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Legal Environment of Business

IBS - Gurgaon

Semester III
Course Code: SL GM 601

Arun K. Agarwal, ACA, ACS

Course Synopsis

Sessi Topic
on
Introduction to Legal
1 Environment
Introduction to Legal
2 Environment

Lecture coverage (Total 30 Lectures) (Include case


discussions with each topic)
Meaning of Law Purpose of Law Sources of Law
Classification of Law Torts National and International
Law Evolution of Mercantile / Business Law International
Business Law Justice Delivery System in India.

Business Contracts

Legal Elements of Contracts Parties Offer Acceptance


Consideration - Types of Contracts Valid Contracts
Voidable Contracts Breach of Contracts and Remedies
Payment of Damages

Business Contracts

Contracts of Agency Rights and Duties of Principal and


Agent Termination of Agency - Special Contracts
Guarantee / Indemnity / Letter of Credit / Lien / Set Off

Business Contracts

Business Contracts

Important Clauses in Corporate & Commercial Agreements


- Amalgamations & Reconstructions;
- Acquisition & Mergers
- Winding up
Employer - Employee Contracts Conditions, Obligations,
Termination, Liquidated Damages, Data Privacy,
Indemnification

Sessio Topic
n
7
8
9

Business Contracts

Lecture coverage (Total 30 Lectures) (Include case


discussions with each topic)
Case Studies & Discussions

Sole Proprietorship - Partnership - LLPs - HUF - Societies Non-Corporate Business


Legal Formalities and Registration Rights and Liabilities of
Entities
Members
Non-Corporate Business
Insolvency Acts of Insolvency Consequences.
Entities

10

Law Relating to
Corporate Business
Entities

Advantages of a Corporate Entity Salient Features of a


Company Lifting the Corporate Veil Types of Companies
Difference between Private and Public Companies

11

Law Relating to
Corporate Business
Entities

Incorporation of a Company Documents of Incorporation

12

Law Relating to
Corporate Business
Entities

Raising of Capital from Public Prospectus SEBI


Guidelines.

Sessio Topic
n
Law Relating to
13 Corporate Business
Entities
14

Law Relating to
Corporate Business
Entities

Lecture coverage (Total 30 Lectures) (Include case


discussions with each topic)
Share Capital and Allotment - Transfer of Shares Buyback
of Shares Dividend on Shares.
Company Management Key Managerial Personnel Qualifications for Appointment of Directors Duties and
Liabilities of Director - Members of Meetings & Resolutions
- Voting - Proxy - - Board Meetings

Sessio Topic
n
Property Law for
15
Business
16

17

18

19
20

Lecture coverage (Total 30 Lectures) (Include case


discussions with each topic)
Classification of Property Moveable and Immovable
Property / Tangible and Intangible Assets

Property Law for


Business

Sale and Agreement to Sell Rights and Duties of Seller and


Buyer Rights of Unpaid Seller (Sale of Goods Act)

Property Law for


Business

Borrowing against Property as Security


Hypothecation / Pledge of Current Assets (Rights &
Liab of Parties)
Mortgage of immovable Property
Registration of Charges by Companies

1. Hire Purchase / Lease of Property


2. Exchange / Gift / Assignment of Property
Property Law for
3. Intellectual Property Rights
Business
-. Protection of IPR law against infringement
-. Remedies
Business and Tax Laws Classification & Chargeability of Taxes Income Tax
Wealth Tax Excise Customs Duty Sales Tax VAT
Business and Tax Laws Service Tax.

Sessio Topic
n

21

Financial Services
Legal and Regulatory
Environment

22

Financial Services
Legal and Regulatory
Environment

23

Financial Services
Legal and Regulatory
Environment

24

Financial Services
Legal and Regulatory
Environment

Lecture coverage (Total 30 Lectures) (Include case


discussions with each topic)
Banking: RBI & Banking Regulations Act
- Negotiable Instruments Act - - Kinds of Negotiable
Instruments Special Characteristics Cheques
Crossing of Cheques Endorsements - - Bankers
Duties and Liabilities for Collection and Payment of
Cheques -Dishonor of Cheques Liabilities of Parties
and Penalties
Insurance:
- Essential Elements of Insurance Contracts
- Principles of Insurance Insurable Interest Indemnity
Causa Proxima Risk Mitigation of Loss
Subrogation Contribution Reinsurance Double
Insurance.
- Standard Clauses in Fire / Marine Insurance Policies
IRDA - Role & Functions
Trading of Securities Market Regulation By:
- Cos Act
- By SEBI - By Stock Exchanges / Depositories

Sessio Topic
n

Lecture coverage (Total 30 Lectures) (Include case


discussions with each topic)

25

Business Transactions
and Cyber Law

Application of IT Act, 2000 to Contracts and Transactions Digital Signature and Authentication of Electronic Records Cyber Offences and Penalties.

26

Competition and
Consumer Protection

i.
ii.

Competition and
Consumer Protection

iii. Competition Law in India Prohibition of Anticompetitive Agreements and Abuse of Dominant Position
iv. Restrictive and Unfair Trade Practices
v. Product Liability
vi. Class Action Suits in US

27

Consumer Protection Law in India Redressal Procedure


Public Interest Litigation in India

Environment Protection
Types of Pollution - Rule of Strict Liability and Absolute
and Business Obligations
Liability - Applicability of Criminal Law
28
Alternative Dispute
Alternative Dispute resolution Mechanisms - Arbitration and
29 Resolution Mechanisms Conciliation Law in India.
30

Case Studies

Introduction to Legal
Environment
Lectures 1

Meaning Purpose Sources Classification


Evolution of Business Laws - Law of Torts National & International Laws Justice Delivery in
India upto slide 31
9

Purpose of Law

Liability of an
Auditor

In the role other


than that of an
Auditor
In the role of the
Auditor

Sources of Law
Civil Liability
Section 34,35

Claim for
damages on
account of
negligence
Claim for
damages for
misfeasance

Liability as an Expert
or in any other
capacity
Criminal Liability
Section 448, 447

Sources of Law

Classification of Law

Law of Torts
Tort may be defined as an infringement of a right of a
person or persons by another person, giving a right of
compensation in a legal suit, to the injured party.
Liability for tort arises from:
i. the breach of a duty towards a person or persons;
ii. primarily fixed by law (and not from any contract
or other relationship);
iii.and such breach is redressable by an action for un
liquidated damages.
Therefore, the constituents of Tort are:
iv. A wrongful act committed by a person.
v. Such wrongful act must give rise to a legal damage
or actual damage.
vi. The wrongful act must be of such nature as to give
rise to a legal remedy in the form of an action for

What constitutes a breach of duty?


The degree of care and diligence in the exercise of duty
by any person is that of an ordinary prudent person who
would exercise similar care in a similar situation.
Conformity with the general and approved practices in
the discharge of a duty will not render negligence and
hence, not result in a breach of duty.
Exceptions:
a. If a person is highly skilled in a particular profession
or field, the law would hold him guilty of negligence if
he fails to use such expert skill to the extent a similar
expert in a similar situation will employ;
b. Similarly, if a persons holds himself out as having a
degree of skill and competence to do acts requiring
professional skill, he will be held liable for negligence
if he fails to exhibit the degree of care and skill as an
expert will exercise in that profession.

Principles of Liability
1. Absolute Liability: Rule laid down by Supreme Court of
India in the Oleum Gas Leak Case
a. Where an enterprise is engaged in a hazardous or
inherently dangerous activity, the enterprise is strictly
and absolutely liable to compensate all those who are
affected by the accident and such liability is not subject
to any exceptions.
b. The enterprise cannot escape liability by showing it
had taken all reasonable care and there was no
negligence on its part.
c. This principle, however, has been rarely applied since it
was formulated.
2. Strict Liability: Rule in Ryland v. Fletcher
The person who, for his own purpose, brings on his
premises and keeps there anything likely to do mischief if
it escapes, must keep it in at his peril; and if he does not
do so is prima facie answerable for all the damage which is
the natural consequence of its escape.
The liability under this rule is strict and it is no defense

Exception to Strict Liability


Strict Liability is only applicable when there is a nonnatural use of land and is not applicable when:
i. the escape of the object was due to act of God
ii. the escape was a result of an act of a stranger, or
default of the person injured
iii. the thing was present with the consent of the
person injured or for common benefit of person
injured.
iv. it is the consequence of an act done for public
purpose in the discharge of a public duty under
the express authority of a statute, For example,
injury caused by an animal escaping from a Zoo.

National & International Law


In the present times of global integration entering into
international treaties and agreements is one of the key
attributes of State sovereignty. Each country is supposed to
honor its obligations arising from the international treaties
executed by it.
Though International law requires a State to carry out its
international
obligations
undertaken
by
its
signing
international treaties, it does not govern the process of
incorporating international law into domestic laws. In fact,
countries follow different processes of incorporating
international law into their domestic legal system, depending
on their constitutional provisions in this respect. Thus, the
process of implementation of international law at national
level varies in different countries.
The divergent State practices pertaining to incorporation of
international law into local laws have been explained by two

Monism Vs Dualism
Doctrine of Monism

Doctrine of Dualism

The International law


supersedes the domestic
law controlling the
domestic legal systems

Ultimately the national


(state) interests can
overrule international law

Based on the premise that


international values can
override domestic values

The international law is first


and foremost founded upon
state consent .

Sees international law as


the legal system that
ultimately aims to protect
interests of all individuals

Emphasizes the role of


states as the most
important subjects of
international law whereby
the international law aims
and tries to protect states
own interests

Reflects a sense of distrust


and inadequacy towards
the States

Implementation of International Law in India


India follows the dualist theory for the implementation of
international law at domestic level. International treaties do
not automatically become part of national law in India. It,
therefore, requires the legislation to be made by the
Parliament for the implementation of international law in India.
In this respect, Indian judiciary, though not empowered to
make legislations, has interpreted Indias obligations under
international law into the constitutional provisions relating to
implementation of international law in pronouncing its
decision in a case concerning issues of international law.
In this way, through judicial activism the Indian judiciary
has played a proactive role in implementing Indias
international
obligations
under
International
treaties,
especially in the field of human rights and environmental law.

Evolution of Business Laws


Business is as old as mankind.
In the course of conducting business from the earliest times
conflicts and disputes were handled through arbitration by the
chieftain or some other person whose authority
was
universally accepted. These were generally priests or kings
who relied on customs, religious texts and common sense in
settling cases.
Some 3,000 years ago documentation of laws including
business laws started and dispensation of justice became
more in line with written laws.
With the industrial revolution around 400 years ago, a whole
range of different types of disputes and issues arose relating
to settlement of labor dues, work conditions etc which
resulted in the expansion of the legal framework by enacting
new laws. These laws were implemented by the authority of

Evolution of Business Laws


However, in modern times with more and more countries
having a democratic system of governance, laws are
enacted in the parliament by the elected representatives
of the people.
However, it may be interesting to note some major laws
are still from the colonial period, such as:
a. Indian Contract Act 1872
b. Negotiable Instruments Act 1889
c. The Partnership Act, 1932
d. The Sale of Goods Act, 1930
and a whole lot of other laws.

Section 288
Liability of persons
who may or may not
be professional
accountants /
auditors

Section 278

Rule 12A of the Income Tax


Rules

Judicial Delivery System in India

A King who administers justice in


accordance with dharma, evidence,
customs, and written law will be able to
conquer whole world -Kautilya

Judicial Delivery System in India


The Preamble of the Constitution of India guarantees JUSTICE
- Social, Economic and Political to the people of India.
Justice has basically two modes:
i. Criminal Offence;
ii. Civil Offence
Constituents of Justice Delivery System
iii. Aggrieved Person( Plaintiff in Civil Cases and
Complainant in Criminal Cases)
iv. Alleged wrongdoer(Defendant in Civil Cases and
Accused in Criminal Cases)
v. Police
vi. Prosecutors
vii. Lawyers
viii.Courts ( from lower courts to Supreme Court)
It is the Courts which ultimately delivers Justice.

Judicial Delivery System in India


The administration of justice begins with the lower courts
which are also called District Courts or Subordinate
Courts. These courts after hearing the case and examining
the evidence and witnesses pronounce their verdict.
The verdict of lower courts can be challenged through the
filing of appeals in the higher court in a chronological
sequence.
The Higher court may either:
a. send back the case to the lower court for retrial in case
of vital evidences not having been taken into account or
for judicial shortcomings in the conduct of the case by
the lower courts; OR
b. Pronounce its own verdict on the case by trying it .
Each state within India has its own High Court and the
judgments of the HC in a state becomes law in that state

Appeal before

Appeal before

Judicial Delivery System in India

Supreme Court

Judgments become
law for the whole
country

High Court

Judgments become
law for the particular
State

District Courts &


Subordinate Courts

Judgments become
precedents for similar
cases in the lower
courts within the same
jurisdiction

Law relating to Business


Contracts
Lecture Nos: 2 4
Slides: 33 to

Lecture 2 3 - Legal Elements of Contracts Parties Offer Acceptance Consideration Types of Contracts Valid Contracts Voidable Contracts Breach of Contracts and
Remedies Payment of Damages - Contracts of Agency Rights and Duties of
Principal and Agent Termination of Agency - Special Contracts Guarantee /
Indemnity / Letter of Credit / Lien / Set Off
Lecture 4 - Important Clauses in Corporate & Commercial Agreements
- Amalgamations & Reconstructions;
- Acquisition & Mergers
- Winding up

31

The huge importance of the Contract Act can


be understood from the fact that out of 30
Lectures 5 have been allotted to this.

Legal Elements of Contracts


What is a contract?
Under section 2 (h) of the Indian Contract Act, 1872 a
contract is an agreement enforceable by law.
For an agreement to be enforceable by law certain
conditions must be fulfilled as laid down in section 10
which states that every agreement is a contract if:
a. It is made with the free consent of parties;
b. Competent to contract;
c. For a lawful object and a lawful consideration; AND
d. Is hereby not expressly declared to be void
Thus,
Contract = Agreement + Enforceability
Agreement = Valid Offer + Valid Acceptance

AGREEMENT
Agreement = Offer + Acceptance
What constitutes an Offer
Section 2 (a) : When one person signifies to another his
willingness to do or to abstain from doing anything, with a
view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.
Hence, offer must:
Signify the willingness of a person to do or abstain from
doing anything. Hence, an offer can be a negative act
also;
Be intimated or communicated to another person or
persons;
Have the intention of obtaining the consent of such
person to such act or abstinence;

Legal Elements of Contracts

Enforceability of an agreement comes from:


Free Consent of Parties + Competence of Parties +
Lawful Object of the Contract + Lawful Consideration
to the parties + Not Expressly declared VOID

Offer & Acceptance Parties thereto


For an agreement to come into existence there must
be two parties at least, one who is called the Offeror
and the other called Offeree who later becomes the
Acceptor.
The Offeror is the person who makes an offer with
the intention of entering into an agreement. Such
offer can be:
Express, i.e.
In writing; or
Oral;
OR

Implied i.e.
By conduct or implication

Offer & Acceptance Parties thereto


An express offer can be made only:
To a specific person or a group of persons
A offers to B that he will sell his house to him for
Rs 40 Lakhs;
On the other hand an implied offer can be made to:
The world at large
Indian Railways running the passenger trains are
making an offer to the world at large and
whoever buys the ticket accepts the offer and a
contract comes into existence
A class of persons
Having a separate rail bogey for ladies or armed
forces is an offer to a group or class of persons

Offer & Acceptance Parties thereto


Section 2 (b): When the person to whom the proposal or an offer is
made signifies his assent thereto, the proposal is said to be accepted.
A proposal, when accepted, becomes a promise or an agreement.
Hence, for an agreement to come into existence the offer must be
accepted by the person or persons to whom it is made.
Different Levels of Acceptance
Offer made to a specific person
Must be accepted by that
person only;
Offer made to a group of persons Can be accepted by any member
of the
group. Thus, any lady buying a ticket for the
ladies compartment in a train has validly
accepted the offer of the Railways resulting
in a
valid contract
Offer made to the world at large
Can be accepted by anyone who
is competent
to enter into a contract.

Case summary of Carlill v Carbolic Smoke Ball Co [1892]

Illustrative Examples

1. A makes an offer to B that he will sell his house for


Rs 50 Lakhs. B pays him a cheque of Rs 40 Lakhs
and claims that he has purchased As house. Is it a
valid contract?
Ans: No, it is not a valid contract as there is no
acceptance. For an acceptance to be valid, the
offer must be accepted unconditionally. Any
change in terms of an offer does not construe a
valid acceptance but merely a counter offer.
2. X and Co advertises in the Sunday newspaper that it
will hold an auction for the sale of furniture of next
Sunday at 11:00 AM at the YMCA, New Delhi. Vikram
reads the news and comes to Delhi from Chandigarh
to participate in the Auction. On the designated date
he finds that the auction had been called off. Can he
sue for breach of promise?
Ans: No. An advertisement does not constitute an

Case summary of Carlill v Carbolic Smoke Ball Co [1892]

Consideration
One of the essentials of a valid contract u/s 10 is the
existence of lawful consideration for each party to the
contract.
What exactly is the meaning of the term
consideration.
Section 2 (d) of the Indian Contract Act states that: when
at the desire of the promisor, the promisee or any other
person has done or abstained from doing or does or
abstain from doing or promises to do or abstain from doing
something then such act or abstinence or promise is the
consideration for the promise. From this definition the
following points emerge regarding consideration:
i. Consideration must be the same thing that is desired
by the promisor;
ii. Consideration may come from any other person than
the promisee;
iii. Consideration can be past, present or future;

Illustrative Examples

1. A makes an offer to B that he will sell his house for


Rs 50 Lakhs payable by Demand Draft. B pays him a
cheque of Rs 50 Lakhs and claims that he has
purchased As house. Is it a valid contract?
Ans: No, it is not a valid contract as the consideration
given by B is by cheque whereas A has clarified
that a DD is required. Hence, the consideration is
not proper from B to A and unless A accepts the
payment by cheque the resultant transaction will
not result in a contract.
2. A makes an offer to sell to B his house for Rs 50
Lakhs payable by DD. Explain the consideration of
the parties
Ans: The consideration for A in lieu of his house, is
the price of Rs 50 Lakhs while the consideration
for B, in lieu of Rs 50 Lakhs is the acquisition of
As house.

Case summary of Carlill v Carbolic Smoke Ball Co [1892]

Case Studies & Discussions

Mohri Bibi vs Dharam Das Ghosh - 1903


(Legality of agreement with Minors)

Case summary of Carlill v Carbolic Smoke Ball Co [1892]

Mohri Bibi vs Dharmodas Ghose


(Legality of agreement with Minors)
FACTS OF THE CASE -1903
Dharmodas Ghose lent the MINOR ( knowing that he is a
minor and is not competent to contract) a sum of Rs 20,000
at an interest of 12% p.a. and secured the loan by way of
mortgage of the property belonging to the MINOR and the
Mortgage Deed was executed by the MINOR in favor of
Dharmodas Ghose.

Later the mother of the MINOR filed a suit for setting aside
the Mortgage on the ground of competence to contract.

ISSUES

Whether the mortgage was void u/s 2, 10, 11 of ICA?

Whether plaintiff to return the money received by him


under such mortgage?

Case summary of Carlill v Carbolic Smoke Ball Co [1892]

Mohri Bibi vs Dharmodas Ghose


(Legality of agreement with Minors)

LEGAL POINTS
Section 10 of the Indian Contract Act 1872 clearly states
that the parties entering into a contract must be competent
to contract.

Section 11 states that every person is competent to


contract if he is of the age of majority according to the law
to which he or she is subjected to and is of sound mind at
the time of entering into the contract.

JUDGMENT

Contract with a minor is void ab initio i.e. void from the


very inception;

Since, a minor is not competent to contract the mortgage is


invalid;

The minor cannot be compelled to return the amount


advanced to him as he is not bound by any promise made
by him in a void contract;

Case Studies & Discussions

Lalman Shukla vs Gauri Dutt


Allahabad High Court 1913
(Validity of an Offer)

Lalman Shukla vs Gauri Dutt

Facts of the Case as recorded:


(Validity of an Offer)
a. In January 1912 the nephew of the defendant absconded
from home and no trace of him was found. The defendant
sent his servants to different places in search of the boy
and among them was the plaintiff who was the munim of
his firm. He was sent to Hardwar and money was given to
him for his railway fare and other expenses.
b. After this the defendant issued handbills offering a reward
of Rs. 500 to anyone who might find the boy. The plaintiff
traced the boy to Rishikesh and found him there. He wired
to the defendant who went to Hardwar and brought the boy
back to Cawnpore. He gave to the plaintiff a reward of two
sovereigns and afterwards on his return to Cawnpore gave
Rs. 20 more.
c. The plaintiff did not ask for any further payment and
continued in the defendants service for about six months
when he was dismissed.
d. He then brought the suit claiming Rs. 499 out of the amount
of the reward offered by the defendant under the handbills
issued by him. The record shows that the handbills were
issued subsequently to the plaintiffs departure for Hardwar.

Lalman Shukla vs Gauri Dutt


(Validity of an Offer)
The court dismissed the claim, and the Plaintiff filed this
application for revision before the Allahabad HC and it is
claimed on his behalf that as he traced out the boy he is
entitled to the reward offered by the defendant.
Contentions
a. The defendant contends that the plaintiffs claim can only
be maintained on the basis of a contract, that there must
have been an acceptance of the offer and an assent to it,
that there was no contract between the parties in this case
and that in any case the plaintiff was already under an
obligation to do what he did and was, therefore, not entitled
to claim the reward.
b. On the other hand, it is contended on behalf of the plaintiff,
that a privity of contract was unnecessary and neither
motive nor knowledge was essential.

Lalman Shukla vs Gauri Dutt


(Validity of an Offer)
Allahabad HC Judgment:
Any opinion in a suit like the present one can only be
founded on a contract.
In order to constitute a contract there must be an
acceptance of the offer and there can be no acceptance
unless there is knowledge of the offer. Motive is not
essential but knowledge and intention are.
In the case of a public advertisement offering a reward, the
performance of the act raises an inference of acceptance.
This is manifest from Sec 8 of the Contract Act, which
provides that Performance of the conditions of a proposal is
an acceptance of the proposal.

Lalman Shukla vs Gauri Dutt


(Validity of an Offer)
Allahabad HC Judgment:
In the present case, however, the claim cannot be regarded
as forming the basis of a contract. The plaintiff was in the
service of the defendant. As such servant he was sent to
search for the missing boy. It is true that it was not within
the ordinary scope of his duties as a munim to search for a
missing relative of his master but he agreed to go to
Hardwar in search of the boy and he undertook that
particular duty.
Being under that obligation, which he had incurred before
the reward in question was offered, he cannot, in my
opinion, claim the reward.
There was already a subsisting obligation and therefore, the
performance of the act cannot be regarded as a
consideration for the defendants promise. For the above
reasons hold that the decision of the lower Court is right and
I dismiss the application with cost.

Case summary of Carlill v Carbolic Smoke Ball Co [1892]

Case Studies & Discussions

lebrated case of Carlill vs Carbolic Smoke Ball Compan


(Legality of promises made in advertisements)

Case summary of Carlill v Carbolic Smoke Ball Co [1892]

lebrated case of Carlill vs Carbolic Smoke Ball Compan


(Legality of promises made in advertisements)
Facts of the Case:

Carbolic Smoke Ball Co (defendant) promises in an


advertisement in a newspaper to pay 100 pounds to any person
who contracts influenza after using its product (called smoke
ball) in the manner specified in the advertisement for a period
of two weeks, three times daily.

Mrs. Carlill (plaintiff) read the advertisement and relying on the


truthfulness of the claim and according to the exact manner
prescribed in the ad used the product smoke ball but still
contracted influenza.

She filed a case against the Carbolic Smoke Ball Co for the
compensation of 100 Pounds

The Carbolic Smoke Ball Company denied to pay the


compensation of 100 Pounds on the following grounds:
There was no contract between the company and Mrs. Carlill in
the first place and even if it is assumed that there was one, it
was void as it was a wagering agreement.
Issues in the Case: Was there a binding contract between the
parties?

Case summary of Carlill v Carbolic Smoke Ball Co [1892]

lebrated case of Carlill vs Carbolic Smoke Ball Compan


(Legality of promises made in advertisements)
Arguments
The defendants council argued that the contract did not exist on
the following grounds:
The words of the advertisement did not amount to a promise as
they were too vague there was no limit as to time & no means
of checking use of the ball by consumers;
The advertisement was merely an offer made by the company
and for it to become a contract the notification of acceptance by
Mrs. Carlill to the company was necessary which did not happen;
There was no consideration from Mrs. Carlill to the Carbolic
Smoke Ball Co in exchange of the 100 Pounds demanded by her;
The Plaintiffs argument on the other hand was that the
advertisement was an offer which they were under an obligation to
fulfill because it was published in the newspaper so that it would be
read and acted upon by the unsuspecting readers. Hence the
promise was not vague and the purchase of the product of the
company was in itself the consideration for the 100 Pounds of
compensation.

Case summary of Carlill v Carbolic Smoke Ball Co [1892]

lebrated case of Carlill vs Carbolic Smoke Ball Compan


(Legality of promises made in advertisements)

Judgment by the court: The judge Hawkins upheld the claim


of the plaintiff and the defendant went in appeal before the
bench of Lord Lindley, Justice Bowen and Justice Smith. In the
judgment in appeal the bench dismissed the appeal of the
Carbolic Smoke Ball Co with costs on the grounds that a
binding contract existed between Carlill and the Carbolic
Smoke Ball Company.

Case summary of Carlill v Carbolic Smoke Ball Co [1892]

lebrated case of Carlill vs Carbolic Smoke Ball Compan


(Legality of promises made in advertisements)
The following key observations were made by Lord Lindley:
The ad was an express promise to pay 100 pounds to anyone
who contracts flu after using the ball three times daily x 2 weeks.

The ad was not a mere puff or a boast by the Carbolic Smoke Ball
Co of the particular statement in the ad 1000 is deposited with
the Alliance Bank, showing our sincerity in the matter. This
statement was a proof of sincerity on the part of the company to
pay.

Promise is binding even though not made to anyone in particular


a unilateral offer i.e. offers to anybody who performs the
conditions named in the advertisement, and anybody who does
perform the condition accepts the offer

The ad is not so vague that it cannot be construed as a promise


the words can be reasonably construed. For example, that if you
use the remedy for two weeks, you will not contract the flu within
a reasonable time after that;

Case summary of Carlill v Carbolic Smoke Ball Co [1892]

lebrated case of Carlill vs Carbolic Smoke Ball Compan


(Legality of promises made in advertisements)

Notification of acceptance notification of the acceptance need


not precede the performance this offer is a continuing offer.
when there is an offer to the world at large, acceptance is legally
valid when the offeree communicates to the offeror notice of
performance of the specified conditions. This means acceptance
is not legally valid when notification of the performance of the
specified conditions does not occur.

This means that the offer is to anybody who performs the


conditions named in the advertisement. Anybody who does
perform the conditions accepts the offer.

There was consideration in this case for two reasons:


Carbolic received a benefit i.e. In the sales directly
beneficial to them by advertising the Carbolic Smoke Ball
The direct inconvenience (and detriment) to the person who
uses the smoke ball 3 times a day x 2 weeks according to
the directions at the request of Carbolic in other words:
performance of the specified conditions constitutes
consideration for the promise

Case summary of Carlill v Carbolic Smoke Ball Co [1892]

lebrated case of Carlill vs Carbolic Smoke Ball Compan


(Legality of promises made in advertisements)
Justice Bowen LJ also opined that:
The contract was not too vague to be enforced as the
statement that 1000 pounds has been deposited in the
bank to fulfill the promise could not be taken as a bluff;

An offer can be made to the whole world and will ripen


into a contract with anybody who comes forward and
performs the condition

Notification of acceptance - There is no need for


notification of acceptance of the offer. (Bowen LJ differs
from Lindley LJ on this point). An inference should be
drawn from the transaction itself that if he performs the
condition, there is no need for notification.
Consideration - there was consideration for the problem
for same reasons as Lindley LJ consideration was using
the smoke ball + the reason that use of the smoke balls
would promote their sale

Justice Smith LJ decided on same basis as Justice Bowen LJ

Types of Contracts

Quasi Contracts - Section: 68 to 72


Quasi Contracts refer to those obligations which arise
without any contract having been entered into by the
parties. Normally an obligation on a person towards
another person arises on the basis of a contractual
relationship between them without which no person can
have any obligation towards another.
However, under the Indian Contract Act, 1872 under the
following situations a person may be obligated to another
even without any contract between them:
i.

Section 68: Claim for necessaries supplied to person


incapable of contracting, or on his account. If a person,
incapable of entering into a contract, or any one whom he
is legally bound to support, is supplied by another,
person;
For Example: A supplies the wife and children of B, a lunatic,

Quasi Contracts - Section: 68 to 72


ii.

Section 69: Reimbursement of person paying money due


by another, in payment of which he is interested.-A
person who is interested in the payment of money which
another is bound by law to pay, and who therefore pays
it, is entitled to be reimbursed by the other;
For Example: B holds land in Bengal, on a lease granted by A,
the zamindar. The revenue payable by A to the Government
being in arrear, his land is advertised for sale by the Govt. Under
the revenue law, the consequence of such sale will be the
annulment of B's lease. B, to prevent the sale and the
consequent annulment of his own lease, pays to the
Government the sum due from A. A is bound to make good to B
the amount so paid.

iii. Sec 70: Obligations of person enjoying benefit of nongratuitous act.- Where a person lawfully does anything for
another person, or delivers anything to him, not intending
to do so gratuitously, and such other person enjoys the

Quasi Contracts - Section: 68 to 72


iv. Sec 71: Responsibility of finder of goods.-A person who
finds goods belonging to another, and takes them into his
custody, is subject to the same responsibility as a bailee;
v.

Sec 72: Liability of person to whom money is paid or thing


delivered by mistake or under coercion - A person to
whom money has been paid, or anything delivered, by
mistake or under coercion, must repay or return it.
A and B jointly owe 100 rupees to C. A alone pays the
amount to C, and B, not knowing this fact, pays 100
rupees over again to C. C is bound to repay the amount
to B.

Breach of Contracts & Remedies


1. Breach of a contract arises when one party fails to
discharge his or her obligations under the contract.
2. When a party commits a breach of contract he
becomes liable to pay compensation to the other party
for any loss or damage suffered by it from such breach.
The law relating to the remedies available to the
aggrieved party may be summarized as under (section
73 of the Indian Contract Act, 1872):
a. The aggrieved party suffers a loss or damage from
such breach;
b. Such loss or damage arose
i. Arose naturally in the usual course of things
from such breach; or
ii. Which the parties knew when they entered into
the contract, would arise from the breach,
c. Compensation or damage is not to be given for any

Payment of Damages
1. A contracts to sell and deliver 50 tones of rice to B, at Rs
50,000/- to be paid on delivery. A subsequently breaks his
promise. B is forced to buy the same quality of rice from
C at Rs 60,000/-. B is entitled to receive from A, by way of
compensation, the sum of Rs 10,000 /- being the
difference between the price at which A was supposed to
sell and the price at which B bought from C.
2. A sells certain merchandise to B, warranting it to be of a
particular quality, and B, in reliance upon this warranty,
sells it to C with a similar warranty. The goods prove to be
not according to the warranty, and B becomes liable to
pay C a sum of money by way of compensation. B is
entitled to be reimbursed this sum by A.
3. A contracts to pay a sum of money to B on a day
specified. A does not pay the money on that day; B, in
consequence of not receiving the money on that day, is

Law of Agency

1. Under section 182 of the Indian Contract Act, 1872


2. An "agent" is a person employed to do any act for
another or to represent another in dealings with third
persons. The person for whom such act is done, or who
is so represented, is called the " principal".
3. Section 183 states that any person who is of the age of
majority according to the law to which he is subject, and
who is of sound mind, may employ an agent.
4. Section 184 further states that as between the principal
and third persons any person may become an agent, but
no person who is not of the age of majority and of sound
mind can become an agent, so as to be responsible to
his principal according to the provisions in that behalf
herein contained.

Law of Agency
5.

Under section 185 No consideration is necessary to


create an agency,

6. Section 186: The authority of an agent may be expressed


or implied.
7. Section 187: An authority is said to be express when it is
given by words spoken or written. An authority is said to
be implied when it is to be inferred from the
circumstances of the case; and things spoken or written,
or the ordinary
course
of dealing, may be accounted
Example
of implied
agency:
circumstances
the case. living himself in Calcutta, and
A owns
a shop in of
Serampore,
visiting the shop occasionally. The shop is managed by B,
and he Is in the habit of ordering goods from C in the
name. of A for the purposes of the shop, and of paying for
them out of A's funds with A's knowledge. B has an implied
authority from A to order goods from C in the name of A for
the purposes of the shop.

Rights & Authority of an Agent


Section 188 of the Indian Contract Act, 1872 lays down the
extent of an agent's authority.
a. An agent appointed to do an act has authority to do every
lawful thing which is necessary in order to do such act.
b. An agent appointed to carry on a business has authority to
do every lawful thing necessary for the purpose, or usually
done in the course, of conducting such business.
Case illustrations
i. A is employed by B who lives in London, to recover at
Bombay a debt from C which is due to B. A may adopt any
legal process necessary for the purpose of recovering the
debt, and may give a valid discharge for the same.
However, if he hires musclemen and uses threat and force
to recover the money due to B from C, he is exceeding his
authority.
ii. A appoints B as his agent to carry on his business of a
ship-builder. B in his capacity of As agent may purchase
timber and other materials, and hire workmen, for the

Rights & Authority of an Agent

Under section 189: Agent's authority in an emergency.


An agent has authority, in an emergency, to do all such acts
for the purpose of protecting his principal from loss as would
be done by a person of ordinary prudence, in his own case,
under similar circumstances.
Case Illustration: A living in Mumbai appoints B in Delhi as
his agent to sell his car in Delhi for the best price. B finds
that if he carries out some repairs to the car he will be able
to sell it at Rs 20,000/- extra but the repairs would cost Rs
11,000/-. B gets the repairs done and sells the car at a good
price. A refuses to pay the cost of repairs on the grounds
that he had not instructed B to do so. In this case A will
have to pay the cost of repairs to B.

Duties of an Agent
1. Section 211: An agent is bound to conduct the business of
his principal according to the directions given by the
principal, or, in the absence of any such directions,
according to the custom which prevails in doing business
of the same kind at the place where the agent conducts
such business. When the agent acts otherwise, if any loss
be sustained, he must make it good to his principal, and, if
any profit accrues, he must account for it.
Case Illustration:
A, an agent engaged in carrying on for B a business, in
which it is the custom to invest from time to time, at
interest, the moneys which may be in hand, omits to
make such investment. A must make good to B the
interest usually obtained by such investments.

Duties of an Agent
2. Section 212: An agent is bound to conduct the business of
the agency with as much skill as is generally possessed by
persons engaged in similar business, unless the principal
has notice of his want of skill. The agent is always bound
to act with reasonable diligence, and to use such skill as
he possesses; and to make compensation to his 'principal
in respect of the direct consequences of his own neglect,
want of skill or misconduct, but not in respect of loss or
damage which are indirectly or remotely caused by such
neglect, want of skill or misconduct.
Illustration Case:
A, an agent for the sale of goods, having authority to sell on
credit, sells to B on credit, without making the proper and
usual enquiries as to the solvency of B. B, at the time of
such sale, is insolvent. A must make compensation to his
principal in respect of any loss thereby sustained.

Duties of an Agent
3. Section 213: An agent is bound to render proper accounts
to his principal on demand.
4. Section 214: It is the duty of an agent, in cases of
difficulty, to use all reasonable diligence in communicating
with his principal, and in seeking to obtain his instructions.

Termination of Agency
Section 201 of the Indian Contract Act, 1872 lays down the
law for the termination of agency.
An agency is terminated under any of the following events
happening:
1. by the principal revoking his authority; or
2. by the agent renouncing the business of the agency; or
3. by the business of the agency being completed; or
4. by either the principal or agent dying or becoming of
unsound mind; or
5. by the principal being adjudicated an insolvent under the
Section
202 stipulates
that
thebeing
agentin has
provisions
of any Act
forWhere
the time
forcehimself
for thean
interest
inofthe
property
which forms the subject-matter of the
relief
insolvent
debtors.
agency, the agency cannot, in the absence of an express
contract, be terminated to the prejudice of such
interest.
Illustration
A gives authority to B to sell A's land, and to pay himself, out of
the proceeds, the debts due to him from A. A cannot revoke this

Special Contracts
Guarantee / Indemnity/ LCs / Lien / Set off
1. Section 124 of the Indian Contract Act, 1872 defines a
"Contract of indemnity" as one in which one party
promises to save the other from loss caused to him by
the conduct of the promisor himself, or by the conduct
of any other person.
Illustration
A contracts to indemnify B against the consequences of
any proceedings which C may take against B in respect
of a certain sum of Rs 20,000 . This is a contract of
indemnity.
2. Section 126 defines a "Contract of guarantee", as a
contract to perform the promise, or discharge the
liability, of a third person in case of his default. The
person who gives the guarantee is called the " surety";
the person in respect of whose default the guarantee is
given is called the " principal debtor ", and the person to

Special Contracts
Guarantee / Indemnity/ LCs / Lien / Set off
1. Letters of Credit or LCs
When an importer wishes to import any material from a
foreign country the key issue arises which is that neither
the importer wants to pay upfront nor does the exporter
want to ship the consignment before receiving the
payment. This paradoxical situation is solved through
the medium of an LC. The importer gets an LC opened
with his bank in favour of the exporter and the bank
validates the credit of the importer under which the
importers bank undertakes to pay the exporters bank
on submission of the proof of dispatch, subject to the
fulfillment of certain other conditions.
2. Agreement of Lien
Lien means having the first right on a property before it
can be sold. Generally banks hold the first lien on the
property of its borrowers to prevent them from selling it.
Lien is created on immovable property by a mortgage

Law relating to Business


Contracts Lecture Nos: 5

Employer Employee Contracts


Composition of contracts: Description of Parties Subject Matter
Consideration Terms and Conditions Signatures and Attestations
Registration and Stamp Duty Endorsements and Supplementary Deeds
73

Employer Employee Contracts


Conditions, Obligations, Termination,

Key Elements of an Employer Employee Contract


From the point of view of an employer, an employment
contract is designed to protect him and his business on the
one hand, while ensuring a suitable work environment for
his employees on the other. When both interests are
equitably served, both the employer and the employee are
in a winning relationship.

Defining the Position & Job Content


Any employment contract should provide a prospective
employee with a clear understanding of the job
requirements, including the name of the position and the
essential duties it entails. The contract should also spell out
the place and hours of employment.

Compensation
Every element of the compensation payable to the

Employer Employee Contracts


Conditions, Obligations, Termination,

Benefits
Spell out the new employee's benefit package in detail in
the contract. Also cover other items such as holidays,
vacations, stock options, any profit sharing your company
offers and retirement plans you provide for employees.

Termination
The situations leading to termination of employment as also
the resignation by the employee from the services of the
company as also procedure and process of relieving,
settlement of account and furnishing of experience
certificate should be mentioned in the contract in full
details.

Case Study 1
Breach of Contract
X is working for an R&D based organization in Bangalore. In
this company, freshers are asked to execute 2 yrs bond at the
time of joining. The bond is signed by X, along with 2
witnesses and executed on a 100 Rs bond paper. Under the
bond an employee has to pay a compensation equivalent to
one year CTC to the company in case he or she does not
complete the period of 2 years as committed in the Bond. Mr
X has completed one year with the company and has given his
resignation letter as he wants to go for higher studies under a
full time M Tech Program.
Legal Issues:
a. Is such a bond valid in India?
b. Can the company recover the compensation from X?
c. What options are available to X who has already resigned
from the company?

Case Study 1
Breach of Contract

Employment of a person for a defined period of time and


barring his exit In India Bonded Labor System was abolished
by the Act so it is unethical to engage someone under the
contract/agreement.
But most of these agreements are Pro-training expenses so
if the employee can prove before appropriate government that
no training cost was incurred for the training of the employee
with valid documentation then not a single penny can be
recovered from the employee.
But in above case if company could prove that there were
some training expenses incurred by the company for
enhancing skill/knowledge of the employee then the company
can recover to the extent of expenses incurred by the
company.

Recap Indian Contract Act 1872


a. A offers to sell his house to B for Rs 1 crore. B says to him
that he accepts the offer but will confirm by evening. In
the course of the day, he talks to his wife who dissuades
him from buying the house. B informs A that he would not
buy the house. Is there a contract between A and B?
No, as the acceptance of B was conditional upon his
confirming in the evening. Hence, there is no contract
acceptance must be unequivocal and unconditional.
b. A client was induced by his lawyer to sell his brand new
car at half price to win the case. Is this the case of undue
influence? What remedy at law does the client have?
In this case there is clear undue influence by the lawyer
due to the fiduciary relationship between him and the
client and secondly due to the inadequate price at which
the client was made to sell the car. It will be for the lawyer
to prove that there is no undue influence. The client can
avoid the contract and if the car has been already given to
the lawyer, the client is entitled to receive the balance

Recap Indian Contract Act 1872


c. The Indian Railways has given a pass for free travel to Mr X
who is a freedom fighter. Mr X who was travelling by train
from Delhi to Mumbai suffered injuries due to the
negligence of the Railways during the journey. His
treatment costs came to Rs 50,000/-. Is he entitled to
claim damages from the Indian Railways and if yes, how
much.
[Hint: In the case of a free pass given by any transport
company, the validity of the contract is not impacted
merely by virtue of there being no consideration at the
time of giving the pass. Under section 2(d) of the Indian
Contract Act 1872 consideration can be a past act or
abstinence. Hence, the contract between the person
holding a free pass and the service provider is valid. This
being so, the Indian Railways being guilty of negligence
will be liable to pay damages to Mr X as Mr X has suffered
injury due to such negligence. However, the amount of
damages will be the reasonable treatment cost for the
injuries sustained by Mr X. In this case assuming the Mr X

Non Corporate Business


Entities
Lecture Nos: 7 8

Sole Proprietorship
Partnerships LLPs
HUFs
Societies Legal formalities and Registration Rights and liabilities of members
80

Sole Proprietorship Business


Key Features
Single Ownership
Non Applicability of any specific law governing formation,
functioning and termination
Complete freedom and non accountability in working to anyone
Taxation at applicable individual rate no separate allowance of
proprietors salary etc
Questionable governance standards and higher chances of
unethical practices

81

Conventional Partnerships
Salient Features of a conventional Partnership
i. Governed by the Indian Partnership Act 1932
ii. Can be Registered or Unregistered
iii. Unlimited liability on each partner for the acts of
every other partner and the firm;
iv. In case of Unregistered firms there are further
disabilities like inability to claim money from a third
party against contracts etc
v. Maximum number of partners not to exceed 20,
incase of banks 10

82

Limited Liability Partnerships


Salient Features of an LLP
i. Is a body corporate and a separate entity from its
partners hence, has perpetual succession;
ii. It is governed by the LLP Act, 2008 and hence is not
governed by the Indian Partnership Act, 1932. Under
the LLP Act, it is regulated by the contractual
agreement among the partners;
iii. Every Limited Liability Partnership is required to use
the letters LLP as the last part of its name;
iv. It contains both the company structure and the
partnership structure
v. Every LLP shall have at least two designated partners
who shall be individuals and at least one of them
must be resident in India;
vi. All the partners shall be agents of the LLP but not of
each other;
vii. An LLP agreement among the partners is not
83

Limited Liability Partnerships


Advantages of an LLP
i. Organized structure and operates purely on the basis
of an agreement among the partners;
ii. Liability of the partners is limited to the agreed
contribution of each partner under the LLP
agreement and no partner is liable for the
independent and unauthorized acts of other
partners;
iii. Lesser compliances and formalities vis a vis a
company;
iv. Easy incorporation no need of minimum capital, no
restriction on number of partners;
v. Easy procedure for becoming a member of an LLP or
leaving it;
vi. Easy transferability of ownership in accordance with
the agreement among partners;
vii. LLP is a juristic person and hence can sue or be sued
84

Limited Liability Partnerships


Disadvantages of an LLP
i. Any act of a partner without the consent of other
partners may still bind the LLP / firm;
ii. Under some cases the liability of any or more
partners can extend to their personal assets;
iii. An LLP is not allowed to raise money from the public
unlike a company;
iv. The winding up of an LLP is a very extensive and
expensive process.

85

Limited Liability Partnerships


Formation of an LLP - Steps
i. Deciding the partners
ii. Deciding the designated partners who must be
individuals and at least one of them must be resident
in India. Designated partners must be at least 2 in
number;
iii. Obtaining the Directors Identification Number and
the digital signatures;
iv. Checking the availability of name for the LLP / firm;
v. Drafting of the Limited Liability Agreement;
vi. Filing of documents for the incorporation of an LLP;
vii. Obtaining the Certificate of Incorporation

86

HUFs
Salient Features of a HUF
i. Family venture;
ii. Headed by the Karta of the family - male family
head;

87

The Societies Registration Act, 1860


Salient Features of Societies
i. Non Profit motive ;
ii. Democratic functioning each member is equally
represented;
According to the Act, any seven persons who subscribe to a
Memorandum of Association (MOA) can register a Society. The
Memorandum should include the name of the Society, its objectives,
the names, addresses and occupations of members subscribing to it as
well as the first Governing Body to be constituted on registration. The
MOA should be accompanied by a set of Rules and Regulations this
should include details such as the procedure for enrolment and
removal of members, procedure for formation of the Governing Body,
conduct of meetings, election and removal of office bearers, procedure
for conducting annual General Body meetings, etc. The membership of
the Society may be kept open (or by invitation) to anybody who
subscribes to its aims and objectives, for which a fee may be charged.
Although the Society can sue and can be sued, the liability of the
members is limited, as no decree can be enforced against the
members private assets. The Society has a perpetual existence and88a
common seal, and can sue or be sued in the name of the office

Law relating to Corporate


Entities
Lecture 9 13 (5 Lectures)

89

Basics
Features of a Co Advantages of a Corporate Entity
Separate Entity Concept Types Difference between
Public & Private Cos.

Companies Act 2013 has replaced the earlier Companies


Act 1956. There have been far reaching changes in the
new Act.

90

Impact of Companies Act 2013


Sr
No

Se
c

Provision of Companies
Act, 2013

Impact

Implementa
tion
Time

Uniform Financial Year


1
.

2(41)

Companies are now required


to have a uniform financial
year ending on March 31 every
year.
A
company
which
is
a
subsidiary of a foreign entity
and is required to follow a
different financial year for
consolidation of its accounts
outside India may have a
different financial year with
prior approval of the National
Company
Law
Tribunal
(NCLT).

Companies can follow 31st


any other period as 2016.
financial year of the
Company upto March
31
2016
and
thereafter, if it wants
to do so, it will have to
apply to NCLT for
exemption

March,

Change in Official Publication


2
.

12

A company shall disclose


certain information in its
business letters, billheads,
letter papers and in all its
notices and other official
publications.

A company is required
to disclose the
following (a) Full name of the Co
(c) Address of its regd
office
(d) Corporate Identity

1st April, 2014

Remarks

Impact of Companies Act 2013


Sr
N
o

Se
c

3.

93

Provision of Companies
Act, 2013

Implementati
on
Time
Change in promoter shareholding

Every listed company shall file


return with the Registrar of
Companies for any change in the
holding of Promoters or top 10
shareholders within 15 days of such
change.

Impact

Mechanism to monitor
shareholding of
promoters and top 10
shareholders should
be in place.

1st April 2014

Annual General Meetings


4.

101

An annual general meeting and an


extra ordinary general meeting can
be held by giving not less than clear
twenty-one (21) days notice.
However such meetings may be
held at a shorter notice with
approval of ninety five percent
(95%) of the members entitled to
vote at such meeting of the
company.

Explanatory Statement is now made


mandatory for all the special
business items for all companies.
Previously private companies had
the option to dispense with the
need
for
having
explanatory
statement for special business.

Extra-ordinary general meetings


shall now be held in India.

Earlier,
holding
of
Annual
General
Meetings at a shorter
notice required the
approval of 100% of
the members entitled
to
vote
at
such
meeting
of
the
company.

Earlier, Extra-ordinary
general
meetings
could have been held

1st April, 2014

Remarks

Impact of Companies Act 2013


Sr
No

Sec

Provision of Companies Act, 2013

Impact

Quorum for General Meetings


5.

103

Unless the articles provide for a larger


number, in case of a public company:
(i) 5 members personally present if
the number of members as on the
date of meeting is not more than
1000;
(ii) 15 members personally present if
the number of members as on the
date of meeting more than one
thousand but up to 5000;
(iii)30 members personally present if
the number of members as on the
date of meeting exceeds 5000.

In case the adjourned


general
meeting
or
change of day, time or
place, a notice of not less
than 3 days shall be
given to the members
either individually or by
publishing
an
advertisement
in
newspapers
(one
in
English
and
one
in
vernacular language).
In
the
adjourned
meeting, the members
personally present shall
constitute quorum.

Consolidation of Accounts
6.

129

The
2013
Act
now
mandates
consolidated financial statements for
any co having a subsidiary and their
adoption at the AGM of the company.
The financial statements to be placed
before annual general meeting shall
include
a
separate
statement

If
consolidation
of
associate
is
not
possible, reasons for the
same will have to be
stated.

Remarks

Impact of Companies Act 2013


Sr
No

Sec

Provision of Companies Act,


2013

Impact

Implementation
Time

Corporate Social Responsibility (CSR)


7.

135

Every company having net worth of


INR 5 billion or more, or turnover of
INR 10 billion or more or a net
profit of INR 50 million or more
during any financial year shall
constitute a CSR Committee.

A company is required
to comply with this
provision based on the
threshold limits in the
audited
financials
commencing from 1st
April, 2014

A CSR Committee
consisting of (3) or
more directors, out
of which at least
one (1) director
should
be
an
independent
director is reqd to
be
constituted in
the ensuing Board
Meeting.

Appointment of Internal Auditor


8.

138

Every listed and unlisted public


company having paid up share
capital of INR 500 million or more
or turnover of INR 2 billion or more
in the preceding financial year or
outstanding loans or borrowings
from banks or public financial
institutions of INR 1 billion or more
at any point of time during the
preceding
financial
year
or
outstanding deposits of INR 250

A company may be
required to appoint an
Internal
Auditor
depending
on
the
aforesaid limits.

A
company
is
required to appoint
an Internal Auditor
within 6 months
i.e.
by
30th
September, 2014.

Impact of Companies Act 2013


Sr
No

Sec

Provision of Companies Act,


2013

Impact

Implementation
Time

Appointment of Internal Auditor


Every private company having
turnover of INR 2 billion or more; or
having
outstanding
loans
or
borrowings from banks or public
financial institutions exceeding INR
1 billion or more at any point of time
during the last financial year shall
be required to appoint an internal
auditor to conduct internal audit of
the functions and activities of the
company.
Rotation of Statutory Auditors
9.

139

Listed
and
unlisted
public
companies having paid up share
capital of INR 100 million or public
borrowings/ deposits of INR 500
million
or more shall rotate its
Auditors. After 1 term of 5 years in
case of individual Auditor and after
2 terms of 5 years in case of an
Audit Firm.
Private ltd companies with a paid up
share capital of INR 200 million or
more and companies with public

A company may
be required to
rotate its current
Auditors.

The period for which the


individual or the firm has
held office as auditor prior
to the commencement of
the Act shall be taken into
account for calculating the
period of five consecutive
years or ten consecutive
years, as the case may be.

Impact of Companies Act 2013


SR
.
NO
.

Se
c.

Provision of Companies
Act, 2013

Impact

Implementat
ion
Time

Woman Director (Applicable)


10.

14
9
(1)

Every listed company and


every other public company
having a paid-up share
capital of INR 1 billion or
more, or turnover of INR 3
billion or more, shall appoint
at least 1 woman director.

A company is required to appoint a


woman director based on the limits
prescribed.

The
woman
director
is
required to be
appointed on
or before 31st
March, 2015.

Resident Director
11.

14
9
(3)

Every company shall have at Every company will now require to 1st April, 2014
least one (1) director who appoint a Resident Director
has stayed in India for a total
period of not less than one
hundred
and
eighty-two
(182) days in the previous
calendar year.

Impact of Companies Act 2013


Sr
N
o

Sec

12
.

149
(4)

Provision of Companies
Act, 2013

Impact

Implementati
on
Time
Appointment of Independent Directors

Remarks

IDs are In
case
a
Listed companies shall have A listed company is The
is
at least one-third of its Board required to have at required to be company
to
as Independent Directors least one-third of the appointed on or required
st
IMPACT OF THE COMPANIES
2013 ON
total number ofACT,
its before
31 appoint
(IDs).
directors
asPUBLIC
IDs. Any March,
2015.
higher
ESSAR GROUP [LISTED
AND
COMPANIES]
number
of
Unlisted public companies fraction contained in
one-third
IDs due to
having paid up share capital such
shall
be
composition
of INR 100 million or more or number
of its Audit
turnover of INR 1 billion or rounded off as one.
Committee,
more
or
borrowings
such higher
exceeding 500 million shall
board
number
of
have at least two directors Review
to
IDs shall be
as Independent Directors constitution
rd
ensure at least 2/3
applicable to
(IDs).
of the total directors
such
companies.
Term
of
Independent liable to retire by
under
Directors fixed for 5 years rotation
152
with 5 year extension with section
approval
by
special excluding IDs.
resolution.
Retirement by rotation not
applicable

Impact of Companies Act 2013


Sr
No

Se
c

Provision of Companies Act, 2013

Impact

Implementati
on
Time

Duties of Directors
13.

16
6

The Companies Act, 2013 has specifically


prescribed duties of directors: To (i) act in
accordance with the Articles of the
Company, (ii) act in good faith to promote
the objects of the Company, (iii) exercise
his duties with due and reasonable care,
skill and diligence, (iv) not get involved in
a situation in which he may have a direct
or indirect conflict of interest with the
Company, (v) not achieve or attempt to
achieve any undue gain or advantage
either to himself or to his relatives,
partners, or associates, and (vi) not to
assign his office.

The Directors need to Ongoing


specifically adhere to the adherence
prescribed duties of the prescribed
directors.
duties.

Board Meetings
14.

17
4

A meeting of the board shall be


called by giving not less than (7)
days notice in writing to every
director and such notice shall be
sent by hand delivery or by post
or by electronic means.

The meeting of the board has to

The following matters cannot be


dealt with in any meeting held
through video conferencing or
other audio visual means:
a) the approval of the annual
financial statements;
b) the approval of the Boards
report;

1st April, 2014

to

Impact of Companies Act 2013


SR.
NO
.

Se
c

Provision of
Companies Act, 2013

Impact

Implementatio
n
Time

Remarks

Audit Committee
15.

177

Every
listed
and
unlisted
public
company having paid
up capital of INR 100
million or more or
turnover of INR 1 billion
or more or which have,
in
aggregate,
outstanding loans or
borrowings
or
debentures or deposits
exceeding
INR
500
million shall constitute
an Audit Committee.
The Audit Committee
shall consist of at least
3
directors majority
being IDs.

A company may be
required to constitute an
Audit
Committee
depending
on
the
thresholds prescribed.

1st April, 2014.

A company is
reqd to have at
least 2 IDs on its
board within one
For the purpose, a year from the
minimum of 2 IDs are commencement
required
to
be of the Act i.e., by
appointed.
31st
March,
2015.

In
case
a
company
is
required
to
appoint
higher
number
of
IDs due to
composition
of its Audit
Committee,
such higher
number
of
IDs shall be
applicable to
such
companies.

Impact of Companies Act 2013


Sr
No

Sec

Provision of Companies
Act, 2013

Impact

Vigil Mechanism under Audit Committee


16.

177

17.

17
8

Implementat
ion
Time

Every listed company and (i) A company may be required to 1st April, 2014
companies which accept deposits constitute a Vigil Mechanism based
from the public; and (ii) companies on the thresholds prescribed.
which have borrowed money from
banks
and
public
financial Review current Whistle Blower
institutions in excess of INR 500 Policy of the company.
million shall establish a vigil
mechanism for their directors and Align with the new requirements
employees to report their genuine such as incorporating the provision
of access to the Chairman of the
concerns or grievances.
The vigil mechanism shall provide Audit Committee in appropriate or
for adequate safeguards against exceptional cases.
victimization of persons who use
such mechanism. The company
should disclose the details of
establishment
of
such
vigil
Nomination
and
Remuneration
Committee (NRC)
mechanism on its website, if any,
and
in the
Boards
Every
listed
and report.
unlisted public A company may be required to 1st April, 2014.
company having paid up capital of constitute a NRC depending on the
INR 100 million or more or thresholds prescribed.
A company is
turnover of INR 1 billion or more or
required
to
which
have,
in
aggregate,
have at least 2
outstanding loans or borrowings or
IDs on its board
debentures or deposits exceeding
within one year
INR 500 million shall constitute a
from
NRC.
commencemen
The NRC shall consist of 3 or more
t of the Act i.e.,
non-executive Directors out of
by 31st March,

Impact of Companies Act 2013


Sr
No

Sec

Provision of Companies
Act, 2013

Impact

Restrictions on powers of Board


18

18
0

Under the 1956 Act, only


ordinary
resolution
of
shareholders was required for
the board to exercise certain
powers. Under the 2013 Act, a
special resolution is required
for the board to exercise those
powers as described below.

i. to sell, lease or otherwise


disposal of one or more
undertaking or the whole or
substantially the whole of
undertaking.

ii. to invest otherwise in trust


securities
the
amount
of
compensation received by it as
a result of any merger or
amalgamation.

The restrictions on powers of


board prescribed under Section
293 of the 1956 Act applied only
to public companies or a private
company which is a subsidiary
of public company; however,
under Section 180 of the 2013
Act,
the
restrictions
are
applicable to all type of
companies.

The 1956 Act did not define the


expressions undertaking and
substantially the whole of the
undertaking. 2013 Act defines
these expressions using 20%
criteria
(20%
of
net
worth/income/value
of
undertaking).

Remarks

Impact of Companies Act 2013


Sr
No

Sec

Provision of Companies
Act, 2013

Impact

Restrictions on powers of Board


iii. to borrow money in excess
of aggregate of the paid-up
share capital and free reserves
of
company,
apart
from
temporary loans obtained from
the companys bankers in the
ordinary course of business.
iv. to remit, or give time for the
repayment of, any debt due
from a director.

Remarks

Impact of Companies Act 2013


Sr
No

Sec

Provision of Companies Act,


2013

Impact

Remarks

Loans and Advances


19.

186

A company unless permitted under


the Rules can make investment
through not more than 2 layers of
Investment Companies.

Exceptions to this basic law are:


acquisition of a foreign company
which has investment subsidiary
beyond 2 layers as per the relevant
foreign law; and
a subsidiary company making
investment to comply with any
relevant law.

Loans, guarantee and security made


to any person (The 1956 Act dealt
only with body corporate) exceeding
60% of its paid-up share capital and
free
reserves
and
securities
premium account or 100% of its free
reserves and securities premium
account, whichever is more will now
attract compliance requirements.
The above limits will not apply in
case of loan or guarantee is given or
where a security has been provided
by a company to its WOS or joint

Whenever a company intend to give


any loan/ advance/ guarantee it is
required
to
follow
the
below
procedure
(1)
disclose
in
the
Financial
Statement, the full particulars of the
loan, investment made, guarantee
given or security provided and its
utilization.
(2) No loan shall be given at a rate of
interest lower than the prevailing
yield on Government Security.
(3) The company has to maintain the
prescribed register.
Under the 1956 Act, one could
escape punishment of imprisonment
by fully repaying the inter-corporate
loan contravening the provisions of
1956 Act. This is not possible under
the 2013 Act.

"Investment
Company" has
been defined
to
mean
a
company
whose
principal
business is the
acquisition of
shares,
debentures or
other
securities.
Note: WOS
means
Wholly
owned
Subsidiary

Impact of Companies Act 2013


Sr
No

Sec

Provision of
Companies Act, 2013

Impact

Remarks

Related Party Transactions


20

18
8

There is no requirement of
obtaining
Central
Government approval for
related party transactions.
Approval of related party
transactions by board of
directors at board meeting
has been made mandatory.

Related party transactions


will
also
require
prior
shareholders approval by
special
resolution
for
companies having paid up
capital of INR 100 million or
more
or
transactions
exceeding below limits:

A company is required to obtain


prior approval of members by
means of special resolution to
enter into any contract or
arrangement with any related
party in excess of the prescribed
limits.
Ensure proper mechanism to
identify the related parties
covered under the new definition
and rules.
Process to evaluate if
transactions are in the ordinary
course of business and at arms
length basis.
No member shall vote if he is a
Related Party.
In case of contracts with a wholly
owned subsidiary, the special
resolution passed by the holding
company shall be sufficient for

No approval
of
Central
Government
is required for
entering into
related party
transactions.

Impact of Companies Act 2013


Sr
No

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c

Provision of Companies Act,


2013

Impact

Related Party Transactions


21.

18
8

(i) individually or taken together


with previous transactions during
a financial year, for contracts or
arrangements, namely,

(a)sale, purchase or supply of


any
goods
or
material
exceeding twenty five (25)
percent
of
the
annual
turnover;
(b)selling or otherwise disposing
of, or buying, property of any
kind
exceeding
ten
(10)
percent of the net worth;
(c)leasing of any kind of property
exceeding ten (10) percent of
the net worth;
(d)availing or rendering of any
services exceeding ten (10)
percent of the net worth;

Related
party,
with
reference to a company,
means
(i) a director or his relative;
(ii)
a
key
managerial
personnel or his relative;
(iii) a firm, in which a director,
manager or his relative is a
partner;
(iv) a private company in
which a director or manager is
a member or director;
(v) a public company in which
a director or manager is a
director or holds along with
his relatives, more than two
per cent. of its paid-up share
capital;
(vi) any body corporate whose
Board of Directors, managing
director
or
manager
is
accustomed
to
act
in
accordance with the advice,
directions or instructions of a
director or manager;

Remarks

Impact of Companies Act 2013


SR.
NO.

Sec

Provision of Companies Act,


2013

Impact

Related Party Transactions


21
Cont
d

188

(e) appointment of agent for


purchase or sale of goods,
material exceeding twenty five
(25) percent of the annual
turnover
and
services
or
property exceeding ten (10)
percent of the net worth; or

The turnover or net worth


referred above shall be on the
basis
of
audited
financial
statements of the preceding
financial year.

(ii) relates to appointment to


any office or place of profit in
the company, its subsidiary
company or associate company
at a monthly remuneration
exceeding INR 250,000; or

(iii)
remuneration
for
underwriting the subscription of
any securities or derivatives
thereof
of
the
company
exceeding one (1) percent of net

(vii) any person on whose


advice, directions or
instructions a director or
manager is accustomed to
act:
Provided that nothing in subclauses (vi) and (vii) shall
apply to the advice,
directions or instructions
given in a professional
capacity;
(viii) any company which is
(A) a holding, subsidiary or an
associate company of such
company; or
(B) a subsidiary of a holding
company to which it is also a
subsidiary;
(ix)
a
director
or
key
managerial personnel of the
holding company or his
relative with reference to a
company.

Remarks

Impact of Companies Act 2013


Sr
N
o

Se
c

Provision of Companies
Act, 2013

Impact

Implementati
on
Time
Appointment of Key Managerial Personnel [KMP]

2
2

203

Listed companies and other


public companies having
paid-up capital of INR 100
million [or] more shall have
the following whole-time key
managerial personnel (KMP):
(1) MD or CEO or Manager
and in their absence, a
Whole-time Director;
(2) Company Secretary (CS);
and
(3) Chief Financial Officer
(CFO).

If
a
companys
capital is more than
the
prescribed
limited,
then
company
is
required to appoint
KMPs.

This section or
rules does not
specify
any
transition
period.
A
company
is
required
to
comply with this
provision
immediately.

Secretarial Audit
2
3

204

Public companies having a


paid-up share capital of INR
500 million or more [or]
turnover of INR 2.5 billion or
more shall annex with its
Boards report, a secretarial
audit report given by a
company
secretary
in
practice.

If
a
companys
capital or turnover
is more than the
prescribed limited,
then company
is
required to comply
with this provision.

A company shall
have to comply
basis
the
Audited
financials of 31st
March, 2014.

Remarks

Definitions Sec 2 of the Cos Act


2013

The Students must read the definitions of various terms


which have serious and wide implications in the study
of the company law from the Bare Act or any other
book.

108

Definitions Sec 2 of the Cos Act


2013
(1) abridged prospectus means a memorandum containing such salient
features
of a prospectus as may be specified by the Securities and Exchange
Board by making regulations in this behalf.
(2) accounting standards means the standards of accounting or any
addendum
thereto for companies or class of companies referred to in section
133;
(3) alter or alteration includes the making of additions, omissions
and substitutions;
(4) Appellate Tribunal means the National Company Law Appellate
Tribunal constituted under section 410;
(5) articles means the articles of association of a company as originally
framed or as altered from time to time or applied in pursuance of any
previous company law or of this Act;
(7) auditing standards means the standards of auditing or any
addendum thereto for companies or class of companies referred to in
sub-section (10) of section 143;
(10) Board of Directors or Board, in relation to a company, means the
collective body of the directors of the company;
109

Definitions Sec 2 of the Cos Act


2013
(13) books of account includes records maintained in respect of
(i) all sums of money received and expended by a company and
matters in relation to which the receipts and expenditure take
place;
(ii) all sales and purchases of goods and services by the
company;
(iii) the assets and liabilities of the company; and
(iv) the items of cost as may be prescribed under section 148 in
the case of a company which belongs to any class of companies
specified under that section;
(18) Chief Executive Officer means an officer of a company, who has
been designated as such by it;
(19) Chief Financial Officer means a person appointed as the Chief
Financial Officer of a company;
(20) company means a company incorporated under this Act or
under any previous company law;
(24) company secretary or secretary means a company secretary
as defined in clause (c) of sub-section (1) of section 2 of the
Company Secretaries Act, 1980 who is appointed by a company to
perform the functions of a company secretary under this Act; 110
(25) company secretary in practice means a company secretary who

Definitions Sec 2 of the Cos Act


2013
(34) director means a director appointed to the Board of a company;
(35) dividend includes any interim dividend;
(38) expert includes an engineer, a valuer, a chartered accountant, a
company secretary, a cost accountant and any other person who
has the power or authority to issue a certificate in pursuance of any
law for the time being in force;
(39) financial institution includes a scheduled bank, and any other
financial institution defined or notified under the Reserve Bank of
India Act, 1934;
(40) financial statement in relation to a company, includes
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying
on any activity not for profit, an income and expenditure account
for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any
document referred to in sub-clause (i) to sub-clause (iv):
Provided that the financial statement, with respect to One Person
111
Company, small company and dormant company, may not include the

Definitions Sec 2 of the Cos Act


2013
(41) financial year, in relation to any company or body corporate,
means the period ending on the 31st day of March every year,
and where it has been incorporated on or after the 1st day of
January of a year, the period ending on the 31st day of March of
the following year, in respect whereof financial statement of the
company or body corporate is made up.
Provided that on an application made by a company or body
corporate, which is a holding company or a subsidiary of a company
incorporated outside India and is
required to follow a different financial year for consolidation of its
accounts outside
India, the Tribunal may, if it is satisfied, allow any period as its
financial year, whether or not that period is a year.
Provided further that a company or body corporate, existing on the
commencement of this Act, shall, within a period of two years from
such commencement, align its financial year as per the provisions of
this clause;
112

Definitions Sec 2 of the Cos Act


2013
(42) foreign company means any company or body corporate
incorporated outside India which
(a) has a place of business in India whether by itself or through an
agent, physically or through electronic mode; and
(b) conducts any business activity in India in any other manner.
(43) free reserves means such reserves which, as per the latest
audited balance
sheet of a company, are available for distribution as dividend:
Provided that
(i) any amount representing unrealized gains, notional gains or
revaluation of assets, whether shown as a reserve or
otherwise, or
(ii) any change in carrying amount of an asset or of a liability
recognized in equity, including surplus in profit and loss
account on measurement of the asset or the liability at fair
value, shall not be treated as free reserves;
113

Definitions Sec 2 of the Cos Act


2013
(51) key managerial personnel, in relation to a company, means
(i) the Chief Executive Officer or the managing director or the
manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer; and
(v) such other officer as may be prescribed;
(52) listed company means a company which has any of its securities
listed on any recognized stock exchange;
(53) manager means an individual who, subject to the
superintendence, control and direction of the Board of Directors,
has the management of the whole, or substantially the whole, of
the affairs of a company, and includes a director or any other
person occupying the position of a manager, by whatever name
called, whether under a contract of service or not;
(54) managing director means a director who, by virtue of the articles
of a company or an agreement with the company or a resolution
passed in its general meeting, or by its Board of Directors, is
114
entrusted with substantial powers of management of the affairs of

Definitions Sec 2 of the Cos Act


2013
Explanation.For the purposes of this clause, the power to do
administrative acts of a routine nature when so authorized by the
Board such as the power to affix the common seal of the company
to any document or to draw and endorse any cheque on the
account of the company in any bank or to draw and endorse any
negotiable instrument or to sign any certificate of share or to direct
registration of transfer of any share, shall not be deemed to be
included within the substantial powers of management;
(55) member, in relation to a company, means
(i) the subscriber to the memorandum of the company who shall be
deemed to have agreed to become member of the company, and
on its registration, shall be entered as member in its register of
members;
(ii)
every other person who agrees in writing to become a
member of the company and whose name is entered in the
register of members of the company;
(iii)
every person holding shares of the company and whose
name is entered as a beneficial owner in the records of a
depository;
(57) net worth means the aggregate value of the paid-up share capital
115
and all reserves created out of the profits and securities premium

Definitions Sec 2 of the Cos Act


2013
(62) One Person Company means a company which has only one
person as a
member;
(68) private company means a company having a minimum paid-up
share capital of one lakh rupees or such higher paid-up share
capital as may be prescribed, and which by its articles,
(i)
restricts the right to transfer its shares;
(ii)
except in case of One Person Company, limits the number
of its members to two hundred:
Provided that where two or more persons hold one or more shares in
a company jointly, they shall, for the purposes of this clause, be
treated as a single Member.
(70) prospectus means any document described or issued as a
prospectus and includes a red herring prospectus referred to in
section 32 or shelf prospectus referred to in section 31 or any
notice, circular, advertisement or other document inviting offers
from the public for the subscription or purchase of any securities
of a body corporate;
116

Definitions Sec 2 of the Cos Act


2013
(71) public company means a company which
(a) is not a private company;
(b) has a minimum paid-up share capital of five lakh rupees or
such higher paid-up capital, as may be prescribed:
Provided that a company which is a subsidiary of a company, not
being a private
company, shall be deemed to be public company for the
purposes of this Act even where such subsidiary company
continues to be a private company in its articles ;
(72) public financial institution means
(i)
the Life Insurance Corporation of India, established under
section 3 of the Life Insurance Corporation Act, 1956;
(ii)
the Infrastructure Development Finance Company
Limited, referred to in clause (vi) of sub-section (1) of section
4A of the Companies Act, 1956 so repealed under section 465
of this Act;
(iii) specified company referred to in the Unit Trust of India
(Transfer of Undertaking and Repeal) Act, 2002;
(iv) institutions notified by the Central Government under subsection (2) of section 4A of the Companies Act, 1956 so
117
repealed under section 465 of this Act;

Incorporation of a Company
Section 3 (1): A company may be formed for any lawful
purpose by:
a. seven or more persons, where the company to be formed is
to be a public company;
b. two or more persons, where the company to be formed is to
be a private company; or
c. one person, where the company to be formed is to be One
Person Company that is to say, a private company,
by subscribing their names or his name to a memorandum and
complying with the requirements of this Act in respect of
registration.

118

Incorporation of a Company One Person


Company

the memorandum of One Person Company shall indicate


the name of the other person, with his prior written
consent, who shall, in the event of the subscribers death or
his incapacity to contract become the member of the
company;
the written consent of such person shall also be filed with
the Registrar at the time of incorporation along with its
memorandum and articles
Provided further that such other person may withdraw his
consent in the prescribed manner.
Provided also that the member of One Person Company
may at any time change the name of such other person by
giving notice in the prescribed manner
Provided also that it shall be the duty of the member of One
Person Company to intimate the company of any change in
the name of the other person nominated by him in the
prescribed manner; and
the company shall intimate the Registrar any such change
119
within such time and in such manner as may be prescribed

Incorporation of a Company Section 7 of


Cos Act 2013

Section 7 (1): Filing the following documents with the Registrar


within whose jurisdiction the registered office of a company is
proposed to be situated:
the memorandum and articles of the company duly signed
by all the subscribers to the memorandum
a declaration by an advocate, a chartered accountant, cost
accountant or company secretary in practice, who is
engaged in the formation of the company, and by a person
named in the articles as a director, manager or secretary of
the company, that all the requirements of this Act and the
rules made thereunder in respect of registration and
matters precedent or incidental thereto have been
complied with
an affidavit from each of the subscribers to the
memorandum and from the first directors named in the
articles, that he is not convicted of any offence in
connection with the promotion, formation or management
of any company, or that he has not been found guilty of any
120
fraud or misfeasance or of any breach of duty to any

Incorporation of a Company Section 7 of


Cos Act 2013

The address for correspondence till its registered office is


established;

The particulars of name, including surname or family name,


residential address, nationality and such other particulars of
every subscriber to the memorandum along with proof of
identity in the prescribed manner;

The particulars of persons mentioned in the articles as the


first directors of the company, their names, including
surnames or family names, the Director Identification
Number, residential address, nationality and such other
particulars including proof of identity as may be prescribed;

the particulars of the interests of the persons mentioned in


the articles as the first directors of the company in other
firms or bodies corporate along with their consent to act as
directors of the company in such form and manner as may

Incorporation of a Company Section 7 of


Cos Act 2013

Section 7(2): The Registrar on the basis of documents


and information filed under sub-section (1) shall register
all the documents and information referred to in that
subsection in the register and issue a certificate of
incorporation in the prescribed form to the effect that the
proposed company is incorporated under this Act.

Section 7 (3): On and from the date mentioned in the


certificate of incorporation issued under sub-section (2),
the Registrar shall allot to the company a corporate
identity number, which shall be a distinct identity for the
company and which shall also be included in the
certificate.

Section 7(4): The company shall maintain and preserve


at its registered office copies of all documents and
information as originally filed under sub-section (1) till its
122
dissolution under this Act.

Raising of Capital from Public


Prospectus SEBI Guidelines Allotment Transfer of Shares
Buyback - Dividends

Provisions Relating to
Prospectus under the
Companies Act 2013
Separate Handout

123

124

125

126

127

Dividends
Question 1
The shareholders at an annual general meeting unanimously passed a
resolution for payment of dividend at a rate higher than that
recommended by the directors. Discuss the validity of the resolution.
Answer
Under section 102 (2) of the Companies Act, 2013 one of the
businesses transacted thereat is the declaration of dividend. The
dividend approved by the shareholders must be at the rate
recommended by the Board of Directors. The shareholders do not have
the right to modify the rate. They can only approve the dividend as
recommended by the Board; hence the resolution is invalid in the given
case.

128

Question 2
Advise on the following situations:
(i) A company wants to transfer more percentage of profits to
reserves.
Answer
i. The first proviso to 123 (1) of the Companies Act, 2013 provides
that a company may, before the declaration of any dividend in any
financial year, transfer such percentage of its profits for that
financial year as it may consider appropriate to the reserves of the
company. Therefore, under the new Companies Act, 2013 the
amount transferred to reserves out of profits for a financial year
has been left at the discretion of the company acting vide its Board
of Directors. Therefore the company is free to transfer any part of
its profits to reserves as it deems fit.

129

Advise on the following situations:


(ii) A company wants to declare dividends out of past reserves instead
of current year profits.
Answer
ii. The second proviso to section 123 (1) of the Companies Act, 2013
permits a company to declare dividend out of the accumulated
profits earned by it in previous years and transferred by the
company to the reserves subject to the rules prescribed in this
behalf. The Companies (Declaration and Payment of Dividend)
Rules, 2014 provide for the rules for declaring dividends out of the
reserves as under:
(a) The rate of dividend declared does not exceed the average of
the rates at which dividend was declared by it in the 3 years
immediately preceding that year.
(b) The total amount to be drawn from the accumulated profits
earned in previous years and transferred to the reserves does
not exceed an amount equal to 1/10th of the sum of its paid-up
capital and free reserves as appearing in the latest audited
financial statement.
(c) The amount so drawn must first be utilized to set off losses
incurred in the financial year before any dividend in respect of
equity shares is declared.
(d) The balance of reserves after such drawal shall not fall below
15% of its paid-up capital as appearing in the latest audited 130

Question 4
Advise on the following situations:
(iii) A company wants to provide depreciation higher than the rates
provided in Schedule II of the Companies Act, 2013.
Answer
iii. The rates contained in Schedule II of the Companies Act, 2013 are
the minimum rates below which companies are not permitted to
charge for depreciation and therefore there is no bar in providing a
higher rate of depreciation. However, it is advisable to give a
statement to the effect that the management has estimated life of
the asset which requires higher rate of depreciation to be provided
than rates prescribed under schedule II of the Companies Act,
2013.

131

Question 5
The Board of directors of M/s RPP Ltd. in a meeting held on 30th April 2012 declared an
interim dividend payable on the paid up equity share capital of the company. In the board meeting
scheduled for 15th May 2012, the board wants to revoke the said declaration. State with reference to
the provisions of the Companies Act, 2013 whether the board of directors can do so?
Answer
Under section 2 (35) of the Companies Act, 2013 dividend includes any interim dividend. Interim
dividend means the dividend declared during the financial year. A company may declare interim
dividend any number of times in a financial year. The interim dividend is merely a distribution of
profits of a company earned during the financial year without waiting for the declaration of the
dividend at the AGM which is held much after the end of the financial year.
Generally, when companies earn bumper profits during a financial year and expect to continue to do
so through out the year, the Board of Directors may declare interim dividend during the financial
year out of surplus in profit and loss account.
The 2013 Act, however, imposes a restriction on the declaration of interim dividend that in case a
company has incurred loss during the current financial year, up to the end of the quarter
immediately preceding the date of declaration of the interim dividend, then the interim dividend
cannot be declared at a rate higher than the average dividends declared by the company during the
immediately preceding three financial years [section 123(3) of the 2013 Act].
132

There are no limitations to the declaration of interim dividend out of current years profits by the
Board of Directors under the Companies Act, 2013 and the directors may do so by passing a
Board Resolution at a Board Meeting.
Having clarified the above provisions under section 2013, regarding the power of the board to
revoke the declaration of interim dividend, the answer is that the Board may revoke the payment
of interim dividend by a resolution at a Board Meeting. The reason for this is that interim dividend
is not a debt and it is a settled matter of law that in case of an interim dividend which the directors
have resolved to pay, they have an option at any time before the payment to review their decision
and resolve not pay.

133

Management of Companies
Key Managerial Personnel Appointment of Directors Duties
and Liabilities of Directors Meetings of Members Board
Meetings

Key Managerial Personnel: Under section 2 (51) of the Cos Act 2013,
the KMP have been defined to include:
I. CEO, MD or Manager of the company;
II. Company Secretary;
III. Whole Time Director
IV. CFO; and
V. Any other officer as may be prescribed
Manager as defined in section 2 (53) means an individual who,
subject to the superintendence, control and direction of the Board of
Directors, has the management of the whole, or substantially the
whole, of the affairs of a company, and includes a director or any other
person occupying the position of a manager, by whatever name called,
whether under a contract of service or not;
Managing Director as defined in section 2 (54) means a director who,
by virtue of the articles of a company or an agreement with the
company or a resolution passed in its general meeting, or by its Board
of Directors, is entrusted with substantial powers of management
134 of

Meetings of Members
ANNUAL GENERAL MEETING
Section 96 (1): Every company other than a One Person Company shall
in each year hold in addition to any other meetings, a general meeting as
its annual general meeting and shall specify the meeting as such in the
notices calling it, and not more than fifteen months shall elapse between
the date of one annual general meeting of a company and that of the
next:
Provided that in case of the first annual general meeting, it shall be held
within a period of nine months from the date of closing of the first
financial year of the company and in any other case, within a period of six
months, from the date of closing of the financial year:
Provided further that if a company holds its first annual general meeting
as aforesaid, it shall not be necessary for the company to hold any annual
general meeting in the year of its incorporation:
Provided also that the Registrar may, for any special reason, extend the
time within which any annual general meeting, other than the first annual
135
general meeting, shall be held, by a period not exceeding three months.

Meetings of Members
ANNUAL GENERAL MEETING
Section 96 (2): Every annual general meeting shall be called during
business hours, that is, between 9 a.m. and 6 p.m. on any day that is not
a National Holiday and shall be held either at the registered office of the
company or at some other place within the city, town or village in which
the registered office of the company is situate:
Provided that the Central Government may exempt any company from
the provisions of this sub-section subject to such conditions as it may
impose.
Explanation. For the purposes of this sub-section, National Holiday
means and includes a day declared as National Holiday by the Central
Government.

136

Meetings of Members
ANNUAL GENERAL MEETING
Section 97 (1): If any default is made in holding the annual general
meeting of a company under section 96, the Tribunal may,
notwithstanding anything contained in this Act or the articles of the
company, on the application of any member of the company, call, or
direct the calling of, an annual general meeting of the company and give
such ancillary or consequential directions as the Tribunal thinks
expedient:

Provided that such directions may include a direction that one member of
the company present in person or by proxy shall be deemed to constitute
a meeting.

Section 97 (2): A general meeting held in pursuance of sub-section (1)


shall, subject to any directions of the Tribunal, be deemed to be an annual
general meeting of the company under this Act.

137

Meetings of Members
ANNUAL GENERAL MEETING Business to be transacted
Section 102 (2)
(a) in the case of an annual general meeting, all business to be
transacted thereat shall be deemed special, other than
(i) the consideration of financial statements and the reports of the Board
of Directors and auditors;
(ii) the declaration of any dividend;
(iii) the appointment of directors in place of those retiring;
(iv) the appointment of, and the fixing of the remuneration of, the
auditors; And

(b) in the case of any other meeting, all business shall be deemed to be
special:

Provided that where any item of special business to be transacted at a


meeting of the company relates to or affects any other company, the
extent of shareholding interest in that other company of every promoter,
director, manager, if any, and of every other key managerial personnel of
the first mentioned company shall, if the extent of such shareholding is
138
not less than two per cent. of the paid-up share capital of that company,

Meetings of Members
ANNUAL GENERAL MEETING Business to be transacted
Section 102 (1): A statement setting out the following material facts
concerning each item of special business to be transacted at a general
meeting, shall be annexed to the notice calling such meeting, namely:
(a)

the nature of concern or interest, financial or otherwise, if any, in


respect of each items of
(i) every director and the manager, if any;
(ii) every other key managerial personnel; and
(iii) relatives of the persons mentioned in sub-clauses (i) and (ii);

(b) any other information and facts that may enable members to
understand the meaning, scope and implications of the items of
business and to take decision thereon.

139

Meetings of Members
EXTRAORDINARY GENERAL MEETING
Section 100 (1): The Board may, whenever it deems fit, call an
extraordinary general meeting of the company.

Section 100 (2) The Board shall, at the requisition made by,
(a) in the case of a company having a share capital, such number of
members who hold, on the date of the receipt of the requisition, not less
than one-tenth of such of the paid-up share capital of the company as on
that date carries the right of voting;
(b) in the case of a company not having a share capital, such number of
members who have, on the date of receipt of the requisition, not less
than one-tenth of the total voting power of all the members having on the
said date a right to vote, call an extraordinary general meeting of the
company within the period specified in subsection (4).

Section 100 (3): The requisition made under sub-section (2) shall set
out the matters for the consideration of which the meeting is to be called
and shall be signed by the requisitionists and sent to the registered office
of the company.
140

Meetings of Members
EXTRAORDINARY GENERAL MEETING
Section 100 (4): If the Board does not, within twenty-one days from the
date of receipt of a valid requisition in regard to any matter, proceed to
call a meeting for the consideration of that matter on a day not later than
forty-five days from the date of receipt of such requisition, the meeting
may be called and held by the requisitionists themselves within a period
of three months from the date of the requisition.

Section 100 (5): A meeting under sub-section (4) by the requisitionists


shall be called and held in the same manner in which the meeting is
called and held by the Board.

Section 100 (6): Any reasonable expenses incurred by the


requisitionists in calling a meeting under sub-section (4) shall be
reimbursed to the requisitionists by the company and the sums so paid
shall be deducted from any fee or other remuneration under section 197
payable to such of the directors who were in default in calling the
meeting.
141

NOTICE OF MEETINGS OF MEMBERS


Section 101 (1) A general meeting of a company may be called by
giving not less than clear twenty-one days notice either in writing or
through electronic mode in such manner as may be prescribed:
Provided that a general meeting may be called after giving a shorter
notice if consent is given in writing or by electronic mode by not less
than ninety-five per cent. of the members entitled to vote at such
meeting.
Section 101 (2): Every notice of a meeting shall specify the place,
date, day and the hour of the meeting and shall contain a statement
of the business to be transacted at such meeting.
Section 101 (3): The notice of every meeting of the company shall
be given to
(a) every member of the company, legal representative of any
deceased member or the assignee of an insolvent member;
(b) the auditor or auditors of the company; and
(c) every director of the company.
Section 101 (4): Any accidental omission to give notice to, or the
non-receipt of such notice by, any member or other person who is
142
entitled to such notice for any meeting shall not invalidate the

QUORUM OF GENERAL MEETINGS


Section 103 (1): Unless the articles of the company provide for a
larger number,
(a) in case of a public company,
(i) five members personally present if the number of members as
on the date of meeting is not more than one thousand;
(ii) fifteen members personally present if the number of members
as on the date of meeting is more than one thousand but up to
five thousand;
(iii) thirty members personally present if the number of members as
on the date of the meeting exceeds five thousand;
(b)
in the case of a private company, two members personally
present, shall be the quorum for a meeting of the company.
Section 103 (2): If the quorum is not present within half-an-hour from
the time appointed for holding a meeting of the company
(a) the meeting shall stand adjourned to the same day in the next week
at the same time and place, or to such other date and such other
time and place as the Board may determine; or
(b)
the meeting, if called by requisitionists under section 100, shall
stand cancelled
143

QUORUM OF GENERAL MEETINGS


Provided that in case of an adjourned meeting or of a change of day,
time or place of meeting under clause (a), the company shall give not
less than three days notice to the members either individually or by
publishing an advertisement in the newspapers (one in English and one
in vernacular language) which is in circulation at the place where the
registered office of the company is situated.
Section 103 (3): If at the adjourned meeting also, a quorum is not
present within half-an-hour from the time appointed for holding
meeting, the members present shall be the quorum.

144

Management of Companies Directors


Section 149 of the Companies Act, 2013 provides for the provisions for
companies to have a duly constituted Board of Directors.
(Number of Directors: According to section 149(1) of the Companies
Act, 2013, every company shall have a Board of Directors consisting of
individuals as directors and shall have(a) a minimum number of directors
i.
in the case of Public company- three directors,
ii. in the case of Private Company- two directors, and
iii. in case of One person company- one director
(b) a maximum of fifteen directors.
If the company wants to appoint more than fifteen directors, it can do
so after passing a special resolution.
(c) Women director: At least one woman director shall be on the
Board of such class or classes of companies as may be
prescribed.[Second proviso to section 149(1)]

Management of Companies Directors


Clause 3 of The Companies (Appointment and Qualification of
Directors) Rules, 2014 provides that the following class of companies
shall appoint at least one woman directora.every listed company;
b.every other public company having
. paidup share capital of one hundred crore rupees or more; or
. Turnover of three hundred crore rupees or more:
A company, which has been incorporated under the Act and is covered
under provisions of second proviso to sub-section (1) of section 149
shall comply with such provisions within a period of six months from the
date of its incorporation.
Further, any intermittent vacancy of a woman director shall be filled-up
by the Board at the earliest but not later than immediate next Board
meeting or three months from the date of such vacancy whichever is
later.

Management of Companies Directors


Independent Director: Every listed public company shall have at
least one-third of the total number of directors as independent
directors. [Section 149(4)]
The Central Government may prescribe the minimum number of
independent directors in case of any class or classes of public
companies.
Any fraction contained in such one-third numbers shall be rounded
off as one.
According to clause 4 of the Companies (Appointment and
Qualification of Directors) Rules, 2014, the following class or classes
of companies shall have at least two directors as independent
directors:
i. the Public Companies having paid up share capital of ten crore
rupees or more; or
ii. the Public Companies having turnover of one hundred crore
rupees or more; or
iii. the Public Companies which have, in aggregate, outstanding
loans, debentures and deposits, exceeding fifty crore rupees.

Management of Companies Directors


Appointment of Directors (Section 152 of the Companies Act, 2013)
According to section 152 (1) of the Companies Act, 2013:
i. Where no provision is made in the articles of a company for the appointment of the first
director, the subscribers to the memorandum who are individuals shall be deemed to be
the first directors of the company until the directors are duly appointed. [Section 152(1)]
ii. In case of a One Person Company, an individual being member shall be deemed to be its
first director until the director or directors are duly appointed by the member in
accordance with the provisions of this section. [Section 152(1)]
iii. Save as otherwise expressly provided in this Act, every director shall be appointed by the
company in general meeting. [Section 152(2)]
iv. No person shall be appointed as a director of a company unless he has been allotted the
Director Identification Number (DIN) under section 154. [Section 152(3)]
v. Every person proposed to be appointed as a director by the company in general meeting
or otherwise, shall furnish his Director Identification Number (DIN) and a declaration that
he is not disqualified to become a director under this Act. [Section 152(4)]
vi. A person appointed as a director shall not act as a director unless he gives his consent to
hold the office as director and such consent has been filed with the Registrar within thirty
days of his appointment in such manner as may be prescribed [Section 152 (5)].

Management of Companies Directors


The Companies (Appointment and Qualification of Directors) Rules, 2014 vide Rule 8 provides
that every person who has been appointed to hold the office of a director shall on or before the
appointment furnish to the company consent in writing to act as director in Form DIR-2 and the
company shall within thirty days of the appointment of a director, file such consent with the
Registrar in Form DIR 12 along with the prescribed fee.
The proviso to Section 152 (5) states that in case of appointment of an independent director in
the general meeting, an explanatory statement for such appointment, annexed to the notice for
the general meeting, shall include a statement that in the opinion of the Board, he fulfills the
conditions specified in this Act for such an appointment.

Section
164 of the
2013 provides
forthe
disqualifications
a
Disqualifications
forCompanies
appointmentAct,
of director
(Sec 164 of
Companies Act, for
2013)
person to be appointed as a director of a company.
(i) A person cannot be appointed as director of a company if:
(a) he is of unsound mind and stands so declared by a competent
court;
(b) he is an undischarged insolvent;
(c) he has applied to be adjudicated as an insolvent and his
application is pending;
(d) he has been convicted by a court of any offence, whether
involving moral turpitude or otherwise, and sentenced in respect
thereof to imprisonment for not less than six months and a period
of five years has not elapsed from the date of expiry of the
sentence.
However, if a person has been convicted of any offence and sentenced
in respect thereof to imprisonment for a period of seven years or
more, he shall not be eligible to be appointed as a director in any
company
(e) an order disqualifying him for appointment as a director has been
passed by a court or Tribunal and the order is in force;
(f)
he has not paid any calls in respect of any shares of the company
held by him, whether alone or jointly with others, and six months
have elapsed from the last day fixed for the payment of the call;
(g) he has been convicted of the offence of dealing with related party
transactions under section 188 at any time during the last
preceding five years; or

Disqualifications for appointment of director (Sec 164 of the Companies Act, 2013)
ii. No person who is or has been a director of a company which
(a)has not filed financial statements or annual returns for any
continuous period of three financial years; or
(b)has failed to repay the deposits accepted by it or pay interest
thereon or to redeem any debentures on the due date or pay
interest due thereon or pay any dividend declared and such
failure to pay or redeem continues for one year or more,
shall be eligible to be re-appointed as a director of that company or
appointed in other company for a period of five years from the
date on which the said company fails to do so.
For ex: XYZ Ltd. has not filed the financial statements or Annual
Return for 4 years. Mr. A is the director of XYZ Ltd. Thus, Mr. A is
not eligible for re-appointment in XYZ Ltd. and also he is not
eligible to be appointed as director in any other company.
iii. A private company may by its articles provide for any
disqualifications for appointment of a person as a director therein,
in addition to those specified in sub-sections (1) and (2) of section
164 as stated above.

Defect in appointment of directors not to invalidate actions taken

Section 176 of the Companies Act, 2013 provides that:


i. No act done by a person as a director shall be deemed to be invalid, notwithstanding that it
was subsequently noticed that his appointment was invalid by reason of any defect or
disqualification or had terminated by virtue of any provision contained in this Act or in the
articles of the company.
ii.

Nothing in this section shall be deemed to give validity to any act done by the director after
his appointment has been noticed by the company to be invalid or to have terminated.

Board Meetings
Section 173 of the Companies Act, 2013 lays down the following
provisions in respect of the meetings of the Board of Directors:
i. Frequency of Board Meetings [Section 173 (1)]:
ii. First Board meeting: Every company shall hold the first meeting of
the Board of Directors within 30 days of the date of its
Incorporation.
iii. Subsequent Board meetings: Every company shall hold minimum
of 4 meetings every year provided that the gap between two
consecutive board meetings shall not be more than 120 days.
However, the Central Government may by notification, direct that
these provisions will not apply in relation to any class or descriptions
of companies or will apply in relation thereto subject to such
exceptions, modifications or conditions as may be specified in the
notification.

Board Meetings
Participation in Board meeting [Section 173 (2)]:
(a)
Sub section (2) of section 173 allows directors to attend Board meetings,
(b) In person, or,
i.
through video conferencing, or,
ii. other audio visual means as may be prescribed.
(b)
Such audio visual means should be capable of recording and recognizing the participation of
the directors and of recording and storing the proceedings of such meetings along with date
and time.
(c)
However, the Central Government may by notification specify such matters which shall not be
dealt with in a meeting through video conferencing and other audio visual means.

Notice of the Board meeting [Section 173 (3)]:


(a) According to section 173(3), a Board meeting shall be called by giving at least 7 days notice
in writing to all the directors at their registered address (whether in India or outside India).
The notice may be sent by hand delivery or by post or by electronic means.
(b) Provided that a meeting of the Board of Directors may be called on a shorter notice (than 7
days) in order to transact an urgent business, subject to the condition that at least one
independent director, if any, shall be present at the meeting. If no independent director is
present at such a meeting of the Board then the decisions taken at such a meeting shall be
circulated to all the directors and shall be final only on ratification thereof by at least one
independent director, if any.
(c) The Companies (Meetings of Board and its Powers) Rules, 2014 further provides that the
notice of the meeting shall inform the directors regarding the option available to them
to participate through video conferencing mode or other audio visual means, and shall
provide all the necessary information to enable the directors to participate through video
conferencing mode or other audio visual means.
(d) On receiving such a notice, a director intending to participate through video conferencing or
audio visual means shall communicate his intention to the Chairperson or the
company secretary of the company. He shall give prior intimation to that effect sufficiently in
advance so that the company is able to make suitable arrangements in this behalf.
(e) If the director does not give any intimation of his intention to participate that he wants to
participate through the electronic mode, it shall be assumed that the director shall attend the
meeting in person.

Quorum for Board Meetings - Sec 174 of the


Companies Act, 2013
A quorum is the minimum number of qualified persons who must
attend in order to transact business at a duly convened Board
meeting. A meeting shall not be deemed to have been properly held
unless the quorum was present at that meeting.
Section 174 of the Companies Act, 2013 lays down the following
provisions for a proper Quorum in meetings of the Board of Directors:
(i)
Sub Section (1): The quorum for a Board Meeting shall be onethird of its total strength or two directors, whichever is higher.
(ii)
The directors who participate by video conferencing or by
other audio visual means shall also be counted for the purpose of
determining the quorum at the meeting.

Decisions by the Board


Decisions by the Board of Directors may be taken in one of the
following ways:
a. By passing resolutions with majority vote at a duly convened and
held Board Meeting;
b. By passing a resolution with unanimous vote at a duly convened
and held Board Meeting;
c. By passing a resolution by circulation
Passing of resolution by circulation
Section 175 of the Companies Act, 2013 provides for the passing of a board resolution by
circulation under the following provisions. Under sub section (1) No resolution shall be deemed
to have been duly passed by the Board or by a committee thereof by circulation unless:
i. The resolution has been circulated in draft, together with the necessary papers, if any, to all
the directors, or members of the committee, as the case may be,
at their addresses registered with the company in India,
by hand delivery or by post or by courier, or through such electronic means as may be
prescribed, and
ii. and has been approved by a majority of the directors or members, who are entitled to vote
on the resolution.

Meetings of Members
There are 2 types of meetings of members of a company
Annual General Meeting; AND
Extraordinary General Meeting
Some key provisions relating to the meeting of members are as
under:
Section 101: Notice of the meeting must be given at least 21
clear days before the date of the meeting;
The notice must be sent in writing or by any other electronic
mode;
Notice of every meeting must be sent to every member,
director and auditors of the company;
Sec 101: In the case of any special business to be transacted at
a meeting of members a statement must be annexed to the
Notice giving full information and details on every item of
special business to enable the members to vote on the same in
an informed manner.
Sec 103: the meeting will not be valid if the prescribed quorum
is present through out the meeting. The quorum for a valid
meeting is as under:

Annual General Meetings Section 96


Key Features of AGM
Every company is required to hold an AGM except a 1 person
company;
Must be held in each year
Must be specified as an Annual General Meeting in the Notice
calling it;
Not more than 15 months shall elapse between two AGMs
The Registrar may for any special reason extend the time for
holding an AGM except the first AGM;
The first AGM must be held within 9 months of incorporation in
which case it is not necessary to hold an AGM in the year of
incorporation
Must be held on a working day during business hours (9:00 AM
to 6:00 PM)
The AGM must be held at the Registered Office of the company
or at any other place in the city, town or village where the
Registered Office is situated
The ordinary business to be transacted at an AGM are:
Adoption of the Financial Statements of the company
together with the Directors Report and the Auditors Report
thereon;

Extraordinary General Meetings Section 100


Key Features of an Extraordinary General Meeting

May be called by the Board of Directors, whenever it deems fit;


Will have to be convened by the Board of Directors at the
requisition made by
Shareholders holding one tenth of the paid up capital of the
company as on the date on which voting will be done, if the
company is one having share capital;
In the case of company not having any share capital by
members holding one tenth of the total voting power
The meeting must be called within 21 days of the receipt of
requisition as above
Every business transacted at an EGM will be a special business

Property Law for


Business Lectures 14
- 16

161

Business & Tax Laws


Lectures 17 - 19

162

Classification & Chargeability of


Taxes
a.
b.
c.
d.
e.
f.
g.

Income Tax
Wealth Tax
Excise Duty
Customs Duty
Sales Tax
VAT
Service Tax.

163

Genesis of Taxation

Taxes
Establishment
are the sources
Costs
of funding the expenditure of Governments. In th

Salaries of Govt
Employees &
establishment
costs

Indian
Railways,
Posts &
Telegraph Etc

Food Bill,
Manrega,
Road
Construction
etc

Direct & Indirect Taxes

Direct Taxes Paid by the


person who bears the
incidence Collected
directly from the persons
meant to bear these taxes

Incom
e Tax

Gift
Tax

Wealth
Tax

Abolished
by Union
Budget
2015

Sales
Tax /
VAT

Indirect Taxes Meant to be paid by


one person but incidence on another
person These taxes are collected
indirectly from persons other than
those on whom the incidence of
these taxes are meant to fall

Servic
e Tax

GST

Excis
e
Duty

Custo
m Duty

Direct Tax Laws


Income Tax Act, 1961

166

Applicability Who is a Person


under I T Law?
Person under the Income Tax Act has been defined to
include the following entities:
a. Individual including Non-resident,
b. Hindu Undivided Families (HUF),
c. Bodies of Individuals (BOI), Association of Persons
(AOP) & Artificial Juridical Persons ( such as Deities of
Temples)
d. Societies & Charitable / Religious Trusts
e. Partnership Firms irrespective of their Income
f. Co-Operative Societies
g. Companies incorporated under the Companies Act
h. Local
Authorities
like,
Panchayats,
Municipal
Corporation etc.
The term Person has been defined in the Income Tax
Act
ICAI,to identify the entities who are liable to pay income

Who is an Assessee?

Under section 2 (7) of the Income Tax Act, 1961 the term
"assessee means a person by whom any tax or any
other sum of money is payable under this Act, and
includes every person:
a. in respect of whom any proceeding under this Act has
been taken for the assessment of his income or
assessment of fringe benefits or of the income of any
other person in respect of which he is assessable, or of
the loss sustained by him or by such other person, or
of the amount of refund due to him or to such other
person; OR
b. who is deemed to be an assessee under any provision
of this Act ; OR
c. who is deemed to be an assessee in default under any
provision of this Act ;
ICAI,

The Concept of Previous Year &


Ass Year

Under section 3 of the Income Tax Act 1961 "previous year" mean

ICAI,

Relevance of Previous Yr & Ass Yr


a. Previous Year is the period in respect of taxable income is
computed for an assessee, whereas the Assessment Year is
the year which governs the taxability of income.
b. Thus for a salaried person the previous year is the financial
year starting from 1st April every year and ending on 31st
March of the next year.
c. For every other assessee the previous year will be generally
the same period as the financial year (as above), except in
the case of a new business in which case the previous year
will be from the date of start of business upto 31st March
next.
d. The current previous year is from 1st April 2014 to 31st
March 2015.
e. The salaried persons will be required to compute their
taxable income for the year 2014 -15 according to the
provisions of the I T Act applicable for the Assessment Year
2015 - 16.
The I T law that will be applicable in an Assessment Year is
f.ICAI,

Question 1
A starts a business on 1st July 2015 . Indicate the first
previous year of A and the Assessment Year relevant to
that previous year. Also indicate the Union Budget which
will determine the relevant Ass Year in this case.

Question 2
What is the current previous year and the assessment year for a
salaried person.
Answer
The current previous year of a salaried person is the financial
year 15-16 i.e. the period of 12 months from 1st Apr 16 to 31st
Mar 17 and the Assessment Year will be 2017-18
ICAI,

Residential Status Section 6

Understanding the Residential Status of a person under t

ICAI,

Residential Status Section 6

The Residential Status of a person is determined for each

ICAI,

Residential Status of Individuals


The Residential
Status OF AN
INDIVIDUAL is
determined
every year for an
assessee hence, a person
may be a
resident in one
previous year
but not in the
next

A. Resident in India
ICAI,

Basic Conditions for


determining
Residential Status
in India
- Both must be
satisfied

Additional Conditions
for determining
Residential Status in
India

Min Stay in
Additional
Additional
Min Stay in
India for an
Condition 1 - Condition 2 India for an
aggregate
Resident in
Min Stay in
aggregate
period of
India for at
India for an
period of 365
182 days in
least 2 prev aggregate of
days in the 4
the
yrs in the 730 days in 7
preceding
Previous
preceding 10
preceding
Prev Years
Year
Prev Years Previous Years

Must be
Complied

Must be
complied

Both the above mentioned


additional conditions must

Residential Status of Individuals


A Hindu undivided family, firm or other association of persons is said
to be resident in India in any previous year in every case EXCEPT
where during the relevant previous year the control and management
of its affairs is situated wholly outside India.
Resident and
If the management and control of its affairs are
Ordinarily Resident situated wholly or partly in India during the
in India
Previous Year
If the Karta or the Manager of the HUF satisfies
both the additional conditions mentoned above,
Resident but Not
i.e. he is resident in India in 2 of the preceeding
Ordinarily Resident
Previous Years out of 10 and has been in India for
in India
a period or periods aggregating in all to 730 days
or more in the 7 preceeding Previous Years.
If the management and control of its affairs are
Non Resident in
situated wholly outside India during the Previous
India
Year
Note: Control and management means de facto control and
management and not merely the right to control or manage.
Control and management is situated at a place where the head,
the seat and the directing power are situated.

ICAI,

Residential Status of a Company Assessee

Residential Status of Companies


a. If it is an Indian Company i.e. It has been incorporated in
India;
Resident & Ordinarily b. If it is a Foreign Company (incorporated outside
India), the management and control of its affairs
Resident in India
are situated wholly in India during the Previous
Year
Non Resident in India

Only a foreign company can be Non Resident in India in a


previous year. A foreign company shall be non resident in
India, if the management and control of its affairs are situated
wholly or partly outside India during the previous year

Note: Control and management means de facto control and management and not
merely the right to control or manage. Control and management is situated at
a place where the head, the seat and the directing power are situated.
ICAI,

Residential Status of All Other Assessees

These assessees can only be either residents or non residents in India


during a previous year.

Resident in India

If the management and control of its affairs are


situated wholly or partly in India during the Previous
Year

Non Resident in
India

If the management and control of its affairs are


situated wholly outside India during the Previous Year

ICAI,

QQ 3:
From the following residential data of Mr
A in India, determine the residential status
of Mr A for the Assessment Year 2016 - 17

Sl
1
2
3
4
5
6
7
8
9
10
11

No of
Financial
Days in
Year
India
2015 -16
177
2014 - 15
40
2013 - 14
200
2012 13
130
2011 - 12
45
2010 - 11
75
2009 - 10
186
2008 - 09
183
2007 - 08
150
2006 - 07
118
2005 - 06
78

ICAI,

The previous year in respect of the Ass


Year 2016 17 will be 2015 16.
The residential status of Mr A for the
Previous year 2014 15 will be determined
in the following steps:
1. Residence in India in the Previous Year:
177
2. Residence in India in the preceding 4
previous years = 40+200+130+45 =
415 days;
3. Residence in India in the last 7
preceding previous years out of the last
10 preceding previous years =
40+200+130+45+75+186+183 = 859
4. From the above, Mr A fulfils one of the
two conditions under 1 and 2 above
where his stay exceeds 365 days in the
4 preceding prev yrs;
5. He also meets the condition of being in
India for 730 days in the preceding 7

Therefore Mr A is a resident in India in the previous year 2015

ICAI,

Question 4
X Ltd was incorporated in New York in 2012. In June 2013
it set up a business office in New Delhi. The business
office in Delhi manages a auto parts plant set up in
March 2014 which started commercial production on 1st
June 2014. The company is managed by the Board of
Directors based in New York. However, the company has
posted a Managing Director for heading its Indian
Operations, a CFO and a Legal Advisor who are all
members of a Management Committee which reports to
the Board of Directors and works under its supervision.
Determine the Residential Status of X Ltd for the
Under section 6 of the Income Tax Act, 1961 a company incorporated in
Previous Year 2015 - 16

Chargeability of Income Tax


The Scope of Total Income
a. The scope of Total Income of a person under the income tax
Act 1961 depends on his residential status in India during
the previous year;
b. Under section 5 (1) of the Income Tax Act, 1961 the total
income of any previous year of a person who is a resident
includes all income from whatever source derived which:
i. is received71 or is deemed to be received71 in India in
such year by or on behalf of such person ; or
ii. accrues or arises or is deemed to accrue or arise to him
in India during such year ; or
iii. accrues or arises to him outside India during such year :
c. Under the Proviso to section 5 (1) the total income of a
person not ordinarily resident in India, the income which
accrues or arises to him outside India shall not be so
included unless it is derived from a business controlled in or
a profession set up in India.

Chargeability of Income Tax


The Scope of Total Income
d. Under section 5(2) of the Income Tax Act, 1961 the total income of
any previous year of a person who is a non-resident includes all
income from whatever source derived which:
i. is received or is deemed to be received in India in such year
by or on behalf of such person ; or
ii. Accrues or arises or is deemed to accrue or arise to him in
India during such year.
e. In terms of explanation 1 of the above section it is clarified that
Income accruing or arising outside India shall not be deemed to be
received in India within the meaning of this section by reason
merely by the fact that it is taken into account in a balance sheet
prepared in India.
f. In terms of explanation 2 for the removal of doubts it is further
clarified that income which has been included in the total income
of a person on the basis that it has accrued or arisen or is deemed
to have accrued or arisen to him shall not again be so included on
the basis that it is received or deemed to be received by him in

Chargeability of Income Tax


The Scope of Total Income
Taxability of income for
Individuals and HUF Only

Not Ordinarily
Resident

Non Resident

Taxable

Taxable

Taxable

Not Taxable in
India

b. Business income which


is controlled from outside Taxable
India

Not Taxable in
India

Not Taxable in
India

c. Income from Profession


Taxable
which is set up in India

Taxable

Not Taxable in
India

d. Income from Profession


Taxable
set up outside India

Not Taxable in
India

Not Taxable in
India

e. Any other Foreign


income like rent, salary, Taxable
interest etc

Not Taxable in
India

Not Taxable in
India

Resident

A. Indian Income
Taxable
B. Foreign Income is taxable
as under:
a. Business income which
is controlled wholly or
Taxable
partly from India

Chargeability of Income Tax


The Scope of Total Income

Taxability of Income in India- For All Other Assessees

All Other Assesses

Resident

Not Ordinarily
Resident

Non Resident

A. Indian Income

Taxable

Not Applicable

Taxable

B. Foreign Income

Taxable

Not Applicable

Not Taxable in
India

All other Assessees can only be either Resident in


India or Non Resident in India in a Previous Year

The Scope of Total Income


Distinction between Indian Income & Foreign Income

Various
situations of
earning of
Income

Classification of
Income

Income
Income
Income accruing
Income
accruing or accruing or
or arising (or
accruing or
arising outside arising in deemed to accrue
arising in India
India but
India but
or arise outside
and also
received in
received
India) and
received in
India during outside India received outside
India during the
the Previous during the
India in the
Previous Year
Yr
Previous Yr
Previous Yr

Indian Income

Foreign Income

Composition of Total Income


Heads under which Income is charged to Income Tax

Under the Income Tax Law all incomes which are taxable at the han

186

Computation of Taxable Income under a Head

The Taxable Income under each head of income is calculated a

187

Computation of Taxable Income - Exemptions

Exemptions constitute a very major element of the Income Tax L

Computation of Taxable Income Rebates

The third kind of concession or relief under the Income Tax

Summary of Relief /
Concessions
under the Income Tax Law

Exemptions: are those incomes which are exempt from tax to th

Question 5 Give a few examples of


a. Incomes which are exempt from income tax;
b. Deductions from Gross Total Income
c. Deductions under the head income from house property
Incomes which are exempt from income Tax are provided for in section 10 of

Indirect Tax Laws


Lecture No:
Excise Duty
Custom Duty
Sales Tax & Vat
GST
Service Tax

Indirect
Taxes

Indirect
Taxes

The Road
Ahead

Taxability of Indirect Taxes

Excise Duty

Sources of Excise Duty

Central Excise Tariff


Act, 1944:
Act, 1985:
referred
originally
to as the
included
Act in
asthis
schedu
lec

Sources of Excise Duty

Annual Union Finance Acts (The Union Budgets): Once the Annua

Sources of Excise Duty

Notifications: are issued by the Central Government or the Central Boar

Sources of Excise Duty

Trade notices / Clarifications: Trade notices are issued by the Excise Dep

Sources of Excise Duty

The Central Excise Act applies to the whole of India .

Chargeability of Excise Duty

Liability of excise duty arises when a product is manufactured, whether

Chargeability of Excise Duty

Goods manufactured by 100% EOU and brought to Domestic Tar

Excisable Goods

Other conditions for levy of Excise Duty

Manufacture defined

The most commonly used


test for ascertaining if
manufacture for levy of
has
taken
Any process,
process incidental
specified
in relation
into
to
relation
or
goods
ancillary
to
specified
any
to ED
goods,
thein
completion
the
in
Third
the place
section,
Schedule,
of awas
manu
chai
evolved by the Supreme
Court in the case of Delhi
Cloth and General Mills
1977, which is used even
today. The judge stated:
Manufacture implies a
change, but every change
is not manufacture and
yet change of an article is
the result of treatment,
labour and manipulation.
.there
must
be
transformation; a new and
distinct
article
must
emerge
having
a
distinctive
name
and
character
or
use.
Therefore,
manufacture
must
result
in
the

Some examples of Manufacture

Processes involving manufacture

Who is a Manufacturer?

A person who employs hired labour for the manufacture of excisable go

Classification of Excisable Goods

Classification of excisable goods may be defined as the grouping and su

Valuation of Excisable Goods

In the vast majority of cases, ED is levied as a % of the value of the exc

Computing the Assessable Value

Computing the Assessable Value

Steps in Excise Duty


Payment
Summary

The Customs Duty Law

Basics

Sources of Customs Duty

Chargeability of Custom Duty


Section 12 of the Custom Act, 1962

Chargeability of Custom Duty


Section 12 of the Custom Act, 1962

The First Schedule of the Customs Tariff Act, 1975 lays down the rates o

Customs Duty applicable on certain Goods


Section 21

Classification of Import / Export Goods

Classification of import / export goods may be defined as the grouping and sub g

Exemption from Customs Duty


Section 13, 22, 23(1) & 23(2)

Exemption from Customs Duty


Section 25

Sales Tax Law


Lecture No:

Applicability of CST

Constitutional Framework

Sources of applicable provisions

The provisions governing the charge of sales tax in respect

Central
CST
Departmental
Annual
Trade
Rules
Notices
Union
Sales
issued
Tax
Fin
and
Circulars
Acts
under
Act,
Clarifications
1956
or&
the
Union
Instructions
CSTBudgets
Act,
Issued
1956
Issued
for giving
for ensuring
clarity touniformity
trade for cor
&

Charge of CST
CST Act, 1956 extends to the whole of India

Key Terms
Goods

Sale

A sale may either be a conventional sale or a deemed sale. A sale includes

Sale Conventional & Deemed

Conventional Sale

Sale Conventional & Deemed

Deemed Sale

Interstate Sale

Interstate Sale

Documents of title to the goods:

Interstate Sale

Inter state sale

Sale in the course of import / export Sec 5

Sale in the course of import / export: Article 286(1)(b) of the Constitution

Sale in the course of import / export Sec 5

A sale or purchase shall be deemed to have taken place in the course o

Sale in the course of import / export Sec 5

A sale shall be deemed to have been made in the course of import of g

Sale to Foreign Missions,


UN etc
Section 6(3)

No CST is payable on sale of goods by a dealer in the course of inter sta

Rates of CST
Section 8 (1)

Rates of CST

In case any of the conditions for charge of CST on concessional r

Turnover

CST is levied on the turnover of a registered dealer. From the total turno

Value Added Tax (VAT)

Concept

VAT as the name suggests is a tax on the value added to the co

Variants of VAT

Gross Product Variant: Tax is levied on total sales and deduction by way

Methods of Computing VAT

Methods of Computing VAT

VAT in India
Excise Duty - Modvat to
Cenvat

VAT
In
The
With
2000
2002,
was
VAT
theMODVAT
on
VAT
first
above
services
was
introduced
integration
was
introduced
was
substituted
in
integrated
1986
the
onEXCISE
cascading
services
as
with
Modified
into
CENVAT
DUTY
CENVAT
also
effect
Value
Payable
thereby
or
Central
in dual
Added
2004
on
allowing
or
VAT
manufacture
which
Tax
multiple
(Modvat)
applicabl
Service
meant
taxor
Ti

VAT in India
State Level VAT

After the introduction of VAT in the manufacture and the Services sector

VAT in India
Goods covered and
exempt

Generally all goods are covered under VAT and are allowed input tax cre

VAT in India VAT


Liability

Net Tax Payable

VAT in India
Input / Output Tax
Input Tax

Output Tax

VAT in India
VAT in Lease
Transactions

VAT in India
VAT in Hire Purchase Transactions

The Road Ahead


General Sales Tax GST - Snapshot

The final reform in the Tax Laws in the country will be to have a single

Legal & Regulatory Framework in Fin


Services
Lectures 20 - 23

C 3 Test 75 Minutes
15 Mins (out of which 5 marks if attendance >75%)
Lecture - 24

Business Transactions & Cyber


Law
Lecture - 25

Comptition & Consumer Protection


Lecture 26 & 27

Concept & Background


The main objective of the Competition Law is to promote
economic efficiencies using competition as one of the
means of assisting the creation of market responsive to
consumer preferences. Supreme Court of India
Competition can be defined as a process wherein cost
efficient production is achieved in a structure having
reasonable number of players (producers and consumers)
with simple entry and exit procedures and where exists a
close substitution between products of different players in a
given industry.
Competition refers to a market situation in which sellers
independently strive for buyers patronage in order to
achieve the business objectives of profit, sales turnover and
market share. In other words, it is the act of competing by
an enterprise against other business enterprises for the
purpose of achieving dominance in the market or attaining a

Concept & Background


Such a competition stimulates innovation and productivity
and thus leads to the optimum allocation of resources in the
economy; guarantees the protection of consumer interests;
reduces costs and improves quality; accelerates growth and
development and preserves economic and political
democracy.
In the absence of adequate safeguards, enterprises may
undermine the market by resorting to unfair practices for
their short term gains. Thus, there arises the need to have a
proper regulatory environment which can ensure a healthy
competition so that all business enterprises can grow and
expand and stimulate economic development of the
country. Legislation of an effective competition law should
contain short term and long term policy options that can
regulate the competition to run the economy on a safe track
with sustaining speed.

The Competition Act, 2002


The Competition Act, 2002 seeks to increase economic
efficiency, enhance consumer welfare, ensure fair trading,
and prevent abuse of market power through regulating the
under mentioned key areas:
a. Anti-competitive agreements Section 3
b. Abuse of dominance Section 4, and
c. Mergers which have potential for anti-competitive effect
Sec 5 & 6.
The Competition Commission of India or CCI which was set
up under the Competition Act, 2002 for the administration,
implementation and enforcement of the Act and was duly
constituted in March 2009.
The judicial hierarchy for the disposal of cases under the Act
is as under:
Level 1: Order is passed by the CCI after carrying out an
investigation;
Level 2: Appeals against the order of CCI to be filed before

Consumer Protection Act, 1986


The Consumer Protection Act, 1986 was enacted to provide:
i. for better protection of the interest of the consumers;
and
ii. for the purpose to make provisions for the establishment
of Consumer Councils and other authorities in the
settlement of consumer disputes and for matters
connected therewith
The Act aims at protecting the consumers in the following
ways:
a. The right to be protected against marketing of goods and
services which are hazardous to life and property;
b. The right to be informed about the quality, quantity,
potency, purity, standard and price of goods or services,
as the case may be, so as to protect the consumers
against unfair trade practices;
c. The right to be assured, wherever possible, of access to a
variety of goods and services at competitive prices;
d. The right to be heard and to be assured that consumers

Consumer Protection Act, 1986


WHO CAN MAKE A COMPLAINT?
To initiate an action under the Consumer Protection Act, 1986, what
is required is a complaint from the complainant.
The term complaint has been defined in section 2(1)(d) of the Act.
According to clause (b) of section 2(1) of the Consumer Protection
Act, a complaint can be made by any of the following:
i. a consumer or
ii. any voluntary consumer association registered under the
Companies Act, 1956 or under any other law for the time being in
force; or
iii. the Central Government or any State Government, who or which
makes a complaint; or
iv. one or more consumers, where there are numerous consumers
having the same interest;
v. In case of death of a consumer, his legal heir or representative

Consumer Protection Act, 1986


CONSUMER
According to Section 2(1)(d) of the Act consumer means any
person who:
a. buys any goods for a consideration ; or
b. hires or avails of any services for a consideration
Therefore, the definition of consumer may be discussed in
following two parts:i. Consumer of goods - A person claiming himself to be a
consumer should fulfill the following requirements :
a. there should be a sale transaction between the seller
and the buyer,
b. the sale must be of goods,
c. the buying of goods must be for consideration,
d. the consideration has been paid or promised or partly
paid and partly promised, or under any system of
deferred payment; and
e. the user of the goods may also be a consumer when
such use is made with the approbation of the buyer

Consumer Protection Act, 1986


CONSUMER
ii. Consumer of services
The term consumer also covers any person who hires or
avails of any services for consideration and also includes
any beneficiary of such sentences. According to subclause (ii) of section 2(1)(d) of the Act, a consumer of
services includes any person, who
a. hires or avails of any services for consideration which
has been paid or promised or partly paid and partly
promised or under any system of deferred payment,
and
b. includes any beneficiary of such services other than
the person who hires or avails of them, when such
services are availed of with the approval of the hirer.
Thus, for the purpose of consumer of services, it is
essential that the services must have been hired or
availed of for the consideration. But it is not essential

Environment Protection & Business


Obligations
Lecture 28

Concept & Background


1. Environment is the most important factor which
determines the quality of life on the planet;
2. Violations in environmental safety / hazard impact the
globe and not merely the place where the violations
are taking place;
3. One of the most important and critical indications of
the management of environment is the forest cover
on the planet and different parts of it which in turn
impact both the air and water quality on which life on
the planet is based.
4. In the 100 years of the 20th century 70% of forest
cover on the earth were wiped out to accommodate
increasing populations and their insatiable demand
for goods based on natural resources. The forest cover
on earth was around 91% in 1901 which fell to around
9% in 2000.
5. If we go by this progression, the world will be deprived

Devastating Consequences of Environmental Damage


1. India which was a land of rivers, canals and ponds just
a 100 years ago with abundant water is today a
country of increasing desertification and water
scarcity in most parts Latur and Maharashtra, AP,
Orissa. In fact today, almost half of the country is
starving for water;
2. Summer temperatures are abnormally high and
winters have become of lesser duration. Bangalore
which 50 years ago used to have an average
temperature of 22 to 24 degrees Celsius is today
burning at 40 degrees Celsius. It is similar story of
Pune, Kolkata, Hyderabad etc.
3. Air pollution has become so high that people are
suffering from breathing diseases.
4. Water pollution is just the same. The quality of
drinking water in India is actually undrinkable by the
standards of many countries such as Singapore, USA,

mples of business obligations for environment protect

In the Ganga Water Pollution case6, the owners of some


tanneries near Kanpur were discharging their effluents
from their factories in Ganga without setting up primary
treatment plants. The Supreme Court held that the
financial capacity of the tanneries should be considered
as irrelevant while requiring them to establish primary
treatment plants. The Court directed to stop the
running of these tanneries and also not to let out trade
effluents from the tanneries either directly or indirectly
into the river Ganga without subjecting the trade
effluents to a permanent process by setting up primary
treatment plants as approved by the State Pollution
Control Board.

mples of business obligations for environment protect

In Taj Mahal's case, the Supreme Court issued


directions that coal and coke based industries in Taj
Trapezium Zone (TTZ) which were damaging Taj
should either change over to natural gas or to be
relocated outside TTZ. Again the Supreme Court
directed to protect the plants planted around Taj by
the Forest Department.
In Delhi, the public transport system including buses
and taxies are operating on a single fuel CNG mode on
the directions given by the Supreme Court. Initially,
there was a lot of resistance from bus and taxi
operators. But now they themselves realize that the use
of CNG is not only environment friendly but also
economical.

mples of business obligations for environment protect

Dehradun Valley Case


In that case, carrying haphazard and dangerous
limestone quarrying in the Mussorie Hill range of the
Himalaya, mines blasting out the hills with dynamite,
extracting limestone from thousands of acres had upset
the hydrological system of the valley. The Supreme
Court ordered the closing of limestone quarrying in the
hills and observed that though this would undoubtedly
cause hardship to them, but it is a price that has to be
paid for protecting and safeguarding the right of the
people to live in healthy environment with minimal
disturbance of ecological balance

mples of business obligations for environment protect

1. Auto sector is required to meet emission standards


Euro 5 & 6
2. Vehicles in NCR have to get re registration after
specified number of years;
3. Polluting business units have to get the clearance of
Pollution Control Board of India before they can start
operations. This sets the treatment of water and air
pollutants.
4. GOI brings out notifications from time to time on
restrictions in operating businesses at certain places
such as units have been shut down along the Ganga
River;

Where do we stand and the road ahead


1. We have more than 200 Central and State legislations which
deal with environmental issues. More legislation means more
difficulties in enforcement. There is a need to have a
comprehensive and an integrated law on environmental
protection for meaningful enforcement.
2. It is not enough to enact the legislations. A positive attitude on
the part of everyone in society is essential for effective and
efficient enforcement of these legislations.
3. The powers vested to the Pollution Control Boards are not
enough to prevent pollution. The Boards do not have power to
punish the violators but can launch prosecution against them in
the Courts which ultimately defeat the purpose and object of the
Environmental Laws due to long delays in deciding the cases.
Thus, it is imperatively necessary to give more powers to the
Boards.
4. The Environment Protection Laws have failed to bring about the
desired results. Consequently, for the purpose of efficient and
effective enforcement of these laws, it is necessary to set up the
Environment Courts; with one Judge and two technical experts
from the field of Environmental Science and Ecology. These
Courts should be allowed to adopt summary proceedings for

Where do we stand and the road ahead


5. There is a multiplicity of environment pollution control standards
for the same type of industries. However, under the
Environment (Protection) Act, 1986 now the power has been
conferred upon the Central Government for laying down the
standards for the quality of air, water and soil. It is hoped that
this will ensure uniformity of standards through out the country.
6. In order to enforce the environmental laws stringently, mere
mis-description and technical flaws should be disregarded by the
Courts. The creative role of judiciary has been significant and
laudable. The jurisdiction of the Courts has been expanded by
way of Public Interest Litigation. The Supreme Court of India has
played a vital role in giving directions from time to time to the
administrative authorities to take necessary steps for improving
the environment.
7. The Public Liability Insurance Act, 1991 which provides for
mandatory public liability insurance for installation and handling
hazardous substance to provide minimum relief to the victims, is
a welcome step in the right direction. Such an insurance apart
from safeguarding the interests of victims of accident will also
provide cover and enable the enterprise to meet its liability.

Environmental Laws in India


Legal
Sl.
Framework

Law

The Constitution lays


down the State's
responsibility with
regard to the
environmental
protection

Article 48-A : "The State shall endeavor


to protect and improve the environment
and to safeguard the forests and wildlife
of the country".

Environmental
protection is a
fundamental duty of
every citizen

Article 51-A(g) of our Constitution: "It


shall be the duty of every citizen of India
to protect and
improve the natural environment
including forests, lakes, rivers and
wildlife and to have compassion for
living creatures.

The Forest

This Act provides for the conservation of


forests and regulating diversion of
forestlands for non-forestry purposes.
When projects falls within forestlands,
prior clearance is required from relevant

Environmental Laws in India


Sl. Legal Framework Law
4

AIR (Prevention and


Control of Pollution
Act, 1981)

The objective of this Act is to provide


for the prevention, control and
abatement of air pollution,

The objectives of the Water (Prevention


and Control of Pollution) Act are to provide
WATER (Prevention & for the Prevention and Control of Water
Pollution and the maintenance or
Control ) Act 1974
restoration of the wholesomeness of water

Hazardous Wastes
(Management &
Handling)
Amendment Rules,
2003

These Rules classify used mineral oil as


hazardous waste under the Hazardous
Waste (Management & Handling) Rules,
2003 that requires proper handling and
disposal. Organization will seek
authorization for
disposal of hazardous waste from
concerned State Pollution Control Boards

The Union Carbide Case Bhopal Gas Tragedy


1.

Bhopal gas tragedy is, till date, the worlds worst industrial
disaster. The Bhopal Gas Tragedy was a major leak of toxic
chemical gases occurred from the Union Carbide chemical plant in
the city of Bhopal in 1984. The Environment Protection Act, 1986
came into force soon after the Bhopal Gas Tragedy.

2. DELHI RIDGE CASE: To save the Delhi ridge from destruction an


order from the Supreme Court was obtained directing NCT of Delhi
to declare it as 'Reserved Forest'.
3. KAMAL NATH CASE: In the State of Himachal Pradesh, Span
motel, owned by the family members of Shri Kamal Nath, Minister
for Environment and Forests, Govt. of India, diverted the Course of
river Beas to beautify the motel and also encroached upon some
forest land.
The apex court ordered the management of the Span motel to
hand over forest land to the Govt. of Himachal Pradesh and
remove all sorts of encroachments. The Court delivered a land
mark judgment and established the principle of exemplary
damages for the first time in India. The Court said that polluter

Alternative Dispute Resolution

The Arbitration & Conciliation Act


Lecture 29

Concept & Background


There was an urgent need felt for a platform for speedily
settling International Commercial Disputes outside of the
Courts due to huge delays Hence, a law to consolidate and
amend the existing laws relating to domestic arbitration,
international commercial arbitration and the enforcement of
foreign arbitration awards was required.
UN Commission on International Trade Law developed the Model
Conciliation Rules which were adopted in 1980 by the Commission.
UN Commission on International Trade Law developed a Model Law
on International Commercial Arbitration and this was adopted in
1985
The said Model Law and Rules make significant contribution to the
establishment of a unified legal framework for the fair and efficient
settlement of disputes arising in international commercial relations
UN General Assembly recommended that all countries give due
consideration to the Model Law and Rules, to have uniformity in the law
of arbitral procedures and the specific needs of international
commercial arbitration practice;

Arbitration & Conciliation Law


Legislation
1. India, realizing the need and importance to make law
respecting arbitration and conciliation, taking into
account the aforesaid Model Law and Rules enacted the
Arbitration & Conciliation Act, 1996.
2. It is important to note that the Indian Law is on the
lines of the Model Arbitration Law & Rules of the UN
Commission for International Trade.

The Arbitration & Conciliation Act, 1996


Key Elements of the Act

Definitio
ns

Arbitration
Agreement

Composition

Arbitral
Tribuna
l

Jurisdictio
n

Arbitration
Awards &
Termination
of
Proceedings

Finality
and
Enforcem
ent of
Award

Conduct of
Proceedings

Recours
e&
Appeals

The Arbitration & Conciliation Act, 1996


Principal Definitions
"arbitration" means any arbitration whether or not administered
by permanent arbitral institution. In simple words, Arbitration is
the process of resolving a dispute by appointing a person as
Arbitrator who conducts a judicial proceeding in the same way
as a court does but the process is speedily conducted and
concluded.
"arbitration agreement" means an agreement referred to in
section 7
The judgement delivered by an Arbitrator is called an Arbitral
Award and includes an interim award
"arbitral tribunal" means a sole arbitrator or a panel of arbitrators
"Court" - principal Civil Court having jurisdiction in the district,
also the High Court having jurisdiction to decide the questions
forming the subject-matter of arbitration, but does not include
any civil court of a grade inferior to such principal Civil Court, or
any Court of Small Causes;

The Arbitration & Conciliation Act, 1996


Arbitration Agreements Section 7
"arbitration agreement" means an agreement by the parties to
submit to arbitration all or certain disputes which have arisen or
which may arise between them in respect of a defined legal
relationship, whether contractual or not.
An arbitration agreement may be in the form of an arbitration
clause in a contract or in the form of a separate agreement. The
reference in a contract to a an arbitration clause constitutes an
arbitration agreement if the contract is in writing and the
reference is such as to make that arbitration clause part of the
contract.
An arbitration agreement shall be in writing, which means that:
1. it is contained in a document and is signed by the parties; or
2. there exists an exchange of letters, telex, telegrams or other
means of telecommunication which provide a record of the
agreement; or
3. there is an exchange of statements of claim and defence in
which the existence of the agreement is alleged by one party
and not denied by the other.

The Arbitration & Conciliation Act, 1996


Power to refer parties to arbitration
Section 8
A judicial authority before which an action is brought in a matter
which is the subject of an arbitration agreement shall, if a party
so applies not later than when submitting his first statement on
the substance of the dispute, refer the parties to arbitration.

The application referred above, shall not be entertained


unless it is accompanied by the original arbitration
agreement or a duly certified copy thereof.

The Arbitration & Conciliation Act, 1996


Arbitration Tribunal - Composition
The parties are free to determine the number of arbitrators,
provided that such number shall not be an even number.
If the parties fail to appoint the arbitrators, the arbitral tribunal
shall be the arbitrator and shall consist of a sole arbitrator
A person of any nationality may be an arbitrator, unless otherwise
agreed by the parties.
"arbitral tribunal" means a sole arbitrator or a panel of arbitrators
in an arbitration with three arbitrators, in case the parties
fail to reach a mutual agreement, each party shall appoint
one arbitrator, and the two appointed arbitrators shall appoint the
third arbitrator who shall act as the presiding arbitrator.

The Arbitration & Conciliation Act, 1996


Arbitration Tribunal - Composition Sec 10 11
In an arbitration with 3 arbitrators where the appointment is to
be made as described above and if:
(a)
a party fails to appoint an arbitrator within thirty days
from the receipt of a request to do so from the other party; or
(b)
the two appointed arbitrators fail to agree on the third
arbitrator within thirty days from the date of their
appointment,
the appointment shall be made, upon request of a party, by the
Chief Justice or any person or institution designated by him.
An arbitrator may be challenged only if(a)
circumstances exist that give rise to justifiable doubts as
to his independence or impartiality, or
(b)
he does not possess the qualifications agreed to by the
parties.

The Arbitration & Conciliation Act, 1996


Arbitration Tribunal - Jurisdiction Sec 16
- 17

The arbitral tribunal may rule on its own jurisdiction, including


ruling on any objections with respect to the existence or validity
of the arbitration agreement, and for that purpose:
(a)
an arbitration clause which forms part of a contract shall
be treated as an agreement independent of the other terms
of the contract; and
(b)
a decision by the arbitral tribunal that the contract is null
and void shall not entail ipso jure the invalidity of the
arbitration clause
A plea that the arbitral tribunal is exceeding the scope of its
authority shall he raised as soon as the matter alleged to be
beyond the scope of its authority is raised during the arbitral
proceedings.
The arbitral tribunal shall decide on a plea and, where the arbitral
tribunal takes a decision rejecting the plea, continue with the
arbitral proceedings and make an arbitral award.

The Arbitration & Conciliation Act, 1996


Arbitration Tribunal - Proceedings
The parties shall be treated with equality and each party shall be
given a full opportunity to present his case.
1. The arbitral tribunal shall not be bound by the Code of Civil
Procedure, 1908 or the Indian Evidence Act, 1872.
2. The parties are free to agree on the procedure to
be followed by the arbitral tribunal in conducting its
proceedings.
3. Failing any agreement between the parties, the arbitral
tribunal may, subject to this Part, conduct the proceedings in
the manner it considers appropriate.
1. The parties are free to agree upon the language or languages
to is used in the arbitral proceedings.
2. If the parties fail to reach an agreement, the arbitral tribunal
shall determine the language or languages to be used in the
arbitral proceedings.

The Arbitration & Conciliation Act, 1996


Arbitration Tribunal - Proceedings
1. The parties are free to agree on the place of arbitration.
2. Failing any agreement between the parties, the place of
arbitration shall be determined by the arbitral tribunal having
regard to the circumstances of the case, including the
convenience of the parties.
3. Unless otherwise agreed by the parties, the arbitral
proceedings, in respect of a particular dispute
commence on the date on which a request for that
dispute to be referred to arbitration is received by
the respondent.
Unless otherwise agreed by the parties, the arbitral tribunal shall
decide whether to hold oral hearings for the presentation of
evidence or for oral argument, or whether the proceedings shall
be conducted on the basis of documents an other materials;
The Arbitral Tribunal will share all information, documents etc
submitted by one party with the other and any expert report on
which the arbitral tribunal may rely in making its decision shall be
communicated to the parties.

The Arbitration & Conciliation Act, 1996


Arbitration Award & Termination of
Proceedings
Where the place of arbitration is situated in India:
(a) in an arbitration other than an international
commercial arbitration, the arbitral tribunal shall
decide the dispute submitted to arbitration in
accordance with the substantive law for the time being in
force in India;
(b) in international commercial arbitration (i) the arbitral tribunal shall decided the dispute in
accordance with the law designated by the parties as
applicable to the dispute;
(ii) Any designation by the parties of the law or legal
system of a given country shall be construed, unless
otherwise expressed, as directly referring to the
substantive law of that country;
(iii) Failing any designation of the law under clause (a) by
the parties, the arbitral tribunal shall apply the rules of
law it considers to be appropriate given all the
circumstances surrounding the dispute

The Arbitration & Conciliation Act, 1996


Arbitration Award & Termination of
Proceedings
In all cases, the arbitral tribunal shall decide in accordance with
the terms of the contract and shall take into account the usages
of the trade applicable to the transaction.
It is not incompatible with an arbitration agreement for an arbitral
tribunal to encourage settlement of the dispute and, with the
agreement of the parties, the arbitral tribunal may use mediation,
conciliation or other procedures at any time during the arbitral
proceedings to encourage settlement.
If, during arbitral proceedings, the parties settle the dispute, the
arbitral tribunal shall terminate the proceedings and, if requested
by the parties and not objected to by the arbitral tribunal, record
the settlement in the form of an arbitral award on agreed terms.

The Arbitration & Conciliation Act, 1996


Finality & Enforcement of Award
Recourse to a Court against an arbitral award may
be made only by an application for setting aside such
award, only if the party making the application furnishes proof
that:
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to
which the parties have subjected it or under the law for the
time being in force; or
(iii) the party making the application was not given proper
notice of the appointment of an arbitrator or of the arbitral
proceedings or was otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute beyond the scope of
the submission to arbitration.
1. An arbitral award shall be final and binding on the parties and
persons claiming under them respectively.
2. The arbitral award shall be enforced in the same manner as if
it were a decree of the Court.

The Arbitration & Conciliation Act, 1996


Appeal against Award
An appeal shall lie only against the following orders (and from no
others) to the appellate court :
(a) granting or refusing to grant any measure under section 9:
(b)Order for setting aside or refusing to set aside an arbitral
award
Appeal shall also lie to a court against an order of the arbitral
tribunal:
(a)
accepting the plea on the jurisdiction of the arbitral
tribunal or the tribunal exceeding its authority ; or
(b)
granting or refusing to grant an interim measure of
protection
1. No second appeal shall against an order passed in appeal
under section 37.
2. However, this restriction shall affect or take away the right to
appeal to the Supreme Court.

C 4 Test 75 Minutes
Field Project Presentations
Lecture - 30

And the best of luck to you all!!!!