunder law should also be revisited, since several companies are now dematerializing their shares.

This brings us back to the question of what purpose the common seal really serves today, other than aiding in issuance of certificates and for execution of certain documents if so provided in the Articles of Association of a company.

The answers probably lie in the manner in which we conduct ourselves in the corporate world, today.

With the ever-expanding and changing world, the exponential rise of electronic communication, corporate interactions for commerce are now merely a click away. Today, transactions—whether cross-border or otherwise—are being negotiated and finalized on a real-time basis across various time zones, many a time with the counter-parties never meeting up in person. Parties finalize complex agreements on which multi-million dollar transactions are structured and then proceed to execute agreements through authorized officials located in different parts of the world. Print copies of the agreements are often exchanged at later dates. On almost no occasion is it found essential for parties either in India or elsewhere to have a company affix its common seal to lend weight or authority to such critical agreements or documents.

There may be just a handful of transactions where a party may insist and require the counter-party to affix the common seal for an agreement, though such requirement may not be based on a requirement of any statute.

Such cases could be found where contracting with a government body (for instance, a municipal corporation, a state electricity board or a public sector undertaking) or a few banking-related documents where the agreement templates are structured to invariably prescribe the use of the common seal by the counter-party. Even in these cases, the parties, through mutual consent, could dispensewith the requirement for the common seal without diminishing the obligations and rights of either party under the agreements.

In the perspective of the overwhelming number of transactions where the common seal is not used, these stray instances would seem to suggest that the common seal is now probably a relic.

Where then does one proceed on this matter? The government is currently finalizing significant and widespread changes to the Companies Act in line with recommendations from various committees. As a part of this process, the merits of retaining the common seal as part of the statute book can be reviewed and probably dispensed with, in the context of the current global requirements of commerce and the need for India keeping pace with changes not only in terms of technology but also in global practices.

Given the real-time nature of modern corporate transactions and the increasing trend towards conducting many aspects of such transactions online or in a paperless manner, it would seem that the fate of the common seal is, for all intents and purposes, “sealed".

This column is contributed by AZB & Partners, Advocates & Solicitors.

Send your comments