The Common Seal – often referred to as the signature of the corporate entity is more often than not deemed as the substantial mark of identification for the corporate entity in question. However, in today’s computerized corporate scenario, Common Seal has lost its gloss and has come to exist more as a ritual than a requirement. Today, Common Seal hardly used in any document other than the Share Certificates and even this is been reduced on a day by day basis with the advent of “Demat Accounts”.
Common Seal and the Provisions in Law:
a) Section 34 of the Companies Act, 1956 specifies that every company on incorporation should have common seal for corporate use.
b) Article 84 of Table A of Schedule I of the Act also indicates that the board shall provide for a Common Seal and this 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.
c) Section 50 empowers the companies to have official seal for use outside India.
d) The guidance note on Compliance Certificate also specifies that the companies should maintain a register of documents sealed containing the information on date of sealing, details of the document, people in whose presence such document was sealed, etc.
e) Companies (Issue of Share Certificate) Rules, 1960, provides that all share certificates of a company are required to be issued under the Common Seal.
f) SS-8 Common Seal of the company has a very critical importance in the functioning of the company. It is the signature of the company to any document on which it is affixed and binds the company for all obligations undertaken in the document.
Rules and Regulations around the usage of Common Seal
1. At the first Board Meeting of the Company, the common seal of the company is adopted by means of a resolution.
2. The common seal of the company must be under the safe custody of authorised director/officer.
3. A Board Resolution should be passed for affixing the Common Seal in any instrument. A committee of directors may also authorise the affixing of Common Seal. The resolution must also authorise at least two directors and the secretary or other persons who shall sign the instrument in token of their presence.
4. The authorised person shall sign and affix the Common Seal on the document/ share certificate(s) in the presence of the authorised directors/secretary.
The provisions above indicate that the framers of law expected the management of companies to seal every document requiring the approval of the company in line with the then prevailing English Law. This might have been relevant and apt during the pre-computer era, but with the electronic communication gaining momentum and the rise of dematerialized share certificates, the need to have a Common Seal needs to be revised. The seal in fact, is a relic of the days when medieval barons used their rings to make a characteristic impression as their approval.
It is not compulsory that common seal should be of specific shape or metal but the company name should be engraved on it. The use of seals, whether in wax, lacquer or embossed on paper to authenticate documents is a practice as old as writing itself. Apart from preventing forgery, the presence of an unbroken seal indicated that the sealed document had not been tampered with.
A look into the purpose and usage of common seal in current transactions is warranted to examine the real need for the law to have the concept of Common Seal.
Although the Companies Act continues with the regulations 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. 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 revered as it used to be. According to the Apex court, merely due to the absence of a resolution, the contract could not have been held to be invalid or illegal. Panchanan Dhara & Others vs Monmatha Nath Maity (Decd.) thru L.RS. [2006] 131 Comp Cas 577 (SC).
The Act does not say that it is compulsory for a Company to have a Common Seal. If a company is floated without share capital or with shares in electronic form, then it is not illegal for such company to operate without a Common Seal. There is no concept of Common Seal in partnership form of businesses. But in company form of business, it denotes the signature of the company and every company shall have its own Common Seal. Limited Liability Partnership form of business may have its own Common Seal, depending upon the terms of the Agreement.
The transactions today are just a click–away where real-time execution of documents takes place across various time zones, without even the requirement of face-to-face meet of the parties involved. There are very few cases today, where one of the parties insists on affixing the Common Seal, but that is not necessarily based on the requirement of a statute. Of course, in some cases where pre-structured documents mandate affixing the Common Seal, the use of seal cannot be dispensed with, unless by mutual consent of the parties involved.
The Government is currently finalizing significant and widespread changes to the Companies Act, 1956 through Companies Bill, 2009 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, to be in line with the existing global practices. However, it may be noted that in the New Companies Bill, 2009 Section 48 of the Companies Act, 1956 is retained as clause 21, while Section 50 of the same Act is scrapped.
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